Last Chance Saloon

Not to brag, but I’ve just solved the housing crisis. But I’ll get back to that: firstly, I just want to look at where we are. Here’s the problem: about two million people who would’ve bought in the past few years, in normal historical conditions, haven’t been able to, and are now renting. This is a problem on several fronts, but mainly as our economy is essentially built around owner occupation: it is the main way in which most people are able to save and build capital, and plan for retirement, and has been incentivised as such for decades through our taxation system.

As millions of people are now excluded from buying, and home ownership for the under 40s has fallen off a cliff, this means they are not only excluded from security of tenure – renters only ever being two months away from eviction at the whim of a landlord, and the ensuing psychological impact that has over many years, even if the dreaded Section 21 notice is never actually issued – but they are also excluded from any form of capital accumulation, and thus have no stake in the system.

A few other countries have majority rental sectors – such as Germany – but people are encouraged to save in other ways, through the local Landesbanken system etc, and thus can accumulate a stake in the status quo without owning a home, and their home is in any case an actual home as they have decent tenure for rental properties. There is nothing wrong with the owner-occupier model of saving and investing per se, but clearly if most people under the age of forty are excluded from it and there is no route in, then it is not sustainable.

So we now have the rise of Corbyn, and the Tories scrabbling around for ideas to counter his rise to power. And for them, it's now or never. I cannot have been the only person to have watched Mrs May’s recent speech open mouthed: having briefed before the speech that she was going to unleash a new generation of council house building, she announced that she was in fact going to build 5,000 new council houses a year. There are 1.2 million people on council house waiting lists, and this was her answer. I was absolutely, completely flabbergasted. We’ve had the worst decade for real wages since the 1860s, home ownership is plummeting, and the Tory answer is, erm….well, just, well. Utterly bizarre. And Help to Buy is just…..I mean, how will this help affordability for First Time Buyers in any way, at all? AT ALL? I mean, crumbs.

If this is going to be as good as it gets, then Corbyn will win power, without any shadow of a doubt. Now, Corbyn has already talked about confiscation of private property in response to the simply awful Grenfell disaster: I don’t want to go into that because it is too horrible for words and a side issue in terms of solving the housing crisis: but Our Future Glorious Leader’s words were instructive, in that he saw no problem in simply confiscating empty flats nearby as a solution.

Once you start on this road, and are happy with the first ideological leap, then it’s very easy to make the next logical step: there are millions of renters, and not so many landlords, landlords have had it good in the last few years, so why don’t we just…….well, take their stuff, and, well, just give the flats to the renters? I don’t think we’re far from this stage. Fewer than 1 in 5 renters are saving for a deposit, and essentially, now, if you don’t own or have parents who own, you will never own – so taking stuff is going to be the next logical step, as there is no other step that they can see. If I was a BTL landlord, I would spend every waking minute haranguing my local Tory MP to ensure better rights for renters, and to solve this crisis asap, as if not my pension is going to go up in smoke. And the consequences of this sort of confiscation will be: well, total bankruptcy for everyone, to keep the story short. That’s just what happens.

So what do we do? Firstly, build a hundred thousand social houses a year, by letting Councils borrow money. Not difficult. A third of what we built after the Second World War when we were completely bankrupt.

And secondly: there are 11 million renters, and 2 million private landlords: transfer ownership of a chunk of these to the current renters, and the problem is a long way to being solved. If nothing is done, this will happen in time anyway: but through confiscation, and we’ll end up boiling stones for soup. So simply incentivise BTL landlords, right now, to sell to their tenants, at decent market values.

This is actually easy to do. There isn’t really a shortage of properties on a gross level: the ratio of bedrooms to people is roughly static, it’s just that the financial system around home ownership is completely screwed, people are stuck in properties they don’t want to sell as it will financially penalize them if they do, and others are renting houses they would normally have bought.

In fact, most BTL landlords can’t sell, as they have a large (normally 28%) CGT liability if they do, and no other decent investment options: so selling will mean they lose money, for a worse return. The solution is obvious –  say to landlords, if you sell to your tenant, then you will not have to pay any CGT. Suddenly, they save 28% on tax on the increase in value, which will be a big chunk of the gross value, in most cases. And if you are a BTL landlord and put money into the stock market from your property sale, we will exempt you from future stock growth CGT and stamp duty (this bit needs refining, but something along those lines).

The other crazy thing is the mortgage process: we were turned down for a mortgage 18 months ago (luckily not on the second mortgage application or I would be writing this having emigrated) on the grounds that we couldn’t afford the repayments, despite them being lower than the rent we had paid on time, every month, for FIVE YEARS. So say to all private sector tenants: if you can pay your rent on time for 3 years, every month, and can prove that you are funding it through your own endeavours: then a bank -  perhaps RBS, say, which we taxpayers frigging own – will guarantee you a mortgage based on those repayments. Certainty returns, tenants have something concrete to aim at, even if it's a few years away. And hey, why not take some of the 28% CGT saving from the landlord, and loan the tenant a 5% deposit from that saving?

Result: millions of private renters enter homeownership in the next year or two, millions more have a stake in the country again, the rest know if they work hard they'll get there eventually, and if they can't, the state will build them a council house: and the stock market is stock full of private investors and capitalism is saved.

You’re welcome Britain.

Bell Ends

So, it’s ten years on from the financial crash, and Big Ben is about to stop ringing. I can’t be the only one who feels this is bad omen. The bongs are a re-assuring, constant presence on our kitchen radio, or at least they have been until midday today. An authoritive, rich, historic sound signalling continuity, letting us know that everything is ok, everyone will solider on, and that somewhere, an adult is in charge. Especially when they ring at 6pm, and it’s wine time.

Ten years on, and it’s easy to forget what happened 10 years ago, and decide it is all ancient history, and that it won’t happen again. It is easy to forget how close we came to complete, total meltdown. It’s easy to forget that money market funds came within a few hours of drying up completely – and without any liquidity in the global financial system, there’d have been no credit, and with no credit no trade, and then…well, before long, no food in the supermarkets. Don’t MI5 say that we are four meals from chaos? After Hurricane Katrina, it took five days before doctors stopped attending hospitals to protect their own families. The traders I worked next to in the City at the time were buying shotguns.

So, why did it happen, again?

The crash happened because Goldman Squids et al conned the ratings agencies into believing that the crap they were selling (complex derivatives such as CDOs, synthetic CDOs etc) were AAA rated, and by the time the markets realized they were worthless, there were billions of the buggers hidden in bank's balance sheets. No banks trusted any other banks, as no one knew who was solvent, Libor rates went up and eventually no one would lend. Banks that had no actual money of their own for their day to day activities (Ponzi schemes, basically), but instead relied on wholesale money markets etc for day to day funding, like Northern Crock, went out of business sharpish and the whole thing snowballed.

The government stepped in, and stopped the world from ending, but putting in a temporary fix: ZIRP. Zero interest rates, and masses of printed money to inflate asset prices. This temporary fix is, of course, still in place.

What's changed since then, exactly? What's that...nothing?

The cycle goes on. Real wages are flat: most people without assets are poorer. Nothing has been done to try and make capitalism more inclusive, or spread wealth more fairly, or re-capitalize the poor. House prices in London have pretty much tripled (by contrast, during the last comparable financial crisis of 1929-1933, property prices in most western economies dropped 80%).

The amount of outstanding complex (ie no one really understands them, certainly not senior bank management) derivatives globally has quadrupled since the financial crisis. Consumer debt has doubled, asset prices have sky-rocketed and banks have, accordingly, since lent billions to the property market. The leverage ratios imposed by regulators are still pathetic, although they've been tripled, they have basically tripled 'nothing'. If residential property prices drop by even 30%, what would happen to the balance sheets of almost all of our high street banks? By their own models, they'd be bankrupted.

Inequality, the fundamental cause of the last crisis, is still rising. We seem to not be willing to do anything to stop it, before it’s too late, because the cause of the inequality is hard-wired into the system – partly via fractional reserve banking.

One possible answer would be to forget ring fencing currently pushed by the regulators - but actually spin off investment and retail banks, and make retail banks actually capitalize themselves properly, ie primarily through deposits. Of course this would never happen, as our fiat-currency and fractional reserve financial system would collapse and have to be re-built to accommodate it.

So there is nothing we can actually do, just sit and wait for everything to go up in flames again, which it will, but much worse this time. The GFC caused so much anger because the people at the top lost their jobs, but still walked away with millions. This anger is what will end the cycle eventually, and probably not in a good way. Housing is at the route of it, but there's nothing we can do now, it's too late. Even building 400,000 houses a year will make no difference to affordability, until house prices crash, and then no one will be able to afford a house, no matter what the market value is, because no one will be lending.

You may be a baby-boomer sitting comfortably in your big, equity rich house with your final salary pension, BTL portfolio and be thinking: I’m ok. But if I were you, I’d be sh****g myself and getting as much money into a bank account in Antigua as I could.

Now, I am not on the same page as Corbyn – I’m not even reading the same book. But I am perhaps in the same library. And what will happen when he gets in? And he will get in.

I’ll tell you: property confiscation and land taxes. Most people under 35 support this sort of thing, because they are locked out of the market anyway and have nothing to lose, in their own minds: if BTL properties are confiscated from their owners, what do they care? They won’t lose anything. In the same way that the average Zimbabwean didn’t lose anything when Mugabe took away land from the “evil white colonialist” farmers. Until, of course, millions started dying in the subsequent famine.

Corybn is talking about property confiscation already, when superficially things are going well (a thin, empty veneer of false, empty credit growth) and the thirst for schadenfreude is on the back-burner for a while.  But as soon as things take a dip for the worse again and the fact that the system is rigged will once more go to the forefront of people’s minds, the temptation to take people’s stuff will re-surface, because they’ll realise that in a rigged game, that’s their only option. Corbyn will be all over it.

And property prices will tank. Banks will go bust. Traders will start buying shotguns again.

And there’ll be no Big Ben to re-assure us that Britain will soldier on.

The Redfern Review

A blog-lette...

...slightly late on this, as it is too depressing for words – but the report commission by the Labour party into housing – the Redfern Review – has recently said that the causes of high house prices have nothing to do with a lack of house building, but everything to do with an explosion in credit, and the private sector building more houses will do nothing in the short term to solve the affordability crisis. It extensively looked at the evidence, thoroughly and methodically crunched the numbers and pretty much proved that this was the case, beyond reasonable doubt.

I have said this until I have become blue in the face, like an ignored smurf.

For what it's worth, here it is one more time, for posterity: building more houses in the short term will do nothing to solve the affordability crisis.

This conclusion has been completed ignored by everyone, including the Labour party, who almost immediately after the review was published authorized a spokesman to say “this report shows it is clear we need to build more houses to make houses affordable again” – which is exactly the opposite of what the report they commissioned says.

I give up.