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.

University education - who 'pays' ?

The Confederation of British Industry (CBI) today stepped forward to say University students in the UK should pay more for their loans and accept higher tuition fees as "inevitable".

The National Union of Students attacked their report as "gross hypocrisy" from the "fat cats at the CBI". The Association of Teachers and Lecturers attacked the proposals as "arrogant and elitist".

In my view the CBI is once again promoting the wrong strategy, and Robert Peston has today done a fantastic job in challenging this position in his blog ... and points to the issue of inter-generational social justice the CBI ignores ... I've included a few of his comments below:

'... More by luck than desert, the generation of Lambert, Balls, Laidlaw and even Peston have had it pretty good ... we had free university education ... we have saved for a pension over the many years of a bull market and when companies and the public sector felt obliged to offer gold-standard final salary pension schemes ... we managed to get on the property ladder before house prices became ludicrously inflated...

... It was our generation which royally messed up the economy with the inadequate governance that led to the credit crunch and the worst global recession since the 1930s ... but we're - on the whole - alright Jack, thanks to the accident of when we happen to have been born ...

... but those leaving school and university today face an altogether bleaker future: a drought of jobs; a bewildering and unappealing set of options for saving and investing; over-priced residential property (even after the "correction"); relentless fearsome competition from India, China, and so on ...

.. and there's the costs of providing a health service and welfare state to sustain an older generation ...

... so some may well argue that as and when a new government decides to make cuts or increase taxes - to fill the hole in the public finances created by the current generation - its first instinct should probably not be to penalise students ... shouldn't the older generation bequeath them something other than debt?'

and in response to his blog I added:

'Well put - an excellent article again ... and many great comments from bloggers too. IMHO setting a target of 50% of people going to university is a joke, the CBI comments are a disgrace and the Government need to think very carefully about what they choose to do in this area ...

... for instance young people also have a choice where they live (n.b. they can move anywhere in the EU without restriction), and if hard-working young people move out of the UK to work elsewhere then there will be few value/wealth creators at all here in the future and no-one to pay the taxes necessary to subsidise any public services at all (or to pay off any of the debts) ... and the whole system will continue a downward spiral ... until widespread protest/social unrest hits the streets ...

Instead of passing more debt on to future generations, what about introducing a new tax - a 'Land Value Tax'* (which a number of other countries currently have) ... as it's known to be particularly effective at targeting rich landowners who own most of the land, assets & wealth ... as this group can more than afford it, it can't easily be 'passed on' and they also can't avoid it - unlike most/all of the other taxes aimed at them**! ...

... It would raise large amounts of tax and would allow other taxes to reduce as a result. It would also push landowners to make more land available for housing - which would partly tackle the over-priced residential property market we still have too. A small fraction of this tax revenue could be used to subsidise free tuition fees and provide maintenance grants (e.g. more 'means-tested' grants) for future generations of value/wealth creators (e.g. so long as they are UK residents and continue to stay in the country) ...

... Let's also reduce the number of students going to University from the stupidly high target of 50%, support proper vocational apprenticeships and scrap/replace all the poor quality courses we see today e.g. most of the very expensive, and yet completely flawed, MBA programmes ... which teach students 19th century management practices instead of 21st century management practices (i.e. outdated courses, which partly got us in this mess, and which are often referred to as 'Maybe Best Avoided' - even without all the debt)!

* take a look at http://poweromics.blogspot.com/2009/08/land-of-free-but-whos-paying-for-it.html for instance.

** NB the Government have allowed 'land' to be one of the very few things exempt from inheritance tax too!

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'..."

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 ...