581: Regrettably - A Perfect Storm In The Developing Housing Crisis – for Renters and First Time Buyers
In the last year there have been many policies the government has instigated and fostered that have exacerbated the housing crisis for renters and first time buyer – by distorting the market and putting in place fiscal measures that are having an awful effect on property supply side leading to many unintended consequences. Let us explain:
Draconian Buy to Let Taxation Reducing Supply: Buy to let as a business has been destroyed by the government’s tax on losses incurred after mortgage loan deductions. This means that it is no longer viable to borrow significant amounts of money to fund property purchases. The outcome has been a large drop in the amount of rental property hitting the market in the last month – and the start of increasing pressures on rents across the country, particularly in London where supply is most needed, borrowing is highest and the effects of the taxation will be felt the most. This will cause big worsening of the London rental crisis in 2017. The amount of buy-to-let purchases has crashed to around 35% of February 2016 levels. Meanwhile rents came down slightly in the July-Aug 2016, but this was only because new rental supply hit the market from the accelerated purchases as Landlords tried to beat the new 3% extra stamp duty deadline early April 2016 on second homes and buy to let properties. Some people think rents would drop further as the economy slowed post Brexit Referendum. But we believe that a severe rental property crisis is just around the corner in SE England off the back of Osborne’s ludicrous and draconian tax grab off buy-to-let businesses. By year end, the new stock will have been rented out – then no further properties will be available then the rents will have to skyrocket as renters become desperate due to a massive supply shortfall by end 2016 to early 2017. This is not rocket science – it’s just market supply/demand and the law of “unintended consequences” from ill thought through tax policies - when the government get involved in taxation of a functioning market – causing it to become dysfunctional.
Stamp Duty Increases on Second Homes and Buy To Let Properties: The 3% additional stamp duty is equivalent to a £6000 added cost on purchase of a £200,000 property. This will dissuade Landlords from buying further new build properties or existing properties for letting – and therefore further exacerbate the rental crisis across the country, leading to a less mobile workforce and less secure rental tenure.
Brexit Uncertainty: This is leading to a crash in property building and hence supply – as we predicted a few months ago. In 2015 the level of building was very low at 144,000 new homes a year, when there was a requirement for at least 350,000 new homes. However, new building projects in the pipeline have plummeted to new historically low level because of Brexit uncertainties - this has distorted the market after the government taxed Landlords to death and Brexit has caused slower foreign investment. The increase in stamp duty is also dissuading wealthy older people from downsizing to a luxury flat – because they would need to fork out about £70,000 to move home and instead would rather sit on their large family homes, to pass down via inheritance to their families. This means the supply of houses hitting the market is drying up. As the demand drops, the supply is dropping to match, but property prices are still rising because of a shortage of supply. Again, this is the unintended consequence of swinging stamp duty increases over the years – which will we believe in 2016 see stamp duty tax receipts drop drastically as people just refuse to move and pay high transaction taxes – there will just be less transactions.
Crash in London Building Levels: Back on the building supply side, we would like to highlight some very disturbing numbers. In the year before the Brexit vote 23 June, there were 10,000 housing starts in London. After Brexit, this number is now running at a meagre and shockingly low annualised 2,500. Just to put this into perspective:
• The population of London is growing at 110,000 people a year
• Even to keep standing still – and not making any progress in solving the London housing crisis, 50,000 new homes need to be build each year
• The building of 2,500 new homes is 20 times less than required to stand still
• If anything, the increase in the population of London is likely to accelerate for a number of reasons:
o European mainland economic and political woes
o Last dash by Eastern and mainland Europeans to grab a London job before it gets more difficult to move to the UK
o A realisation that by the time we leave the EU – it may be 3 years from now – and this might be enough years for mainland Europeans to be allowed to stay in the UK – one of the reasons why migration acceleration is more likely than deceleration
Stamp Duty and Extensions: Because of the giant stamp duty bills – people are instead extending their homes into the lofts, down into basements and laterally to provide more space for their families whilst avoiding a dreaded stamp duty bill. Very few people are moving any more, the supply of homes has dried up. Let’s face it, would you rather spend £50,000 on a loft conversion that adds £100,000 to your property value or give the government £50,000 in tax when moving. It’s not rocket science. No wander there is so much scaffolding around London properties at the moment – it’s a big concerted drive to avoid the stamp duty. Overall stamp duty receipts will crash as it has had the unintended consequence of drying up the housing market – albeit any reasonably intelligent person could have predicted this.
Brexit and Migration: The Brexit campaign was fought off the back of reducing net migration. But we don’t believe there will be a meaningful fall in the number of migrants joining the UK’s swelling population. Many of the EU workers coming to stay in the UK are builders – and if we stop these people coming, again, we will see less building. Even if the UK does not sign up to free movement of EU citizens in return for access to the open market, we cannot see the government either seriously reducing the levels of global migration into the UK even if they wanted to. They may say they want to – but controlling it and putting it into meaningful action when 5 billion of the 7 billion people live in the developing world and many are desperate to move to a far more wealthy land of opportunity. It’s not a new phenomena – look at European migration to USA and Australia for example. As we develop trade deals with other nations, this will also lead to more inward migration of citizens from outside EU countries. This all has the impact of exacerbating the housing crisis, and increasing the population unless far more homes are built. And we do need migrant workers to build them.
Planning: The amount of viable building land is abysmally low. Our cities are surrounded by Greenbelts that are no go zones for developers. A good anecdotal example of the Nimby inbred into the British psych is the story and uproar that a playing field used by Trevor Brooking in the 1960s to hone his footballing skills is being considered for development in Redbridge NE London. This playing field it seems is iconic and part of our national heritage and should be treasured. Meanwhile everyone lives in more cramped conditions of poor housing and sky high prices. We are not going to present all the solutions to the crisis – like building New Towns, building on Greenbelts, building on greenfield sites, using railway/hospital land etc, using land owned by the lords and the aristocracy – in part because we are so sceptical that anything will be done. Its more to advise that we will see more of the same – a piecemeal fragmented approach where a few homes are built “here and there” just like in the last 30 years as the housing crisis has developed. Anyone that things the UK will seriously build more than 150,000 homes a year any time in the next decade is probably rather deluded. We predict building will actually drop to 110,000 this year – yes, less building, not more – and the biggest drop will be where it is most required in London. Home starts have crashed to about 35% of 2015 levels in London. There is just a few very expensive luxury apartments being built. Social/council housing starts is almost none existent – they don’t have the money for it. The new London Mayor Sadiq Khan makes lots of noises about new homes as does the Housing Minister Gavin Barwell but they will struggle to deliver even a fraction of their promises – just like Boris Johnson struggled.
Size of Properties Pitiful for Major Developed Nation: We call ourselves Great Britain, but when it comes to property size, we rank the lowest of all developed nations at 76 m3 on average. Not only are property prices exceedingly high, but the size is exceedingly small. The average in Demark is 137 m3, and in Holland which has an almost equal population density to England, their property size is 115.5 m3 on average, with prices around 65% of UK levels. Germany at 112.8 m3 and France with 115.5 m3 all have far large average property sizes. The small size in Britain is cause by planning regulations, shortages of building land, no overall planning, no new towns, and developers cramming as many tiny homes into ever decreasing sizes/parcels of land.
Building Density: The population density of London, the main city is around half of that of Paris (11,700 per km2, versus 21,329 per km2) – so how come the properties are so small you might be thinking? It’s because London is full are parks, playing fields, cemeteries, allotments, gardens, roads, offices, rivers, streams, railways and public sector building that consume vast amounts of land and block out opportunities to build low cost homes. We really don’t believe this will change any time soon if ever. Whenever anyone proposes a sky-scraper – nimbies start campaigns against them – like they did in with the “Paddington Pole” skyscraper recently. We cannot build up, we cannot build laterally and when people try and build down into basements – local residents and councils try to block it. In summary, don’t expect any change to these types of behaviours and policies any time soon. People just don’t want to see building – and this is one of the reasons why it took 12 years to widen the M25 by 3 metres on each carriageway and why Heathrow is not likely to get another runway. It stirs the emotions and politicians and councillors don’t win votes from building lots of homes it seems – they win votes by saying the right thing then not building. It’s a long term problem. Its politics as well.
Property Investors Strategy: Enough of the analysis of the lack of supply and increasing demand. How can property investors make higher returns from this melange is the key question probably on your minds?
Smaller For Better Profits: Firstly as the population and business continues to grow in London and SE England – there will be greater demand and further shrinking of supply. Any opportunity to take large properties and rent out multiple rooms (HMO) or knock large homes into flats will boost rental returns. Any opportunity to convert a basement into a flat, a loft into a flat, build an extension into a flat, will be lucrative for small investors – either to sell onwards or rent out. The draconian tax increases mean more and smaller units will be required to eke out a reasonable return on a risky investment. This would help fill the supply gap caused by years on government mismanagement of the housing crisis by successive governments.
Lots of Units: In the London area there are still opportunities to buy many roomed flats and houses for a reasonable price. For example, if there is a 4 double bedroomed ex-council flat being sold for say £400,000 – each room can be rented out for £600 a week – that’s £2400 a month – and will give a fairly good return on the investment – however, the next taxes will destroy any profits if you borrow a large amount so be careful. No longer is it economic to rent such a home out as one flat for say £1500 a month – instead it needs to be an HMO – and again this is the unintended consequence of the taxation on Landlords – smaller properties and rental units – this trend is set to continue and accelerate.
Brexit – Hard or Soft: Longer term – it’s difficult to know how Brexit will affect in the UK. One thing is for certain, there is no way the UK will be able to negotiate access to the single market and financial services “passporting” without allowing free movement of EU citizens. Prime Minister May will have to choose between one or the other – may be this will be describes as a “soft” or a “hard” exit – and we think it most likely it will be a “hard” exit – because the government on behalf of the UK population will want more control of its borders.
European Disintegration: If the European project disintegrates, which is quite possible as more people wake up to the unelected EU elite feathering their nests – the UK will be glad to have got out. There are definitely warning signs like the trouble Deutsche Bank are in at the moment. This is the biggest bank in Germany and mainland Europe – so if it goes down, there will be major repercussions. We think the German government will need to bail them out shortly. The $11.5 billion fine that the USA has imposed on the bank is sending ripples all around Europe – the next banks to get fined will be Barclays and the Royal Bank of Scotland. It’s like a trade war – the Americans are coming to get the European banks. It’s probably in part retaliation against punitive EU taxes imposed on Apple and Google. It could be another reason to Brexit – since European Courts casting judgements on what Ireland for example does with its taxation seems way out of order and European Courts will have more and more powers in years to come to impose fines and the like on its member and American companies. A sorry state of affairs. If you think the EU Project is doomed – then Brexit is probably a good thing regardless of soft or hard exit.
London Financial Centre: London will always be a major global financial centre and it’s still possible in the long term it could prosper outside the EU as less regulation, a more dynamic business environment and trade with countries outside the EU make up for the economic damage done during the Brexit process. In the meanwhile, its global status as number one financial centre is at risk and will be challenged – certainly the Germans and French look with envy on London and will do all they can to seize the Brexit opportunity to shift financial services to Frankfurt and Paris. Long term we don’t see property prices crashing because money printing and/or low interest rates are likely to save the day. In a major downturn in a global city like London – the Bank of England will step in to supply almost unlimited amounts of cheap currency to prop the lot up. This re-inflates the economy. Ultimately every time the bank prints currency, physical assets inflate – like property and commodities – oil/gold - and the rich get richer, whilst food prices rise sharply and the poor get poorer. General inflation and low interest rates take money from savers and poor – and transfer it to the wealthy who own assets and are able to borrow the ultra-low cost currency to invest and buy assets - that then go up in value. Every once in a while the government gets desperate and put up the taxes again for the rich, then they will have to compensate by printing currency and dropping interest rates to keep the overall show on the road. It’s also worth noting that Sterling’s 10% drop in value against the dollar has made central London property prices 10% cheaper for people buying with the dollar.
Physical Assets Are King: Essentially to get ahead financially in life, you have to own property and other assets like oil, gold/silver and anything you think will appreciate in value year by year. This of course does not include cars, electronic goods, new furniture etc.
Everything an Investment: In our view – all expenditure should be considered and treated like an investment. If it only has a chance to come down in value, its best to avoid spending money on it. If you put money into something like artwork, oil shares, gold, silver or property that you think will go up in value, you are on the right track. If you buy a second hand car – let’s say an 8 year old Volvo for £3500 and you know a ten year Volvo costs £3000 – the depreciation is therefore only £250 a year so you are doing some wise spending. But if you buy a brand new Volvo for £35,000 and you know a 2 year old Volvo is only worth £22,000 – you can right-off a massive £6000 a year if you buy a new one every two years. It’s a very bad investment in our view for its utility.
Eating Out: You might think – how does a nice meal with your partner stack up. We would say that – if you don’t keep your partner happy, your whole financial empire might melt down into a messy and economically catastrophic divorce case, so a nice meal every once in a while with your partner is actually a good investment!
Private Schooling: What about school fees? Considering that private schooling is paid in after tax pounds – and is very expensive – it can cost about £150,000 per child (or £270,000 in gross costs or earnings) to school a child privately from age 4 to 18 – that might not be a good investment. You could always give that money as a one off lump sum at age 18 for your child to invest in property – whilst sending them to a state school. It’s a judgement call – because having a good education will pay back big dividends in years to come, but it’s certainly not worth breaking the bank for.
Silver – Bargain of the Century: If you buy 20 silver coins, each one costing £20 – that’s £400 worth of silver coins – you can probably expect the price of silver to rise particularly if a monetary crisis breaks out. Consider this. Globally there are 7 billion people but only 500 million ounces of silver. That means there is only 1 ounce of silver for every 14 people. That means if you spend a mere £400 on silver coins - you will own about 400 people’s worth of silver. Silver prices at $19/ounce are far less than they were in 1980 – and it’s the only thing on the planet that is cheaper today – actually only 35% of the price – that it was in 1980 when it was $55/ounce. Silver in our view is the deal of the century. One day, the price will skyrocket. One of the key reasons for talking about silver is to highlight that it is a physical asset – that you can touch, feel, hold, see and is not going to go away – go up like a puff of smoke like many paper assets. Silver bullion bars and coins – stored in a safe vault is the sort of investment wealth people will put some of their wealth into as an insurance policy against monetary collapse and hyper-inflation. When currencies fail, the only real money is something tradable like silver coins or gold coins. We just never really know if a huge financial crisis and monetary implosion is just around the corner or not. As a guide, its best to have at least 5-10% of your wealth in gold and silver bullion.
Physical Asset: Back to property – one of the key reasons why so many wealthy people put their currency into property is because again it is a physical asset that you can see, touch, feel, it will not go away, it’s not paper and it has land value as well. If hyper-inflation kicks in – one house will still be worth one house. It won’t be worth “nothing”. German property owners during the Weimer hyperinflation of the early 1930s were about the only people that financially survived. Businesses can also survive hyperinflation particularly if they have property assets. This is of course one reason why banks can lend money against property – they know they are real tangible physical measurable asset. This is not going to change any time soon. As the population of the UK expands and properties become more scare relatively – their values will rise. This is of course why central London property prices keep on heading higher – it’s almost impossible to build new Kensington terraces houses. The land has all been used up – and land prices are stratospheric because of high demand and scarcity. This is not likely to change in years to come. Anyone that can get hold of a house or apartment anywhere in central London as the global economy expands and money printing continues – will see their asset increase in value. We can’t see any end to the endless currency printing and devaluation of Sterling and other currencies. As this happens, oil, gold, silver and property prices should keep rising.
We hope you have found this Special Report insightful and it helps as a backdrop to your investment decisions moving through 2016. If you have any queries or comment, please contact us on email@example.com