Broken Capitalism /brokencapitalism 26 Jul 2017
The FT this morning runs a piece about how the majority of high-end London homes coming off the market are being withdrawn rather than sold. This speaks volumes about people's perception of reality, reality itself and our reticence to accept that the value of our homes (or investment properties) is falling.
The prime central London market has been falling for months but still these presumably above-averagely educated and informed owners are still in denial - so what hope for the rest of the country to reach sanity?
The underlying question I want (as a younger, non-home owner) to ask here is when will prices normalise?
The causes of today's high prices are simple: 10 years of governmental intervention (QE and low interest rates in particular) have inflated the price of assets. Everyone who held them in 2008 have pretty much only had the option to buy each other's at increasingly expensive prices - all of them getting "richer" in this Ponzi-scheme kind of a way, but also in a real way since the value of non-assets - food, etc have stayed the same, pinned down by low wages. (This "differential inflation" has been huge in the unofficial world of assets, at the expense of low or zero inflation in the everyday items that make up the official inflation measure - mostly those things consumed by the young and relatively poor - exacerbating inequality)
What's propping it all up?
- Low Interest Rates (a) allowing mortgagees to stretch the amount they can borrow
- Low Interest Rates (b) making buy-to-let returns (initially) way better than savings accounts
- Help-to-buy and other ultimately unhelpful market interventions
- Bank of mum-and-dad, passing on equity gains to allow purchase of houses out-of-whack with wages
What's stalling it now? Over time the above factors max-out:
- Wages are not growing in any meaningful way, creating a limit to what any job (assuming a range between £25k and £150k for most everyone) can stretch to - properties over £600k simply cannot be purchased by income alone, regardless of job
- There comes a point at which rental returns come back into balance with less hassely savings products. A £1m house needs to charge £20k/yr rent just to make a 2% return (excluding costs). Rising prices further reduce yield until once again other options - even at low rates - become viable
- Ignoring the political sensitivities, prices eventually reach a level even help-to-buy can't boost past
- As mum and dad get old and their equity fails to inflate further, draining it becomes less of an option - particularly when expensive care costs start to hit (as they now are for the elder of the baby boomers)
- Homeowners with decent equity are running out of working age road - getting too old to secure a re-mortgage in order to substantially upgrade. The "remortgage wall"
- Younger homeowners who haven't benefitted from the same explosive price inflation as their parents don't have enough equity to move. The "rungless ladder wall"
- The even younger have given up on houses. Jobs - all of them - don't add up to houses, and they know it - so they are not even bothering
There are no magical ways to prevent these factors continuing to impact the market. The magic money tree might be shaken again, with QE boosting prices but it will also further crystalise the sales freeze. Helicopter money is out since that would also set off the inflation bomb. Property prices it transpires have a ceiling past which they cannot lift without a shift in the value of money itself. What's more, any upward change to interest rates or inflation once at the fully-inflated top will accelerate the destructive effect.
The only realistic way is down - the question is really how long can the market tread water? The answer to that is probably the same amount of time that the general public can continue to suspend belief. Or perhaps just a little bit shorter.