Monday, 18 November 2013

Osbourne's Sugar Rush Looks Short-Lived

George Osbourne's attempt to garner votes for the next election in 2015, by providing the economy with a sugar rush via the property market, already looks to be running out of steam. Osbourne first announced the “Help to Buy” scam back in 2012. It was launched at that time under the pretext of helping first-time buyers to buy new houses, thereby also stimulating house building. It was essentially a flop. In the first year, only about 1% of the people it was supposed to con into buying over priced houses did so. So, in the 2013 Budget, Osbourne offered an even bigger, more obvious bribe. As well as extending Part 1 of the scam, he introduced a Part 2, aimed at anybody stupid enough to go into debt slavery to buy over priced houses up to a value of £600,000. When even property asking prices continued to fall, and as the Tories popularity waned, he announced that Part 2 of the scam would be brought forward by 3 months to start this October, rather than next January. But, according to this month's Rightmove survey, asking prices for houses fell last month compared to the previous month by a whopping 2.4%. In London, where the bubble has been blown up to supernova proportions, the fall has been significantly higher than in other parts of the country.

In Greater London, the fall was 5%; in Waltham Forest down 6.8%; in City of Westminster down 6.3%; in Greenwich down 6.2%; in Haringey down 6.1%; and in Havering down 5.5%. Given that Osbourne's main concern is to shore up core Tory support in the South-East, the prospect that the London property bubble might even be deflating – and ultimately bubbles never just deflate they always burst – despite Osbourne's attempts to keep it expanding by using all of the measures that caused the sub-prime crisis of 2008, must be troubling for the Tories this far out from an election.

The Liberal-Tories have been cock-a-hoop over recent economic data showing the economy growing strongly, even more strongly that the UK's competitors. But, that data is largely a mirage induced by the sugar high that Osbourne and the Bank of England caused with their money printing, and debt binge. Like a drunk it led to a confidence to fight anyone, only to find that it falls over soon afterwards. Far from it bringing about the kind of restructuring of the economy into investment in real productive capital, that is actually necessary, and which the Liberal-Tories claimed was their goal, it has simply promoted the same conditions that led to the crisis in the first place. The low-wage/high debt model for the economy established by Thatcher in the 1980's, has locked the economy in to a dependence upon precisely that – low wages, and high levels of debt. Just as the US is locked into the need to keep printing vast quantities of money, because even the slightest indication that they might even reduce it, causes markets to crash, so the UK economy is locked into the need to keep property prices high, because once they start to fall sharply, private borrowing against it will tumble, and the banks that are basically bust, and have tens of billions of pounds of what is really bad mortgage debt, will go bust.

In fact, as I've pointed out before - Incredible Indices – the house price indices put out by the Estate Agents, Mortgage providers etc. are a sham. They only focus on the newly listed asking prices of properties, not the actual prices at which properties sell. I'm experiencing this personally at the moment. I'm in the process, with my sister, of selling my cousin's house as executor's of his estate. She keeps looking at the prices of similar properties listed in Estate Agents' windows with a belief that the house will actually fetch at least that kind of price. That belief has, of course, been encouraged by the Estate Agents. The house is going to auction, and the Estate Agents have been saying from the beginning that the house, which is in a pretty poor state, will attract interest from speculators and builders, who will bid the price up.

Of course, you always hope that will be the case, but I've had to try to get over to my sister, that all of mine and my wife's extensive analysis of local property prices over the last few years suggests otherwise. A look at the lists of sold house prices as opposed to asking prices continues to show prices falling. A further look shows that initial asking prices are often very quickly reduced, suggesting that Estate Agents are attempting to obtain business by giving potential clients inflated estimates of what their house is worth, only having done so to then recommend a reduction in that asking price. I was looking at one house recently that was advertised in June of this year, and by the end of July the asking price had been reduced by more than 10%! It still seems to be the case that in order to sell people are having to reduce their initial asking price by between 25-30%, and where they don't, the house simply remains unsold.

In fact, what “Help To Buy” seems to be doing is to make it harder to sell at the lower end. The estate agent told me that they are finding that where a year ago, people were prepared to offer up to £50,000 for a really good terraced house, now they will not, because with just £5,000 deposit they can get a decent £100,000 semi-detached with gardens. At the same time, as Moneyweek have described, there is evidence of very rich people using “Help to Buy” to speculate and buy up £600,000 houses.

On the other hand, there is every reason why properties in the £300,000 - £600,000 range are falling as they are. Firstly, there are fewer potential buyers to begin with, but also many of those in this range who need to obtain mortgages may not be helped by “Help to Buy”. For one thing, many people in this category could well be part of the “squeezed middle”, who have seen their Child Tax Credit removed and so on. Moreover, the rules for “Help to Buy” mean that simply obtaining a 95% mortgage is not enough. Banks are charging up to 6% for 95% mortgages whether they are in or out of the scheme. That compares to around 3% for an 80% mortgage. In other words, the monthly mortgage payment is double! But, banks now have to also check that borrowers can cope with mortgage payments if interest rates rise. On that basis it seems that many people who might have expressed an interest in the help to Buy scam, may have found that they do not qualify. According to Rightmove, one of the active "Help to Buy" lenders has approved only 169 out of 1,075 applications.

But, it has been the debt fuelled sugar rush into the economy based on the idea of rising property prices that has been behind the growth of the last few months, and prognosis of growth next year. But, in fact a look at the underlying fundamentals shows no reasons for optimism. After a short period of increased retail sales, even they fell back last month. In most of the country, wages are stagnant in nominal terms, and falling sharply in real terms. The fact that the figure for inflation was shown lower this month rings hollow with most people who find that their shopping bill continues to rise each week, and who face 10% rises in energy prices, large rises in water bills, transport costs and so on. And as I set out previously - Wages, Jobs, Productivity and Prices – the other side of the UK's low-wage/high debt economy is that productivity is low and falling.

The Eurozone economy has had a short lived bounce induced by the underlying fundamentals of the Long Wave Boom, and the phase of the 3 year cycle, but, as a result of the effects of austerity on the periphery, that bounce has been muted, and appears to be already running out of steam. Given that 40% of UK trade is with the EU, any fall off in Eurozone growth will have a bad effect on UK growth prospects. The 3 year trade cycle is due to turn down again in the third quarter of 2014, and with Osbourne's sugar rush via the property market, already looking to be leading to the kind of crash that follows any sugar rush, the chances of the UK economy continuing to grow strongly after that look slim.

But, Osbourne may have miscalculated anyway.  A recent Ipsos/Mori survey found that 57% of people thought that rising house prices was a bad thing compared to only 20% who thought they were a good thing.  That's three times as many who beleive that rising house prices are a bad thing as think they are a good thing.  Even in terms of their own personal position 41% thought that rising prices would be bad for them personally, as opposed to 29% who thought they would be good for them personally.  In both case around 25% strongly felt that rising house prices are a bad thing.  They are, of course correct.  High and rising house prices are only good news for builders and landlords.  For the vast majority of other people, whether they own their house, rent it on a mortgage from a bank, or do not currently have a house, high house prices are a very bad thing, just as high prices of anything else that workers have to buy is a bad thing.

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