Basic economics and the road to ruin

One of the basic laws of economics is that of “Supply and Demand”. It has the fundamental premise that there is a potentially infinite supply and an equally infinite demand. It’s called a free market.
 
It’s also very simple to understand.
 
If supply is plentiful then the price will be cheap until such time as the demand increases to outstrip supply. Then scarcity will drive the price up. At that point new suppliers will be attracted by the profits, enter the marketplace and drive the price back down to a reasonable level again.
 
Already you can see the problems.
 
What if the supply is artificially restricted?
 
Demand continues to outstrip supply and the price stays high.
 
In a free market, other suppliers would come on the scene and, with the increased supply, drive the price down. But there is rarely such a thing as a completely free market.
 
Take Guernsey.
 
We are an Island and we’ve seen this law in operation with our shops.
 
Supply was restricted by the number of shops and the difficulty of establishing a new business here. Why start a new (say) bookshop, when there are already three around and only so many readers to sell to. If we’d been in the UK, no doubt a major bookseller would have bought into the marketplace and deep discounted the others out of existence but this didn’t happen because basically we weren’t worth it. The demand was insufficient.
 
Instead the internet happened and e-books happened and suddenly the book market has changed and bookshops are a dying breed.
 
New suppliers, avoiding the artificial restrictions, have come into the marketplace and driven the prices down.
 
The same is now happening with almost every other type of shop everywhere else on the Island.
 
Now lets look at residential property.
 
No chance of a new supplier coming into the marketplace; there is no more land, unless we reclaim or build skywards, or release dormant land being held derelict for just such a day.
 
So the basic law of supply and demand cannot work. There is no free market.
 
But we pretend there is and allow this law to fix the price of homes in Guernsey.
 
The results are predictable.
 
Fixed supply and a ready demand makes the prices rise until they reach a level where demand falls off.
 
That’s where our economy provides a double kick.
 
We have a financial elite who are able to command high salaries because of our beneficial tax regime which attracts wealth preservation schemes to be based here.
 
I make no judgement on such an arrangement as it is keeping the Island alive but we must recognise the cost.
 
The cost, as far as property is concerned is that the demand is inflated by a substantial number of affluent people chasing a fixed number of houses.
 
The ordinary person is being priced out of the market by those in, or servicing, the financial sector who are able to afford to buy property.
 
Not only  that but a lot of these people have been able to build up property portfolios and rent them out at ever increasing levels of income because, again, there is an artificially restricted level of supply.
 
The result is that Guernsey is becoming a haven for the well off, with the ordinary population forced to pay high rents or leave.
 
Many of our youngsters are choosing the second option and we wonder why.
 
What is the answer?
 
Regretfully it is state intervention, something which just isn’t going to happen.
 
It’s either that or revolution and that won’t be allowed to happen either.
 
What we need is affordable housing and to get that we need to break the hold of free market economics. Recognise that we do not have a free market and act accordingly.
 
This means state intervention which means taxes.
 
1) Introduce rent control and restrict the ability of landlords to charge what they deem the marketplace will bear. Also introduce effective supervision of minimum standards to residential properties to ensure that landlords meet their responsibilities to ensure that their properties are habitable and suitable for the numbers living there. No more ten to a room with one shared bathroom.
 
2) Introduce a capital gains tax on the sale of all properties which are not an individual’s principle private residence. This will hopefully stop speculation and the treatment of homes as investments.
 
3) Couple this with an empty property tax to dissuade people from buying or holding property as an investment be it buildings or land.
 
The aim of all of this is to remove the idea of property being used as something to invest in. Houses and land should be there for homes and not for investment.
 
Burst the property bubble and bring prices down to a level where ordinary people can at least aspire to living and thriving on the Island of their birth.
 
Will anything like this happen?
 
No.
 
Too many vested interests and too many politicians with property portfolios.
 
It would take a revolution and that’s never going to happen either.
 
Instead we will see the poverty gap widen and the emigration levels increase and the time bomb of an ageing population tick ever closer to explosion
 
But hey, why worry?
 
We can always market the Island as a huge gated community for the elderly well off where they won’t have the bother of an underclass who have been priced out of existence.