The UK seems to be in the limelight again today with the overnight release of the RICS house price index popping up on our screens at midnight. I humbly admit that I hadn’t set my alarm clock so it wasn’t until this morning that I was faced with the news that the index fell to 5 in July from 15 in June.
For those unacquainted with the release, the Royal Institute of Chartered Surveyors collects data from its members who report on whether they see house prices rising or falling. In simplistic terms, the price balance number of 5 therefore tells us that 52.5% of surveyors still see prices rising in their area whereas 47.5% see them falling (ignoring the possibility in this example that there are some who see no change).
“Brexit! Brexit!” Are you quite sure? If there is one subject that gets the tongues wagging at dinner parties or, at this time of year more likely barbecue parties, it is the way in which the rampant development of property prices has locked our children’s generation out of home ownership.
There is a two-fold cause for the rise in house prices, the first of which is “nimby-ism” (not in my back yard), which has made the planning process for the development of new housing ridiculously complicated. Over time this has led to a chronic housing shortage that has been vitiated by the notoriously inaccurate immigration figures, which in turn have led to a chronic underestimation of housing needs. Economics 1.0.1 teaches that inflation is caused by too much money chasing too few goods. Too many people pursuing too few houses? Whooosh!
The second and less reported influence is the parental generation itself. We – and I’m speaking generically here for I sadly have no children of my own – have been looking at property as a cool way of investing for our retirement. The British middle class has grown up with axiomatic confidence that nothing is safer, nothing appreciates more and nothing generates as stable an income stream as residential rental property.
In mainland Europe apartment blocks are built for and bought by insurance companies and pension funds which rent out units managed by their own or by contracted real estate management companies. In the UK blocks are built and the units sold off to individual investors who rent them out themselves or are managed by a multitude of local operators. This is not of itself problematic but when it comes to pricing such properties the process is willy-nilly and classic yield calculations often go out of the window.
If a young person or a young couple is looking to get on the property ladder, the calculations as to how much they can afford in terms of down-payment and subsequent monthly mortgage costs will have been done to the Nth decimal. Up pops a middle-aged professional looking for a safe haven for the retirement fund. When the two are competing for the property, the “oldies” can in most cases easily outbid the youngsters. What’s an extra £5,000 or £10,000 when looking at a long-term investment? Thus the second-home buyers in most cases could compete the first time buyers out of sight.
Up steps former chancellor George Osborne who totally revamps the stamp duty regime which is now structured to fleece second-home buyers to the benefit of the first-time buyers while raising taxation on the top end of the house price bubble in order to cool things down. On paper a great idea but in reality a fiasco in that the buy-to-let community is squeezed out before the buy-to-live bunch can yet afford the pricing. A vacuum was created and more or less ever since the tax changes the UK property bubble has been deflating.
Although at a reading of 5 the RICS index is still showing rising prices, it has fallen from its reading of 50 in February of this year. There is no doubt that the Brexit debate took some steam out of the residential property market but at the same time it could also be argued perfectly well that Osborne’s tax changes, which were aimed at rebalancing the market, are taking effect.
I heard somewhere this morning that the fall from 15 to 5 is a record. Lies, damned lies and statistics. Between April and May the index fell from 38 to 20. In percentage terms the decline is by two-thirds; the June/July decline is large but in absolute numbers, at 10, the earlier decline of 18 is larger.
Osborne was chancellor and therefore not responsible for the housing shortage. He tried, to the best of his ability, to rebalance the existing market in favour of the weaker and less flexible first-time buyer. However, the problem remains and the shortage of housing as a whole needs to be addressed.
Bubbles
London prices are falling which is more than overdue while prices further out are still rising modestly. The glass-half-full view will be that this is ongoing proof of the success of the Cameron government’s objective of taking steam out of the market while the glass-half-empty lot continue to scream “Brexit!”
Markets are strange places and their population is often even stranger. We watch with trepidation as asset price bubbles form but then, when the bubble begins to deflate, instead of celebrating, we go into head-long panic and demand that something has to be done.
This was the case in 2008 and we have ended up with monetary policy that is out of control. I repeat my mantra that central banks are supposed to be here to soften the effect of recessions, not to prevent them. The destructive credit bubble that went up in a mushroom cloud in 2008, taking Lehman Brothers with it, was indisputably caused by Alan Greenspan’s efforts to stave off recession by excessively loose monetary policy in the aftermath of 9/11. It is easy to argue and hard to refute that current ZIRP and NIRP will eventually lead down the very same path for a second time but without any meaningful weaponry left in central banks’ and governments’ armouries.
The decision today by the Korean central bank not to ease policy is to celebrated. Although Bank of Korea indicated that from the current rate of 2.5% there might be room for further easing, it would prefer to keep its powder dry for the while.
So is the UK facing a housing collapse or is the bubble beginning to deflate in an orderly manner? Those among us who have hung around markets for long enough know that bubbles rarely, if ever, deflate in an orderly fashion but we also know that when they burst they take the “tail-end Charlies” down with them. The fear must be that the central banks’ lure of cheap money will have caused that tail to be overpopulated and the press and media will again be full of tales of woe of the poor victims who have lost everything in the downturn rather than questioning why they had been so blindly led by monetary authorities into overdosing on lemming juice.
Finally, Zero Hedge released an article yesterday reporting on an academic exercise that had been conducted and which put European banks through the US model of stress tests rather than those of the EBA. The results were apparently scary and had Deutsche Bank held up as being capital deficient in excess of its market capitalisation. I’m generally not a great fan of stress tests because they are undertaken by the very authority that sets the conditions and which will obviously want to prove to the political masters that it has done a good job. That said, I wonder how the US banks would fare if they were to be measured under EBA rules. Maybe it would not be a bad idea, as we do with exam papers, put them in front of two markers.
Trade markets remain thin and featureless. I might just switch off and watch some more of yesterday’s Olympic highlights…