House prices wilting - a little more reality creeping in?

In recent months new channels (including the BBC only yesterday) and papers have been reporting the 'return to growth' of house prices ... based on a mixture of 'hope' and 'flawed economics'.  Today, following the Halifax figures showing them falling the BBC has had to report the situation slightly differently ...

UK house prices wilting in summer

House prices are falling in part because of more properties for sale. UK house prices have fallen slightly in the early summer compared with the start of the year, a survey has found.

Property values dropped by 0.6% in June compared with May, following a 0.5% fall the previous month, the Halifax said. This meant prices in the second three months of the year were 0.1% lower than the first quarter.

More properties coming onto the market and less activity from house buyers has caused the fall, the lender said. The average home in the UK is now valued at £166,203 according to Halifax figures.

The typical property was still 6.3% higher than a year ago, although the figures point to the house price recovery faltering this year.

Martin Ellis, housing economist for the Halifax, said that the figures were not a great surprise. "This pattern is in line with our view that house prices will be broadly unchanged over 2010 as a whole," he said.

"A shortage of properties for sale in 2009 contributed to an imbalance between supply and demand and was a key factor driving up house prices last year.

"An increase in the number of properties available for sale in recent months has helped to reduce the imbalance, relieving the upward pressure on prices."

He said that the continued low level of interest rates continued to keep demand steady. The Bank of England's Monetary Policy Committee is widely expected to announce later that it is to keep the Bank rate at 0.5%."

David Smith, of property consultants Carter Jonas had previously told the BBC "where house prices go from here is difficult to predict because there are so many factors at work at the moment ... the fallout from the Budget will certainly have a major role to play in the coming months, with uncertainty surrounding impending public sector cuts and higher taxes, and of course we still have the ever-present threat of interest rate rises in the mix".

He is right, except for the predicted future for house prices (e.g. take a look at the standard curve for any 'asset' above - we are just going past the 'return to normal' point).  In fact the only thing that will slow the second decline is the realisation that supply of new property under the last Government was allowed to consistently lag well behind known demand (helping to 'inflate' prices and provide a 'feeling of wealth') ... but to everyone's cost.  If you currently feel you are a beneficiary of this, please think again ... e.g. think about the 'hand' you have dealt to your children (and grand children) and all young people today (and how long those clever enough to spot this are likely to stay in this country as a result), about how much you (and everyone else) have actually paid in your lifetime to banks (e.g. double the value of your mortgage) and bankers bonuses (and inflated estate agent fees), the fact that you only actually recover any actual 'profit' when you die and when it's of no use to you (as you still have to live somewhere), and the fact the Government plan to fund your old age care by selling your house to pay for it (as they don't have the cash to do it any other way)!  Speculation and investment in property also does nothing to improve the massive trade imbalance (and our ability to fund the nation's public services) or halt rising Government debt ...  etc etc

The new Government do not appear to be planning anything with regard to easing constraints to building new property either, which will maintain the long term imbalance between supply and demand, and will obviously reduce the speed and final level of decline.  They have also reduced the top rate of capital gains to help the 'speculators' who benefited greatly from property speculation in the past, to maintain people's interest in property, and to once again reduce the speed and final level of decline. None of these things solve any of the real problems however, and just wait until public sector jobs are slashed and interest rates start to increase (due to the rising costs of imports e.g. petrol prices up 30% to £5.30/gallon).

A little more reality still needs to creep in I'm afraid ... and 'flawed economics' (Poweromics - self interest, and greed) needs be replaced by a 'new economics' (Leanomics - based on value, values, trust, honesty, responsibility and respect). Nothing else will do ... as nothing else will work.  Where do you think the millions of jobs are going to come from to reduce the trade deficit, reduce Government debt, and pay for public services?

House prices - An obsession with failure

Stephanie Flanders recently commented on the Nationwide saying house prices are the same as they were a year ago (i.e. no longer dropping), but asked if this is 'too good to be true' ... take a look at a few of the key issues raised below for instance:

"... house prices are rising in a market where very few properties are changing hands. As the Nationwide points out in today's report, the housing turnover rate - the percentage of the private sector housing stock changing hands on an annualised basis - is still only 4%. That's not much higher than it was at the end of last year, when literally no-one in the market wanted to do anything. Before the crash, turnover was 7-8% ...

... you might expect prices to carry on falling in a market with such little activity - because usually low turnover reflects the fact that everyone expects prices to fall. But the relationship breaks down if there's only a tiny number of houses up for sale. That seems to have been true for most of this year and it's still true ...

... if prices stagnate, or fall further, there'll be plenty who worry about the knock-on effects for confidence and the economic recovery. But it would be good news for young people who are otherwise bearing the brunt of this economic bust ...

... from an economic standpoint, the rise in house prices since the early 1990s has been a massive transfer of wealth from young wannabe home-owners to the older generations who bought when the going was good. It's worked like a tax on young people -and a windfall to large numbers of the middle-aged and old ...

... One way or another - whether through higher lifetime taxes or unemployment at a crucial time in the career - young people are going to be paying for this crisis for a long time to come. It would be no bad thing if they could at least come out of it able to afford a home".

To which I added the comments below:

A good article ... I've haven't read this blog for a while (partly due to poor journalism and partly due to blog spamming from a small minority) ... but having done so today it's good to see the quality of journalism appears to be improving slightly ... IMHO for economic recovery to resume in a sustainable way we need the folly/obsession with house prices to stop, we need to introduce a 'land value tax' into the economic system and challenge planning regulations / restrictions imposed to serve the interests of just a few (i.e. the landowners - e.g. Duke of Westminster et al).

More houses will then be built and young people will then be able to afford a roof over their head, without having to give most of their hard-earned money away each month to bankers in the way of interest. Some of revenues raised from a land value tax could also be re-invested into real value adding activities that create jobs and wealth (instead of manipulating wealth) which would create a more sustainable economy and reduce our debts, balance of payments and trade deficits.

A few areas your report does not refer to however are when interest rates start to rise again from their historic low (e.g. due to inflation from import costs rising with the increasing demise of the pound), continued job losses (and the impact/cost of this to the taxpayer and public debt), as well as lack of opportunities available to young people and the debt we are asking them to take on to go to University.

They will not forgive us, or the leaders who forced this upon them. We must also remember that hard-working people can choose where to live (ie. work and pay their taxes) and can move freely in the EU now too, and as more of them leave the tax burden placed on those remaining will start to spiral upward until they also decide to leave too ... the outcomes are entirely predictable, but an effective intervention strategy from this Government to deal with the problems we face is not.

The end of an 'era'

As time progresses, many are looking for the 'green shoots' of recovery (e.g. see my previous post) ... but many people are starting to realise we are coming to the end of an 'era' (see Stephanie Flanders' latest blog). With the UK consumer debt now standing at £1,400,000,000,000, and more & more people worried about their jobs (with unemployment continuing to rise rapidly), it's definitely time to start asking more questions ... the Government are trying to respond early to the risk of another 'lost generation' now too (and to try to reduce this risk of social unrest), but once again this only addresses the symptoms ... it does not fix the fundamental problem.

The fundamental problem is 'traditional economics' is 'too narrow in scope', and is 'effectively dead' ... and the current toxic mix of 'Poweromics' & 'Ignoromics' is now starting to collapse too (nb the advent of internet/mobile technology will predictably make this so) ... a new 'values system' will emerge, and a 'new economics' focused on 'adding value for others' will be needed (see Leanomics) too ... but such changes requires 'leaders' to learn from mistakes ... and they will need to do a U-turn in many of their policies & practices too ... but are the current 'leaders' likely to do this ... well history suggests not and recent articles suggest very different people will be needed to bring this about too ... so there's a lot more to do, and much more to come ... before we reach the 'real turning point' and start along the 'road to recovery', and the 'path to prosperity' ...

For instance - take a look at my comment added to Stephanie's blog below:

Post 6 (leanomist) wrote:

"IMHO I believe we are coming to the 'end of an era' - and the signs of recovery should not be focused on house prices rising again, people starting to borrow heavily again, or GDP simply stabilizing (or rising slightly again). Traditional 'economics' is too narrow in scope, and effectively 'dead' ... and a 'new economics' will emerge (nb Dr. W. Edwards Deming highlighted the needs for this way back in the 1990's) and new 'economic indicators' will be needed. For those interested in exploring this a little more you can take a look at this post, which also looks at some alternative indicators to use whilst searching for signs of a 'turning point' and the 'start of the recovery'..."

'Land' of the 'Free' ... but who's 'paying' for it ?

I've often referred to the folly of wishing for (and relying upon) house prices to rise again, as for most people this simply equates to 'paper wealth', not 'real wealth' (as everyone still needs a roof over their head), and it creates a huge (and totally unnecessary) financial burden on our children, and our children's children (e.g. because every month a huge proportion of their hard earned money has to go straight to the banks in interest).

Whilst this clearly starves people of their own money, it also constrains their standard of living, their freedom and choices, as well as their natural creativity & ability to innovate too - which could otherwise have been put to good use in creating 'real value' for others ... for their community, as well as creating products & services that are tradable all around the world (which creates more 'value' and 'prosperity' for a nation).

At present most people do not realise what's going on and they simply join the 'treadmill of life', looking to buy a house, taking on huge debt and having to desperately look for ways to pay it back (e.g. through any 'money for nothing' scheme they can see themselves, such as more property speculation, using buy-to-let-schemes, for instance). The problem with this (besides all the ethical ones) is that 'wealth manipulation' does not add 'any real value' (or wealth) to an economy / nation, or increase a nation's overall well-being & happiness ... and it doesn't reduce a nation's trade deficit or level of borrowing either (in fact it makes all of them worse) ... and just like any 'pyramid scheme', it's now starting to collapse, big time, and it has the ability to take the 'whole nation' with it ...

So how have we got to this? Well, there are many steps that have taken place, but arguably one step in the wrong direction took place in the UK during the late 80's/90's (under Margaret Thatcher) as she tried to introduce the Poll Tax. Do you remember all the demonstrations that took place as a result, the fact that it led to Margaret Thatcher eventually losing her job, and that it was updated/changed to a Property Tax instead (that's still levied today)? It turns out that the changes Margaret Thatcher made were still highly significant - as a land tax (or Land Value Tax) would have worked entirely differently in 'economic terms' to a property tax - as one taxes land ownership, whilst the other taxes people based on the value of a property (and not the land itself) ... which we need to understand further ...

Land Value Tax is well known and arguably one of the simplest, fairest and best methods of taxation, as it taxes all land ownership based on it's potential value, based on it's natural position/resources and the community/amenities placed around it (e.g. people, jobs, transport, services) ... which are placed their by us - the Community (hence the original, and true definition, of a 'Community Charge'). It deliberately separates the 'value of the land', from the value of a 'property' (i.e. the basic bricks/mortar) on that land so it can tax land, and not the building - which is effectively the opposite of what we have now! By taxing land ownership (not the individual tenants or property) it also drives landowners to seek better 'economic' use of any land they own (instead of simply hoarding it and watching the value of their land grow without doing any work at all) ... and it has numerous more positive aspects too ... for instance when implemented properly the land tax itself cannot simply be passed on to those who live there, or who 'use' the land, because of the overall environment and the natural 'economics' that's created, as it simply taxes land based on it's 'economic value', and if landowners seek to pass on this tax, then people & enterprises are able to adapt and move to where the 'economic' conditions are more favourable (and the landowner has to pay the tax whether they are using it to it's full potential or not !) ...

A Property Tax (i.e. based on the size/value of a property) naturally moves the focus of attention away from adding value and switches it to 'asset speculation' instead. It also arguably avoids one of simplest forms of taxation (e.g. it cannot be avoided, it stops asset speculation/hoarding, and it arguably provides one of the most 'natural', 'ethical' and 'fairest' forms of 'economics' known to mankind). The avoidance of land tax, coupled with the fact that 'land' is one of the very few things left that is still not subject to 'inheritance tax', has made wealthy land owners pay far less for 'owning land', to 'hoard land', and to pass on land/wealth to future generations (without the risk of inheritance tax) ... so they can also continue to make money from it without doing anything at all (yet another example of 'wealth manipulation' instead of 'wealth creation').

One could argue that a Conservative Government would naturally want to do this as the party is well known to be 'sponsored' by the very rich, who are clearly the small minority benefiting greatly from such steps. However, when Blair/Brown took over they did very little about it, in fact they complicitly supported house price inflation, as coupled with banking (nb mainly 'asset speculation' and 'wealth manipulation' again), became their way of 'building' economic 'growth' without apparently having to work hard or creating lots of real value (and by two 'leaders' who preached to us prudence and who were supposedly brought up in the 'ways of the church')! One clear (and arguably callous) example of this was when they deliberately changed the Bank of England inflation target to one which specifically excluded house prices ... to allow house prices to continue to rise unchecked (i.e. as interest rates would no longer have to rise). Hence the 'illusion of wealth' was extended a lot longer, which will make the fall much deeper and greater now.

Real wealth is created by building new homes, not the price of existing homes going up. The bricks and mortar in themselves should arguably normally depreciate as they get older too, though the land value may grow (which is another good reason for separating the two). Yet the current system continues to incentivise landowners to hoard land and benefit from its continual growth in value (at very little cost - nb the low ceiling deliberately put in place with the property tax) and often without using it. Insufficient supply of housing, due a mixture of hoarding, demographic changes and increasing marital breakdowns (nb which are often related to money and stress!), means basic 'economics' (i.e. supply and demand) will make prices of property more than they could/should be, but arguably the main reason for all of this was to raise tax but i) to avoid a 'Land Value Tax' (so as to mostly ignore the real 'economic value' of land), and ii) to favor 'wealth manipulation' over 'wealth creation' ... and until both of these are reversed, things will only get worse ...

Value creation will continue to decline and unemployment will grow, borrowing and trade deficits will continue to get worse too ... all that will continue is wealth being transferred to the landowners, the bankers, and the already rich, whilst everybody else pays for it in their taxes, mortgage interest and their worsening quality of life (and for generations to come) ... so who's 'paying for it' - well it's pretty clear that good and otherwise hard-working people & communities are ... in terms of their well-being & happiness, the 'spare' money they have to spend, and in the 'freedom' they have and the 'choices' they are able to make ...

Solutions do exist, but those currently in 'power' will try to 'fight' any such change. In many ways we face a battle that 'transcends nations', and circumstances will continue to get worse until more people start to take proper notice, realise what's actually going on, and decide that this must change ... in the future we need to reward 'wealth creation' not 'wealth manipulation', and we need to move away from the toxic mix of Poweromics & Ignoromics we currently have today ... to a much wider, much fairer, and far more holistic form of 'economics' ... which I call 'Leanomics' ...

Land Value Tax should arguably be introduced early on (nb places like Hong Kong, Denmark, Singapore, Taiwan and Australia already have it and it works very well), so that it can replace, or at least dramatically reduce, other arguably less fair forms of tax* ... such as taxes on jobs/employment [Income Tax, National Insurance Contributions], taxes levied on enterprise [Corporation Tax] and taxes paid for providing goods/services (i.e. real value!) to others [Value Added Tax] and all the other 'stealth taxes' [e.g. road tax, congestion charging**] for instance too ...

As can be seen here, Leanomics is based on an entirely different 'values system', and one that focuses on (and rewards) ...

"People taking responsibility for adding value and continuously improving the situation for others (e.g. customers, communities, overall environment), based upon fundamental values such as trust, honor, responsibility and respect"

... a system very different to one the UK has right now, but ones that other nations (particularly smaller nations and those in the far east) understand only too well ...

* It is also worth noting that these are all set to rise dramatically in the future (VAT increases etc have already been announced), not reduce, to pay for all the current failure!

** If you're perhaps wondering where 'carbon taxes' fit in, and why I've included road tax and congestion charging as 'stealth taxes' here too, you may also want to read this.

The Writing's on the Wall ...

I was interested to read an observation made by a fellow blogger (writingsonthewall) on Robert Peston's blog (post 60), referring to where the current slight up-turn in house prices comes from ... and what we are yet to face (e.g. 'capitulation' & 'despair') - it chimed with a number of people reading the blog and with much of what I've been saying here too ... so I thought I'd summarise his comments here too ... and link it to my previous post ...

"... you can listen to all the optimism - or you can prepare for the worst and be pleasantly surprised if the worst does not happen. This graph (included below) beautifully explains where the mini-boom comes from. It's for the housing market but it applies to all asset bubbles (and we are currently moving towards 'return to normal') ..."

As pointed on in my last post, wealth manipulation 'transfers' wealth (e.g. share dealing, loans, mortgages, debts) ... whereas wealth creation is achieved by 'providing value' which 'creates wealth' (e.g. products, services, shelter ...).

House prices are starting to stabilise/go up again slightly (e.g. in the UK), partly as we've been building too few houses for so many years (nb a lot of projects have virtually stopped now too = i.e. we've stopped creating any more value - i.e. real value/wealth!) ... and partly due to the low interest rates at the moment (NB the gap between the rate at which banks now lend money compared with the Bank of England rate itself).

However asset (house) price inflation is arguably not what most hard-working families should be looking for ... as it simply means our children, and our children's children become forced into taking on more debt (and effective poverty/stress), for more of their lives (just to pay for a roof over their head) - so that the bankers/landowners can benefit from this more.

A reality check is due (as highlighted in the graph) and this hasn't happened yet ... but it will and the whole 'illusion of wealth' will go with it, alongside the current 'political' and 'economic' system ...

This will be further exacerbated when people realise that the politicians have effectively colluded with the bankers to take the future health, wealth and prosperity away from our children, and children's children (paid off in future debts/taxes), due to the colossal bailouts of the banks (who have made billions, have personally pocketed millions, and who are now doing exactly the same thing again - and all at our expense, and not from 'creating wealth', but by 'manipulating wealth!).

History says change will happen, and with the advent of the internet now, it's likely to occur in many different ways ...