The house price puzzle

Everybody knows that the housing market has become financialized, as Josh Ryan-Collins among others has documented. But what kind of financial asset is housing? The answer is far from straightforward.

In one sense, house prices are like share prices. Both are claims upon future incomes – profits in the case of equities and wages in the case of houses (it’s fair to assume rents are a stable fraction of wages). Both tend to fall in recessions. And both have over the years delivered a risk premium – though how great depends upon which time period you use, how you account for liquidity risk and so on.

But there’s a massive difference between house prices and share prices.

Since the mid-90s house price valuations have soared. In 1998 the average house prices was 3.1x the income of first-time buyers according to the Nationwide. Today it is 6.7x. Equity valuations however (at least in the UK) have not much changed in this time. The ratio of the All-share index to dividends or earnings is much the same as it was in 1997-98. In this sense, house prices have behaved far more like bonds than equities: they have risen as interest rates have fallen whereas share prices have not.

There’s an obvious explanation for this. Lower real interest rates raise the net present value of future rents (or of rents saved if you are an owner-occupier) so they raise house prices. As Bank of England economists say: “the rise in real house prices since 2000 can be explained almost entirely by lower interest rates.” My chart shows that there’s a huge correlation between the house price-earnings ratio and the ten-year index-linked yield. House prices, then, have behaved like bond prices. And if it walks like a duck and quacks like a duck…

In theory of course, a lower discount rate should have also raised share prices. I suspect it hasn’t because the same stagnation and risk aversion that’s pushed bond yields down has depressed expectations for dividend growth and increased the risk premium investors demand on equities.

But why haven’t these same factors also depressed house prices? Surely increased risk and the prospect of lower rental growth should be bad for them?

The answer might be that, in fact, housing is a safe asset just like a bond.

One way in which this is true is that protects us from future rises in rents: the demand for owner-occupation is a demand for rent control. Also, as Cristian Badarinza and Tarun Ramadorai have shown, foreign investors have regarded the London housing market as a safe haven (pdf) from economic and political risk – just as they regard western bonds.

What’s more, for many of us our house is not wealth so we shouldn’t care if its price falls. And an asset whose price fall doesn’t bother us is similar to one whose price doesn’t fall in the first place.

Put it this way. I grow a lot of kale in my garden, so I never need buy any from the shops. The price of kale therefore doesn’t bother me. If it falls I’m worse off as a kale-grower but better off as a kale-consumer to exactly the same extent. The net impact is zero. As an owner-occupier I’m in the same position. I’m providing housing services to myself. A rising cost of those services benefits me as a supplier and makes me worse off as a consumer with no net effect. As Mervyn King said (pdf) back in 1998:

A rise in house prices leads not only to an increase in wealth but also to an increase in the cost of housing services. Or, to put it another way, if the price of your home goes up, you will not be able to spend more on other things if you wish to carry on living in your home.

This shows that housing like a bond in another sense. A rise in bond prices is ambiguous for bond-holders. Yes, it makes them better off in the sense that their assets are worth more. But it makes them worse off in that they will have to pay more in future to obtain a given income: “higher bond prices” is another way of saying “lower annuity rates”. For many, the net impact is zero.

Obviously, this is not true for everybody. If you are a landlord or someone planning on trading down – that is, on consuming less housing services in future – rising house prices do make you better off.

Such people, though, are a minority. Atif Mian and Amir Sufi estimate that the boom in housing transactions in the US during the bubble of the mid-00s was driven by the 1% of people who bought and sold many houses quickly. The vast majority didn’t behave as speculators – but as Ulrike Malmendier and Adam Szeidl show (pdf) bubbles are generated by minority behaviour.

But for everybody who is long of housing, somebody else is short such as younger people wanting to buy a home. Net, as Willem Buiter pointed out, housing is not net wealth (pdf).

If all this is right, it has an encouraging implication. It suggests that measures to definancialize the housing market such as credit controls, curbs on speculation or land value taxes are – from an economic point of view – a free hit. They would reduce the economic harms done by high house prices such as increased instability (pdf); lower productivity (due in part to encouraging longer commutes); and greater labour market frictions – not to mention the cultural and psychological damage they do. And they’d do so at very little cost: if house prices aren’t net wealth, cuts in them don’t matter.

This is not to say the job is politically easy: the tiny minority for whom house prices are wealth would resist such measures, and it is they who control politics. The point is, though, that what we have here is an obvious cost-benefit win.

But is it right? There’s a different explanation for the contrast between bond and equity behaviour in the face of falling interest rates.

It’s possible that housing speculators have priced in the good news of lower bond yields (a lower discount rate) but not the bad, that they betoken stagnation.

There’s a sort of precedent for this. Back in 1979 Franco Modigliani and Richard Cohn argued that shares had fallen in the 70s because they were only half reacting (pdf) to higher inflation: they were taking on the bad news of higher interest rates and hence discount rates but not the good, that inflation would raise future earnings. Maybe the housing market is also doing some half-pricing in – taking on the good news of lower interest rates whilst ignoring what those lower rates symptomize.

If this is the case (and I don’t know if it is) then prices should eventually fall of the own accord. In which case we don’t need policy to definancialize housing: the market will do it anyway.

Comments

[Blissex]

There are several terrible "misunderstandings" in this terrible post, of which the most ludicrous is this:

«In one sense, house prices are like share prices. Both are claims upon future incomes»

Most people don't need to buy bonds to get a job or to have a family, but they do need to live in a house, whatever the price is.

Investors can say "bonds are overvalued nowadays, I won't buy any until they get lower", but very few people can say "housing is overvalued today, dear spouse and children we are better off homeless (even if that likely means I will lose my job) until the market cools down".

Sure there are ways to go "short" an overpriced housing market like the south-east one, other than homelessness, but they aren't that great either.

That housing in general is a necessity, and housing in particular areas not quite but still a strong advantage, makes it very different from bonds. A famine of bonds is much less of a big deal than a famine of food, or a famine of housing.

BTW von Thünen's principle that rents a direct function of wages applies here.

[Blissex]

A very interesting paper is one by the young Ben Franklin in 1729, where he powerfully and very candidly argues that "Quantitative Easing" can vastly increase the cost of housing, describing very explicitly how much money can incumbent owners extract from new tenants and new buyers thanks to high housing cost inflation:

https://founders.archives.gov/documents/Franklin/01-01-02-0041

Nothing much has changed in the nearly 300 years since 1729, in the USA or in the UK.

Torstein Veblen already in 1923 also described how much of USA "economic" activity is based on price gouging by real estate rentiers:

https://books.google.co.uk/books?id=KCMxDwAAQBAJ&pg=PT150
«Its name may be Spoon River or Gopher Prairie, or it may be Emporia or Centralia or Columbia. The pattern is substantially the same, and is repeated several thousand times with a faithful perfection which argues that there is no help for it. The location of any given town has commonly been determined by collusion between “interested parties” with a view to speculation in real estate, and it continues through its life-history (hitherto) to be managed as a real estate “proposition.” Its municipal affairs, its civic pride, its community interest, converge upon its real-estate values, which are invariably of a speculative character, and which all its loyal citizens are intent on “booming” and “boosting,” – that is to say, lifting still farther off the level of actual ground-values as measured by the uses to which the ground is turned. [...] So, farmers and townsmen together throughout the great farming region are pilgrims of hope looking forward to the time when the community's advancing needs will enable them to realise on the inflated values of their real estate, or looking more immediately to the chance that one or another of those who are “born every minute” may be so ill advised as to take them at their word and become their debtors in the amount which they say their real estate is worth.»

[Blissex]

«rising house prices do make you better off. [...] The vast majority didn’t behave as speculators»

This is another ludicrous claim, for example I have here a nice quote from "BusinessWeek" that I think is highly realistic as to typical middle class property speculators (many of which will boast to acquaintances and coworkers how much money they are minting with their clever property investments):

https://www.bloomberg.com/news/articles/2020-12-22/opendoor-open-faces-an-expensive-path-to-profitability-in-real-estate
“From the minute the average couple busy a home they're constantly calculating how much they'll make when they sell it, and most won't sell for much less once that day comes.”

This quote from a commenter on "The Guardian" exemplifies a very common mentality:

“I will put it bluntly I don't want to see my home lose £100 000 in value just so someone else can afford to have a home and neither will most other people if they are honest with themselves”

«the tiny minority for whom house prices are wealth»

Another quote related this ludicrous claim, which I have read many times in online discussions, usually I think made in bad faith by property speculators to persuade gullible losers that booming rents and prices are not really what it is all about;

http://www.dailymail.co.uk/money/mortgageshome/article-2105240/Stuck-rent-trap-How-middle-class-family-kept-remortgaging-home-pay-bills-longer-afford-repayments.html
“Certainly, we overstretched ourselves when we bought our lovely period home for £419,000 in 2002. But with mortgage companies practically throwing loans at us in a rising property market, we slept soundly at night, smug in the knowledge the house was making us money. [ ... ] The valuer had barely been in the house for five minutes yet we were able to borrow a further £80,000. [ ... ] We were lulled into a false sense of security about our wealth. Whenever we overspent we just remortgaged without comprehending the consequences of taking yet more equity out of the property. [ ... ] In our defence, we weren’t spending the money on expensive designer clothes, luxurious holidays or flash cars. Much of it was going on school fees and upkeep of the house. By the beginning of 2008 we had remortgaged three times, taking out a staggering £500,000 loan on a house that wasn’t worth much more.
Our interest-only mortgage payments had soared to nearly £3,000 a month.
Which would have been just about palatable if the market hadn’t crashed. Now we were faced with the fear of living in a home we could no longer afford that would probably plummet in value.”

[Blissex]

There are another two factors that this article ludicrously fails to mention:

* As an astute commenter on another blog pointed out, housing is the only asset class that retail investors can buy on 20 times leverage.

* Because of that in many countries 90% of bank loans by amount are mortgages, and therefore governments and central banks backstop the property markets as any wobble can wipe out nearly the entire financial systems.

* Both the 20 times leverage and the backstop largely exist because there are studies that show that property owners vote far more to the right than renters, and the majorities of thatcherite/neoliberal governments in many countries depend utterly on the votes of property owners and satisfying their expectations for huge upward redistribution from lower class renters and buyers.

Put another way it is an even more thoroughly government "sponsored" market than the stock market.

[Blissex]

There is a big picture that this terrible article does not relate to (an euphemism for "obfuscates"):

* There has been for decades a phenomenally high rate of housing cost inflation and of pension cost inflation (that is an inflation of bond and stock prices without a corresponding inflation of their yields, that is an inflation of valuations, that is P/Es; this without considering that for many "my property portfolio is my pension").

* This inflation of valuations has made incumbent owners of housing and pensions immensely richer, and not just on paper: they can cash out in many ways, e.g. with re-mortgaging for housing assets. Note on pensions: for defined benefit pension holders, as the transfer values have ballooned too, even if they are less liquid.

* The parties that represent incumbent housing and pension owners have been in power for 40 years in many countries, and most MPs from most parties are incumbent housing and pension owners, and are richly "sponsored" by finance and property interests.

Treating property as an "investment" like bonds is ludicrous, and even treating bonds (or stocks) as an "investment" since (at least) Greenspan is also ludicrous, even if slightly less so, as someone said that "front running the government and central bank" is the only "investment" strategy that is worth considering.

It is all about redistributive politics and the "western" world dismissing industry (risky, polluting, difficult to manage, much better outsourced to China and India) to strategically turn back to rentierism.

[Njamescouk]

"Since the mid-90s house price valuations have soared. In 1998 the average house prices was 3.1x the income of first-time buyers according to the Nationwide. Today it is 6.7x."

well yes, the banks are printing more money specifically to buy houses with, and the result is wild inflation. but that's ok, the banks reckon they have solid collateral, that they can push people out on the street and then sell to a slightly smaller mug.

[Njamescouk]

not sure I should argue with a former governor of the boe but here goes

"if the price of your home goes up, you will not be able to spend more on other things if you wish to carry on living in your home."

the price of my home is constant, the amount I paid for it. if he means the cost of debt service, I, and lots of others, don't have any debt. even if I've borrowed the price of the house debt service isn't related to notional value.

if he means people are borrowing on the strength of a notional increase in the value of their houses, that could indeed be unpleasant, but no doubt the irresponsible lenders will be bailed out.

so what is "the cost of housing services"? hard to see what the point is here.

[Dave Timoney]

@Njamescouk, re: "if the price of your home goes up, you will not be able to spend more on other things if you wish to carry on living in your home."

What this means is that a nominal rise in your property's value doesn't give you any more disposable income unless you decide to sell the property.

[Dave Timoney]

@Blissex, re: «In one sense, house prices are like share prices. Both are claims upon future incomes».

This is correct. House prices ultimately reflect the ability to service a mortgage, which means they must reflect future incomes. Two reasons why house prices have risen are: a) the relative fall in the cost of other necessities since the 1960s (food, clothing); and b) mortgage terms (i.e. durations) have gradually grown.

In the 60s, you'd get a mortgage at 25/30 (& start a family), pay it off at 50/55 (& fund your kids' weddings/deposits), retire at 65 & then die. Today, if you can afford to get on the property ladder in your 20s, you'll be willing to commit to a 40 year term. If you get on later, say in your 30s, you'll be able to afford higher repayments for 25 years because your starting income will likely be higher.

The relative drift of spending from consumables, like food and clothing, to fixed assets is arguably the great secular shift of the last century. Despite the prominence of consumerism, and even the contemporary vogue for intangibles like "experiences", the reality is that we're locking our wealth into tangibles that reflect frozen future (as much as dead past) labour.

[Blissex]

«In one sense, house prices are like share prices. Both are claims upon future incomes».
«This is correct. House prices ultimately reflect the ability to service a mortgage, which means they must reflect future incomes.»

Oh please that quote from this blog is another example of the terrible "misunderstandings" in this article: the stream of income from shares and bonds is generated by them, our blogger wants us to believe that the price of housing is not the discounted future flow of (notional or actual) rents and capital gains they can generate, but a fixed ("fair to assume rents are a stable fraction of wages") share of an owner/occupier's wages, if not by requiring higher monthly payments, by requiring longer repayment periods.

But that is ridiculous:

* Obviously a floor to property valuations is set at the margin by the prospective income (expected rents and capital gains) for BTL landlords.

* Rents charged by landlords can well be, up to a limit, an increasing proportion of wages, as in the south-east (bit not just) in the past 40 years; the same for mortgage payments by owner-occupiers, as that can happen by way of a longer repayment period, not just a higher deposit and monthly repayment.

* Regardless the clever "misunderstanding" is also based on misassuming that valuations are a function of a *single* person's wages, whether renter or owner-occupier, as in the "communist" past where a single man's wages could pay for the housing costs of a family, but currently valuations depend usually on two person's wages paying the rent or the mortgage, and increasingly on those of three or four persons, if the parents help a couple pay the mortgage, and many more persons if a property is subdivided into many smaller properties.

Note: one of many astute "misunderstandings" related to the latter point is to look at the cost of housing in terms of "bedrooms" or "flats" or "houses", rather than in terms of square meters per person, which have been falling precipitously for most lower-class and many middle-class people.

What is a straightforward function of wages is the cost of *buildings*, but the cost of housing is principally the cost of land. As to this, there is a really amusing (in retrospect) quote from Michael Lewis, "Pacific Rift", 1992:

«the Japanese property market operates by different rules than its American counterpart (first rule of thumb: in the former the land is worth eight times the building, while in the latter the building is worth eight times the land)»

That valuations depend on the rents and capital gains that can be received by landlords, that mortgage payments can take an increasing proportion of an owner occupier's wages by longer terms, and that increasing numbers of tenants or owner occupiers can be put into the same "property", are really well known developments in the english property market for some decades, I wonder how news of those developments have not reached the wilderness of Rutland :-).

[Blissex]

«What this means is that a nominal rise in your property's value doesn't give you any more disposable income unless you decide to sell the property.»

That is indeed what it means, but there are some additional notes...

The "misunderstanding" is quite similar to the notion that someone with £500,000 in their pension account is as poor, for most of their lives, as someone with £5,000 in their pension account because neither can spend that until they retire.

To me this kind of misunderstanding seems to "inadvertently" spread the notion to credulous losers who don't understand the basics of "wealth" that unrealized capital gains are not real wealth because they are illiquid and cannot be spent straight away (as “disposable income” can) like cash.

That is I guess it is used to make marks think that someone on a £25,000 final salary pension and with a £800,000 unrealized capital gain in their flat is just as poor as someone with a £25,000 wage and renting.

But of course there are whole industries devoted to making liquid, for a fee of course, illiquid assets, and anyhow there are two main ways in which property owners can spend their capital gains:

* By far the most popular: “smug in the knowledge the house was making us money” and that their property is their pension, many middle-class people stop saving any of their wages, thus substantially boosting their disposable income and their lifestyles, confident that the capital gains on their property (the savings of the next buyer) will be more than sufficient when they retire, sell their flat and retire to Dubai or Spain, and that the government backstops the property market.

* Quite popular: just re-mortgage.

http://www.opendemocracy.net/ourkingdom/oliver-huitson/thatcher-black-gold-or-red-bricks
“Another of Thatcher’s magic potions was ‘home equity withdrawal’ or remortgaging – drawing down the equity in the borrowers home for (mainly) consumption purposes – new cars, holidays, and so forth. Under the two Prime Ministers that preceded her, James Callaghan and Ted Heath, home equity withdrawal as a percentage of GDP growth was around 36% for both. Under Thatcher, this exploded to over £250bn across her premiership – a staggering 104% of GDP growth. To a significant extent, Thatcher grew the economy by unleashing easy credit, asset inflation (including house prices) and equity draw downs – ‘wealth creation’ indeed.”

I guess that Mervyn King at the time he was writing that "misunderstanding" was doing his duty for of the finance and property lobby, but in post-retirement writings he has adopted a rather different tone.

[Blissex]

«The relative drift of spending from consumables, like food and clothing, to fixed assets is arguably the great secular shift of the last century.»

Actually from 1980 rather than last century, and a better understanding is: lower prices for products (goods, services) made with labour (worldwide median wage : £1/hour), and higher prices for assets owned by incumbents.

«we're locking our wealth into tangibles that reflect frozen future (as much as dead past) labour.»

I would think a better understanding is that "they" are locking "their" wealth into tangibles and intangibles that reflect "their" ability to extract rents from future labour (and sometimes natural resources).

[Ander]

The average householder has some skin in this game. Most people aren’t on a full term mortgage, so the house value plays into the equity available to refinance. Around 2010 my partners home came to the end of the fixed term but with changes in mortgage availability and drops in house values, she was unable to secure a remortgage which left her at the whim of her mortgage lender who set her at the upper bound of her variable mortgage rate. This cost her hundreds of pounds every month.
This is an extreme example, but the equity in a home is of relevance for millions of “ordinary punters” beyond the 1% who speculate.

[Patrick Carter]

On the topic of a house being a claim on future wages, this paper is quite interesting:

https://www.nber.org/papers/w24867

(I don't think the idea is that you would choose to become homeless if the future earnings did not justify the house price, I think the idea is you would try to move somewhere else where the relationship between the two is more favourable)

This is another very interesting paper, showing how local productivity growth pass through to rents (and house prices)

https://eml.berkeley.edu/~moretti/tfp.pdf

[Blissex]

«drops in house values, she was unable to secure a remortgage which left her at the whim of her mortgage lender who set her at the upper bound of her variable mortgage rate. This cost her hundreds of pounds every month.»

What a pitiful story of someone who speculated that property bought on huge leverage would only have an upside, and for a couple of years until the government managed to get prices to balloon again she got a bit screwed by that leverage on the downside.

Indeed the tory middle classes *know* that they are entitled to speculate on property with huge leverage without any downside risk while pretending that they don't care about the upside profits (but only crazy people use massive leverage to go long on assets that are not expected to go up).

«but the equity in a home is of relevance for millions of “ordinary punters” beyond the 1% who speculate.»

90% of "ordinary punters" speculate, just ask them a simple question: given that capital gains are irrelevant to you, would you accept a 100% tax both ways (that is a credit in case of capital losses) on property capital gains, so on sale you would get back what you bought if for, without losing or gaining a penny? In many, many years of online discussions on this topic I have never had a single positive reply.

Again: “From the minute the average couple busy a home they're constantly calculating how much they'll make when they sell it”, “in a rising property market, we slept soundly at night, smug in the knowledge the house was making us money”. It is really not that complicated, except for those who badly want to "misunderstand".

[Blissex]

«don't think the idea is that you would choose to become homeless if the future earnings did not justify the house price»

Note again: not *the potential owner's* earnings, but *the property's* earnings. The potential owner's earnings only define affordability for that owner, it is the potential to extract rents and/or capital gains that sets house prices (plus the cost of liquid capital).

«I think the idea is you would try to move somewhere else where the relationship between the two is more favourable»

Being an expat is an alternative to going short on housing by choosing homelessness, but that is part of the "but they aren't that great either" alternatives.

What is far more common is moving somewhere else where there are few jobs and low wages, and thus low property prices, *once retired*. The local ratio between the two can still be bad, but the ratio between foreign retirement income and local housing costs can be a lot better, and retirees often have a lot less constraints on moving somewhere else.

«This is another very interesting paper, showing how local productivity growth pass through to rents (and house prices)»

Which is von Thünen's principle. House prices depend mainly on two factors: job/wage density in the area (except for areas of natural beauty), and how many renters and buyers can be packed per sqm of land and building surface.

[Blissex]

«House prices depend mainly on two factors: job/wage density in the area [...] can be packed per sqm»

BTW the two links by "Patrick Carter" are interesting, being a rediscovery of georgism and of von Thünen's principle, with supporting evidence:

https://eml.berkeley.edu/~moretti/tfp.pdf
“Workers benefit from local TFPR growth, after subtracting increases in housing costs, but homeowners benefit substantially more than renters.”

https://www.nber.org/papers/w24867
“it is useful to conceptualize the location choice of individuals as a decision to invest in a ‘location asset.’ This asset has a cost equal to the location's rent, and a payoff through better job opportunities and, potentially, more human capital for the individual and her children.”

Shop chains have models to locate stores, based on the density and level of wages in an area. I would think that property agents and developers also have pricing models based on job density and level of wages: the higher the job density, the smaller the sqm per person, the higher the wages, the higher prices and rents per sqm; I guess that farming yield models can be used, with the "crop" to harvest being worker wages.

PS I hope that the authors of the two papers already have tenure...

[Blissex]

Oops it looks like that this article "triggered" me :-), and the point at which I started to be "triggered" is the title, as if there were really a "puzzle" about ballooning house prices. Ludicrous.
The ending is greasily monstrous too.

[ltr]

https://fred.stlouisfed.org/graph/?g=oCkD

January 30, 2018

Case-Shiller Composite 20-City Home Price Index / Owners' Equivalent Rent of residences, 2000-2018

(Indexed to 2000)

https://fred.stlouisfed.org/graph/?g=of2K

January 15, 2018

Real Residential Property Prices for United Kingdom and United States, 2000-2018

(Indexed to 2000)

[Blissex]

Graphs of national aggregate quantities often are rather less informative than more detailed ones, especially for highly local phenomena like property. Some regional data:

https://loveincstatic.blob.core.windows.net/lovemoney/House_prices_real_terms_lovemoney.jpg
http://www.lovemoney.com/news/53528/property-house-price-value-real-terms-2005-2015-uk-regions

I guess it is pretty clear where government policy is trying to concentrate the "good jobs" to attract new tenants and new buyers to be shaken down by tory voting incumbents.

https://blissex.files.wordpress.com/2021/10/dataukonshousepricesbyregion2005to2021.png
https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/housepriceindex/july2021

https://blissex.files.wordpress.com/2018/02/dataelectrukfallbyregion2005to2015.png

[ltr]

https://www.nytimes.com/2021/10/11/opinion/pandora-papers-britain-london.html

October 11, 2021

The City of London Is Hiding the World’s Stolen Money
By Nicholas Shaxson

In 1969, two years after the Cayman Islands, a British territory, passed its first law to allow secretive offshore trusts, an official government report struck an ominous note. A tide of glossy propositions from private developers, it warned, was washing through the islands. Cayman was fast becoming a state captured by shady finance.

Those were the pungent beginnings of a modern system brought to light by the Pandora Papers, an enormous data leak coordinated by the International Consortium of Investigative Journalists. The papers exposed a smorgasbord of secretive and questionable financial dealings by more than 330 politicians and public officials from over 90 countries and territories — and over 130 billionaires from Russia, the United States and elsewhere. On display was a dizzying array of chicanery and wealth hoarding, often by the very people who should crack down on it.

The revelations, published on Oct. 3, are global in scope. But if there is one country at the system’s heart, it is Britain. Taken together with its partly controlled territories overseas, Britain is instrumental in the worldwide concealment of cash and assets. It is, as a member of the ruling Conservative Party said last week, “the money laundering capital of the world.” And the City of London, its gilded financial center, is at the system’s core....

[ltr]

https://www.nytimes.com/2021/10/11/opinion/pandora-papers-britain-london.html

October 11, 2021

The City of London Is Hiding the World’s Stolen Money

Edith
London

Londoner here. Almost every building in the city is owned by some foreign entity nobody knows anything about. Streets are depopulated from St. James to Holland Park. What was 20 years ago a living, breathing city has been reduced to an investment asset made of bricks and wood, plunged in darkness night after night. Real life has been pushed to the ever expanding margins. It's madness. The agonizing death of a city that has gorged itself on money. From what I hear, Paris, New York and others aren't too far behind. This is what happens when the mode of measuring (money) becomes the goal.

[Blissex]

The foreign investors vs. London housing story is mostly a "misunderstanding" because:

* the crucial thing about housing is the link between housing and jobs, that is housing is the toll that one must pay to have access to jobs; most "pundits" seem to assume that most people buy housing don't need a job and choose a location out of pure personal preference, having independent means;

* if foreign investors were buying up Hull or Neath it would not be a big deal, there are no "good jobs" there;

* but Conservative, LibDem, New Labour policy has been to concentrate new jobs in the magic wider M25 area, so that foreign investors buying up what are gateways to jobs matters to job seekers;

* part of the reason why foreign investors buy in London is that they are very aware that government policy concentrates "good jobs" in London, so they know that if they need to liquidate their investment, there is a huge queue of incoming new tenants and new buyers attracted by the "good jobs".

«"Almost every building in the city is owned by some foreign entity"»

Many or most of those foreign entities are ultimately owned by english people. It is well known that ownership via corporate shells has been designed as a ready-made trick against many tax laws (using the eternal excuse that low corporate taxes "increase business").

«"nobody knows anything about"»

That is ridiculously naive, of course the security services know exactly who owns what:

https://twitter.com/nntaleb/status/1186271838386774018
NN Taleb, 2020: “every financial transaction done on Planet Earth since 2005 is traceable (the aftermath of Sep 11). Even if one uses prête-noms. Even if one uses cryptocurrencies, art work, etc. You cannot hide anything anymore.”

Of course the security services don't tell HMRC, that would be "cheating".

[Blissex]

«"Almost every building in the city is owned by some foreign entity"»

Some years ago there was a fascinating comment on "The Guardian" about this that illuminates the issue and gives many hints as to how the world ("their" world) works (and obviously the bright people at HMRC know all about this but cannot do anything because of political will):

“London is indeed full of oligarchs from the USA to Outer Mongolia, hell bent of out spending and out doing their neighbours, if they even bother to turn up. Running a small cleaning company in the magic areas over the last few years has been insane. The demand for our cleaning services is high and we are able to turn down the so called oligarchs who whine about price but never about the quality, of course it won’t last

Many of our payments are coming from North African based banks within the Spanish territories, Morocco, Algeria and most unusual Mali, who seems to issue a huge number of loaded debit cards for payment of services. In very recent years, many of the houses we clean, have been mortgaged to once again Mali based banks, although they have very familiar names, eg Santander.”

[ltr]

Blissex, the comments are revealing and important and disheartening for general economic well-being in Britain from here.

I am grateful.

[ltr]

It’s possible that housing speculators have priced in the good news of lower bond yields (a lower discount rate) but not the bad, that they betoken stagnation....

[ What though of housing speculation being driven by a significant amount of foreign buying?

Also, buying housing can always be a long-term protection against even moderate inflation. ]

[Blissex]

"buying housing can always be a long-term protection against even moderate inflation"

Buying housing is not an "investment", it is a purely speculative bet on politics. If it were an investment it would be not protection against inflation, as it could go up or down, and on 20 times leverage it could hurt a lot. There are a lot of examples of this across the world.

But also in the UK itself. Perhaps I wasted as usual some pixels by linking to this:

https://loveincstatic.blob.core.windows.net/lovemoney/House_prices_real_terms_lovemoney.jpg
http://www.lovemoney.com/news/53528/property-house-price-value-real-terms-2005-2015-uk-regions

[Blissex]

"Buying housing is not an "investment"

Oops. That has to be qualified: at least in the UK and other countries where political parties use it to buy votes, etc.

[ltr]

Buying housing is not an "investment", it is a purely speculative bet on politics. If it were an investment it would be not protection against inflation, as it could go up or down, and on 20 times leverage it could hurt a lot.

[ I have read and re-read every post carefully, and almost understand.

What however of buying a house with a fixed long-term mortgage and expecting the value of the house to simply keep up with inflation in the long-run? Why is that speculation as opposed to investment? After all, we can generally expect moderate inflation so why not expect the value of a house to increase along with the inflation rate?

What am I still failing to understand? ]

[ltr]

October 16, 2021

Coronavirus

United Kingdom

Cases ( 8,404,469)
Deaths ( 138,527)

Deaths per million ( 2,027)

China

Cases ( 96,502)
Deaths ( 4,636)

Deaths per million ( 3)

[ Distressing. ]

[Blissex]

«buying a house with a fixed long-term mortgage and expecting the value of the house to simply keep up with inflation in the long-run? Why is that speculation as opposed to investment?»

I think that I have already illustrated it, but I'll try again in different words:

* Property ("land", "location") is totally unproductive and entirely redistributive like gold or Bitcoin (category: collectibles), and it is highly volatile, like gold or Bitcoin.

* Buffett says that gold is therefore not an investment and Taleb says that therefore Bitcoing is not an investment. Property must therefore be the same.

«After all, we can generally expect moderate inflation so why not expect the value of a house to increase along with the inflation rate?»

As to the case where someone "expects" out of sheer imagination that property prices will steadily increase with inflation:

* As to volatility, property valuations depend on rent extraction from job workers; therefore in a "natural" market, property should be at least as volatile as the job market. But actually it should be more volatile, because it depends on the job market *at the margin*: when recessions happen, demand for new housing falls a lot more than jobs, as people become scared. There are *plenty* of examples of that happening in history and contemporary locations (e.g. Tyneside or Detroit).

* Even more so when bought on leverage (deposit+mortgage) the volatility gets amplified by the degree
of leverage, that for a 5% down mortgage is 20 times.

* Therefore it is thoroughly insane for a retail "investor" to have almost the entirety of their balance sheet in a speculation on a totally unproductive and redistributive highly volatile asset on 20 times leverage, and for any financial institutions to finance that speculation with their own balance sheet. What would be sane is insurance companies with a long time horizon investing in low-but-steady yield buy-to-let, and retail "investors" to rent from them.

* Unless the retail "investor" and financial institution are speculatively betting on two things: the government will ensure that is a tight housing market, that is an imbalance between jobs and housing in specific areas, by attracting jobs to those areas, and limiting supply in them (or relying on them being already congested), such that valuations will always grow at least as much as inflation, and that if that for whatever reason does not happen the government will put at work the "plunge protection" team to keep pumping up valuations.

I hope that is clearer... Here is another related quote I like a lot from JK Galbraith's "The Great Crash 1929" which is truly great on so many topics (page 46):

“As noted, at some point in the growth of a boom all aspect of property ownership become irrelevant except the prospect for an early rise in price. Income from the property, or enjoyment of its use, or even its long term worth, are now academic. As in the case of the more repulsive Florida lots, those usufructs may be non-existent or even negative.

What is important is that tomorrow or next week market values will rise -- as they did yesterday or last week -- and a profit can be realized. It follows that the only reward to ownership in which the boomtime owner has an interest is the increase in values. Could the right to the increased value be somehow divorced from the other and now unimportant fruits of possession and also from as many possible burdens of ownership, this would be much welcomed by the speculator. Such an arrangement would enable him to concentrate on speculation which, after all, is the business of a speculator.

Such is the genius of capitalism that where a real demand exists it does not long go unfilled. In all great speculative orgies devices have appeared to enable the speculator so to concentrate on his business. In the Florida boom the trading was in "binders". Not the land itself but the right the buy the land at a stated price was traded. This right to buy -- which was obtained by a down payment of ten percent of the purchase price -- could be sold.”

That is 10 times leverage. A 5% mortgage is 20 times leverage (note that in english law a mortgage does not give full ownership of the house, that happens only when the mortgage is fully paid, it is essentially a "binder", except that "binders" were less risky). Owner-occupiers *also* take advantage of the usufruct (they actually live in the property), but that is incidental.

[Blissex]

«speculatively betting on two things: the government will ensure that is a tight housing market [...] will put at work the "plunge protection" team to keep pumping up valuations»

Basically retail "investors" in property (and the financial institutions that finance them at scale) are creating a "straddle" to lock in gain by buying a "put" option (the Greenspan Put plus the Bernanke Swap actually) from the government with their vote (and "sponsorship" from the financial institutions) for right-wing (tory, thatcherite, reaganista) parties.

[Blissex]

«why not expect the value of a house to increase along with the inflation rate?
What am I still failing to understand?»

Put more curtly: this map:

https://loveincstatic.blob.core.windows.net/lovemoney/House_prices_real_terms_lovemoney.jpg

which is "perhaps" related to this graph:

https://blissex.files.wordpress.com/2018/02/dataelectrukfallbyregion2005to2015.png

[ltr]

Finally, I understand properly and I appreciate the patience since going back I understand you are making the same argument but more clearly for me.

Perfect, you are right. I understand as well now the intent of the Chinese to sharply limit the speculative aspect of homeownership. "Homes are and must be for living." Mainland policy will limit housing speculation directly. Hong Kong is planning releasing land for another city. Macao is already building to surrounding islands.

Excellent!

[rsm]

Why ignore mortgage-backed securities, real estate investment trusts, etc. whose returns allow investors to afford rising house prices?

Wouldn't a land value tax completely miss these financial investors who get higher returns on land than landlords, and pay no property taxes on their security holdings?

Can any English investor buy the S&P 500 index, and buy a more expensive house?

Don't lower interest rates decrease mortgage payments, allowing house prices to go up without affecting monthly payments, so you don't need any economic mumbo-jumbo about future expected rents and whatnot?

What if we opened up public land to camping and designed policies to minimize environmental impact (garbage removal)? Why shouldn't government uphold the ancient, natural right to sleep for free on common land?

[Blissex]

«Graphs of national aggregate quantities often are rather less informative than more detailed ones, especially for highly local phenomena like property. Some regional data»

Even the regional or city-based house price graphs/indexes in the UK and some other countries also obfuscate, because they are prices *per dwelling* instead of per sqm; given the tendency for new build houses and flats to be smaller than in the past, and the related tendency to the subdivision of an expensive property into smaller cheaper (but more expensive per sqm) ones, most "per dwelling" property price indexes under-report (quite a bit) property price rises (probably entirely deliberately).

In other countries where property interests and thatcherism are not the national religion ("property is the alpha and the omega, thatcher is the truth and the way" :-/) property rents and prices are indeed reported per sqm, even if there is often a bit of "flexibility" as to what a sqm is (includes walls? includes balconies? etc. etc. etc.).

[Blissex]

«buying a "put" option [...] with their vote [...] right-wing (tory, thatcherite, reaganista) parties.»
«the intent of the Chinese to sharply limit the speculative aspect of homeownership.»

Property speculation has two deleterious effects, it kills investment in productive activity, and it creates a strong political pressure for right-wing politics. and the problem for China in the short term is the latter, as already mentioned:

* In the UK/USA/... most MPs (whether Conservatives, New Labour, LibDem, SNP, ...) have property portfolios (many of them are landlords too) and they would become considerably poorer if they voted for lower housing cost inflation. Some lik Corbyn can be trusted to do what is best for their lower class constituents, but I think that most would agree with a commenter on "The Guardian" who candidly wrote:

“I will put it bluntly I don't want to see my home lose £100 000 in value just so someone else can afford to have a home and neither will most other people if they are honest with themselves”

* In China (both mainland and Taiwan) probably most party members and all party officials have property portfolios, and would probably get rid of Xi Jinping if he made them much poorer. Xi has the problem of how to discourage home ownership and encourage renting from state or private "housing services" providers without cutting the wealth of his party officials and members.

I have a tongue-in-cheek suggestion: discourage/forbid CCP members and officials (and more generally chinese people) from owning chinese property, but encourage them to speculate in property in the USA, and UK etc., with two considerable advantages:

* There has been by some countries a struggle to see which one exports more capital to keep their exchange rate low; the chinese government have done this by buying large amounts of USA treasuries; it is time for chinese individuals to put their personal savings at work to keep the yuan lower.

* Property speculation destroys the incentive to expand business investment in the target countries, and enfeebles their ability to sustain confrontations, and at the same time supports right-wing parties that push for greater inequality and lower ("I am alright Jack" areas and "pushed behind" areas for example) national cohesiveness. Encouraging private savers to feed the property frenzy in the obvious regions of the USA and the UK not only weakens their economies, but also their political structure.

[Blissex]

«I have a tongue-in-cheek suggestion»

This could be done by buying the property portfolios of CCP members and officials at market prices, putting them in state-run housing providers and insurers, and giving as payment shares in property investment vehicles (capitalized by the chinese government's still vast holding of treasuries and gilts) registered in Dubai/Bermuda/Cayman buying up USA property (jut like many private equity funds are doing) via a number of local USA and UK private equity companies. It would be important to give them local names and management to obfuscate that the capital pushing up rents and prices of housing was coming from China. I am sure that any party-friendly HK tycoon knows very well how to arrange things. :-)

VU "Lenin" and JM Keynes: “Lenin is to have declared that the best way to destroy the capitalist system was to debauch the currency … By a continuing process of inflation, governments can confiscate secretly and unobserved, an important part of the wealth of their citizens”

As the USA have demonstrated several times, economic war is a very effective form of war. Feeding a process of housing cost inflation is much more effective and can last much longer than simple generalized product costs inflation.

[Blissex]

«Owner-occupiers *also* take advantage of the usufruct (they actually live in the property), but that is incidental.»

That contrarily to "misunderstandings" the primary motivation for owner-occupiers is capital gains and not having a home is also demonstrated by two anecdotes:

* When New Labour cut significantly the Right-to-Buy discount council housing sales almost stopped, and they boomed again after Cameron increased again the discount to 70% (one of the first things he did as Chancellor, priorities!).

* https://www.heritagemuseum.gov.hk/documents/2199315/2199693/Public_Housing-E.pdf "in 1976 the Governor appointed a Working Party chaired by the Financial Secretary to investigate the planning and implementation of a Home Ownership Scheme (HOS). This would help residents buy their own flats, so as to help them improve their living conditions. [...] From the sale of the first batch of HOS flats in 1978, the HOS was well received by the public. Almost all the sale exercises were oversubscribed. In more recent years, as property prices fell drastically, HOS flats apparently lost their attractiveness."

Who could have known? Surprise! Surprise! :-)

[Blissex]

«Feeding a process of housing cost inflation is much more effective and can last much longer than simple generalized product costs inflation.»

Could also help reunification to encourage rich PRC "investors" to push up property prices and rents in the ROC's Taiwan Province, where many of the urban population there are already desperate to find the money to pay rent, never mind buy a micro flat.