Monday, 17 September 2012

An Answer To James Bevan's Question

On CNBC, this morning, financial analyst James Bevan, of CCLA, asked the question,  "What would be the response of British people if house prices here fell by the same kind of proportion they did in Hong Kong some years ago?"  My answer is that the large majority would jump for joy!!!

The question arose as part of a discussion on the role of QE, with another contributor arguing that it had done very little to boost economic growth, whilst it had blown up asset bubbles in shares, and property etc.  He argued that some years ago,  Hong Kong, instead of printing money to save its banks, had left these markets crash.  CNBC anchor, Geoff Cudmore, pointed out that in the process, house prices in Hong Kong had not just fallen to pre-bubble levels, but to 30% below what they had been prior to the bubble.  James Bevan's comment was in response to that observation.

Look at the facts.  In Britain, 40% of people live in rented accommodation.  The vast majority of them do so not out of a preference for renting, but out of necessity, because they cannot afford a house at current price levels.  If house prices fell, by the kind of amount I believe they need, and ultimately will, that is around 80%, then that 40% of the population would indeed have reason for jubilation, because most of them would now be in a position to buy the house they currently live in, instead of renting it.

But, assume some chose to continue renting, or still could not afford to buy.  They would still benefit massively, because if house prices fell by that amount, enabling millions of people to choose to buy rather than rent, it would mean that landlords would not be able to charge anything like their current rents, be they private or public landlords.  So, it would dramatically reduce housing costs both for people choosing to buy, or to rent!  That is a massive benefit and reason for joy, already for nearly half the population.

Of the 60% who do not rent, I estimate that perhaps half actually own their home.  That is they have already paid for it, rather than that they are essentially renting it from a bank or building society on a mortgage.  So, another 30% of people actually own their homes.  There would be cause for jubilation by this part of the population too.  Firstly, they would benefit from incidental things such as, insurance premiums to cover buildings should be much reduced, because of the much reduced figure to be insured.  But, they would benefit in other more significant ways too.  Firstly, many of these people will have children, who currently face the problem of everyone else in raising the money to buy a house.  So, they would benefit from seeing their children be now able to buy a house.  They would benefit even more if it meant that their children were not reliant on them to remortgage their house in order to provide them with a deposit!

But, they would benefit even more than that.  If you have actually bought your house then what its current price is, only matters if you come to move from it.  The majority of that 30% of people would probably like to move to a better house.  Suppose, you own your house, and it is currently priced at £100,000, and you have had your eye on a £200,000 house, but can't afford it.  If prices fell by 80%, your current house falls to £20,000, and the house you wanted has fallen to £40,000.  Now, instead of having to find £100,000 to move to the house you want, you only have to find £20,000.  It becomes much more affordable.  So, the majority of these people will have several reasons to jump for joy.

We are already at around 70% of the population who would benefit massively from a huge drop in house prices.

Of, the other 30% of people who have mortgages on the houses they live in, the majority of these will benefit too.  A considerable number, possibly the majority of this 30% will have taken out mortgages 20-25 years ago before house prices really bubbled up over the last 15 years.  Some may even have bought in 1990, taking advantage of the last big collapse of house prices, when they fell by 40%.  A house priced at £150,000 today, would have cost around £30,000 back then.  So, if they took out a 90% mortgage on such a house that would mean a £27,000 mortgage, which would now be largely paid off.  In other words, they would have considerable equity in their house, even if it fell back to its 1990 level.  That means, they are in a not much different position to the 30% of people who actually own their house.

Of the remainder of this 30% only a minority will have taken out their mortgages at the height of the bubble in house prices.  Maybe 20% of people may find themselves in a position of negative equity, and of these a significant number will be people who are not actually homeowners, but who are people who have speculated in property, as buy to let landlords.  I have little sympathy if speculators lose out.  They took a risk to make lots of money.  If the risk turns round and bites them, that is the cost.  Of the rest, they have not actually lost money so long as they continue living in the house they bought, because its only if you come to sell that the change in price really affects you.

But, finally, for those who cannot take that position, the solution used by people in the US, and the solution Capitalists frequently use in such situations can be used.  That is simply walk away from the property.  Hand the keys back to the banks whose reckless lending policies created the bubble in the first place.  Declare yourself bankrupt as firms do in such situations, so the problem is left with the reckless lenders.  Then you are free to buy a house at some point in the future at the new, much lower, more reasonable prices.

So, its clear that the vast majority of people in Britain, would benefit greatly from an 80% fall in property prices.  The people who would really lose out from such a collapse are the banks and building societies who created the problem in the first place.

CCLA are providers of investment services to churches, charities and Local Authorities, and James is an ethical investor.  So, they more than most should be aware that high housing costs are an evil in society.  The need for adequate shelter is one of the basic requirements of life, and anything that makes it more onerous to achieve should be opposed.  No rational person would say, "Oh, the price of petrol has doubled, the price of cheese has doubled etc.  What a good thing."  So, why would anyone, let alone an ethical person, believe that an increase in the price of what is already a very expensive, and vital element of everyone's life, such as housing, is a good thing.  Likewise, why would anyone believe that a significant fall in that price was a bad thing.  High house prices are an evil, because they make it more difficult for people to obtain decent shelter, and because they encourage people to take on high levels of debt to do so.  It turns people into debt slaves as well as wage slaves.

If CCLA really are ethical investors they should be opposed to high property prices, and pressure the government to do everything in their power to reduce them.  But, its unlikely that CCLA will do so.  After all, the Churches, and Local Authorities are themselves substantial Social Landlords.  They benefit from the income off unsustainably high rents, founded on unsustainably high property prices.  Moreover, the Balance Sheets of those organisations benefit from having on them inflated assets in the shape of those bubbled up property values, not to mention bubbled up share prices, and Bond prices.  Money and profits it seems determine the attitude of the Church and Local Authorities as much as other Capitalists.

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