Always look on the bright side of life

By Martin Skinner,

"Martin Skinner"

Martin Skinner

The last few weeks have been frantically busy and while lots of big deals are on the horizon, fundraising and transaction setbacks are still frequent and frustrating.

On the personal front I’ve just returned from a trip to New Zealand and best man duties at a close friend’s wedding.  In fact I wrote most of this on the long flight back, having written my speech at the last minute on the way over.  The big day was fabulous and was followed by a tour of the North Island together with Ben and Anna the newlyweds, their daughter Trilby (hats off to them for that name) and Ben’s family.  Some honeymoon! I was there when we heard the terrible news from the South Island and my heart goes out to everyone in Christchurch.

Ben & Anna take their vows led by Captain Barnaby

Ben & Anna's Wedding in New Zealand

While I was out there corrupt leaders were falling like dominoes as people harnessed the power of everyday web tools like Google, Facebook and Twitter.  The debate rages as to whether the situation will deteriorate without the ‘regional stability’ these leaders used to provide.  Personally I believe increased transparency and accountability will lead to better government in the long run and that must be a good thing.  Short to medium term the instability will increase the flow of capital out of regions like the Middle East and into safer environments such as prime and fringe prime London property.

In terms of the UK economy, discussion is finally turning towards growth. While the downside surely has to include rising interest rates, there is also much to be positive about.  David Smith recently published another superb piece describing how the ‘feel good factor’ was lost when consumer price inflation overtook wage inflation, an event that paradoxically contributed to higher employment and lower interest rates.  He also highlighted a report forecasting a return of the feel good factor next year, when broad inflation is expected to fall back below wage inflation once more.  At the same time, development luminary Mike Slade listed many more reasons to look on the bright side of property life in his recent Property Week article.

I’m sometimes accused of being optimistic as if that’s a bad thing.  Yes, I underestimated the credit crunch and agree it’s important not to get too carried away with wishful thinking.  At the same time, it’s also important to recognise the positive signs that are beginning to appear.  When I was playing a lot of tennis, we were always told to focus on where we wanted to hit the ball and it clearly improved results.  With timing and location critical to success in the property market too, I’m looking forward to some excellent years and returns ahead – particularly for investors in London residential.  As real estate emerges from the downturn, London’s diverse, much vaunted and ultimately proven strengths will continue to draw both investment and human capital in ever greater numbers.

Having just gone through a recent batch of reports from the big UK residential agencies, I thought the following key points and charts on London residential property were worth sharing:

“…an astounding 70% [or £2.9 trillion of the £4.1 trillion total market value of UK residential property] is held as equity”.

“…it is London’s status as a world city that sets it apart in value terms from the rest of the country.” Yolande Barnes, Savills, Residential Property Focus Q1 2011
Savills are now forecasting a rise of 33.4% in prime central London house prices over the next 5 years.  See the full report here.

How low levels of available housing stock have historically supported house prices

Available Stock vs Price Growth | Savills

“Outperforming their national markets, the cities of London, New York, Moscow and Hong Kong are sought after by the world’s richest households and are at the forefront of a truly global market ~ the residential sectors of these global cities have more in common with each other than they do their domestic markets” Yolande Barnes, Savills, Spotlight on Four Global Cities, Feb 2011  Read the full report here.

5 year performance, cities (executive unit) versus countries (national house price index)

5 Year City Performance | Savills

“Global economic growth is now running at pre-recession levels contributing to wealth creation around the world which is pouring into London again. ~ London’s reputation as a ‘safe-haven’ investment location, combined with geo-political concerns elsewhere around the world, most recently for example in Egypt and Tunisia [and now Libya], have helped draw buyers into the market”  Liam Bailey, Knight Frank, The world’s most desirable residential market: The Super-Prime London Report 2011

P.S. Check out www.beek.co This is recently married Ben Knill’s new and innovative technology venture and it’s shaping up to be a huge success!  I’m proud to say that we incorporated early versions of his interactive 3D walkthroughs on our consumer website Nice Room as early as 2003.  Prospective tenants loved it and we got a lot of remote bookings as a result.  As consumers increasingly shop online and seek comfort in online research before buying or travelling, its potential is enormous.

Bad, but this year could have been a lot worse

This article from the Sunday Times summed up the year very well.  Some of my take-outs were:

  • Deflation averted – good news
  • Temporary inflation boost over Xmas & in the New Year – better than deflation
  • Global growth estimated at 3% in 2010 by the IMF
  • V-shaped recovery likely

By David Smith

We have all lived through a remarkable time. As we approach the end of 2009, we are also preparing to say goodbye to a year that will go down as the worst for the global economy and world trade since the second world war.

It has also been, by a margin, the worst year for the UK economy since the Depression. Even if the figures are eventually revised up, as I expect them to be, that record will not be affected. On the Treasury’s estimate of a 4.75% slump in gross domestic product this year, that is more than twice the decline recorded in the previous worst year, 1980.

For the global economy, the International Monetary Fund estimates that world GDP has fallen 1.1% this year. That does not sound much but is the first drop recorded on the IMF’s database, which stretches back to 1970. Before that we had the post-war “golden age” of the 1950s and 1960s.

Advanced economies have seen a GDP fall of 3.4% this year, the IMF says. World trade has slipped before, falling 2.7% in 1975 and 0.9% in 1983, but this year’s fall, 12%, takes us into new territory.

It may seem odd then to say that things could have been a lot worse. Part of my mission is to take the “dismal” out of the dismal science of economics.

The first thing to say is that the worst of the downturn happened quite a long time ago. The period between October 2008 and April 2009 was when global growth, world trade and the UK economy “fell off a cliff”. Economies then stabilised and started on a modest path of recovery. That is true of the world economy and, notwithstanding the official GDP figures, of Britain.

The improved economic tone, and the rise in markets, has happened as we have come out of that sickening dive. Anything could have happened to the banking system, from nationalisation of every bank to the cash machines running out. Instead, as the Bank of England’s financial stability report pointed out on Friday, the banks are a long way from being back to normal but an even worse crisis was averted, for which credit is due to the authorities.

In March, the world was looking at “mark-to-market” financial losses of £24.3 trillion. The recovery in markets has cut that to £6.3 trillion. House prices, expected to fall by up to 25% at the start of the year, will end with a modest rise. Sterling rose over the course of 2009 too.

There is other good news. Last week saw a flurry of concern about inflation, as headline consumer price inflation rose from 1.5% to 1.9% and retail price inflation turned positive (by 0.3%). There will be further rises over the next two to three months, before inflation comes down again.

Why is that good news? The dangers of prolonged deflation were exaggerated but the risk was there and has been averted. Had this crisis been followed by a prolonged period of deflation, comparisons with the 1930s might indeed have been justified. As it is, I would much rather have Britain’s problems than those of Japan.

Best of all is the job market. Employers and employees have shown huge flexibility to get through this recession. Wage freezes, cuts and shorter working weeks mean employment has fallen by only a third of what it was reasonable to expect.

The government deserves a little credit for its labour-market policies, including job and training guarantees. Aggressively expansionary monetary policy and modestly expansionary fiscal policy have helped.

Last week brought news of the first drop in the claimant unemployment count since February last year. The wider Labour Force Survey measure held below 2.5m for the fourth month running, against high-profile predictions of something like armageddon in the job market.

One of the worst labour-market forecasters, interestingly, has been Danny Blanchflower, formerly of the Bank of England’s monetary policy committee, who was appointed to the MPC for his labourmarket expertise.

In January he predicted that unemployment would rise to 3m, or worse, over the following 12 months. In May, even when it was clear from the data that the claimant count was rising much more slowly than expected and that the wider jobless measure could be expected to follow suit, he predicted monthly unemployment rises of 100,000 for the rest of the year. Even as lower numbers came through, he insisted it was the lull before the storm.

It may still be, though it would be an odd recovery that saw job losses accelerate. Unemployment probably has further to rise and will be slow to fall. The Treasury expects the jobless total in 2014 to be some 50% above its pre-recession level.

Only if there is a “double-dip” in the economy, however, would you expect a big unemployment surge. The job-market numbers suggest the economy has been recovering for some months. The risk of that recovery running into a roadblock will be one of the key issues for next year.

There will be more to be said on this but let me just leave you with a couple of quick observations. We are clearly not yet out of the woods. The Bank, in its report, noted renewed worries about the vulnerability of the financial system to sovereign risk, because of Dubai and Greece. Many high-deficit countries, including the UK, have yet to announce the “credible fiscal consolidation plans” the Bank thinks necessary.

The banking system has to wean itself off emergency financial support and needs to get on with it. The Old Lady has taken the banks to her bosom but wants them to stand on their own two feet.

Banks should be doing more to help themselves. By reducing pay bills by 10% and cutting dividend payments by a third, they could rebuild capital by £70 billion over five years. They face big challenges, of big losses on commercial property and rolling over funding in the markets, though the Bank sees these as bumps in the road rather than roadblocks.

The debate about whether banks are lending enough to businesses — or whether the demand for loans has just shrunk — will continue. The return to normal interest rates (which the Bank thinks is 5%) will pose problems, though it will not happen over the next 12 months.

Having said all this, it is very difficult for Britain not to have a recovery if the world economy is growing. The UK is an open economy and 3% global growth next year, which is what the IMF expects, will lift Britain. Most recoveries are V-shaped and the strong likelihood is that this one will be, though there are any number of alternative shapes, including W, square root and saxophone, to debate.

But as we look forward to those debates and say farewell to a fascinating year, probably never to be repeated, we can breathe a sigh of relief that it was not even worse.

PS: We may be getting close to wrapping up 2009 but the excitement is not yet over. Next week will be my annual forecasting league table, which will make some people’s Christmases and ruin a few others. This year’s competition, as much a part of the seasonal ritual as mulled wine or carols from King’s, has an added twist. Readers were invited to submit their own forecasts and some will have done well in comparison with the professionals. There will be prizes.

We are in an online age but the forecasting league table is best viewed on good old-fashioned newsprint. So make sure to get a copy of the paper, even if it means trudging through shoulder-high snowdrifts. Until then, I offer you my best wishes for Christmas. (David Smith, The Sunday Times) http://business.timesonline.co.uk/tol/business/columnists/article6962721.ece

Home Economics: Can taxes control house prices?

By David Smith

With some people arguing that we have not yet got through the bust, thoughts are already turning to how to stop the next house-price boom.  Adam Posen, a member of the Bank of England’s monetary policy committee, argued last week that interest rates alone would not be enough to stop prices from getting out of hand in the future.

One way to do so, he suggested, would be to vary housing taxes according to the economy’s position in the cycle.  So, when prices are rising too strongly, stamp duty should rise to deter buyers.  Other taxes could also be used to cool over-exuberance.  When the market slows and prices fall, such levies could be cut.  We have, of course, seen a stamp-duty holiday on properties below £175,000 during this recession.

Could such a variable tax work?  There is a month of data to go, and anything could happen, but it seems clear that on the Nationwide Building Society’s measure, house prices will end the year higher than they started.  Prices rose by 0.5% last month, up 8.3% on their February low and 2.7% on a year earlier.  Because prices fell sharply in December last year, even a flat figure this month would ensure that prices end 2009 more than 5% higher.

This was not in the script.  At the end of 2008, house prices were falling at such a pace that few saw them stabilising, let alone recovering.  The average prediction was for a 10% drop in prices during 2009, and several leading forecasters predicted a 20% fall.

This year’s experience shows how hard it could be to set a variable tax.  Triggering an increase in duty each time, say, house-price inflation went above 10% would be fraught with difficulty, although we should not reject the suggestion out of hand.

Posen’s proposal was not the only tax idea doing the rounds last week.  The Liberal Democrats modified their “mansion tax”, which would now apply only to homes worth more than £2m.  Taxes, as we all know, will be going up in the next parliament, whoever wins the next election.  And that in itself may be enough to cool any boom.

More than one in three tenants expect their rent to rise in the next year, according to a consumer-confidence survey conducted by Rightmove.  The website also found that, of the 35,000 people questioned, almost two in three were renting only because they could not afford to buy. (David Smith, The Sunday Times).

Home Economics: Buy-to-let breathes again

By David Smith

In the darkest days of the credit crunch, one claim was made so regularly, you might have believed it.  This was that buy-to-let was dead, a victim of a housing boom that had turned to bust.  “Bye-bye, buy-to-let” was an irresistible headline.  We now know reports of its death were exaggerated.  Cluttons estate agency reports a 40% increase in demand for property – concentrated around the £500,000 mark – from professionals such as solicitors, accountants and doctors investing for the first time.

This will displease the moaners, but a functioning private rental sector is necessary for a healthy housing market.  Private landlords took a battering and faced funding difficulties as severe as anybody.  They appear to have weathered the storm.

Figures from the Council of Mortgage Lenders (CML) showed gross buy-to-let lending grew in the third quarter, its first rise for two years, with a rise from 21,600 to 23,700 in the number of loans and an increase to just over 1.2m in the number of outstanding mortgages.

Admittedly, the rise was from a low base, but this was a clear sign of life.  “The figures show buy-to-let is here to stay,” says Michael Coogan, director-general of the CML.  “Future demand for housing in all tenures supported by lenders will remain strong, despite mortgage funding constraints and low construction rates.  With funding for social housing under pressure, the private rented sector has a strong future.”

The other buy-to-let story – the expectation of a flood of arrears and repossessions as landlords faced grim reality – is not going according to plan either.  The number of buy-to-let mortgages with arrears of more than 1.5% of the balance has fallen for the third quarter in a row and stands at just 20,500.

As with other parts of the housing market, this is a slow climb back after the huge shock of an abrupt withdrawal of mortgage availability.  Moneyfacts.co.uk says the number of buy-to-let mortgage products has risen by more than a third from its September low, which sounds impressive – except that this is still 93% lower than its August 2007 peak.  Sensibly, deposits of at least 20% are required, which was not the case in the past.  Like it or not, buy-to-let is still alive.

Housing markets in the world’s leading economies are continuing to recover, although the majority are still lower than this time last year, says the Global Property Guide (globalpropertyguide.com).  Israel has been the strongest performer, with prices up by 13.7% in the year to the end of September.  The sharpest fall was in Latvia, down 59.1%. (David Smith, The Sunday Times).

Mind the housing gap

By David Smith

The Queen’s speech, published last Wednesday, sets out the areas the government considers important in the year ahead.  Britain’s impending serious housing shortage, one must conclude, is not a priority.

True, this was a speech designed to extract maximum political advantage for the government in the months left before the election.  And true, not all changes require legislation.  But the need to build many more homes in Britain, and thus improve affordability, which was once such a priority for Gordon Brown, has slipped off the agenda.

When he was chancellor, this was a big issue.  Britain needed 240,000 new homes annually to meet demand and hold down house-price inflation.  Though the housing market has changed since that target was set, the underlying picture has not.  The UK has 61.4m people, and official projections are for this to rise to 63.5m by 2013, 67.8m by 2023 and 71.6m by 2033.

How far are we running behind the target?  The National House-Building Council reports that it received applications to build just under 25,000 new homes in the three months from August to October: 27% up on the same period last year, but still barely more than a third of the target.  While the builders are increasing their output, it is from a very low base.  Government initiatives, meanwhile, most of them launched in a blaze of glory, have either been forgotten or scaled back to the point of irrelevance.  Remember the £60,000 home?  How about eco-towns?

The slump in new housing supply has, of course, helped to prop up prices, thought not as much as the “sellers’ strike” by existing homeowners.  But it is storing up serious problems for the future.

Stuart Law, chief executive of Assetz a property investment company, says: “The current undersupply of property is likely to worsen, as house builders struggle to deliver any substantial increase in new properties in 2010.  Developers are only going to be building about 100,000 units next year, whereas at the peak this was around 180,000 units a year.”  The market will stay thin, which will support prices, but it is a long way from normal.  Judging from the Queen’s speech, the government has run out of ideas about what to do about it.

Gross mortgage lending last month was an estimated £13.5 billion, up 5% from September, but down 27% from £18.5 billion 12 months earlier, the Council of Mortgage Lenders says.  It reports that the number of loans to buy new homes has picked up significantly in recent months, but remortgaging has dropped to levels last seen a decade ago. (David Smith, The Sunday Times).

Bank of England should release £30bn more in quantitative easing

David Smith: Economic Outlook

To QE or not to QE? It is the big question for the Bank of England’s monetary policy committee (MPC) this week, and it is a big question for the economy.
After those unexpectedly weak gross domestic product figures nine days ago, showing that officially the economy remains in recession, the onus is on the Bank to do more quantitative easing (QE) this week. Will it, and by how much?

The story so far is that the Bank has done £175 billion of quantitative easing: buying assets, mainly government bonds or gilts. The MPC, while not claiming it has solved everything, is upbeat about its effects.

David Miles, who joined in June, said recently: “I believe the evidence is that QE is having an impact and that it is relevant to economic conditions right across the country. And not just in financial markets in London, but in high streets and factories and homes throughout the UK.”

Kate Barker, another MPC member, said a few days ago that it had helped ease the recession in the housing market, thus supporting house prices.

I don’t suppose many people discuss quantitative easing before sitting down to watch EastEnders but if the Bank is right, they should. It is as important in its way as changes in interest rates and the guide on the Bank’s own website provides a simple explanation why.

The Bank, it says, “boosts the supply of money by purchasing assets like government and corporate bonds”, adding: “Instead of lowering Bank rate to increase the amount of money in the economy, the Bank supplies extra money directly. This does not involve printing more banknotes.

“Instead, the Bank pays for these assets by creating money electronically and crediting the accounts of the companies it bought the assets from. This extra money supports more spending in the economy.”

It goes on to say that this extra spending is necessary to get inflation back to its target — inflation is the Bank’s only target — but I suspect most people would rather see the economy boosted in a more straightforward way, such as getting unemployment down and preventing firms going bust.

The question is when the process should stop. Is £175 billion enough, or should the Bank go further? Let me first offer a guide to how the MPC would like us to think of its approach to policy, then offer my view.

There will come a time, though perhaps not for quite a while, when the Bank raises interest rates. At least some of the headlines that will accompany that announcement will be something like: “Worried Bank slams on the brakes”.

That is not, however, how the Bank would see it. Interest rates are very low, the lowest in the 315 years of the Bank’s existence. At 0.5%, Bank rate is a tenth of what I would regard as the modern-day norm, 5%.

So the way the Bank sees it is that as long as rates remain below 5%, then even if they are rising, monetary policy remains expansionary. So the right headline when, say, Bank rate goes up from 0.5% to 0.75%, would be: “Bank eases off the accelerator.”

The same applies, though in a slightly more complicated way, to quantitative easing. There are three ways any decision on interest rates can go: up, down or sideways.

There are also three ways this week’s decision on quantitative easing could go. The equivalent of a cut in rates would be announcing more easing, in other words more asset purchases.

Sticking with the existing £175 billion but not committing to any more would be like an interest rate “hold”.

An announcement that some of the gilts and other assets were to be sold back into the markets would be the equivalent of a rate hike, though it could still be argued that the policy would remain expansionary until they have all been sold back.

No such sell-off announcement will happen this week. The debate is about whether the Bank announces further easing or stops at what it has done so far.

It is of intense importance in the City, where the programme of asset purchases is seen to have helped lift markets (which the Bank acknowledges and welcomes). A halt would bring an immediate adverse reaction, most notably by pushing up the yields on gilts and corporate bonds.

It is also very important, if Miles and Barker are right, in high streets, factories, estate agents and homes up and down the country.

It matters too for the pound. The Bank’s aggressive easing programme has helped push sterling lower against other currencies though, as I shall try to explain, that might be a perverse reaction.

What will it be? MPC-watchers say October’s meeting offered few clues, merely putting off the decision until this month, when the existing programme runs out.

The shadow MPC, which operates under the auspices of the Institute of Economic Affairs, has been keen on quantitative easing from the start and thinks it would be a mistake to stop now.

Tim Congdon, one of its members, did an impassioned presentation at a recent meeting, arguing that Britain stood out in its policy response.

The easing programme had lifted growth in the money supply at a time when it was heading down worryingly in both the euro area and America. On his analysis, the currency markets should be concerned about recovery in Europe and America, not Britain.

A more cautious note is struck by Chris Williamson, chief economist at Markit, which produces the monthly purchasing managers’ surveys. He is convinced on the basis of these surveys that the economy has been recovering for some months.

The danger, he suggests, is that the Bank pumps in more money at a time when the economy does not need it, risking that the inflation already present in asset prices extends to other parts of the economy.

He has a point, which is why I think the Bank, which also has its doubts about the official statistics, needs to proceed with caution. It is too soon to stop the asset purchases altogether, not least because of the adverse reaction in markets that would result.

It is fair to argue, however, that the economy needs less of a boost than it did. At its peak, the Bank was doing £25 billion of easing a month. In August it slowed the monthly rate to £17 billion-£18 billion. I would slow it further, to perhaps £10 billion, implying that the Bank should announce a further £30 billion of purchases this week. Let’s see what it does.

PS: Many have written books on the credit crunch — I’m just putting the finishing touches to one — but not many people have written two. So I take my hat off to Graham Turner, founder of GFC Economics, for his second; No Way to Run an Economy.

He has always advocated dramatic policy measures to lift Britain and other economies out of the crisis and criticised policymakers for their timidity. His latest book is no exception.

Some think Britain and America have been irresponsible in allowing their budget deficits to rise too much. He argues that they should have been bolder in their fiscal stimulus efforts and allowed deficits to rise much more.

The parallel he draws is with wartime. During the second world war, America’s budget deficit rose to 28.1% of gross domestic product, while Britain’s was just behind at 26.1%. Debt and deficits fell sharply in peacetime, when full employment was re-established.

By “socialising” the banking industry’s losses, he argues, governments have been unable to offer a proper Keynesian response to the crisis. As you might expect, he is not optimistic about the outlook. (David Smith, Economic Outlook, The Sunday Times) http://business.timesonline.co.uk/tol/business/columnists/article6898000.ece

Borrowers face the squeeze

David Smith: Home Economics

How big a threat to the housing market is the proposed clampdown on mortgage lending by the Financial Services Authority (FSA)?  And is there a bigger immediate problem?  Nobody thinks that irresponsible lending should be allowed to continue, and it would help if lenders know their customers better.  Thought we never really had 125% mortgages, even from Northern Rock, anything approximating to a 100%-plus mortgage should be discouraged.

Looking at the “table of shame” in last week’s FSA mortgage market review though, I am not sure how irresponsible lenders were.  It includes the striking statistic that 49.3% of mortgages handed out in 2007 (the market peak) were given without proof of income.  Yet not all of these were self-certified mortgages, wrongly disparaged as “liar loans”.

The other figures in the table suggest that the FSA may be overdoing the “irresponsibility” bit.  Fewer than a third of mortgages were interest-only, fewer than 14% were on a loan-to-value basis of more than 90%, and fewer than 4% were genuinely sub-prime – loans to people with impaired credit histories.

Regulators, by their nature, tend to lock the stable door when the horse has bolted.  To the extent that lenders were irresponsible, and I don’t dispute that some were, things will change.  The new guidelines will make it harder for some buyers to get mortgages, particularly the self-employed.  But nothing will change before the second half of 2010, so the deserving self-employed should make loan arrangements now.  In the long run they will be squeezed.

The new guidelines will take the edge off the housing market in the long term.  In the short term, there is another danger, identified by David Adams, head of residential at Chesterton Humberts estate agency, following Rightmove’s report that asking prices rose 2.8% in the past month.  “This is an agency-induced increase that is not sustainable,” he says.  “There is a huge stock shortage in much of the country, and agents desperate for instructions are giving unrealistic quotes to prospective sellers.”  He is right.  The best way to kill off the market is if prices rise too rapidly. (David Smith, The Sunday Times)