Monday, 22 September 2014

Kevin McCloud Says Rent Don't Buy

Its an indication that the UK property market has reached the limit of the bubble that has been blow up over thirty to forty years, when a TV property guru like Kevin McCloud advises people to rent rather than buy. However, although McCloud is correct that people should rent rather than buy because property has become unaffordable, and because, as he says, “prices have peaks and then drop”, he is wrong to believe that the reason for this is because there is not enough housing, as I illustrated a while ago.

The current massive property bubble has been blown up over the last 30 years. The origin of it was the start of the long secular fall in interest rates. The stagnation of the late 70's and early 80's, created a situation where the demand for money-capital fell relative to the supply. From the mid-1980's onwards, the rise in the global rate of profit meant that the supply of money-capital, as these profits were realised, grew relative to the demand for that money-capital, pushing interest rates ever lower. These ever lower interest rates, combined with the scrapping of credit controls by Thatcher in the 1980's, that deregulated the banks, and encouraged people to borrow and speculate to compensate for their falling wages, acted to push up asset prices, be they property, shares or bonds.

When, as always happens, that speculation resulted in the bursting of a bubble, as happened in 1987, the monetary authorities responded by printing money to reflate the bubble, and inflate it to even higher levels. The bursting of such bubbles has happened periodically ever since then, for example, with the housing bubble in 1990, and in stock markets in 1994, 2000, 2008, and on each occasion the state has responded by printing money to reflate it.

But, today, the thirty year process of falling interest rates has come to an end. Instead we face a similar thirty year period of global interest rates rising, as the demand for money-capital exceeds the supply, as the annual rate of profit begins to fall. The fundamental factor, which was the engine of rising asset prices for thirty years has been put into reverse, and all those who believe that the direction of travel for house prices was a one way bet, will be badly burned. At the same time, each time the state has printed more money, to reflate a burst bubble, it has been less and less effective. More and more money has had to be printed to achieve the result.

Today, we have literally trillions of excess dollars, pounds, euros, yen etc. that has been flung into circulation. It has had no effect on stimulating economic activity, but it has protected the banks and the very rich by preventing the collapse of the prices of the assets they own. The same process has made it more and more difficult for the rest of us to own a house, or to build a decent pension fund, because, like property, the price of shares and bonds has been inflated, so our contributions buy fewer of them. We have had official interest rates, for the last five years, at effectively zero, so that workers are cajoled into spending rather than saving. But, its clear that this process has come to a close.

More money printing does not seem capable of inflating asset prices any longer. Interest rates are headed higher. Meanwhile, the three year cycle has kicked in, and economic activity is once more slowing down. Property prices face a perfect storm of rising interest rates, tightening monetary policy, continued squeezes on workers real incomes, as prices rise faster than wages, and rising unemployment, as the three year cycle brings economic slow down for the next year or so.

Even London property prices seem to be reflecting the new reality. The share price of estate agents Foxtons, has mirrored the ups and downs of the property market in London. In the 1990's, when property prices fell by 40%, in 1990, Foxton's did badly, reportedly almost going bust. Having been sold to another company, it went public in August 2013. Its share price rose sharply, reaching almost £4, after listing at £2.30. Its share price has been falling since March of this year, the chart resembling the path of a falling knife. Its now down to around £2.20, and falling steeply.

In parts of London, completed sales are down 50% from last year. According to Rightmove, agents in London are reporting that they have double the amount of stock on their hands to try to shift than they had only months ago, and its taking much longer to sell, because sellers have been brought into the market, on the false promise of high selling prices, touted by the media, and property programmes, whilst buyers find it increasingly difficult to afford current prices. Meanwhile, the number of foreign buyers has started to decline, and the actions of Britain, in imposing arbitrary sanctions on Russian oligarchs, is only likely to intensify that, as the super rich from a range of countries will not want to risk having their assets seized or frozen.

Agents are reporting that even asking prices are falling by between 6-10%, and it has always been the case outside London, that selling prices were much lower than asking prices. The smart money seems to be getting out of property. That was also indicated by the decision of some of the biggest buy to let landlords selling up, because they believed the top of the market had been reached

No wonder, even some of the property gurus are advising people to rent rather than lose their shirt buying property at massively inflated prices.

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