Another Home-Owner-Ist milestone is within grasping distance...

From City AM:

In ten years time only 26 per cent of so-called “generation rent”, those aged between 20 and 39, will own their own homes according to a study by accountants PwC.

In 2013, 38 per cent of those in that age group had bought a house. The amount of 20-39 year olds renting privately by 2025 is expected to have ballooned to 59 per cent, up from 45 per cent in 2013.

Richard Snook, an economist at PwC said:

“The continual advance of house prices, which have for outstripped growth in earnings, is fundamentally changing the way that people live. Changing the outlook for generation rent will require us to build more houses than need just to match population growth in order to make up the past shortfall between housing supply and growth in demand.”

Not much of an economist, is he?

Firstly, there's not much hard evidence to show that building more homes gets prices down (unless you build them in entirely the wrong place, in which case they are not homes, they are just piles of bricks), only blind faith.

Secondly, who does he think will be snapping up those new builds?

Answer: exactly the same 'equity rich' Baby Boomers who are snapping up a disproportionate number of any other homes which are up for sale. At present, the ratio is one BTL purchase to two first time buyers, but that ratio is worsening (or improving, from the Homeys' point of view).

And whatever happens, all those new builds are a net transfer of wealth to large landowners.

Reader's Letter Of The Day

From The Evening Standard (25 February 2013, page 43):

The downgrade should come as no surprise - the Coalition made it clear at the start that they were going to continue running up large annual deficits for their whole five-year term.

What is noticeable is the extent to which a narrative of "savage Tory cuts" has gained traction, when what's actually happening are exemplary cuts for people the Conservative frontbench don't like (welfare claimants; social housing tenants) while ever larger sums are given to influential businesses and party donors (banks; welfare to work providers).

What is even more surprising is that Labour politicians go along with the charade and call for higher spending - surely they know the Government is spending £100 billion a year more than Labour was before the credit crunch?

Mark Wadsworth, Young People's Party.

Croydon - True power is with the people, in your vote. How will you use it?

The latest from Mr King's counting house...

The mainstream media are howling about the Bank of England's recent claims that it's 375 billion quid 'quantitative easing' policy has mainly benefitted the wealthiest 5% of the population.  The punters are lapping it up too, check out the comments over at the Guardian for instance.  The basis for this claim is that the richest 5% of Brits own 40% of all the shares and corporate bonds, and that QE made the price of these assets rise, but did it?

The above chart shows the UK's top 350 shares (the FTSE350) tracked against the USA's top 500 shares (the S&P 500) from late 2007 to today.  As you can see, both indexes bottomed out in March 2009, the same time QE started, and have tracked one another ever since.  Are the Bank of England seriously saying that their QE program also made the US stock market rise? 

Another point worth noting is that the red line is denominated in pounds sterling, and the blue line US dollars.  At the start of the chart the exchange rate was about 2:1, in March 2009 about 1.35:1 and now it is about 1.57:1.  So although it looks like the FTSE 350 fell less and then outperformed the S&P 500, it didn't when you adjust for the difference in currency exchange rates and is still underperforming it by about 20%.

 
Another thing worth noting is that the UK FTSE index is very overweight with mining stocks, London being the traditional home of metals trading.  Very few of these companies actually mine anything in the UK and they sell their raw materials globally.  The above chart is the share price for BHP Billiton, one of the world's biggest miners.  Mining stocks bottomed around November / December 2008, right around the time the massive Chinese infrastructure stimulus was announced.  Mervyns more recent bouts of QE have done nothing boost the price of UK listed mining stocks in the face of a Chinese slowdown.

The truth about QE is that the Bank of England have purchased about as many government bonds as HM Treasury have issued since it started.  Whether Mervyn is simply doing it because the monetary policy text book says he should, or has more secretive deficit financing motives, we will probably not know for a long time to come.  However the Bank of England's central claim:

"In fact, the Bank’s assessment is that asset purchases have pushed up the price of equities by at least as much as they have pushed up the price of gilts"

is highly dubious.  It is impossible to tell what would have happened to the share price of the big global companies listed on the London Stock Exchange in the absense of QE (most of whom can easily issue bonds and borrow in dollars or euros if they want to).  This report is more psychobabble from an overpaid economics lecturer and thinking people would be wise to pay very little attention to it.

Good comment at The Telegraph

By Dreadnought On The Slipway, our only quibbles are that he doesn't go far enough:

There is a lot of rent seeking in the UK. This is only natural and very understandable in a society where the population is aging and retiring people seek to live off the accumulated assets of their lifetimes. One might say that it is a good and positive thing that large numbers of people have saved enough to have an income in retirement and indeed it might be good, if it were wholly true.

But the fact is that the large numbers of rentiers now retiring from paid work and
hoping to live off their rents have been the most fortunate recipients of inflationary benefits [and transfers of wealth via the tax system] who have ever lived. Their inflationary gains over the years have been simply an accident of demographic, social and financial history. From the point of view of effort expended they are completely undeserving of their fortunate position.

Looked at from the point of view of a thinking, forced renter, and there are many, the situation is completely unacceptable. These people, who are mostly of working age, rightly perceive a future where they will work to pay for the retirement of the current generation without any chance ever to enjoy their good fortune. They feel that they will never be able to buy houses because prices are too high, because deposits are too high and because the high rents they pay prevent them saving a deposit anyway.

They see a direct connection between their work and the idleness of others. They have also noticed a further malign historical conjunction. They have to pay student fees that the previous generation did not pay just at the same time as the previous generation needs funds so that they can be looked after in old age.

If this situation is not remedied it will have incendiary social consequences. But what can be done?

To diffuse this worsening problem we need more homes and we need more jobs. This can only be done by shifting capital from unproductive sectors to productive ones. If rent seeking is to be made less attractive there is only one simple way to do this and that is to tax rents at a higher level than at present [an even better solution is to tax the rental value of all land, whether owner-occupied, tenanted or vacant/second home]. The resulting revenue should be put to work building homes for use by workers and building and renewing only infrastructure that makes the economy more competitive[and cutting taxes on work, profits and output].

There will be the usual howls from the self-interested that this tax will not produce revenue, that it will have unintended consequences, and that it will not benefit the people it is intended to. In any taxing decision there are risks. I think that if rents are taxed more some property owners will sell. This will increase housing supply for sale and reduce prices. If more houses are built this will provide
jobs, satisfy demand for houses and reduce rents and prices. If infrastructure is improved it means more jobs and the economy will be more competitive.

The capital locked up in property is simply being hoarded [actually there is no capital locked up in 'land', what happens is that income and profits are diverted from the productive economy to the unproductive sector, i.e. land owners]. We have to liberate it and use it for production and growth. It will be painful as the deadwood is culled out of the economy.

Lucy Tobin summarises...

From The Evening Standard:

Who would want to be leaving school or university this summer? When I finished my education five years ago, the default setting among escapees was optimism.

Sure, we were sad to wave goodbye to friends, fancy dress festivities and — for some of us, at least — studying, but there was a wider world of work we wanted to be part of. Today, that feeling must have turned into despair.

According to research released this week, an average of 73 graduates will be chasing every job. But if the situation sounds dire for the highly educated, imagine how those without letters after their names feel as they fire their CVs off into the abyss. More than one in five 16- to 25-year-olds is currently out of work. They aren’t simply suffering alongside everyone else — the young are being hit disproportionately.

I’ve spent the past three years wondering what it will take for those in power to tackle the problems facing the under-25s adequately. For instead of helping them, this Government seems intent on kicking them.

The Education Maintenance Allowance was abolished. Tuition fees have trebled. And if the Tories stay in power, the young can look forward to having their housing benefits scrapped too. But nowhere does this attitude manifest itself more obviously than on youth unemployment, where the Government’s £1 billion Youth Contract is nowhere near enough.

Perhaps the Conservatives have largely given up on the young, deciding that it’s easier to convince the generations above that the fresh-faced are just shirkers, too hopeless to find work or to deserve homes or help. Certainly, the under-25s are easy to ignore — they don’t, after all, vote in the numbers that the elderly do.

But if there is a political explanation for half-hearted action, there certainly isn’t an economic one...

House prices and immigration

When you complain that the Home-Owner-Ists deliberately pushed up house prices in the UK over the last ten or twenty years, their favourite excuse is that it was purely down to large scale immigration under New Labour and they deny that it is down to their deliberate attempts to restrict supply, i.e. NIMBYism.

Now, there is plenty of evidence to say that recent immigrants are given priority in the allocation of social housing, but let's stick to the central issue: the purchase price of houses.

We know that most countries* had a house price bubble over the last ten or twenty years, same as the UK, and a different ostensible reason is given each time, for example:

1. Ireland. The narrative is that interest rates fell after they joined the Euro, fuelling a speculative credit bubble, most of which went into land. It is noteworthy that in the boom years, the Republic of Ireland, with a population of 4.5 million, completed 75,000 new homes a year.

2. Spain. The narrative is that they had a bubble after they joined the Euro (same as for Ireland), and that this was exacerbated by Germans pouring in their untaxed money from supposedly secret accounts. Spain, with a population of 47 million completed 400,000 new homes a year during the boom.

3. Norway, where "property prices have tripled since the mid-1990s, up nearly 30% since the Great Recession as the oil-rich nation rode the coattails of the commodities bubble and has benefitted from the same “flight to safety” capital flows that have benefitted (and inflated bubbles in) other Nordic countries."

4. The USA, where the house price bubble is traditionally blamed on political interference, i.e. Clinton and Bush after him encouraged banks to advance mortgages to low income households, where house prices doubled since the mid-1990s. It is believed that there was also a construction boom, but on a national level, this is not actually true. Nationwide, with a population of 294 million, housing completions have been around 1.5 million a year since 1968, which per capita is not much more than in the UK (population 62 million, 200,000 - 250,000 new completions per year until the credit crunch). There are states with strict zoning laws with little new construction (which had the biggest house price increases) and states with liberal planning laws (which had the smallest house price increases).

5. Canada's economy is pretty similar to that of the USA, but there were no efforts to increase the level of home ownership (such as encouraging lending to low income families) and their system of banking regulation is much better than in most countries. Interestingly, the level of owner-occupation has now outstripped that of the USA. Prices there more than doubled over the last twenty-five years.

6. And so on and so on, there is always an excuse, the Home-Owner-Ists are always ready to blame specific local factors: Canada and Australia shared in the commodities and raw materials price booms, the same as Norway; in China they are building like topsy, they are building whole ghost cities but most homes are bought as 'investments' and stand empty; in the Eastern European countries, prices boomed after they joined the EU in 2004.

7. For example, prices in Poland went up by a third in the first few years after joining. Interestingly, while the English like to blame high house prices on immigrants from e.g. Poland, their excuse is the equal and opposite: "Joining the EU prompted purchases by foreigners, who are however limited to one dwelling each, and encouraged remittances by Poles working abroad. As the money flowed in, the Zloty gradually moved up against major currencies, encouraged also by lower inflation..."

8. The fact that other countries had construction booms and still had bubbles (Ireland: 2 new homes per 100 people; Spain: 1 new home; USA: 0.5; against UK: 0.3) seems to exonerate the NIMBYs slightly (as malevolent as their motives are); the fact that so many countries had house price booms seems to rule out immigration as a factor - if people were emigrating from e.g. India to the UK, then wouldn't house prices be falling in India? Nope. But they then have a similar excuse to Spain/German hot money: "The Indian Property Market is purported to be in bubble territory since March 2005, when the current UPA government decided to open FDI in Real Estate. This "FDI" rules ensured that Indian money stacked in Switzerland and other tax havens can be brought back to invest in high yielding Indian property market, away from low-yielding dollar assets."

This is not to deny that inwards immigration to the UK must have had some impact - if we hadn't had this, maybe house prices would "only" have doubled in ten years instead of trebling. And while New Labour's immigration policies were questionable for many other reasons, it is also true that most immigrants did come here in good faith and found a job (their unemployment is lower than for British born people of the same age) and most are not in social housing, so as individuals they are not to blame (and are welcome to join YPP!).

10. So... once you rule out all the equal and opposite excuses (it's funny how these special local factors all seem to push prices up - nowhere are there special local factors keeping a lid on prices*), what you are left with is the same basic reason everywhere: the easiest way for banks to make money is to expand mortgage lending; they make twice as much profit if they can get house prices to double, enabling them to siphon off rental income; politicians like house price bubbles because it creates the illusion of wealth and gets them re-elected; existing owner-occupiers like it because it makes them feel rich etc, it is a vicious circle.

NB: bankers are in fact indifferent whether there's new construction or not. If the NIMBYs prevail, then they can lend more on the rising price of existing houses; if there's a lot of new construction, they can lend the money to "property developers" instead.

11. And there's something else which is the same everywhere: it's the same people who end up paying for all this; that's the next generation, assuming they're "lucky" enough to get a job. Residual unemployment is racked up each recession, and never returns to its old pre-recession level. Back in the 1970s it was headline news when unemployment in the UK hit half a million and then a million. Nowadays it'll be headline news when it hits three million. And The Daily Mail will continue to blame this on the 'welfare culture' while simultaneously saying hooray to house price inflation (and boo to immigration).

* The only noteable exceptions are Germany and Switzerland, but this is probably down to the fact that their houses were so stupendously expensive to start off with - even back in 1990, pre-unification, the average house in Germany cost seven times the average household's income at a time when the average ratio in the UK was three or lower.