Saturday, 27 January 2018

We cannot rely on rising property prices to keep the UK economy going

An observation today from the East Devon Watch blog points to the pointlessness of new housing provision in these parts:

Owl says: most homes in the Devon and Somerset Local Enterprise Partnership area are being built near Hinkley C nuclear power station to house up to 5,000 largely temporary workers.

“Building more homes in London won’t solve the country’s housing crisis” | East Devon Watch

This was followed by a very pertinent comment from a real estate professional writing in November:

England’s fragile economic growth is underpinned by household expenditure, which accounts for 63% of gross domestic product. This is dependent upon perceived wealth, which is directly correlated with the price of housing. House price growth has left homeowners (particularly in London) feeling richer while renters feel poorer. To undermine that perception of affluence among homeowners would have a significant economic impact.

Building more homes in London won't solve the country's housing crisis | Jonathan Manns | Housing Network | The Guardian

At the same time, statistics backed up the importance of land price growth to the UK economy:

The UK's worth grew by the largest amount on record to reach £9.8tn at the end of last year, boosted by land value, which has grown "more than fivefold" since 1995, according to official data.

Combining the UK’s total assets, the Office for National Statistics (ONS) found that the UK’s value increased by 8.9pc or £803bn between 2015 and 2016. The country’s net worth has risen steadily since 2012, following a course in line with pre-financial crisis conditions.

Land was found to be the UK’s single most valuable asset, making up more than half of the UK’s total net worth, according to the annual ONS report, an estimate of the market value of UK assets is known as the national balance sheet.

The UK is worth £10tn - and more than half of that is from land value - Telegraph
Britain wealth soars to a RECORD £10trillion | Daily Mail Online
UK posts largest annual rise of net worth on record | City & Business | Finance | Express.co.uk

And exactly the same was happening last year - with exactly the same explantion:

Good news, we're getting richer! The UK's net wealth rises to £8.8TRILLION with each household worth an average of £378,000... but most of it's down to soaring property prices

With an overview from one of the authors from 'Rethinking the Economics of Land and Housing' - and a suggestion from Churchill:

To solve the housing crisis, we need to fix our broken land economy

23rd August 2017 Laurie Macfarlane 

Land in the Twenty-First Century

Today the value of the UK housing stock stands at £5.5 trillion – around 60% of the entire net wealth of the UK. This has increased from just over £1 trillion only twenty years ago.

As the Office for National Statistics acknowledges, this rapid increase is largely the result of soaring house prices:

“The increase in the value of dwellings was largely due to increases in house prices rather than a change in the volume of dwellings.”

But the price of a property is made up of two distinct components: the price of the building itself, and the price of the land that the structure is built upon. We don’t know the exact breakdown between these two components (bizarrely, there is currently no reliable public dataset on the land market in the UK) but the available data implies that land under homes is currently worth around £3.7 trillion – nearly 70% of the total value of the housing stock. This makes residential land the UK’s most valuable asset, even in today’s high-tech economy.

So why is land so valuable? And why have land values, and thus house prices, increased so much relative to incomes in recent decades?

Land values increase naturally over time as economic growth and a rising population increases demand for a resource that is inherently fixed in supply. Public and private investment in infrastructure and amenities also increases the value of land, making some locations much more valuable than others. For example, new transport links or being in the catchment area of a good school can dramatically increase the market value of nearby land. As a young Winston Churchill said in a famous speech to Parliament in 1909:

“Roads are made, streets are made, services are improved, electric light turns night into day, water is brought from reservoirs a hundred miles off in the mountains – and all the while the landlord sits still. Every one of those improvements is effected by the labour and cost of other people and the taxpayers. To not one of those improvements does the land monopolist, as a land monopolist, contribute, and yet by every one of them the value of his land is enhanced.”

There is also good evidence that as economies mature, the demand for land relative to other consumer goods increases. Land is a ‘positional good’, the desire for which is related to one’s social status. In economics jargon, land has a ‘high income-elasticity of demand’ – people will stretch their incomes to consume it. This goes some way to explaining why the rise of information technology and globalisation has not meant ‘the end of distance’ as some predicted, but has driven the economic pre-eminence of a few cities that are best connected to the global economy and offer the best amenities.

But this is only part of the story. The land economy is most decisively shaped by the laws and regulations that govern the ownership, trade and use of land. In other words, the rules of the game matter. But these rules have very little to do with economics, and much more to do with politics and power. They have varied immensely over time reflecting the evolution of power and class relations in society.

But what does this mean for the future state of the UK economy?

Britain can't cope with a fall in house prices – here's why

This is how changes might affect employment, household consumption, investment, the Government deficit and, critically, the UK current account – the net measure of cash flows in and out of the economy

Alexander Tziamalis
Monday 9 October 2017

First, many pension funds and investment bonds rely on UK property to generate income for their beneficiaries. Second, we have what economists call the wealth effect.

Economists have long associated consumers’ perceived real estate wealth with spending behaviour: if you believe your house is worth a lot, you feel financially secure. And then you allow yourself to save less and spend more. Just consider the rising number of people who plan to subsidise their retirement with wealth generated by their homes.

If their assumed valuations start to look shaky, these people will spend less to build up their savings. The pain would be felt by many: about 64 per cent of households in England are owner-occupiers.

The wealth effect is important in most developed economies but even more so in the UK which relies on ever-rising levels of consumer spending for its growth. A 10 per cent fall in the value of dwellings in the UK would correspond to a loss of wealth equivalent to more than the value of all the cars exported from the UK in a decade.

Ripple effects

The climate of economic uncertainty, reduced consumption and falling real estate values brings an additional problem for the UK. Britain has long had a trade deficit, but it has also benefited from positive foreign direct investment.

The current account itself has been in the red for nearly 20 years now but the hundreds of billions of inward foreign investment channelled to UK property over the same period meant that this deficit remained manageable – just about.

According to the Bank of England, overseas companies have accounted for roughly half of all UK commercial real estate transactions since 2013. If international investors expect prices to fall in any sustained way, the inflow of money would stop and many would sell up. Why buy or hold an asset just at the start of what might be a long decline?

This would not only put pressure on real estate prices but would affect UK GDP, reduce government revenues and worsen the UK current account position. The credit rating of the UK would come under more pressure, and trillions of UK government debt would cost more to refinance. Then the UK government deficit would deteriorate further, taxes might rise to cover for this and the domino effect would be in full cry, spreading to all sectors of the economy, similar to events in Greece.

Policy plays

Real estate values are critical to the UK’s prosperity. Households, pension funds and businesses have invested heavily; most of the country has, in one way or another, skin in this game. Britain may need to wean itself of its property addiction, but it also needs to sustain confidence in the single asset class that counts for almost two thirds of its wealth.

It is deeply difficult politically to sell that story, however, when the understandable clamour is to make housing more affordable. In a move designed to win over younger voters, May has imposed punitive taxation on landlords, cutting one of the life-lines of UK real estate and driving many out of the market. The new measures announced at the Conservative party conference apply further pressure.

May is desperate for a positive message but the implications of targeting the real estate market right now are huge. Britain’s Brexit fumbling is already failing to inspire confidence. The fear has always been that Brexit would spark a period of stagnation, but the danger of deeper, more accelerated damage now seems real, and the potential effect on property values and the economy stark.

The UK government should act decisively. This would require the continuation of loose monetary policy, a reinstatement of tax incentives for real estate investment and, of course, a real plan for Brexit and the future of London’s financial services industry.

Alexander Tziamalis is a senior lecturer (associate professor) in economics and a consultant at Sheffield Hallam University. This piece originally appeared on the Conversation

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