Thursday, 30 October 2014

High House prices will realise the socialist utopia in the UK

Following on from some perspetive comments on the last post, it is worth further exploring just how quickly the UK is running down its historical wealth.

This has happened to many, many countries in the past - Argentina of the ealy 1900's is always a prime example, but of course Spain was a world power and the Chinese empire's waxing and waning over the millenia offers many examples.

The UK itself nearly fell-off the cliff in 1976. An IMF bail-out at the height of the 'sick-man of Europe' phase. It took a decade of supply-side reforms to drag the country back from the precipice, but was thay forever, or a bump on the road down.

I ask, becuase increasingly no just in the UK but all all over Europe and North America, the feeling is that our children will have worse prospects than ourselves, that life is getting tougher and not better. Some of this is illusory, as we accept massive developments in health care, technology and communications whilst attaching no valuee to these. But in terms of income and GDP, the writing is on the wall.

Perhaps a good example of how a country can decline can be seen in the wealth transfers between generations.

In the UK, property prices have meant that the family home is the man source of savings for the vast majority of the population. These prices have shot up, making older people much richer than young ones. Now we are seeing them want to pass-on this wealth their children, who cannot afford to buy a starter home. So far, so what, the wealth is being shared around. But then, the cost of the bank rentier removes the built-up wealth

But in London I note  key affect. English people are selling to foreigners and moving out. No one in my large team at work in the City buys anywhere near central London now, if at all. No on under 30 evens owns a flat. The foreigners are buying up the City. They are bringing in wealth to replace the UK wealth. This then works its way out to the surrounding South East.

However, the parents have to chip in for their children, so the money they have made from the foreigners is expended on bloated house prices elsewhere. The build up of wealth was illusory - but the decimation of it real. The younger generation do not have the incomes, when they in turn come to help their children, they will not have the previous generations pensions or housing gain to support them. The Country will be poorer.

Now, perhaps house prices will crash and the foreigners will sell up, allowing younger generations to buy into a lower market and start the process again. The thing is, this has never happened in the UK and is not the experience of Countries like Japan - where prices stagnate at the top end in an advance economy.

To this story we have to add in the Government deficit and debt crisis, which will entail a spending crunch and poorer services for decades from now onwards for 30 years. The Government is still increasing the total public debt whilst at the same time the private stock of money is being diminished or further poored into housing.

In the end, with the intergenerational stock fo wealth run down, the main hgh priced assets in the hands of foreigners and high taxes there will be a leavening of the living standards or British people - all at the lwo end. Often it is the right wing who agitate for high prices in house and engineer house price booms like Osborne and Cameron have done - but the reaping of what has been sown will prove very painful in the end.

24 comments:

Richard said...

I agree high house prices are a huge inter-generational problem, but it is economically illiterate to say it means loss of wealth. If prices are rising and foreigners are net purchasers then wealth is being tranferred INTO the country not out of it. The country will be richer as a whole. The part you correctly identify is that the next generation will be poorer and live in worse housing.

Bill Quango MP said...

And, in the cliff edge times of the 1970's, it was the Gulf Arab states who poured money into London. The house price boom came off the back of the OPEC oil crisis.
And inflation running at 15% during 'normal' times.

But the nation survived. And the money did not flow away.
And a 1970's child such as myself was , on average, 20% richer, in 1980 than they had been in 1970.

That, despite the oil crisis, the EEC, Wilson and heath, Union barons, mass picketing,Militant Labour, nationalised industries,Record inflation, the 3 day week, the winter of discontent, West German efficiency, Arab/isreli wars/ The cold war, Iranian revolution, European terrorism, Hijacking, punk rock, IRA bombing campaign, Soccer hooliganism and some of the dodgiest fashions ever unleashed on society.

Anonymous said...

Yeah but those dodgy fashions ahve left you scarred for life, BQ.

Jer said...

Land value tax - yay!

Bill Quango MP said...

Nah! I was 13 in 1979. It was the '80s, every so slightly less dodgy, fashions that scared me.

CityUnslicker said...

Richard, I don't think so. The wealth you think is there is going on mortgage payments as the 3x moves towards 6x wages. The banks get rich and the capital may increase, but the realtive wealth and savings is syphoned off in interest payments.

Hence my link to the Santander never ending interest only mortgage - the future of the UK housing market in a macro sense too.

CityUnslicker said...

BQ - inflation ate the debt, levelled the playing field and allowed a re-set. OUr new perma-low inflation reinforces the debt positiona and prevents a re-set. The old remain rich the young poor.

andrew said...

If I recall correctly, house prices fell by about 30-40% between 89 and 93.

Once interest rates rise above 3% (so mortgages rise above 6), we will see those who over-leveraged come to grief.
Forced sales may be at the margin, but those sales will force prices dramatically down - in london.

I am sure that shortly after most houses in central london really are owned by non-resident non tax payers, there will be a tax on the value of property.

The stories abut the old granny on a £3m flat in bermondsey who has no income will be outweighed by the russian ogliarchs who pay no uk tax.
... and given the way russia is going, the russian ogliarchs will be happy to pay.

Budgie said...

CU, I hope you have not forgotten Gordon Brown's role in this? He raided pensions so making them less economic for both employers and employees. Then he set interest rates by the CPI, rather than using the RPI, thereby holding down interest rates just when people were piling into property as an alternative to (their devalued) pensions.

The result was the property boom. The ex building societies were locked into property so when the bust came they were worst hit. The only significant exception was RBS, which fell because of the combined hubris of Brown and Fred Goodwin.

Without this and Brown's ill considered regulatory reforms on top, I do not think we would have had significant banking collapses in the UK apart from RBS. We would of course still have been severely affected by the subsequent Global bust. But in the UK it really was all Brown's fault.

Mark Wadsworth said...

Congrats, you are getting there.

There's an easy answer of course, stop taxing earnings, output and business and tax land values instead, but that goes down like a cup of cold sick when I suggest it.

PS, Gordon Brown did a load of shit things, but he did not 'raid pensions'. On that charge he is entirely innocent.

Electro-Kevin said...

Richard @ 1.18 - Many of those properties are being bought to be rented to UK citizens - or lived in by newcomers competing for their jobs.

Rent going out of the country - wage depression coming in. And when the property is sold at a higher price because it has appreciated where does the money go then ?

And if the market collapses ? Well. The whole thing will have failed then, won't it !

What you seem to be saying is that our homes have become one of our greatest exports.

This is a good thing ???

What next ? Our wives selling themselves to tourists on street corners ?

Budgie said...

MW, Brown's pension raid: "Documents released under the Freedom of Information Act show civil servants warned at the time [1997] that the move, which finally resulted in a £5bn pensions raid, could lead to the closure of many occupational schemes." Read more: http://www.thisismoney.co.uk/money/news/article-1608722/Browns-tax-raid-on-pensions.html#ixzz3Hg0dV696

And many other articles.

Nor was it just the money value of the raid, it was what people did in reaction - to buy property as their pension instead. Which helped trigger the property boom in the noughties.

CityUnslicker said...

MW - You have to tax income to be fair year on year. otherwise with an LVT people are constantly forced to move every year if their circumstances adjust - that is no way to live. Plus you are taxing wealth and not income, when you do that you end up with no wealth - precisely what I am trying to highlight in this post.

growing wealth is important, holding on to it too! LVT stops this entirely. Communism would be preferable, as you knwo I am want to say!

andrew said...

it depends what wealth is and that depends on what money is.

deliberately not answering the questions, i do think money is best used wisely (like it wasnt in '6-8)

by not taxing wealth we encourage people to bury gold in the ground and even the bible says that is not a good idea.

right now, money in a primary residence is not taxed on the gain, but money spent on investments is.

the result (unsurprisingly) we tend to buy houses too much and we all agree that lower prices would be a good thing (funny how not all deflation is evil).

the state is not shrinking, it needs more money. and we want to pay less tax (funny how not all deflation is evil) some sort of tax on property is near inevitable
- especially if it can be advertised as falling on rich foreigners (even if they are numerically a tiny minority) to plug the gap in the NHS

You wont have an annual land tax for the reasons CU stated.
But CGT on your primary residence...

One consequence of that tax is that improvement / maintenance should be deductible.
Which implies your local brickie will now be asked by you to produce a nice (vat registered) receipt you can file it away, rather than what the cash price would be.

It would also slow your borrowing against the value of your house as lenders will know HMRC gets first claim

And you can get rid of death duties on primary residences.

whats not to like?

Elby the Beserk said...

Brown is the greatest arse this country has ever had the misfortune to have in power. As well as bringing about a debt fuelled housing bubble (an economic boom in Brownspeak), he also invited Lehmanns and AIG to the City, where they were enable to execute dark deeds with derivatives and such like that the SEC forbade them at home.

The rest is history.

BUT ...

There's a nightmare round the corner. With Labour committing suicide in Scotland, it is entirely possible that the SNP will hold the balance of power after the election. We may well wish that the YES folks had won the referendum.

FUBAR

Had to laugh when I heard Sturgeon banging on about how they won't be forced out of the EU by a referendum. Happy to be forced in, though, Nicola?

No. Sorry. We're stuffed. Government will grow bigger and bigger, EU bureaucracy will grow bigger and bigger. Both will require more and more money, until it all falls down. As history shows us it will.

FFS. If the Tories borrow like they have done, WTF are Labour going to do?

hovis said...

Elby ahh Osbrown economics.

CityUnslicker said...

Elby - any gov faced with 2010 situation and the euro crisis was going to struggle.

The lack of truth telling by all politicians is scary these days, but there we are.

ANDREW - Why are more taxes inevitable? Whay does the state have to grow? Whay can't the NHS have some limites put on it and pension ages increased so that future potential claims are reduced?

CGT on your main house would pretty much mean no one ever moved - remember there is stamp duty already so at sale you would pay a massive tax. There would be no sales, better to wair for inheritance tax to kick in or hope the law changes.


The reason house prices are going up is IMMIGRATION and CATASTROPHICALLY low levels of house building.

Electro-Kevin said...

"The reason house prices are going up is IMMIGRATION and CATASTROPHICALLY low levels of house building."

Add: low interest, HTB, bank forbearance...

It's all deliberate. They're not going 'up' anyway. People are going down !

Turnbull2000 said...

Housing is not a real issue in they eyes of the electorate. If you look at polling figures, immigration is the biggest concern, and housing doesn't even make top 10.

But with main residence and BTL rentals becoming the defacto means of pension provision, it's imperative that property prices are not undermined and continue to perform.

BenniGholami said...

I somehow had a vision of families in more rural settings and under developed countries when it comes to inheriting the house instead of putting it up for sale. The plot of land that the family owns gets dissected into such small bits that it becomes practically worthless generations down!

Ben Jamin' said...

"MW - You have to tax income to be fair year on year. otherwise with an LVT people are constantly forced to move every year if their circumstances adjust - that is no way to live. Plus you are taxing wealth and not income, when you do that you end up with no wealth - precisely what I am trying to highlight in this post. "


Mortgages and rent are privately collected LVT. So what's the difference if these are collected to pay for State services instead? Also under LVT those who currently work and pay tax will have more disposable income, so this non-point will be even less of an issue.

And for a tiny minority of whom it might be an issue, unlike banks/landlords we can offer roll up and deferment.

LVT is not technically a "tax", it is a user fee, and certainly not one on private wealth i.e capital and income.

Land, unlike private wealth(income/capital) has no cost of production.

Capitalised land values can only therefore represent a claim on other peoples wealth.

Reducing this cannot therefore reduce aggregate wealth(indeed the overwhelming majority of people will be better off). The reduction of dead weight losses can only increase aggregate wealth.

This is a good thing.

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