Tuesday, March 27, 2007

So that's where the money's gone ...

Pub Philosopher with one of the more important posts I've read in a long while. I've been watching house prices rise for 15 years or more,waiting for the crash which hasn't happened. I look at the average cost of a semi and wonder how anyone on average wages can afford it. Who keeps buying ?

We've been reading about vast city bonuses for a long time now. Each year directors of large companies get 15%-odd salary increases while shopfloor Joe gets 3%. Don't get me started on the share options.

My late mother's house was bought by an investor. So was my late father's.

Before the second world war, even middle-class people, for the most part, lived in rented property. Home ownership was only for the wealthy. In many European countries, it is still unusual for people to buy houses until they are in their late thirties. Might the rise in home ownership since the 1950s be thrown into reverse? And what will be the social impact of wannabe house buyers being forced into the rental market?

You really must read the whole thing.

Blogging will be light for the next two weeks. If I have time I'll post from Mexifornia.


Voyager said...

You don't need Milton Friedman to recycle Keynes Liquidity Preference Theory. Anyone reading Treatise on Money by J M Keynes or any works by Harry Johnson or Don Patinkin knows that people invest along a yield spectrum trading liquidity for returns with cash balances held as a precautionary reserve.

If liquidity is abundant money riples quickly into illiquid asset classes such as property and a bidding war ensues to obtain illiquid and non-fungible asset classes.

If the Govt undermines liquid assets like the Stock Market and Bond Market and illiquid investments like Pension and Trust Funds then the property market takes off as an investment category.

That housing also has a use as a residence is irrelevant when liquidity bids up the price of scarce resources like land.

That the Bank of England is inept at Monetary Base Control has been proven for decades. In the past it was because of Govt borrowing execesses required liquidity so the Banks and insurers would buy Gilts. Now that borrowing takes place through PFI and offsheet stunts like Network Rail, the Pension Funds get a more liquid investment through equity withdrawal and leveraged recapitalisation of the projects.

Thus even capital infrastructure projects become iquid to investors who then pyramid the deals.

The abundance of hedge funds leveraged on cheap money is indicative of a bubble economy. The two major countries with the biggest trade deficits are the ones with the most active hedge funds; Spain another basket case has a property boom on low Euro rates.

The de-coupling of Risk from Return is the phenomenon of the Age, as people take on risk just to gain any return thus competing away the risk-premium.

The Bank of England then gets frightened of the mess it has created by having interest rates too low - a consequence of the Y2K Scam, and the Dot-Com Bust.

The Govt has used the housing market to keep Consumption high and allowed leveraged refinancing of houses in a sort of privatised pump-priming of the economy...but after 2001 the Govt started running huge deficits too which added oil to the fire.

Unless mortgage lenders keep offering cheap credit the housing party will burn out, but Money Supply in Britain is expanding at >16% pa in a country growing at 2%.

There will be a Bust and it will be a beauty. The Exchange Rate will go down with the US Dollar and interest rates will go up to hold imported inflation down........

Dave said...

When will this bust be? haven't people been predicting it for about 7 years?

Do you blame the Labour government for it, or would the same of happened regardless?

Voyager said...

Labour is undoubtedly responsible - ten years is a long time - few CEOs get as long to prove their incompetence.

The Bank Of England was seduced by the Millennium Bug hoax to increase liquidity this caused the Dot.com Boom. The bust scared the B of E so it pumped in more liquidity.

China flooded the country with cheap goods so inflation affecting the CPI stayed low and the Balance of Payments went to hell as British companies folded

The Bank is at fault for not bringing Govt fiddles like PFI to heel

The bust will come when the mortgage lenders stop feeding the fire with teaser-rates of 4% for 24 months.....put base rates up to 8% and watch it pop.

There are big cutbacks in public spending coming - that means people cannot pay mortgages....

Anonymous said...

Around here I have noticed some unusual activity in the buy to let market. If you look at the cheaper end of the market (small terraced houses on busy roads) you see a house go up for sale and then sale sign go up a couple of weeks later. Next the "To Let" sign goes up and stays there usually for a month. There can't be any takers as next a for sale sign goes up again and the process repeats. Several houses must have been empty all year but have had 4 or 5 different owners. It appears there are far more buyers than actual letters out there. I suspect if there is a crash that is the segment of the market is will hit the hardest.

Anonymous said...

A couple of points to make:-

buy to let is only attractive for investors because the number of homes required exceeds supply. This is because we had a total incompetent in charge as DPM. Build more houses and the buy-to let market will end, housing will become chepaer and mortgages will make up a smaller proportion of peoples income. All the citizens become genuinely better off. Perfect as a policy for the next Tory government I would say.

Secondly, the idea that Thatcher was responsible for the growth in home ownership is wrong. Growth started when the baby boomers couldn't find enough council homes and the growth in the supply of private homes rose to meet demand. This was helped by extremely high inflation rates at that time. Council homes were in any case falling in popularity due to people disliking the idea that they were placed in whichever house became available first and had no choice in the matter. There was also a historical understanding amongst the working classes that owning your own property gave you greater freedom and some wealth to leave to your children.

Dave said...

Total rubbish anon.
#1 There is already vast building projects going on in this country. Everywhere I look there is building going on, my brother is a landscape gardener and has a huge amount of work from newly built houses.
#2 Until immigration is controlled it doesn't matter how many houses are built they will never meet demand.

Voyager said...

buy to let is only attractive for investors because the number of homes required exceeds supply.

Not so. It is attractive because investors can offset interest against tax which owner-occupiers cannot.

Investors can also depreciate property.

If the business is run commercially with Ltd Company status and leveraged properly the business provides a nice tax-shield for high income groups in financial services who run a leveraged portfolio.....since they offset losses against their personal tax they can set up their structure as a CMO bundled against secured property assets and either parcel properties to a leasing company or look for NASS or other Government funding of tenants for a clear income stream.

The other trick is to acquire properties above shops and claim tax credits for renovation and particularly in university towns clean up on the commercial and residential rental streams

The new rules on Self-Administered Pensions and the development of quoted REITs in Germany make funds available for property investment on a more substantial scale than hitherto

Anonymous said...

Voyager: you are mixing up the tax benefits that would apply to a private investor with those that might apply to a ltd company. In fact what you have written is basically untrue.

Voyager said...

NO anonymous I am not. It costs £20 to become a Ltd Company online.

Anyone buying property would package each unit into a Ltd Company to avoid CGT problems and to structure each component. Any private individual can become a Ltd Company and leverage - that is how business works.

In fact you can double dip and invest SIPP pension funds into a Limited Company investing in property

Voyager said...


Interesting report...wonder when it will arrive here ?

Anonymous said...

Hey Laban,
You picked a great time to visit Mexifornia - the weather is perfect right now - clear blue skies, gentle breeze, 77 degrees. Hope you're going to visit Solvang (aka Little Denmark) on your visit - friendly people, great wines.