Unintended Consequences

It is now five years into the financial crisis. In those words there is a something of an oxymoron – as a crisis shouldn’t last that long. Because it has, it has begun to seem like normal; life goes on and many – maybe most – are now planning their lives as if the economic landscape they see around them is normal, and that it will continue in this vein for the foreseeable future. They may be right. But what is emerging is a raft of unintended consequences, which should not surprise, as the Law of Unintended Consequences is one of the universe’s most immutable – along with that of Sod, Murphy and Thermodynamics.

Interest rates and their twin, Gilt yields, are at historic lows – held down by a mixture of quantitative easing and financial repression. The aim of this has been to take money from those that have it and use it to ease the lot of those that don’t – those who are borrowers rather than savers. Governments are doing everything they can to get borrowers to borrow and banks to lend in order to get growth which, so the script goes, will give the tax receipts that will enable them to pay down their vast debts. This has been the focus of media attention.

In more normal times interest rates this low would result in a spectacular property boom as professional developers and amateur speculators gear up and spend. This has not really happened – mainly because banks have had to repair their balance sheets and raise their capital ratios to satisfy Basel III. The boom that has happened has been on the other side of the balance sheet, amongst those with money looking for any sort of real return or somewhere that is safe from the predations of their own government. The obvious place where this has happened on an international scale is in the Central London property market, and its offshoots, which has become the asset class of choice for the internationally wealthy. For the most part these are cash investors – spectacularly so in the case of St George’s Hill in Surrey where there are nearly thirty new-build houses that will be coming on at between £10m and £30m. Very little of the finance for this is from banks – anecdotally it is mostly from Russians who see gold in the ‘Dacha’ effect.

This weight of money is appearing in other places. Property auctions, traditionally populated by men in black hats and matching suits, have been seeing a rather different clientele of late. Women, more usually spotted on the King’s Road in SUVs, big hair and sunglasses, have been bidding up prices to sometimes double the auctioneer’s estimates in locations that they would have had a problem finding on a map in more normal times. Buy-to-let for modest ‘pension’ pots is becoming the asset du jour for those seeking a reliable income. All of this is putting upward pressure on prices of property that first-time buyers would have bought in the past – forcing these buyers into borrowings, if they can get them, that may just about work in the ‘new normal’ of interest rates but which have the potential to become a train wreck if rates spike. Low rates are now baked into the pie of many buyers’ expectations.

This support by buy-to-let investors goes a long way to explain the resilience of the wider general market across the UK. A glance into estate agents’ windows across southern England reveals almost nothing that might resemble family accommodation at less than £200k. When the average wage is around £25k per annum and the bank lending ratios are 4:1 there would appear to be a disconnect – until the buy-to-let investor is taken into account. Whether the stagnation of the general economy outside the London effect will allow the rents to give the yields that these investors are chasing remains to be seen.

Back in the prime markets there is a noticeable change this year. For the last four or five years, the country-house market has been the poor relation in comparison with the explosion of values in London: in very broad terms London has doubled while the country market has stagnated. This has altered behaviours. Those who would naturally have sold in London and decamped to the country have taken a rain-check as they realised that such a move was likely to be one way: if they sold and moved out they were unlikely to be able to afford to move back. The last few years have seen a profusion of tyre-kickers and buyers’ chains in a market where traditionally scarcity had made cash buyers the only ones that estate agents took seriously.

This year it feels very different. We are seeing country buyers who want to buy – and soon – and plenty of them. Why the change? It may well be that the same factor – high London prices – that kept them anchored in the capital may now be working the other way as those making the move see a compelling advantage in the price arbitrage and feel that the risks of getting on the wrong side of the trade are diminishing. In other words they feel that London is getting fully priced. While in no way calling the top of the market, there are enough examples of houses and flats not making their asking prices and others being sold by long-term owners to make it feel that there is a change in the air – even if it is a natural pause after such a meteoric rise. We are also seeing the ‘mansion tax’ effect at work with the bulk of activity being up to £2m – and above £5m. Another unintended consequence.

So why the change this year? Stock markets certainly help – which is allied to the general feeling that, while all is patently not well with the world, the point of a near-death experience has passed. For those agnostic about the direction of the world economy there seems to be a willingness to get on with life and make personal changes in the hope that, at worst, it is a zero-sum game with annoying extra costs. Let’s hope they are right.



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