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| Liberal-Tory Incompetents |
The report says,
“..the £1.4bn scheme to help boost the private sector economies of struggling English regions had so far only seen £60m of funds reach businesses.”
What is worse, the Regional Growth Funds were introduced as a replacement for the Regional Development Agencies that the Liberal-Tories abolished. To be honest, I was not a fan of the RDA's either. They were undemocratic quangos, stuffed full of business representatives, and like most such bodies were as much about providing cushy, well-paid jobs for middle class bureaucrats, as they were about providing decent jobs for workers in the regions. But, their record was far better than has been the Regional Growth Funds. But, then that would not be difficult!
But, the revelation over the RGF's, is only one example of the Liberal-Tory incompetence. Another revelation over recent days has been in relation to housing policy. If anything its worse than on RGF's. Earlier this year, the Liberal-Tory Government announced its “NewBuy Scheme”, to encourage people to go into further debt to buy overpriced houses. The idea was that the Government would underwrite a portion of the mortgages taken out to buy new built houses. At the time I pointed out that the scheme was likely, even if it were taken up, to introduce further anomalies and distortions into the housing market. For one thing, it implied a bias against resales of existing houses, which would mean that it would put downward pressure on prices of those houses.
The Government said that the scheme was intended to encourage the purchase and construction of 100,000 new houses. How many houses have actually been sold? Just 220!!!
The Government's Regional Policy is in tatters. Its Housing Policy is in tatters. Its Monetary Policy is in tatters as inflation continues to rise. Its Economic Policy in general is in tatters, as its prime policy aim, deficit reduction, has failed, as austerity has cratered the economy, and sent borrowing up.
But, a further look at the condition of housing, shows just how these various areas of policy interact, and just what trouble the Government is in.
A standard piece of data that tends to be taken as a given is that there is a housing shortage in Britain. In my blog - House Price Crash – nearly a year ago, I argued that this assumption was false. There are, in fact, approximately 1 million empty homes in Britain. The demand for homes is estimated to be 250,000, whilst around 150,000 are built each year. On that basis, there is enough empty stock to fill the next ten years demand. On top of that, there is around 300,000 houses for which permission to build has been granted, but which have not been built. In addition, we live in Europe, and indeed in a global market for housing as with every other commodity. For Britain's rapidly growing retired population, there are now literally hundreds of thousands of available homes to buy in France, Spain, Ireland and the US, mostly of much better quality, and at a fraction of the price of homes in Britain. But, in that analysis, I also argued that the figure for demand is also not as solid as it might seem. 
A reduction in student numbers – which the Governments recent decisions on foreign students will affect – will cause demand to fall, as will Polish workers returning home to a more rapidly growing Polish economy, and so on. But, a recent report from Fathom Financial Consulting, has also exposed the myth of the housing shortage. According to Fathom, the quantity of housing per person, in Britain, has risen by 50% since 1970, and is continuing to rise!!! Clearly, the so called housing shortage is no such thing. What has happened, is that as the Supply of housing has risen, the demand has risen even more sharply, because individuals have taken advantage of cheap financing to buy houses, where previously they would have continued living with their families. Its rather like, in the 1960's, most families didn't even have one car, but by the 1970's many families had more than one car, and by the 1990's many families thought it was obligatory for every family member to have their own car. In addition, cheap financing has encouraged some people to buy more than one home, some as holiday homes, and others, in order to become landlords.
This latter is borne out by another aspect covered in the Fathom report. They point out that again, contrary to popular belief, the cost of renting has fallen in real terms. According to Fathom, compared with the ‘rental cost’ measure of the Retail Price Index, rents haven’t even kept up with growth in disposable incomes. That will be partly due to the fact that housing demand is not as strong as the vested interests would have you believe, but it is also a function of the fact that some of those vested interests are people who have sunk large amounts of money into property, in order to make money. The increasing number of amateur landlords, who have gone in for “Buy-To-Let”, have increased the available supply of rental properties pushing rents down accordingly. As it has become increasingly impossible to sell overpriced houses, an increasing number of people have thought they could get round the problem, by renting out their old houses, while they wait for prices to rise. That has simply pushed rents down further, whilst it has made little difference to the continuing downward slide of house prices from their stratospheric heights.
I can see all this in practice around me, as many more people must do. In the village where I live, there is around 20 houses. In the last couple of years, a quarter of the properties have come up for sale, in an area where Estate Agents normally tell you nothing ever comes up for sale. One property, a farm with loads of outbuildings and 4 and a half acres of land, came up for auction with a guide price of £350,000. I understand it was sold prior to auction, to someone who already owns a huge manor type house in the village. For the last two years, although it is kept in tidy condition, it has remained empty. In the adjoining village, a stone built lodge with a large amount of land, and outbuildings came up for sale at around the same time, for £400,000. It too has remained empty for the last two years, though there are signs now of it being renovated, possibly for sale again. An old school room was sold around the same time, for £160,000, and is only now being extended to make it big enough for a family to live in. In the same village, another house that had been up for sale for some time, was then put up for rent, and I see many other properties in the surrounding area, where that has been the case.
Huge numbers of houses in the area have been up for sale for more than a year. Some luxury homes have been reduced from £1.5 million, down to £800,000, many others have been reduced by 25% or more, houses that have only been up for sale for around four or five months are being reduced by more than 10%. When I was speaking to an Estate Agent last week, he told me that prices are falling by the week, but people putting their houses up for sale, are still asking totally unrealistic prices. That is mirrored in the figures for houses racking up on estate Agents books, and the fact that 50% of houses put up for sale have not been sold. Yet, a I pointed out in a recent post, that is despite the fact that according to Halifax, mortgages are at their most affordable in fifteen years.
So, what is going on? Some time ago, I wrote a blog post - Why Charlie Bean Could Be Disappointed – in which I described the fact that Bank Of England, Deputy Governor, Charlie Bean, had admitted that one reason the Bank had kept interest rates so low, was to force people to spend rather than save. I argued he might be disappointed in his hope that might happen. The reason is simple. Suppose you have £250,000 which you were thinking of using to buy a house. Charlie Bean and the Bank want you to spend this money, in order to create demand in the economy, and save the Government's bacon. By keeping interest rates at rock bottom, they ensure that, as a saver, you will get a paltry return on this money. You could get around 3%, which after tax, comes down to just over 2%. However, with inflation running at over 3%, that means that each year you are actually losing 1-2%. The Bank hopes that rather than lose this money, you will spend up.
But, of course, there are good reasons not to do that under current conditions. Suppose, by keeping your money in the Bank you lost in real terms 2% a year. Not a happy prospect. But, whether you have actually lost that money or not depends on what you were going to spend it on. In the terms of Marxist Economic Theory, it depends on the particular Exchange Value. If you were going to spend the £250,000 on a new Maserati, and the price of Maseratis goes up, then yes, you have lost money. However, if you were going to spend the £250,000 on a new house, and the price of houses falls, then rather than losing money, you have gained money, by keeping your savings in the Bank!
So, it all depends on what you think is going to happen with house prices. If you think that house prices are going to fall, then it makes sense to keep your £250,000 in the bank, because as time goes on, it will buy you a better and better house. As against general inflation you might lose £2,500 on your £250,000, but if house prices fell by just 10%, you would be better off by £25,000. The same thing happened in Japan, when its deflation began. No one wanted to buy, because everyone knew that next week, the prices of things would be cheaper. The reality is that house prices in Britain have been inflated to astronomical levels, and even if they do not fall back to their long-term average levels, which would require a fall of around 80%, the chances of them going up, are non-existent. In investing terminology, this is an asymmetrical risk. That is the chance of you making a lot of money, by holding off from buying is many, many times greater than the chance of you losing even a moderate amount of money buy rushing in to buy at current levels. The same is true about selling. There is a far bigger chance of losing money by holding back from selling at current prices, than there is if you get in and sell now, before prices collapse. 
That is why an increasing number of houses are coming up for sale, but why no one wants to buy at current prices, because everyone knows that next week prices will be lower, and at some point when prices collapse, they will be much, much lower. The only thing preventing that from happening at the moment is the very low mortgage rates, being propped up by the Government, the fact that Banks are holding off foreclosing on mortgages in arrears for fear of starting a fire sale, which will make their Balance Sheets look unsustainable, and a concerted propaganda campaign by the press and sections of the property industry to pretend that prices are not already falling sharply. One indication of that is that, as Fathom point out, in the US, mortgages write-off rates peaked at more than 2.5%. In the UK, they are not even at 0.5%! 
The cost of that, is that the Bank of England's low interest rate policy is crippling savers, and pension funds, as well as pushing up inflation as a result of the falling pound. The latter had some justification, if it boosted UK competitiveness, but it hasn't. As Engels described a long time ago, protectionist measures, which is what devaluing your currency amounts to, can have some beneficial consequences only under certain conditions. In general, they merely encourage domestic producers to take advantage, rather than improve their productivity. With devaluation, the downside is that it increases the costs of imports, which is important for a country like Britain that imports lots of its food, energy, and now manufactured products, after Thatcher de-industrialised the country in the 1980's. That has pushed up inflation, which has cut workers real wages, as Government policy has impose wage freezes, and the economic stagnation caused by their austerity measures has pressed down on the wages of workers in the private sector. The effects of that on housing, which depends, even more on what is happening to real disposable income than on top line wages, has meant that pressure on demand has increased further.
In short, the Government's economic policies do not hang together, but instead are contradictory in their aims, and effects. It is just another example of Liberal-Tory incompetence.
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