It might be the 6 coffees and impending fatherhood, but I’m feeling optimistic

Ok, so bad news abounds. It appears everyone is starting to agree: we have a growing economy, but only because it is being driven by the inflation of asset prices via 0.5% interest rates, and hundreds of billions of QE being pumped into the economy, and also by large population growth enabling a growing GDP number (as GDP per capita is falling). Even worse for all the newly emerging political demagogues, we can't stop flogging off our property to foreign investors, as it's the only thing stopping our balance of payments problem from exploding.

We also seem now to be nearing the start of the next recession, seemingly without many people having noticed the last seven years of ‘recovery’.

In fact, living standards have fallen month on month for almost 74 months in a row, with 4 exceptions, with even those exceptions looking a bit shaky statistically speaking (CPI ees lies! LIES!). Wages look set to keep on falling – so the economy is getting bigger as more people are moving here, but we’re mostly all getting poorer. I’m personally concerned by reports that the wages of people born in 1981 are likely to peak at 35. Bugger…

That Carney chap has also gone a bit quiet with his ‘Will we? Won’t we?’ teases on interest rates, with Haldane (his chief gimp) essentially coming out into the open and admitting that, no, rates are never going to go up, as it’s too late now and you can’t taper a Ponzi scheme. Although he didn’t quite put it like that.

One striking feature of our economy is the fact that not far off a trillion pounds is now invested in buy-to-let. In 1996, there were a few thousand BTL mortgages, now there are two million private landlords, with five million private rented properties (and about nine million people living in them). This worries me slightly, if only the fact that previous housing crashes have been tempered by the illiquid nature of the housing market: but presumably with ASTs, BTL properties could all come onto the market quite quickly in a falling market…but anyway, my housing market predictions are predicated on the fact that IT IS A MARKET when it’s clearly not anymore.

I don’t think this is unfair (‘fairness’ is a daft test of anything) but it’s not very efficient: imagine if that £1 trillion had been invested into productive parts of the economy and the bulk of those nine million renters were in owner-occupied housing, enjoying security of tenure and decent housing conditions, and there were as a consequence 9 million more financially secure consumers in the economy, rather than all that money being ploughed into buying houses that had already been built, and renting them out to people priced out as a consequence – what would our recovery look like instead?

Anyway, whatever: we now have a situation where the young generation are poorer than their parent’s generation. And they scare me: have you seen our young folk?! They are often outside the office. Neat haircuts. Polite. Soberly dressed, talking to each other about working hard at school, drinking less than previous generations - WHAT THE HELL IS WRONG WITH THEM?!

Despite what we read in the press, we have actually been here before. Quite a while ago, admittedly: but in the years leading up to the Enlightenment. This was a time when increasing wealth and living standards for a few at the top meant that infant mortality plummeted among the upper classes, whilst it remained high for the lower classes: essentially, the aristocrats started to outbreed the serfs. At the same time, primogeniture ensured that most kids from rich families actually ended up poor, and less financially secure than a lot of serfs – as only the eldest inherited anything. And yet, all the rich kids received a decent education. This led to a large group of well-educated yoof who had no money and were on the whole much poorer than their parents. This led to an explosion of, generally pretty decent, radical thought, and eventually led to the Enlightenment: an era of progress generally regarded as a Good Thing.

We have a similar situation in this country now: a generation coming up, much more educated than their parents, but overall much poorer. This could lead to great things.

C’est Cidre. Not Cider.

The title just refers to the fact that I am completely baffled by the slogan for Stella Artois. I mean, what?

First blog for a while. That’s largely because nothing has changed in the housing market and I have nothing new to say! Not that I generally do. It’s also because I have so much work to do, I don’t know where to start, so I’m not going to. I’m going to write a blog post for ten minutes.

I still as a surveyor on a daily basis see an awful lot of money flooding into the London market from all over the globe, pushing out baby boomers into the regions, retiring to their orchards in Sussex and Hampshire to start a Handmade Artisan Cider business, having made hundreds of thousands of pounds on selling their little box in Fulham (millions in the case of Fulham, really) and pricing out the locals. The general mood now I think seems to be of resignation at the status quo: if you’re under 35 and don’t have parental help (ie your parents don’t own their own home), you will never buy, and spend your life on a rolling periodic tenancy. This seems to be accepted now. What that means the country will be like in 10 or even 20 years, no one seems to think about.

One thing that has changed actually, after ranting on this blog for quite a while on how Carney seemed to have bewitched the media and they seem to be oblivious of the fact that he contradicts himself almost constantly (so do I, but I'm not in charge of the economy): the media are starting to turn against him now, and even report his actual words that come out of his actual mouth. Fickle eh?

The Canadian property market, which he stoked into the biggest asset boom in the Western hemisphere before he came to do the same for Osborne here, is now starting to implode, but we’ll ignore that for now.

Let’s focus instead on another nation that is also famous chiefly for being shit at cricket: France. President Hollande has today convened an emergency cabinet, largely in response to the housing market there going into what Le Monde describe as a ‘meltdown’. But in French, obviously. Une meltdown.

What number have new housing starts in France dropped to? 306,000. Meltdown!

Meanwhile in the UK, “the Government’s Long Term Economic Plan Is Getting Britain Building Again”, and our starts have grown to…possibly 150,000, if we’re lucky. Half a French meltdown. Une demi-meltdown.

And we at OP have just had yet another planning application turned down for no apparent reason, so we’re taking it to committee. So that looks like a possbile 149,999.

Still, at least housebuilders’ profits are up almost 50%, and the baby boomer rentier class can retire in comfort to their orchards.

More Cidre anyone?

The Croupier's Cut

In the Guardian on 3^rd September 2003, there was a story saying that Asteroid 2004 QQ47 was predicted to potentially smash into the earth on 21^st March 2014, causing the kind of destruction expected in a thermonuclear war. So the current housing market price-growth in London and the South East may not be as sustainable as some people think.

Anyway…

As I’ve said before, our housing policy is made by people who own lots of properties. David Cameron, I will always remember, once forgot in an interview with the Independent how many homes he owned. Currently, and I write this ahead of the budget tomorrow, that policy is to pump as much taxpayer's money as possible into an endless pit of mortgage credit: and apparently these pumps are about to be jammed open (can you jam a pump open?).

I won’t rant any further on this here, and about how the eventual crash will make this Friday’s asteroid impact look tame, but I would however like to offer an indication of how much money is sloshing around at the moment.

I’m always struck by how many estate agents there are on any given high street: now, I’m not having a go; in fact, I think that estate agents are in the last truly competitive industry, as no one agent has more than a single digit % of the market as a whole. I am firmly of the "if you think bankers are paid an unfair amount and want to be as well, then become a banker" school of thought. Systemic sustainability is a separate issue to 'fairness'.

However, as to why so many can survive, I offer as a first example the flats the survey reports for which I am typing up at the moment (which is why I’m writing a blog, as I will find any excuse not to type up a survey report): they form part of a Fulham house that was pretty large (very large actually) that ten years ago was bought for £380,000. It has now been turned into seven flats (pretty tiny) and each one is on the market for just under £700,000 (I'm not saying this is a bubble. Nope. Not me). The agent’s fees are about £10,000 for each, to take some photos and put them up on their website - so not too bad.

As an aside, by the way, each one has already sold (as far as I can make out they came on the market about three weeks ago).  The flat, the specific survey report of which I stopped writing just before starting this blog, has – according to the agent – 42 people interested in it.

Example number two: take the house I’m off to a survey in a minute: this is a four bedroom semi-detached house in London, fairly good area, but not ‘super prime’. This is being bought by a Greek Cypriot family, although I am dealing with their Russian lawyer (paid via an account in the Cayman Islands). The house was found for them by an “executive search agent” who finds properties for rich people living abroad.

The estate agent’s fee in this case is roughly £19,000 - £20,000, going by the published fee scales on their website. Not bad again, for putting some photos up on a website. I’m guessing the lawyer’s fee is probably about the same, but I’ve no idea.

The search agent’s fee is…£36,000.

Not bad for having a quick scan on Rightmove, eh?

Something Wicked This Way Comes

Nick Clegg is terrified. He snuck some money out of Miriam’s purse this morning to buy booze, and is pissed already (I know this because he always texts me when he’s drunk), and the pubs aren’t even open yet. Carney could barely bring himself to eat his waffles and maple syrup this morning. Even chief alien lizard-creature Osborne is worried: and no wonder. With an election only a year away, we are now several  months into the housing crash that I predicted would start “…in the autumn (of 2013), which will wipe at least 30% off headline values, possibly more given a market’s tendency to over-shoot.”

Ok, so clearly I know nothing about economics – the proof perhaps being that I worked as an analyst for an investment bank, as good as having a certificate in Economic Ignorance.

I’d also point out that pretty much every prediction on house prices I’ve made for seven years now has been almost comprehensively inaccurate, so at least I’m consistent.

BUT! And there’s always a but…I would quote this, again from myself (and I don’t quote myself because I think my writing is especially worthy of quotation. That’s for other people to think): “there is no rational analysis possible. All you can really do is try and predict what the executive is going to do next.”

Except…we will hit the end of the limits of government market manipulation at some point. House prices are up almost 10% this year, more in my own personal surveying experience; first time buyers are paying 6% more than a year ago (Help to Buy is set up to help First Time Buyers, remember, look into my eyes…) and 92% of people reportedly think house prices will rise this year…except wages have been falling for years in real terms, and are predicted to do so until 2017 at least (ONS figures). Is this really sustainable? With base rate at 0.5% and interest rate swaps at similar lows in perpetuity, possibly.

Except… they won’t stay that low for ever. They just won’t: and the longer they stay low, the worse it will be when they rise. I note that unemployment is down to 7.1% - very close to Carney’s forward guidance limit, which he said would trigger a rate rise. Which he has now said he will ignore. On a side note, I would mention he is really very slippery, but no one seems to notice: Carney now talks about how “phase 1 of forward guidance is nearly complete” – but he never mentioned a phased programme before, did he? Yet now he talks as if this was always the plan. Scary, if you ask me.

The most pernicious part of this whole asset bubble is, I think, the way the market-warping of the economy manifests itself in the fact that inherited wealth now accounts for 20% of total personal wealth in the UK. It had dropped in the 1960s/1970s to a low of 5%, and is now (unbelievably) back up to Victorian levels. This is fine if, like me, you have parents who own an expensive house outright, among other assets. But this is bad if, like me, your father has gleefully told you for almost three decades now that every single penny of his personal wealth will go to Sidmouth Donkey Sanctuary in his will.

I would note that, on average and with alarming regularity, recessions occur every seven years. And it’s been, what, almost…seven years since our last one? And what would happen if the economy tanked now? Private debt is larger than before 2007. The national debt is much, much bugger. The banks’ balance sheets are hardly in much better shape – in fact, under the new Basel regs they need to hold even LESS of a capital buffer than in 2007! If mortgage rates rise to a modest 3% - very low by historic standards, of course – then almost 25% of people’s income will be eclipsed entirely by debt repayments*, leaving nothing to buy food.

Notwithstanding famous housing analyst Kate Moss’ well known quote “nothing tastes as good as mortgage payments feel” – this isn’t, I think, a good situation to be in.


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*Edited to add: by which I mean that, with rates at 3%, 25% of the total population will have debt repayments larger than their income. This does currently read a bit like the "60% of the time, it works every time" quote from Anchorman regarding "Sex Panther".