Something Is Rotten In The State Of...Everything

It’s that time of the year when bankers are starting to tuck into their mulled cocaine, and we feel the need to pause, and gently reflect back on another totally f****d up year in the British property market.

No one working in property likes Christmas, as it’s a deadline rather than a religious festival, so my mood always dips a bit. But anyway, back on topic: first, the wider context: the world is a f****g disaster. Fear and uncertainty dominate public discourse. The only way things could be worse would be if the BBC’s fantasy candidate and arch IHT-avoider Hilary Benn became Labour leader (I’m not saying we shouldn’t bomb Syria, but starting two disastrous wars and then saying it's ok to launch a third one: are we setting a bit of a bad precedent for Germany...?).

The f****d-up-ness of the world is micro-cosmically reflected in the British property market, as in all spheres of modern life.

Take the latest budget statement – now, I applaud the assault on residential landlords from the point of view of Generation Rent, but solely on the grounds of schadenfreude. Having destroyed all decent chance of pension provision and encouraged retirement funds to be trammeled almost entirely into property, he is now hammering the people that did just as they were incentivised to do.

The cornerstone of Conservative democracy has always been that all property owners are treated equally, but the financial system has so screwed things that even the Tories are now bowing to an impending disaster that even they can see is coming, and are differentiating  for the first time in our history, before a total nutter does something more insane. Which they probably will anyway, as it’s too late now.

We model our country as a property owning democracy, but we now have the fourth lowest property ownership rate of the twenty-eight countries in the EU*.

Is this down to a shortage of land? Hell no. The UK’s 60 million acres consist of 41 million acres of agricultural land, 15 million acres of natural wastage (forests, rivers, mountains etc) and only 4 million acres of urban plot, which most of us are crammed into. We have lots of space.

The single most important fact underpinning unaffordable house prices is the very low interest banks charge on mortgage credit (and I feel quite vindicated that people are accepting now that snake-oil salesman Carney has never ever had any interest in ever raising the Bank base rate) and as house prices are a leveraged bet on interest rates, a 0.5% rate will lead to extraordinarily high prices for as long as rates stay that low, until disaster hits.

Rooms-to-people ratios are actually at historic lows. The housing crisis is a financial problem.  It’s a problem that’s getting worse, and as predicted, this inequality will produce more and more demagogues such as a Trump in the US, and, though less directly related to property but along the same lines, le Pen in France. 2017 is going to be great with those two in charge.

Property is merely our own particular manifestation of the financial inequality, built on fractional reserve banking, that is consuming the west, and we will have our own demagogue in time.

Anyway: Happy Christmas!

*recently released Eurostat figures – it’s also good to have an asterisk here that isn’t in a swear word

Generation Spent

House prices have very little to do with supply or demand. House prices are determined by the availability of credit. Everyone in the media however, and most of our politicians etc, when writing about housing now seem to have settled on supply as the main problem. It's a start, of sorts. However, commentators and politicians alike now seem to conflate housing supply with new houses being built. Hence the fixation on Cameron’s recent pledge to build 200,000 starter homes by 2020 (by which time the population is projected to have grown by at least by another 2,000,000).

But most housing supply is actually provided by houses that are already built. There are about 100,000 housing transactions a month, and currently about 1,200,000 housing transactions a year, down from the historically normal approx. 1,600,000 annually; and only 10% of these are new builds. 

Cameron wants to provide 200,000 starter homes by 2020. This would be an extra 40,000 homes annually for sale. So he wants to increase the number of homes for sale every year by from a current 1,200,000 to 1,240,000, or an increase of just 3% of the supply. Will that really make that much of a difference, given houses are currently rising by 10% a year? No. It is neither here nor there.

There is a backlog of, roughly, about a million homes from the past few years of undersupply, so as a rule of thumb taking these into account and from the figures produced by the ONS there are now approx. 250,000 potential first time buyers  every year as a result of new household formation, although the ratio of bedrooms to people is actually near historic lows (ie we're not that short of houses in aggregate, we just use our stock very inefficiently). 

Providing 40,000 of these FTBs with the opportunity to buy discounted homes would mean that Cameron would potentially be helping about 16% of them, and possible making things worse for the other 210,000, or 84%, by reducing the social housing stock dramatically in the same period.

So Cameron is very keen on keeping house prices elevated, whilst pretending to do something about it, but doing very little other than sleight of hand.

QED: other impediments to keeping the credit bubble on the road? Worry no. 1 was the fact that the people that own all the housing wealth - ie baby boomers - are just coming up to retirement, and were going to start putting all their impossibly expensive houses on the market. Result: vastly increased supply, house prices dropping rapidly, panic, all is lost....

...action by the Tories: increase inheritance tax on everything, but exclude the main home up to a £1,000,000.

Result: houses no longer coming onto the market en masse, as they are the only asset that the moderately wealthy will hang on to at all costs, liquidating pensions etc.

Conclusion: credit bubble rumbles on...

Interest rates and the availability of credit are a key - in fact, the key - determinant of housing cost, and building another million homes, even if they were all built in a month, will not necessarily bring down house prices, especially if they are all snapped up by BTL landlords and foreign investors: Ireland, for example, built 2,000,000 houses in a decade before the great financial crash humbled their banks, and house prices doubled during that period. And as interest rates remain at historic lows, and QE has injected billions into asset markets and all policies point to maintaining house prices, prices will remain elevated until something goes terribly wrong, and people start to panic that a new financial crisis is on its way...which it is, clearly, given that every problem that caused the last financial crisis has not only not gone away, but has in fact become significantly worse (public debt has doubled, etc, etc, etc...).

My only conclusion is that Cameron isn’t interested in actually helping Generation Rent, but he has now grasped that he needs to use smoke and mirrors to convince Generation Rent’s worried parents that he is doing something for their 20 and 30-something children, but without actually affecting the house of cards that constitutes the housing equity wealth of the over-55 demographic, who are his main voting block.

Welcome To The Non-Linear World

It seems clear that we’re on the verge of an enormous financial crisis, one that’ll make the last one look like a wasp-ridden al fresco meal (a picnic, keep up Nick Clegg, Christ…). No one seems to mind though, so that’s good. In fact, Osborne seems quite pleased at the way everything is going. The unprecedented drop today of inflation to zero, he not only takes credit for, but the fact that we are on the verge of deflation and he is planning massive fiscal cuts after May, he seems to positively welcome. Which seems a bit…odd.

Anyway, I’m a Chartered Surveyor. So back to houses. So, houses eh? Cor!

I recently heard a Tory pitch to ‘frustrated first time buyers’ on the radio, saying you should now vote Tory, as they have introduced the FTB ISA. This would provide an extra three thousand pounds, potentially, towards a deposit, which, as it happens, starts shortly before the Help to Buy 2 scheme expires. So this new scheme will prop up house prices by allowing those who are going to buy anyway to have a slightly bigger deposit, and then when minimum deposits go back up to 10% for mortgages, on an average house in the south east, that will leave a mere extra thirty thousand pounds to save, in cash, for everyone else.

He then mentioned the 20% discount on new homes for FTBs, also promised by the Tories, as a reason for FTBs to vote Tory. This is a great scheme – buy a badly constructed and un-insulated shoe box, with no section 106 contributions – so no roads, drains etc – and the developer can say they’re worth 20% more than they would otherwise, and then ‘knock’ 20% off – job done! Hurrah!

What slipped through the cracks when this was reported was that these shanty-towns will also replace social housing construction nationally, so even less affordable housing will be built. If any.

I also love the other Tory promise to increase housing by proposing to flog off the remaining social housing at a discount, and then replace them, only not as a many, as there won’t be the money to do so, as they were sold at a discount. Let’s make sure we have more cake by selling all our cake, cheaply, and then making slightly less cake! Hurrah! Because that will mean we have less ca….oh, hang on…

He also mentioned the savings on stamp duty, which has been reformed so that there is now no slab structure. I was fairly drunk when I did my Masters in economics, but even I can remember basic stuff: this streamlining of the tax involved will increase the velocity of transactions in the market, which, with dwindling supply, will increase prices. Hurrah!

I wrote a blog about Vladimir Surkov, but I haven’t posted it yet – but essentially, he is a chief advisor to Putin, and is a master at saying and making people believe one thing, whilst doing the complete opposite, thus creating constant confusion amongst any opposition. He calls it the ‘non-linear’ world. He has been behind Putin’s actions in Crimea: effectively invading, and then saying ‘what us? Nope, we’re not doing anything…’.

A cynic would say this is what the Tories are doing; so, here goes: THIS IS WHAT THE TORIES ARE DOING. They are pretending to help first time buyers, but are making is harder with every sinew of their being(s).

I think the point I’m trying to make here is this: if you are trying to buy a house for the first time, but can’t afford it, and you think voting Tory will make it easier ultimately to buy your first house THEN YOU ARE WRONG. Their policy, and everything I’ve mentioned above, is designed to keep house prices high. Whether you can buy a house from now on depends almost entirely on whether your parents have a house.

This worries me. Even though my parents, being the lucky, baby-boomers they are, own a house worth ten times what they paid for it. And even though I ‘helped’ them access their internet banking the other day, and they have now very generously given me a large deposit, and it’s not my fault they can’t remember actually doing that, but you know, they’re getting old and what-not. But even they are beginning to see that this is not healthy. What kind of madly inefficient society has this created?

You hear now all the time ‘all we need to do is build more houses’. And yet, of the million houses built since 2000, 86% were bought by BTL landlords. Build another million, and we’ll still potentially have a ‘crisis’.

Maybe it won’t matter though. Sovereign wealth fund transfers, the so called ‘wall of money’ flowing into the west, which has kept interest rates low for years, are going into reverse now. The Fed looks like it is on the verge of tightening policy. We are facing deflation. Private debt is at an all-time high. And public debt is twice what it was in 2010, more or less. The government is printing billions every month, and using this money to buy its own debt to fund its own fiscal activities (that fact alone is fairly mad).

So, when interest rates are forced up because of this, the current three million amateur buy to let landlords will put their properties on the market overnight, kicking out their 9 million private tenants with a few weeks’ notice. Only no one will be able to afford to buy them, as years of no wage growth will finally catch up with us: we will realise house prices are a leveraged bet on low rates, and they will tumble. Banks have, on average, nearly thirty times more assets than equity – so a 3.5% drop on their balance sheets would wipe them out. So banks will go bust. And everyone will have to sit down and work out what the hell they’re going to do.

I won’t though, as I have my parent’s internet banking details. I’ll be in the Caribbean…

Labour's Unworkable Mansion Tax

Ed Balls has said that the proposed Labour mansion tax will be £250 a month on properties over £2 million, and 1% above £3 million.

He has also said that it will be an ownership tax, as it will be paid by investors.

So, firstly, how will they identify the owners to see who has a property worth over £2 million?

They can’t look at sold prices, as this will not capture properties where the value has inflated above £2 million since it was purchased.

So, HMRC will have to look at every single registered sale in the UK and index the value up to present day values. That sounds fun!

BUT…if it is just done as a desk-top exercise, this won’t capture physical changes – a wreck that has been done up, for example, will not be detected. HMRC can’t use the upper band of council tax as it is decades out of date and bears no relation to current capital values.

So, given the above is almost impossible, they would instead have to go for self-assessment; this will throw up an awful lot of houses valued at £1.9 million, as whether a property is above or below £2/£3 million will mean that the tax varies from nothing, to £3,000 annually, to potentially £30,000 annually and rising. This will be hotly contested, and there will need to be a system for dispute resolution, which will be very expensive to administer (m'learned friends ain't cheap), all of which will be money that doesn't go to the NHS, which the tax is 'designed' (there is no way this tax has been designed) to help.

Also, and more importantly, we have an extraordinarily complicated leasehold system in this country: and if it is an ownership tax, as proposed, this means that every interest in a house or flat held on any type of tenancy or lease will have to be valued to see if it qualifies. To say this is daunting for HMRC is an understatement! I have to add that, as a Chartered Surveyor, the prospect of this happening has me almost weeping with happiness.

There are so many other problems that I haven't included here, I mean where do you even start...but the final point I would make is that it would mean every millionaire with property currently worth over £2 million will have the opportunity to stratify their title so that at no level is there an interest worth £2 million. Why they don't just propose to re-value council tax bands, I mean, what the...but anyway.

The whole thing is almost hilariously unworkable.  I would urge you all to vote Labour, just to see what happens.