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.

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?