Harrison, author and proprietor of the Eenegade Economist blog, predicted the 1992 recession in his 1983 book, Power Of The Land, and in 1997 he wrote Chaos Makers, in which he described “a collapse that will presage the global depression of 2010”. Then, in 2005, he wrote Boom Bust, The Depression Of 2010, describing a “downturn…on an unprecedented scale”.
So far, Harrison’s predictions have been eerily accurate. They even pinpoint the peak of the UK housing market to Q4 2007. He then tried to warn the UK of the “cyclical big one”. In November 2007, he wrote to senior ministers and urged them to prepare for the worst. He wrote to Peter Mandelson, saying: “I am your worst nightmare. I know exactly why New Labour will fail.”
Harrison says: “Nothing was done. We just got Gordon Brown assuring people that there would be no more housing boom-busts. We now know how that turned out.”
How did Harrison predict the crash? He says history proved to him that the crash would be inevitable. His theory is that the speculation of capital gains on any housing market is unsus-tainable for any longer than 18 years. He looked at the statistics of the 1974 and 1992 crashes and predicted that Brown would oversee a market which produced a six-and- a-half times income to house price ratio along-side a 20 per cent house price drop by 2007. He was right.
He says: “There was no counter-cyclical upturn in one region to compen-sate another region. After the Second World War, all business cycles were synchronised on the same growth path, so any catastrophe in a national economy based on a housing crash would be multiplied globally. Link that to the disguising of the bad loans dragging out the pain without a cleanout, which I also predicted, then you have a catastrophe waiting to happen.”
Does Harrison think there will be another crash in 18 years? He says: “The Government is deluding people into the idea that they are taking control of events by simply expanding the money supply. They are just seeking to expand the debt, this time making it a public debt rather than a private debt in order to try and boost consumption.”
Harrison argues that by storing up debt now, public sector spending will have to be cut back just at a time when the private markets may appear to be recovering. “All the governments are abjectly failing their people and their future generations,” he says. He adds that the core problem lies in the fact that the UK’s tax system rewards property rather than income.
He says: “We have to alter the incentives to invest and to work. The Government structures the incentives. It penalises people who work and invest through taxes but they add incentives to investment in real estate and, as a consequence, we distort the enterprise economy and distort the incentives to work, save and invest.”
Harrison says if Britain swapped its tax regime away from income to the price of land, the effect would be to reduce prices in the markets because taxes are added to prices but charges on rent do not end up pushing up prices. He says prices would be pushed down and the UK would be more competitive against the US and Asia.
He believes this system is feasible. Hong Kong’s property market is pred-ominantly lease-based and it is one of the most thriving economies in the world. He says: “Hong Kong has a unique system of public pricing that does not penalise people on wages or corporate profits, making it a dynamic economy.”
Harrison says he will be writing to the next Government in 2010 and will once again warn them that the boom and bust cycle will continue if Britain’s economy continues to be based on land and property gain.
Legal & General head of mortgages Ben Thompson says: “These theories are certainly not far-fetched, they are spot-on in some senses. Taxing land so as to create more income makes sense. It removes the profiteering aspect of the housing market.
“People came in and out of the housing market and made a huge profit at the peak and while it is not quantifiable, that certainly added to the house price bubble.”
Schroders chief economist Keith Wade says: “I am not sure that moving taxes would help. The crash came about thanks to an over-leveraging of debt.
“I can understand the theory from a capital-formation perspective – income made from property is not productive. But property has an inelastic supply so if you change the mathematics, the price of the asset will change. The willingness to speculate will not change.”