Lower than a convict

Today’s news: convicted prisoners are to get the vote.

It’s one more tiny token of just how marginalised you can be by the economic exclusion of being stuck in the private rental market.  As in, when I moved here I lost the opportunity to vote, by being ineligible to get onto the electoral register in time for the election.  I even asked the council about it, and they confirmed that I couldn’t vote.

It’s not even as if I had a choice about when to move house.  Private tenants have no security, and my former landlady gave me notice to quit because she was selling up and returning to her native Switzerland after divorcing her English ex-husband.  Unlike the rich (homeowners) or indeed the rich-by-proxy (social tenants), we are completely at the mercy of a total stranger.  And now, just to rub it in, convicts in prison are elevated above us.

FWIW, I first had the vote in a UK general election in 1983, when I was a postgraduate student at Cambridge.  We’ve had six further elections since then, but I’ve had the vote in exactly one of those.  Lifetime track record of the universal franchise: two of seven!

Still, it’s all pretty symbolic.  The real kick in the teeth is the living conditions we endure.  No security, arbitrary rules and restrictions (like not putting a picture up on the walls), and above all paying rents in a market massively inflated by taxpayer-funded housing benefit.

But here’s the rub.  Maybe if we’d had the vote over the years, governments would have noticed.  Maybe we’d’ve been spared decades of paying three times over[1] for property pimps to get obscenely rich exploiting us.

[1] First through taxes, some of which are channeled into housing, both in ‘affordable’ and ‘social’ housing, and in housing benefit.  Second through rent, which is inflated by having to compete with housing benefit recipients who have no incentive to seek a good deal.  And third, if I get rich enough to buy, by prices inflated by all that public money, including not least the inflated yields (rents) for property pimps.

drama@home

This morning I was sitting at the ‘puter (as one does), when there’s a ring at the door.  Stick the head out of the window to communicate: there are three men.

“Hello?”

“Are you Flat 3?”

“No” (dammit, that would be the doorbell labeled “3”, and it doesn’t ring in my flat)

“Can you open up so we can access it?”

“Erm … I think you should speak to the agent” (all four flats are managed by the same agent for the same landlord, but it’s a long, long time since a tenant has been seen in Flat 3).

“It doesn’t matter; if you don’t let us in we’ll break in anyway.  We have a warrant.”

WHAT??????

“Erm, if you have legitimate business there, I’m sure the agent will arrange access”

On the one hand, I wouldn’t exactly expect a housebreaker to ring my doorbell.  On the other hand, this is alarming.  OK, time to ‘phone the agent.  The ‘puter is on, so it’s a ten second job to google the agent’s number.  ‘Phone it.  A recorded message tells me a mobile number for emergencies only.  Try that one, get voicemail.  Heh, so much for emergency hotlines!

Hmmm …

OK, next stop, try the police.  Explain what’s going on, let them either sort it or disclaim all interest.  At least the presence of the workmen outside should help deter anything too extreme, if the men are up to no good.  The police do show up fairly quickly, and find the men do indeed have legal authority for what they’re doing!  Meanwhile the men have got in (turns out Clare from Flat 1 let them into the building), and I hear drilling as they force entry to Flat 3.

Going out later, I see a notice on the door of Flat 3, the lock has been changed!  The notice is (or claims to be) from British Gas, so not a repossession[1].   Before anything else I go straight to the agent’s office in search of an explanation.  It seems they knew some of the story: BG was in dispute with the tenant and cut off the supply (wow, that must’ve involved a marathon legal process even if, as seems likely, the tenant never answered any of their correspondence).  But they didn’t know the flat had been forcibly entered and the lock changed!

Black marks to both BG and the agent there: it could’ve been handled so much better if they’d communicated.

[1] A repossession would’ve been alarming for me. If a mortgage holder is in difficulties, huge amounts of taxpayer help are available.  If a tenant defaults on the rent, he can only be evicted after months of legal process.  But if a landlord defaults on a mortgage, the tenant gets treated like dirt, and may not even get notice of the bailiffs coming to evict.

Executive Slums

It’s official.  The kind of “luxury” pad a hardworking professional aspires to is not fit to house the homeless.

I’ve spent most of my adult life in substandard accommodation costing most of my net income, so I should know.  Now Birmingham City Council has said explicitly that flats built for hardworking ever-exploited taxpayers don’t meet the minimum standard for council housing.

Reminds me of something I vaguely recollect from my childhood.  We were somewhere unfamiliar, and my mother said with confidence that the houses around us must be council, because no commercial developer would have left so much green space between them!  Some things don’t change ….

House-hunting

Just been househunting (Friday). Went to view three properties, with a view to finding somewhere better than the current hole[1].  Wasn’t sure if I’d make it, having spent Thursday flat out in bed with a cold, but getting out of the place and drinking lots and lots of fluids sustained me pretty well, and it was only on the homeward journey I felt like collapsing.

The first viewing was at Bovisand Bay: a flat comprising the upper floor (of two) plus attic in a substantial and attractive older house. This is an exceptional location, set on the steep hillside rising straight out of the sea and right on the southwest coast path, and with fantastic sea/cliff views from two rooms. Opening the windows, one can also hear the roar of the sea.

Entering the flat is a little disappointing: there’s a hint of shabbiness in the entrance hall and stairwell, and space to keep bikes is limited (I’d be hard-pressed to accommodate more than one full-size bike, unless the occupant of the other flat is happy for my to keep it in the shared entrance).

Inside is again a mix of very nice and slightly shabby. The best room is the kitchen-diner-livingroom, with a very substantial and nicely-fitted kitchen, a good breakfast bar, and decent living area with sea view. The worst feature is the uninspiring laminate floor, which is shared by the entrance hall and back bedroom. The back bedroom would, I think, have to become my office, which is a little suboptimal because it’s also the room with en-suite shower room. The other front room is very nice, with a pleasant fitted carpet and the very best sea view. It would be great to have as a sitting room, but would, I think have to serve as main bedroom because of the biggest disappointment: the attic room. Though a decent size, it has only a velux window, no view, and fails to inspire me as a candidate for main bedroom. Also in the attic is an uninspired but presumably practical main bathroom.

The flat is generally well-modernised, with a condensing gas boiler, fully double-glazed windows in good nick, etc. All in all, interesting, but not quite what I’d hoped from the brochure.

The second viewing was a cottage in Brixton. Not such an exciting location: more a conventional cottage in a village. It’s advertised as “furnished or unfurnished – landlord is flexible”, and I could be tempted to retain some of the landlord’s furniture – particularly the lovely bed, wardrobe and other stuff in the main bedroom. It also has the advantage of small/basic shops and a pleasant pub (I went in for a cuppa tea and – more urgently – to use their gents) within the village, so no need to jump on the bike just ‘cos I’ve run out of milk for my tea.

It’s hard to know what to say about the cottage. There’s a lot to like: like the flat it’s well-modernised, yet retains bags of character, like the beamed ceiling in the main room, the latched doors, and lots of nooks and crannies. The kitchen is good, though smaller than the other place. And there’s a separate utility room and a good garage with bags of space for bikes and other things. The three bedrooms are unsurprising: at the front a main bedroom and a small bedroom (well, OK, they’re all rather small, but YKWIM), and another (which I guess would have to become the office) at the back. And a decent bathroom.

But against this, some serious drawbacks. The front is directly on a semi-main road, and all the back windows are tiny. That’s not so bad downstairs, but it leaves too bedrooms that tend to be too noisy, and a third with inadequate window. And the main room itself felt inordinately gloomy: one really shouldn’t have to turn the light on at 2pm, even in December!

The third place was the most unusual: a flat in a genuine Stately Home, owned by the National Trust. Saltram House is set in its own grounds on the east side of the Plym estuary, and the distant roar of some of Plymouth’s biggest roads was all around. Unlike the others, this is (long) walking distance of some of the big shops, and it’s a far shorter bike ride than the others to the city centre.

Entering the flat, it quickly became clear that the inside is a class above the others: the theme is space and elegance. From the generous entrance area (ideal for bikes and other things that want storing), up the stairs to the long L-shaped corridor that links all the rooms. A big and elegant lounge, three bedrooms of which two are very attractive while the third is less exciting (high window, no great view) but still perfectly adequate, and any of them could serve as office. Even the bathroom is incredibly spacious, though alas it’s only equipped with the very basics (bath with shower over, basin, loo). I was less keen on the kitchen: the ample space is not so well used as in either of the other places, and there’s no space for my upright fridge-freezer. But it’s still perfectly adequate.

But this is a seriously high-maintenance house. There’s no gas, only electricity supply, and everything about the place screams inefficient usage. From the big, single-glazed sash windows, to the builtin cooker with ceramic hob (yuk), to the huge water tank with immersion heater supplying the bath, to the night-storage heaters (if I should ever use them). Add to that the quirks of the NT whereby I’d have to pay for existing carpets(!), and the fact I’d need more furniture in all that space (not to mention new worktop-height fridge and freezer), and all that elegance doesn’t come cheap!

[1] not such a bad flat in itself, but far, far too noisy, and in this season filled with soot and carbon monoxide from someone’s defective coal fire.

Losing money, and glad of it

Today’s news about Lehman Brothers seems likely to hit stock markets hard enough to send my portfolio firmly into the red.  No, I don’t have stock in or near Lehman or its peers, but the expectation is that there will be substantial collateral damage throughout the world’s stockmarkets, including those stocks I do hold.

Why am I happy to make such losses?

Well for one thing, there’s no reason they should be sustained.  They won’t vanish as quickly as the surreal gains that followed news of the fannie/freddie bailouts (gains of 10-15% in UK bank shares on Monday didn’t even last the week).  But neither do they reflect on the fundamental value of unconnected businesses.

More importantly, the end of the bottomless taxpayer purse is long overdue.  The US allowing Lehman to fail is moving on from its King Canute phase to face reality (and so close to an election, they must expect it to be popular – or at least less unpopular than another bailout).  The UK is showing signs of doing likewise, with Mervyn King reportedly taking a stand against throwing ever more taxpayers money into the black hole of housing.  In the meantime both countries have suffered huge losses, but better late than never.

This weekend seems to bring us much closer to drawing a line under “housing rescue” schemes that serve only to prolong the pain.  The Vested Interests can stop talking the market up[1], and start telling vendors to drop 60% from peak prices if they’re serious about selling.  When a £200K house has fallen to £80K we’ll be back to something like the long-term average in terms of income multiples.  Then I’ll be able to afford a house, and those stockmarket losses will cease to matter.

[1] Mainstream predictions – coming from vested interests – started this year at about +1%, moved to -10% in six months, and are now moving to -25% and more amongst those who need buyers as well as sellers.  All in an effort to convince people like me to start buying at prices that are still a long way above their long-term trend, in the expectation they won’t fall very much further.

House prices: Statistics vs Reality

The chattering classes profess confusion over discrepancies in the various house price indexes. There are several indexes published regularly and closely watched, with plausible claims to statistical validity:

• Nationwide (August – £164654)
• Halifax (August not available yet)
• Land Registry (August [for July] £178364)
• Rightmove (August – £229816)

The Rightmove index represents asking prices, and is unsurprisingly much higher than any of the others – which represent actual sold prices. No problem there.

The Nationwide and Halifax are our long-term biggest mortgage lenders, and their indexes represent the sale price of houses purchased with a mortgage. Reassuringly, these indexes are closely correlated (graph: BBC News), so we can infer that any differences between the two lenders’ markets (who they lend to) are not important. That might not hold for smaller, specialist lenders, but we can surmise that these fairly represent the mainstream.

What seems to have the pundits baffled is why the Land Registry differs from the Nationwide and Halifax. There is a time lag, said to be around 3-4 months, built in to the Land Registry compared to the others. But that doesn’t explain the divergence we now see, as noted today by the FT.

It seems to me there is a perfectly simple explanation, and that we can extrapolate from it what will happen at a hypothetical turning point where confidence returns to the market. The issue is that the downturn is affecting different parts of the market in different ways.

Let’s consider a hypothesis with some plausible assumptions:

• Tighter mortgage conditions have a disproportionate effect at the lower end of the market, particularly first-time-buyers. Higher up the market, rich people are less reliant on mortgages.
• Therefore the reported 60%[1] drop in numbers of transactions is concentrated primarily at the lower end.

That’s enough. Let’s put some representative numbers to these assumptions[2]. The numbers themselves don’t matter: feel free to vary them, consistent with the assumptions. Your results will differ from mine, but they’ll still demonstrate why the observed discrepancy exists. Just to emphasize the point, we’ll take one figure way in excess of what any of the indexes tell us (of now): an actual drop of 20% across the entire market!

Applying that to some representative price points, we hypothesise:

• First time buyer, down from £150000 to £120000
• Mid-market, down from £250000 to £200000
• High-end, down from £500000 to £400000

In “normal” times – before the crash – there’s little doubt that the majority of transactions were in the lower price ranges. Let’s say the above price points represent 60%, 35% and 5% respectively of the market. That gives us a pre-crash average of (0.6 * 150000 + 0.35 * 250000 + 0.05 * 500000) = £202500, which is roughly consistent with published figures (for sale prices, not asking prices).

Now we know that the crash has affected the bottom end disproportionately, and left the top end relatively intact. Let’s put some figures to that too, bearing in mind that the overall drop in activity is reported as being at least 60%[1]. Suppose activity levels are down by 70%, 50% and 10% at our three price points. That gives us an overall percentage drop of (70 * .6 + 50 * .35 + 10 * .05) = 60%.

Now, here’s the crux. Let’s calculate the average post-crash price with the above figures, bearing in mind that we have assumed each individual house is down by 20%. Our post-crash distribution of market segments have changed:

• First time buyers: 60% reduced by 70% = 18% of the pre-crash market
• Mid-market: 35% reduced by 50% = 17.5% of the pre-crash market
• Top-end: 5% reduced by 10% = 4.5% of the pre-crash market.

That’s a total of just 40% of the pre-crash market (the 60% reduction). So what we see is different shape of post-crash market:

• First-time buyers: 18% * 2.5 = 45%
• Mid-Market: 17.5% * 2.5 = 43.75%
• Top-End: 4.5% * 2.5 = 11.25%

So with the 20% drop in price of each individual house, we get an average of

(45 * 120000 + 43.75 * 200000 + 11.25 * 400000) / 100 = £186500

as compared to our pre-crash

(60 * 150000 + 35 * 250000 + 5 * 500000) / 100 = £202500

That’s a percentage fall of 100 * (202500 – 186500) / 202500 = 7.90%.

While individual houses have fallen by 20%, the market average – and hence the published statistics – has lost a mere 7.9% in our model. That’s actually smaller than the current falls reported by the Nationwide and Halifax!

Now my gut feeling is that the figures I’ve used may be conservative: the market skew may be much bigger than that (bearing in mind reports about first-time-buyers being near-eliminated, rather than 45% or the market as above). That would indeed be consistent with the mere 2% fall recorded in the Land Registry index.

Now it’s not hard to see how the discrepancy arises. The mortgage lenders see a different market profile to the land registry. We could perform a similar analysis with some more numbers: say 95% of first-time-buyers, 75% in the mid market, and 50% at the upper end have mortgage, we see their figures are biased towards the market sector that’s been most affected. I’ll leave it as an exercise to the reader to calculate hypothetical Nationwide/Halifax indexes based on those numbers (or choose your own).

Side-Effect: Rise of the Rental Market

A well-documented fallout from the crash is the rise of the rental market:

• People unwilling to sell at current prices are letting their houses instead.
• People waiting for further falls are choosing to rent for the time being, even those who could afford to buy.

So suddenly the rental market has changed. The quality has risen – with lots more houses than before that the owners thought good enough to live in themselves! And the status of tenants has risen too: it’s no longer so heavily dominated by those too poor to get a mortgage (and too honest to lie for one). And because the UK rental market is traditionally small (most people own their own home), the effect on it is disproportionately large. Even if the traditional rental market (the rich exploiting the poor) were little-changed, the overall market has risen with the coming of the new landlords and tenants.

Predicting the bottom of the market

Supposing this month, we were to hit the bottom of the market. Confidence suddenly returns. All the prospective buyers who are currently renting decide it’s time to buy.

• The profile of the market returns to “normal”. The statistics catch up with the individual houses, so a 7.9% drop suddenly becomes a 20% drop in the published indexes.
• Corollary: the sharpest adjustment to the Land Registry index. If it happens after more than a year of falls (so the indexes aren’t measuring from the top of the bubble) it will not merely catch up with, but overshoot, the Nationwide and Halifax indexes in terms of year-on-year percent falls.
• Even so, the market doesn’t return to bubble-level, because the mortgage lenders have got burnt giving out pyramid-scheme money willy-nilly.
• The top end falls off the rental market, leaving only the poor as tenants for all those buy-to-let landlords.

Clearly the key to that is the first point. Such a sudden fall in the indexes is going to kill of that returning confidence. Corollary: there will be no sudden return of confidence, now or anytime: it’ll be a gradual thing, with several years in the doldrums after the sharp falls have gone. That fits the pattern of past house price corrections, including the 1989-97 one[3].

The third is also interesting, as it could mean (far) more buy-to-let landlords in trouble with falling rents and far-more-fallen sale prices. That’ll be the point Bradford&Bingley (the specialised buy-to-let mortgage lender who just raised money on very unfavourable terms in a rights issue) will be in real trouble. With any luck, the Northern Rock fallout will be so visibly horrendous by then that the government of the day will have the guts not to pour in yet more taxpayers money to do the same for B&B.

So what will the house price statistics look like as the market bottoms? Well, the key is that activity has to return to the lower end of the market, and that’ll be gradual. But from the above analysis, we’ve got a visible sign. So long as the Land Registry index trails the Nationwide and Halifax (over and above the 3-4 month difference in reporting time), we can infer that real prices are falling ahead of any of the indexes. When the Land Registry starts catching up could be a good time to look for a bargain. Once it’s caught up, we’re back to a saner, and lower, market, and we can finally start to take the statistics at something closer to face value again.

[1] From memory, and very probably wrong. Not important – you can get a similar analysis with a different (large) percentage drop.

[2] This is the kind of analysis mathematicians do all the time: take a complex problem and get a handle on it by making simplifying assumptions. It’s useful in that it can provide a good insight into “what if” questions – how does it affect the overall picture if different inputs vary, or if our working assumptions are incorrect. My degree was in Maths, and my first professional job after graduating involved precisely this kind of operational analysis.

[3] Mathematicians will often prove a result by an approach of assume the contrary, and show that implies a logical contradiction. Mine isn’t a mathematical proof of anything, but it’s a similar kind of argument.

Here be dragons!

The dragon in our mythology is characterised by many things.  But perhaps most interesting is that they’ll sit on a hoard of gold, jealously guarding it but gaining no benefit from it.  Tolkien’s Smaug is one of my earliest memories: my parents read me The Hobbit when I was just three[1].  Wagner’s Fafner, even more tellingly, turns himself into a dragon only when he has the ill-gotten hoard and his life turns to the sole task of possessing it.

The housing crash has revealed dragons in our society.  People who might’ve sold their house in a rising market, but resolutely refuse to accept less than some hypothetical peak price when it’s falling.  Fair enough when someone has no reason to move, but as sad as any dragon when they have a good reason to move, and would even be buying in the same market conditions.  For example, the true dragon is revealed in comments like:

Paul’s comment explains why so few decent houses are on the market. I would never accept 25% less than what I know my house is worth in a normal market, so it will stay off the market until it picks up again.

Many such dragons will retreat in the face of reality.  But perhaps not for some time.

[1] They refused to read me Lord of the Rings.  So I had no choice: I had to learn to read.

Now everybank’s a Northern Rock!

The amount of money being paid by the taxpayertreasury to bail out the banking system as a whole is spiraling rapidly. Though it’s not targeted at a particular institution, it’s looking like the early weeks of the Northern Rock bailout last year. That is to say, the taxpayertreasury is underwriting debts that the market won’t touch, but everyone currently insists they’re good and we’ll be repaid.

Today it’s reported that the taxpayertreasury, through the Bank of England, will buy up dodgysound mortgage debt that the banks can’t shift.  So the banks can lend more, and keep the bubble inflated.  The pyramid must be supported!

Once again, this smells of throwing good money after bad.  The mortgages that they can’t shift in the open market are by definition the most dodgy ones.  They may be better than US subprime, but speaking as a taxpayer, if I’m forced to buy this debt at anything more than 40% of its face value, I shall be seriously pissed off.  Again.

What’s happening now is a correction to the housing market.  This is great news for the poor, who are currently paying three times over, but more likely to be able to afford a place when the prices have fallen.  It is neutral news for the comfortably-off, who are both buyers and sellers if they move house.  It is bad news only for the seriously rich who have wealth tied up in property over and above their own homes.

So we can’t allow that – the long-suffering taxpayer has to bail them out as usual.  No correction!  The bubble must be sustained!

If chickens can’t come home to roost now for property millionaires and bankers, we’re transferring yet more burden onto the productive economy.  And that’s tilted towards the young (because fewer of them own property) and high-earners (who pay more tax).  That’s precisely the people who will be most welcome in other countries, when the burden of subsidising our fat-cats gets too much for them.   If we drive too many of them out, the economy is basically gone!

thinking about catching up …

Can one, these days, get a mortgage on something like the following terms?  Since I’ve lost the tax-flexibility of self-employment, I need to find some way to avoid getting the worst of all worlds.

• Regular payments of interest only.
• Tax-efficient saving to repay, using a self-invested personal pension (augmented by my company pension if necessary).
• Repayment on taking my pension, using the tax-free lump sum.
• Offset account to enable early partial payments on a flexible basis.
• Offset amount to include, or at least account for, existing ISA savings.
• Flexible final repayment date.

Not, of course, that I want a mortgage in a falling market.  Except … property available to rent in the UK leaves something to be desired, and I’m not getting any younger.

(I expect the “M” word will collect spambots to this article, like flies to a corpse.  So any comment that shows no sign of having read my words will not be given the benefit of the doubt).

I want my £730 back!

The BBC news just told us the latest amount of taxpayers money that’s gone to prop up Northern Rock, and calculated it as £730 per taxpayer in the UK.  That’s to date: it’s increasing without limit!

The effect of Northern Rock’s over-generous lending that got it into trouble was to inflate property prices artificially. Other financial institutions are doing it (albeit to a lesser extent), and the long-suffering taxpayer pushes up prices directly too, by putting money into social housing. All that money in the system inflates both prices and rents.

Non-property-owners are paying for this twice over: once through our rents, and again through our taxes. And of course a third time if we ever get rich enough to buy.

I want my money back!