Schadenfreude i/ˈʃɑːdənfrɔɪdə/ (German: [ˈʃaːdənˌfʁɔʏdə]) : pleasure derived from the misfortunes of others.

Oooh mansion tax! Labour have recently said that they support a 1% levy on property over £2 million – the so-called mansion tax that the Lib Dems pretend to like (how very liberal of them). There could even be a vote soon on this issue in the Commons (which wouldn’t actually achieve much, even if it passed, by the way).

This is basically an entire policy based on schadenfreude. I am amazed how long it has taken to get to this politics-of-envy point, to be honest, but I suppose this is down to the fact that most people on mortgages actually are doing just fine thankyouverymuch.

Before I start, I would like to point out that I am more prone to this envy than most, as I spend my working days as a surveyor waddling around the houses of the super rich and I don’t even own a property at all.

The principle of the tax is based around two starting points: a) lots of people are really rich, especially foreign people, and they are buying all ‘our’ houses in London and now elsewhere, and b) young middle class families can no longer easily afford to buy houses in London, even if they cut back on Ocado deliveries and pay their nanny less (“can I just pay you directly in Zloty?”).

Squaring the circle by Ed Milibrain, we get to c) let’s hammer the rich foreigners! Wouldn’t it be great fun if squillionaires buying these ‘mansions’ (tiny, badly built over-priced rabbit hutches) in central London suddenly had to pay hundreds in thousands in tax? Hehe! That’d be brilliant. And it would also solve b) as well (I am being SARCASTIC on “b)” Nick Clegg, keep up).

Now, I have long suspected that flogging off all our central London property for insane amounts of money to gullible foreigners has been part of a really terribly clever sting. This sting involves us hoovering in billions from abroad selling this stuff off and then, once we have hoovered in these billions, turn around and tell them it’s all going to incur loads of taxes etc etc we were just joking before on the whole ‘safety deposit box’ thing – and now it looks as though Labour have given the game away too soon, and the plan has been ruined before we have extracted all the petro-dollars we could have done.

However, what is clear is that this tax will do nothing to alleviate our housing shortage in the short term – in fact, foreign money coming into the market is the only thing propping up the market at all at the moment, if we choke that off then the housing market could well have to face up to reality – and do people really want to do that, right now? Really?

The schadenfreude could be great in the short term, I agree, and a really good national mood-lifter – but then we might suddenly realize that – whoops! – they have lowered the tax to include houses worth £1 million, and now £500k, and now all houses… wasn’t income tax meant to just be a temporary tax on the really rich, originally? I guess this is my main objection – ignoring practicalities etc.

So what do we do instead? Something must be done, after al! I know that under the law of un-intended consequences, every single intervention in the housing market at any level by government recently has, without exception, made the housing market worse. But something MUST BE DONE!

Well, how about imposing Capital Gains Tax on a main residence, and abolish inheritance tax? Thus instantly stabilizing the housing market, removing the possibility of all future un-sustainable housing booms and creating a balanced, sustainable economy, with incentive to put money into productive areas of the economy, rather than sinking all available funds into stagnant, depreciating bricks and mortar assets. 

Wait…did I just solve the entire housing AND financial crisis?

I believe I did.

You’re welcome, Britain.

Nie moj cyrk, nie moje malp

Okay, just a quick one! Honest. By the way, the title refers to a recent Polish idiom I heard recently, meaning ‘not my problem’ – it literally translates as ‘not my circus, not my monkey.” It has almost no bearing at all on anything, but I thought it was awesome.

So: house price indices!

 There is a lot of confusion around house price indices – so I will do my best to add to that confusion by writing this blog based on absolutely no background research whatsoever, save for a lecture I had a few years ago, and my recent perceptions of actual, like, reality.

I read this morning in a newspaper that house prices have gone up, and also down (separate newspaper) and have also possibly stayed the same (third newspaper from last week).

So why the difference? Well, I don’t really care to be honest – they are weighted differently, have different sample sizes etc etc blah blah blah.

HOWEVER house prices have, on average (important) gone down A LOT. And I know this because a) I know everything and am always right, just ask my spaniel (but not my wife, she disagrees on this point) and b) I am an RICS Registered Property Valuer, so I can legally tell you what your house is worth, despite the fact that I can barely even remember my lectures and accidentally burnt a lot of my lecture notes.

Firstly, forget the fact that people completely forget about inflation when discussing house prices, so even my spaniel can see that house prices have dropped by a third in real terms (no one mentions this in the media, ever). I recently tried to introduce the concept of inflation to a middle aged Chartered Surveyor I know who is very knowledgeable about property and construction, probably more so than anyone I know, in fact, as he is one of the few people in Britain who is both a Chartered Architect and a Chartered Surveyor. I won’t name him here to preserve his anonymity, so without expressly divulging his identity, let’s for the sake of this blog post just refer to him as ‘my father’: half way through my explanation of exactly what inflation was, he accused me of inventing "voodoo economics". But I digress. 

Back to my point, the important difference is this: the average price of a property nationwide is different from the average price of a property bought and sold.

Example: if you have 10 houses, 8 worth £100k and 2 worth £1 million, then the average house price is £280k. This in itself is meaningless, as there are no houses worth £280k AT ALL in this scenario, but then it is a sort of useful benchmark.

House prices are dictated at the margins, and average prices based on transactions – so if every house was bought and sold then we could base our average on the £280k figure, as an average of all the transactions that have taken place.

But, if the lower end of the market is stagnant (which it is), and the only houses being bought and sold are top end, eg the only housing transaction in this scenario is one of the million pound house being sold, what is the average house price, based on transactions, according to the indices? (Keep up Nick Clegg). It has gone up (a lot in this instance), despite no movement elsewhere. Now imagine the other houses are falling in value in reality, and the figures are even more screwed.

This is an extreme example, but as a microcosm is what is currently going on – house prices are falling, apart from a minority in London, but this is rarely reflected in the figures.

But then again, I rent, so it’s not really my circus, or my monkey.

"How can a nation be great if its bread tastes like Kleenex?" - Julia Child

There is an advert on the tv for Center Parcs at the moment, that starts with something like:

“What would you like your children to inherit?”

“A house? Or…good memories?”

Their implication being that the logical choice is, for some reason, good memories.

Apart from the fact that you can’t inherit memories, which is a bit weird, you can almost hear under-35s around the country screaming the words: “A HOUSE! A HOUSE!” at the tv.

But anyway…

Recently a minister compared our housing market to bread. If the cost of a loaf of bread had risen in line with the cost of a house, a loaf of bread would cost….well, a lot, is his point: 50 quid-ish, some say, depending on your time frame.

That would be bad, correct?

Except that he left it there. But it is logical to extend that analogy a little bit…

…imagine that a loaf of bread does cost 50 quid, but two thirds of the population already have bread-making machines. And that one third have to buy bread at 50 quid.

Suddenly, this is only a problem for some people – most people don’t care. Now imagine that people with bread making machines are more likely to vote than non-bread-machine owners, and you are a politician in charge of bread-making policy.

Would you change anything?

No, of course not. Except then your children have to start buying their own bread for 50 quid, and come and keep nicking your machine, so you might make some noise about it but not really do anything. Why?

Well, I would leave the analogy there, only to add that non-machine owners (renters, keep up Nick Clegg) are even less likely to vote because they have to re-register constantly as they move around, so politicians will not start trying to win their votes any time soon, as even if they did wield electoral power, they’d still be in the minority.

So the pain continues.

Be Careful What You Wish For...

A recent Economist report has shown that, on key indicators (rents to value ratios etc) Canada has the most over-valued property in the world at the moment. Clearly it would be a good idea to get the guy that ran their economy to come and be our new Bank of England Governor. Oh, we already did...?

But I digress…

There seems to be a hope among frustrated FTBs that falling property values will make it easier to buy a home. I don’t think these people have quite thought this through.

Homes will be indeed be cheaper, as their values will be falling (let me know if this is a bit of a complicated point, Nick Clegg) but this does not necessarily mean that they’ll be easier to buy for most FTBs. In fact, if you think about it (and I do from time to time) falling property values will probably make it considerably harder for most first time buyers to purchase.

And by ‘FTB’ I mean the traditional first time buyers, for example a young family on average incomes attempting to buy a house – not a millionaire Qatari using London property as a safety deposit box (someone who also counts as a first time buyer and is also regularly used in ‘FTB numbers rising’ reports in the British press).

Let’s start from an a priori position:

This is how banks think (and I used to work for a bank as an Analyst): I will give you money, but how do I cover my ass? (I worked for a US bank, you see)

Here are three succeeding scenarios, two plucked at random from our recent economic history, with plucked from a potential economic future:

SCENARIO 1 House prices are booming, they will only ever go up!

SCENARIO 2 House prices are fairly static, they may go down a bit but probably not more than 10% at worst. Where is my Diazepam? I might need to take some.

SCENARIO 3 House prices are plummeting. Benzodiazepines are yummy.

Scenario 1 – banker thinks: rising prices, I will lend 105% of the house price as I will definitely get my money back! The house price will rise to cover it! Brilliant. I don’t even NEED my diazepam anymore, this is the best thing ever.

Scenario 2 – I am a banker and I need a 10% deposit against the loan, just in case. As ‘scenario 1’ has already pushed up prices to multiples of the historic average, this means the annual average wage as a deposit please. Cue most FTBs being excluded from mortgage finance. I will keep diazepam on hand. Just in case.

Scenario 3 – house prices are falling a lot, looks like they may go down another 25%. I am a banker, and I want to cover myself – I need a 30% deposit please. Cue total exclusion of ALL FTBS. Plenty wailing and much Diazepam was had by all.

Build lots of houses with the express intention of having house prices fall, and lending to FTBs will disintegrate completely (along with all bank’s loan books and subsequently what is left of the British economy, but that is a separate point).

Luckily the government has no intention of building more houses, they’re just pretending to want to.

So what is the answer?

Well, at what point will people realize that THERE IS NO ANSWER! There is no way out without pain.

The longer we try to avoid that pain, the worse that pain will be when it comes.

Here endeth the lesson.

Government Housing Policy Goes Bananas

At first you wonder what the hell the Coalition are playing at with regards to housing, and why their rhetoric is so different to what is happening on the ground, but gradually it all starts to make sense when you realize that it is essentially being dictated by the major housebuilders.

The Coalition listen to the Housebuilders, partly because they are massive contributors to the Tory’s coffers, but probably (I hope) mainly because they are seen to be experts on housing (rather than anything dodgy, heaven forbid).

But their aims differ from that of the country as a whole: a housebuilder’s aim is, quite rightly, to increase the profit of housebuilers.

The Coalition are very keen to pay lip service to the idea of increasing the number of houses built, as their vote is in danger from key constituents of their base, as the baby-boomer property owners who benefited from the massive property boom are starting to reaslise that their little Tobys, Tobias and Tobs’s are not moving into their own homes.

This is, as we all know, as they are unable to obtain mortgage finance – and thus are cluttering up baby-boomer housing despite the fact that they are sometimes pushing 35. Banks won’t lend to high LTVs as they realize that there is a significant danger of house prices dropping significantly, and this would decimate their already precarious loan books, cause LIBOR to shoot through the roof, interbank lending would cease and banks would seize up and we’d have GFC part II – Director’s Cut, bank runs etc.

Most people have a basic grasp of economics and think: high prices = shortage of homes, ergo, more homes = lower prices = Tobias moving out at last.

Of course, this is ignores the very basic reality that every single piece of empirical evidence suggests that high house prices have nothing to do with a shortgage of homes, and in fact supply outstripped demand/population growth (yes, including immigration) for the whole of the period 1997-2008 by several percent a year. But let’s ignore that as no one ever believes it – because it is repeated constantly by everyone that there are not enough houses, the proof being HOUSE PRICES ARE TOO HIGH! THERE MUST BE A SHORTAGE! – obviously nothing to do with the fact that mortgage lending increased by 500% during this period, it MUST BE BECAUSE OF A SHORTAGE not our fractional reserve banking system ploughing billions into pumping up hard asset classes etc etc no one is listening…

But I digress. The Coalition aim to increase house building somehow, or at least be seen to be to satiate their core vote – but the housebuilders don’t want to, but want to pretend to as it’s good PR. De Beers don’t flood the market with diamonds or they would lose billions – prices would fall. Same with Housebuilders. They realize the market is precarious – only foreign money coming into London, combined with massive bank forbearance and historically low interest rates, are keeping things alive – prices are dictated at the margins, so if you can maintain low transaction numbers at a decent level you can pretend price stability is being maintained.

Actually the government probably do know what needs to happen to normalize the market (they are probably not that stupid) using simple supply-demand principles - but it would be completely unacceptable to them of course – the solution would be to put interest rates up to historic norms, ie 5%, watch 2 million people lose their homes with vast, enormous misery and 6 months of absolute turmoil and Armageddon and then a return to normal growth. The longer that is put off, the worse it would be – but they are choosing (and who can blame them, really?) years of, they hope, managed price decline and debt stagnation. Is this better? Maybe it is. Two decades of gradual decline versus six months of devastation and ten years of growth? Which would you choose?

So what to tell government to do, if you’re a housebuilder? After all, they will do what you tell them to do, you ARE the expert. Why, reform Section 106s! Now, Section 106 agreements are a fairly stupid but almost workable solution where a housebuilder building, say, 100 flats has to set aside a certain number for affordable housing, as the council doesn’t want to build these themselves – they have all their money tied up in much more important things, like final salary schemes for local government workers etc - so let's make housebuilders do it all, after all they have massive yachts and you should see the cost of that guys watch I met from...etc etc

Housebuilders still manage to make massive profits despite doing this, but if they didn’t have to then they could make even MORE profits! So seeing as they're asking, let’s get the government to get rid of 106s, which they are doing, and replace them with a Community Infrastructure Levy (CIL), which they are doing, and which means that housebuilders no longer have to build affordable homes and shoulder the cost entirely themselves – but the cost of this type of similar, social development is spread evenly among the whole community, among all developers – ie people who are bolting on extensions, basement dig outs etc.

Result: no small scale development as it becomes vastly more costly more for small scale players = housebuilding increasingly concentrated in the hands of developers = no increase in houses being built but bigger profits for the housebuilders. Winning!

Have you ever heard of the CIL? No? I hadn’t until recently, and I’m a surveyor! And yet, for a basement dig out a client wants to do I was told today the new tax is £50,000. Result = no basement dig out.

Well done government.