Help To Buy

In the Budget today George Osborne announced a new scheme to 'help' house buyers. Here is the flyer (or infographic as they call it)...



...which I have annotated for clarity.

"This was a bust without a boom"

The words of Mervyn King again  speaking in the Today programme lecture last night. on the financial crisis. History provides evidence that this statement is a physical impossibility and the same will be confirmed eventually with the current depression. His comment illustrates how he completely misses the underlying causes. Relying on inflation measures missed the enormous expansion in mortgage lending by the private banks which fuelled a tripling of house prices in 12 years. Astonishingly, when questioned on this, King claimed that this house price increase was sustainable by the low interest rates and the borrowing of first time buyers (95% mortgages and 7 time earnings sustainable!)

In a credit based economy it is the natural tendency for asset prices to outstrip the productive side and this is the foundation of the boom-bust cycle. This will be shown to be the case in the UK again; the fragility of our economy, too reliant on the expansion of debt cannot support land prices that remain inflated. Until policy makers understand this, the boom-bust process will continue to fuel inequality, unemployment and misery.

Yorkie, officially for girls

Towards the end of last year I noticed that picking out my customary Yorkie bar from the vending machine was easier than normal and its consumption was far less satisfying. I also spotted that they were no longer using the catch phrase "Its not for girls". More recently I was pleased to pick up some 'old stock' Yorkies approaching their use-by-date from my local Coop and I was able to do a direct comparison.

So Nestle have decreased the mass of the Yorkie bar by a staggering 15% and are selling it at the same price. I can only conclude that the new Yorkie "is for girls", perhaps those that are on a diet for the new year. Sadly I expect this change to be permanent and I will have to look elsewhere for a chunky chocolate fix.

This did get me thinking about the nature of 'inflation'. The price of the product has not changed, however the price/g of the chocolate has gone up. For the chocolate consumer this represents an increase in the cost of living but I don't believe this will be recognised via the 'basket of goods' by which 'inflation' is measured. However there is a fundamental difference between a price increase caused by, say, a poor cocoa harvest reducing supply to the market and a price increase brought about by a devaluation in the currency caused by an increased supply of money. Which is true 'inflation'?

On another thing I am more certain, an increase in base money from the Bank of England is not directly inflationary. Since it tends to sit in commercial bank reserve accounts and does not flow outwards into the wider economy. The amount of money in active circulation is increased by commercial banks creating new loans. This is something that they are not currently doing much of, since the pool of credit worthy borrowers is shrinking (as unemployment increases and businesses contract) and their security of choice, real-estate, is falling in value.

Bank of England, there is hope?

I was rather critical of Mervyn King and the BoE's inability to spot the enormous credit bubble developing in the run up to the current financial crisis. However, I have just been directed to this publication from last year that appears to make a less orthodox economic assessment of the run-up to the crisis "the Great Moderation".  Although, yes the horse had long since bolted. I have only just started digesting this but on the face of it, it is very interesting to see Hymen Minsky cited describing the inherent instabilities of the finance sector. In a nutshell the paper concludes that although established macroeconomic indicators (inflation and unemployment) were stable, credit, balance sheets and asset prices were certainly not, so in the future we should probably keep an eye on these. Halleluja!

One interesting figure that I can pull out straight away is this plot confirming the much debated transfer of  "wealth" from young to old over the past 15 years:

Housing wealth gains are clearly concentrated amongst baby boomers (50-65yrs). Net financial wealth (less pension assets) actually reduces across most age groups but is clearly skewed towards the youngest since they have been taking on proportionately more debt (larger mortgages) and so their liabilities have increased substantially. Only the oldest have seen a net actual increase in financial wealth (less pensions) since this cohort have typically paid off mortgages and come from a more debt averse generation. Across the population the net financial wealth asset (area above line) is clearly smaller than the net financial liabilities (area below line), I deduce that the missing bit must be with the banks!

I do wonder why the more insightful work of the BoE such as this is buried but frankly deluded statements such as "Mortgage debt cut by £8.6bn but Bank of England sees little sign of rush by households to reduce debts" are publicised.

London, tax haven of the year 2011

Despite a totally stagnant housing market across most of the UK, Savilles estate agents have reported that top-end London property prices have increased 18.6% in 2011. This increase is ascribed to international buyers sinking money into UK real-estate as a tax-efficient safe-haven while other investments look increasingly volatile. By assigning property to an off-shore company, it can exchange hands via the sale of shares rather than deeds. So rather than the usual top rate of 5% stamp duty land tax, only 0.5% stamp duty is paid. It goes further than this though, by exchanging equity in an offshore holding company, capital-gains and inheritance tax can also be avoided, as can tax on rental income if the property were to be let. To add insult to injury to the UK taxpayer, many of these super expensive properties are left empty much of the time. They are purchased as a secure store of wealth rather than a residence. So despite seeing the majority of the London workers being forced to pay an increasing proportion of their income for  housing, the most desirable residential locations are becoming increasingly under-utilised.

In fact the only tax that is likely to be paid consistently on property purchased in this way is council tax. However if these properties are left long-term empty then a 50% discount is available for 6 months and 10% discount thereafter. Perhaps in an attempt to lure further foreign buyers to invest, Westminster council proudly proclaims the second lowest council tax in the UK. An apartment in no.1 Hyde Park, valued at £30 million, will pay less in council tax than a 'band C' two bed terrace here in Oxford. Remember that Council tax does not pay for local services but more properties left empty by foreign owners does mean fewer bins for Westminster to collect which is handy for them.

And of course central Government proudly announced that, although they have increased VAT and National Insurance, they would be continuing to freeze council tax this year. Bravo.

"It is hard... to identify asset price bubbles"

A quote from Mervyn King, Governor of the Bank of England, in 2004 agreeing with Alan Greenspan the Chairman of the Federal Reserve. Perhaps he should have looked at the plot below which I put together with data from the Bank of England's website.

The peak in the rate of change of mortgage lending occurred around the same time as the words were being uttered. As far as the central bankers were concerned, since inflation was low and stable, all was fine and dandy. This conclusion was made despite the huge amounts of credit money pouring into real estate. Yet as the financial crisis has developed there has still been no genuine acknowledgement of this failure to spot the critical factor - the change in private debt.

Note the discontinuity in the mortgage lending plot. This occurs where there is a change in the source of the numbers from BoE derived to mortgage lender derived. It is almost as if the BoE want to disown the data.

Government set to help established homeowners

News is filtering out of the government's overdue housing strategy paper and it looks set to be a major shot in the arm for those at the top of the housing "ladder". The government appears to be siding more with the CBI's recommendations rather than those of the Intergenerational Foundation. However the proposal that both reports recommend, namely the removal of Stamp Duty, looks set to be ignored. The government instead is likely to go with a state-backed mortgage indemnity scheme.


"Under the mortgage indemnity scheme the government would cover the risk for the lender, which should enable first-time buyers to take out larger mortgages relative to the value of the home."


Firstly we can ask why tax-payers should be taking the risk when the banks get the interest (have we not learned anything from the financial crisis?). Secondly we can surely see that the ability to take out larger mortgages only serves to increase house prices (again a take-home message from the financial crisis is that inflating asset prices with ever increasing debt leads to bust). So this policy looks set to boost existing homeowners at the expense of first time buyers.


"The plans also propose that borrowers should be able to use money in their pension pots to boost deposits."


So not content with first time buyers paying an ever increasing proportion of their disposable earnings into housing, now we propose that they put their pensions into it too! As above, this only serves to inflate house prices which helps established homeowners at the expense of first time buyers.


"Cameron is also expected to develop his plan, first set out at the Conservative conference, to extend right-to-buy for council homes... The consultation will reveal the level of discount available to tenants wishing to purchase their homes and a broad outline of how sales receipts will be distributed."


An established government policy is to sell off stuff that we all own at a discount so that private owners can sell it back to us at a higher price. Witness the number of former council homes that are now rented out privately at the market price and typically sold at prices above which first time buyers can afford (since former council houses are typically bigger than new builds).


"Grant Shapps, the housing minister, has developed a "build now, pay later" model, to be applied on many of the sites. Developers will not have to pay for the state-owned land until homes are complete, relieving pressure on their cash flow."


So as far as the land goes (which is often most expensive element of UK homes) the developers are simply acting as an intermediate passing on the cost to the homebuyer. Why not then simply take them out of the chain so the developers do not need to worry about the cost of the land. This way the state really could make homes "affordable" by simply leasing the land to the buyer, so the buyer only need to raise immediate funds to cover the build costs. Without such a policy we are back at the previous point with the state selling off national assets, that we all have a stake in, at a discount. History tells us that this is one way street and we will soon reach the point where this land is being rented (either explicitly or imputedly) back to the nation with the proceeds pocketed privately.


So all in all a thorough package to boost the finances of existing homeowners. And we all know who are the biggest homeowners, currently holding the most property title deeds, the banks of course!