The problems with property

Nick Hubble

My attempt to move to London continues today.

We’re currently thwarted by a disappearing visa agent and a steady stream of stabbings in the news.

But the marriage certificate is making its way through the Japanese bureaucracy.

My surname has been changed to Ha-Bu-Ru so that Japanese people can write and pronounce it. One variation of the meaning is Wave-Dance-Lapis Lazuli. The other involves the art of war and hegemony. But that lettering was vetoed for our family stamp – how Japanese people sign things.

The in-laws repeatedly ask me, “Have you got a place to live yet?” Which is a bit pushy given we haven’t even applied for the UK visa…

But it does beg the question – to buy or to rent?

The property dilemma

No asset dominates our lives like our home.

We spend decades paying for them. Then they become our biggest asset.

In the UK, net property wealth comes second only to pension wealth as a proportion of household assets. For the middle-class households, property makes up between a third and a quarter of net wealth.

The power of house prices is immense. And they create enormous wealth divisions. The countries I have ties to offer are a perfect comparison.

In Australia, where I got my accent, more than a quarter of the country’s billionaires made their money in property, double the next highest classification. And property makes up more than half of Australian net household wealth.

But it’s the division that’s fascinating. People who own their own homes happen to own 94% of Australia’s total household net wealth. “This leaves those who are non-home owners–34.8 per cent of the population–with just 5.6 per cent of the total,” according to investment analysis firm Morningstar.

On the opposite end, we have my country of birth. Germany didn’t have a property bubble, but it does have traditionally low home ownership rates. The result is extraordinary. In 2012, Germans registered the lowest median household net wealth of the 15 euro area members for which data was available when the Peterson Institute compared them:

Germany, generally viewed as the richest country in Europe and the biggest resource for taxpayer bailout funds, in fact recorded the lowest median net household wealth in the 15 euro area members for which data is available1 at just €51,400. This is less than half the euro area average median household net wealth at €109,200.

That’s changing now, with a property boom underway in Germany thanks to the European Central Bank. But having seen where this left Ireland and Spain after their bubbles crashed, the Germans are not so happy about it. And thanks to low homeownership rates, only some are benefiting.

In the UK, Savills’ research calculated that over 50s own 80% of the country’s housing equity.

The proportion of homeowners in the population is down to 63% and the per cent of the country renting has doubled to 20% since 2000.

Again, it’s the division that’s fascinating. Boris Johnson, having moved from burka bashing to criticising Britain’s homebuilders and housing policy, wrote this:

It was only ten years ago, for heaven’s sake, that the proportion of owner-occupiers among 25- to 34-year-olds was still up at 64 per cent. That figure has now plummeted to 39 per cent – more than half the key generation shut out of the housing market.

It would seem that a huge part of the wealth inequality in Western nations is driven by property prices. People got rich by being there first, and by borrowing a lot of money. Neither seem terribly productive ways to build national wealth and assets.

Don’t forget, all this property wealth is theoretical.

Bricks and mortar are not safe

Apparently, the UK’s heatwave is causing Britain’s ground to shrink. And houses built on that ground are cracking up. The Telegraph reports that insurers are waiting on subsidence claims to quadruple.

It’s a bit of a metaphor. If you take a closer look at the property boom, the risks are extraordinary.

You only need to go back to the sub-prime crisis to see how it can all go wrong.

But there are plenty of other examples.

In Japan, house prices fell 64% from their height in a 30-year bear market. As we looked into on Monday, about a third of Japan’s homes will stand vacant in the 2030s…

Britain and Europe will follow Japan’s demographic change. But that’s a long-term trend.

According to the International Monetary Fund, house prices in key developed economies are overvalued by about 12%. That’s £30,000 pounds of the average UK house.

But figures like these are very abstract. And it’s easy to dismiss national figures for what is a collection of separate markets.

Right?

Britain’s reliance on housing bubbles

Britain’s reliance on the financial sector is terrifying. And the financial sector’s reliance on housing wealth is extraordinary too. This leads me to some shocking predictions about what’ll happen to us during the next financial crisis.

But it doesn’t just play out in macroeconomic figures. It’s hitting the high street too.

A Consumer Intelligence survey reveals that British retailers are struggling with the widespread closure of bank branches. Now that we don’t have to head to the bank to sort our financial affairs, we don’t go to our high streets any more either.

The Express:

Now a shocking 46 per cent of shop owners have claimed the loss of a local bank in the last three years has negatively impacted their business, according to a survey by Consumer Intelligence.

And almost one in four said bank closures had contributed to them going out of business within the last five years.

We’ve lost 2,500 bank branches since 2015. I wonder what that did to property values on high streets…

Personally, I think this is great news. Bank branches are a terrible idea.

In 2015 I spent countless hours at various bank branches in Canary Wharf trying to get a bank account. I even staged an inadvertent sleep-in as a passive aggressive form of protest.

Eventually I managed to open an account designed for working holidaymakers with my limited supporting documents. Which is ironic given I have both German and UK citizenship. But the purpose of opening the highly limited account was purely to get proof of address.

Once the bank printed my new account’s blank bank statement, I told them I was going next door to open a proper account at Barclays, armed with my new proof of address. The manager was contacted and eventually gave in. My working holiday account was closed and they opened a proper one for me.

It took me more than a month and more than five visits to get the account. In Australia, it takes about ten minutes and one visit.

Back to property.

Property price cycles create political divisions

The divisive nature of the property market creates a serious political problem. One side needs house prices to rise. The other can’t afford that. The government is stuck in between.

To home owners, the affordability young people demand is code for falling house prices. Which would rob existing homeowners of a frightening amount of wealth.

The solution has been to make lending standards more lax. And to support first-time home buyers with government money loans.

The trouble with this is that marginal borrowers get into trouble if house prices stop going up. If they can’t sell their home into a rising market when they default, the whole property market scheme comes crashing down. That’s begun in Australia now.

Ironically enough, when prices finally do fall to more affordable levels, it becomes more difficult for new buyers to enter the market thanks to tighter lending restrictions. So they don’t benefit.

Meanwhile, those who managed to grab the bottom rung of the housing ladder discover they’re holding the short straw. Developers selling off-the-plan properties demand buyers pay up on prices that are now vastly overvalued, just when they can no longer get the loans to do so. Their deposits were used to finance the build…

Developers are the gatekeepers of the equilibrium. According to Boris Johnson’s article, there are “half a million unused permissions to build”. But they don’t use them, knowing they must manage supply to keep prices rising.

What mystifies me about the euphoria of property price bubbles is how useless they are. Every dollar of property wealth is merely a dollar someone else will have to borrow if that wealth is to be realised. Property prices are just an indicator of how much debt we have to go into. The banks are the only net beneficiary at the expense of the rest of the economy.

The escape hatch

Eventually, the baby boomers will have to sell. To finance their retirement. Or to finance the huge bill that comes due after retirement.

I’m talking about inheritance tax. The housing bubble is a huge part of the government’s revenue base. Boris Johnson wrote about the ill effects of stamp duty in his Telegraph article too.

We’ve had quite a response to our new report explaining how to minimise or even cut your inheritance tax bill to 0. I lay it all out here.

Making some of the moves now could help you avoid not just inheritance tax, but the flimsy nature of property wealth too.

Until next time,

Nick Hubble
Capital & Conflict

Category: Economics

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