The housing market

Will 'scowls on jowls' replace 'smiles on dials'?► 3rd December 2006

House prices - can there be any other topic that has so successfully, and comprehensively, hijacked the human psyche in recent years. Even countries that used to enjoy reasonable immunity from this 'Anglo Saxon' affliction have succumbed. It seems as though all across the world the 'house price obsessed' wait - like beasts of prey - ready to bore their latest victim to death with tales of 'how much they've made'.

Sometimes it seems as though there is no escape. This came home to us some months ago during what promised to be a leisurely breakfast. With a fine bowl of porridge - and no newspaper to disturb the proceedings - events look set fair for some convivial conversation and numerous cups of tea. Yet, when it comes to the subject of house prices, complacency can be fatal. Like fools we had left the radio on and yes, you've guessed it, what was one of the main headlines? - the latest news from the housing market! There will be 'smiles on dials' we were told, as statistics showed local house prices had moved up sharply in the preceding quarter. Now fortunately New Zealand has not yet reached the stage of Great Britain - where cameras seem to be watching your every move - so we felt reasonably safe offering a wee scowl rather than the recommended facial ebullience.

As far as we aware not smiling about rising house prices is thus far not a crime in New Zealand - although it would probably be considered as evidence of insanity! At NZ Gold our thoughts are a little alternative. Certainly, we are in favour of home ownership - and we particularly lament the exclusion of so many of our younger people from what has historically been a Kiwi 'rite of passage'. Therein lies the essence of our position - we are in favour of home 'ownership' rather than the phenomenon of home 'loanership' that has become so ubiquitous.

Of course, for most people, it has always been necessary to take on a mortgage to buy a house, and a period of saving for a deposit followed by a loan of perhaps two and half to three times annual income would have been considered a prudent norm for many years. Yet not any more. Britain has undergone one of its episodes of gross credit excess - a condition it has now successfully exported to New Zealand (lucky us!). Whilst on a recent visit to England an opportunity emerged to do a 'back of an envelope' calculation on properties that we could have bought in the early 1980s - for around 2.5 times our income at that time - approximately £8,000 per year! (around $22,000 NZ Dollars). This would have facilitated a loan of £20,000 assuming, of course, that one 'passed muster' with the austere but commendably conservative bank manager - who would require an interview and unequivocal evidence of your financial 'bona-fides' before agreeing the loan. Combined with a painstakingly accumulated deposit of some £4,000 it would have provided just £24,000 for that exciting first home purchase. Now £24,000 would not have bought anything palatial, but it would have been enough to get a structurally sound, if modest, three bedroom Victorian house with garden 'in need of modernisation'.

Almost twenty five years on, we recently discussed the housing situation in our Essex home town with friends over a pizza. We had walked from their pleasant home in a 'sought after neighbourhood' to the retail centre in the early evening. This was something that "they seldom did at night any more" because of the ubiquitous undercurrent of menace and aggression that now permeates what we recall as a largely safe place in the nineteen sixties, seventies, and eighties. So much for Tony Blair's 'Cool Britannia'. Yet their subsequent comments, about the astonishing price to which the most modest of properties had risen, gave us clues as to why behavioral standards had declined so much. The politicians favourite con-trick of 'easy money' - and especially the 'supremely easy money', the 'unimaginably reckless and contemptibly easy money' - that now permeates Britain (and New Zealand) is always associated with exploding asset prices -and a dramatic decline in standards of public probity. This fascinating association, between reckless monetary expansion and an inevitable fall in standards of public behaviour, is something we shall examine in more detail in a subsequent NZ Gold article.

Yet we digress! Back to house prices - the subject that now evokes the sort of passion that 'star-crossed lovers' might once have reserved for their wedding night! Indeed, this could be a new entrepreneurial opportunity for someone. Never mind the hotel with four-poster bed, what about organising real estate seminars for couples on their honeymoon. Who said the age of romance is dead?

Of course, the irony is that a huge proportion of young married couples, as well as single people who would like to buy a modest first home, are now excluded by the 'rampant house price inflation phenomenon' that has brought so many 'smiles on dials' to those already on the housing ladder. All these new 'untouchables' - whose only shortcoming was to be born a few years to late can do - is to think and talk about a house, because they have scant chance of buying one! In our home town we calculated that, in July 2006, the modest Victorian house that could have been purchased for around £24,000 in the early eighties would now set you back some £250,000. Yet wait we hear the politicians and real estate agents cry - the rise in values reflects the dynamism of the economy and peoples wages are much higher than they were twenty five years ago. Well there is an element of truth in what they say, but as is so often the problem when vested interests speak - you get an 'element of truth' coated thickly with a 'load of old cobblers'.

At NZ Gold we like honesty and are the first to admit that the example we have chosen - of a modest house for £24,000 (purchasable with a loan at around 2.5 to three times annual earnings) comes from a period when the market was depressed. Yet why was the market depressed? Wasn't it because of the exceedingly tight monetary conditions that Lady Thatcher's government was forced to impose following the rampant monetary excess of the nineteen seventies. It is a lesson - credit booms always end and it can be argued that the one we are in now makes the nineteen seventies look like a period of monastic abstinence in comparison. We note a recent article by Britain's superbly incisive financial and political commentator Lord William Rees-Mogg (What happens when house prices collapse? - Times, Monday November 27th 2006) in which he cites a historic house price to income ratio of around four times annual earnings. So there is some room for some debate about averages. Yet what is unequivocal is that prices, both for Britain and New Zealand, have now moved to ridiculous - and we believe dangerous - multiples of annual income. This is particularly the case when so many people now earn the money, with which they pay for their home, from income either directly or indirectly derived from the housing market.

Back to our modest Victorian house that would now set you back some £250,000. Having considered what a similar job, to the one in which the author was engaged during the early nineteen eighties would pay today, we come to a 'price to annual income ratio' of around seven to eight times - with a deposit of around £40,000! This is very relevant to Kiwis (not to mention horrifying) because it is roughly consistent with the ratio of seven times annual income for houses in New Zealand, which we note was cited in the Christchurch Press recently ('Confidence in housing still strong - Monday November 6th, 2006 ). What this means is that an ever greater quantity of 'yet to be earned' income has to be apportioned to buying a house. This, of course, makes a mockery of political suggestions that exponentially rising house prices reflect some sort of miraculous 'economic renaissance'. On the contrary, at NZ Gold we believe the phenomenon largely reflects the massive expansion of the supply of new money that has occurred all over the 'Anglo Saxon' world in recent years - with Britain and New Zealand being offenders par excellence! Should you want objective evidence, rather that our comments, that the British and New Zealand economic miracles are not what they seem we suggest you look at two appalling indicators - the balance of payments and the inexorable growth in household debt.

In his article Lord Rees-Mogg makes an extremely important observation - "voters do not like falling house prices". The corollary is that voters seem to love rising house prices. At NZ Gold we are bound to ask why anyone would want the most expensive thing that they will usually buy in a lifetime to become even more expensive? Meantime, they seem desperately concerned that already relatively cheap items, such as DVD players, should become even less expensive. Forgive our facetiousness! We fully understand why voters love rising house prices - it is because the phenomenon creates a sense of increasing wealth. So we begin to 'expose' the psychology of all this. Rising house prices make existing 'owners' feel rich and financial institutions, having supplied the credit that fuelled the inflation of values in the first place, can then supply still more credit in the form of 'equity release' for the purchase of second homes, cars, holidays, plasma screen televisions etc. Everyone is happy and there are 'smiles on dials' because 'wealth' appears as if by magic. Of course, those who could not access the new money - such as the next generation on whom Britain's and New Zealand's future depends - are more likely to wear a look of frustrated despair as they press their excluded noses up against the real estate agents window. Never mind, new innovations such as the fifty year mortgage or the more than 100% loan might yet save their dreams.

Yet it is not just the young who are unlikely to have 'smiles on dials' over the housing market. At NZ Gold we suspect a great many British and New Zealand pensioners, whose homes really are theirs by virtue of being mortgage free, are starting to understand the downside of inexorably rising prices. Generally on a 'fixed-income' they are having to meet ever rising local authority rates which, in both countries, are based on the value of their house. So they are stuck with exploding rises in the 'nominal' value of their property, against which they are forced to pay increasing rates with 'the folding stuff' from an income which is essentially static. Indeed, in real terms, most superannuatants incomes are probably falling because the dramatic money supply expansion inevitably distils down from the housing market and into more generalised inflation. Yet what do they get for the extra precious pounds and dollars they are compelled to hand over - a single extra rubbish sack, cleaner streets, more libraries? At NZ Gold we do not believe it inconceivable that many elderly will, ultimately, be 'wiped-out' financially as a consequence of what history suggests will follow from the current house price euphoria.

Ultimately, at NZ Gold, we are of the view that house price inflation has become an overwhelmingly political phenomenon. We are persuaded that the euphoria associated with booming house prices has effectively become a new - highly addictive - 'opium of the people'. Under cover of its seductive temptations the most outrageous assault, particularly in Britain, upon every tradition, civil liberty and vestige of social cohesion has been possible. Small wonder that a new euphemism for that once wonderful country has recently emerged - 'departure lounge Britain' as thousands flee. Even the 'TV property guru' Daisy Goodwin (Housey housey is a mug's game - Times, Sunday November 19th 2006) has recently offered her lamentation for what the obsession with house prices has done to the British character. We have become as she astutely points out "a nation, in short, that nobody would want to sit next to at a dinner party". We respectfully ask of New Zealanders - are we now any different?

Perhaps we are not young and struggling to get that first step on the property ladder. Perhaps we are not old and worrying about how on earth we are going to pay our rates bill. So we think we are o.k. At NZ Gold we are not so sure! All of history suggests that the rampant monetary expansion feeding our new 'addiction' does not ultimately end very favourably for 'Joe average' - especially as he is unlikely to be 'holding gold'. Whilst we have no doubt that the 'ruling elite' will do everything in their power to keep the balloon inflated for as long as possible we suspect, that in the end, the timeless laws of economics and human psychology will overwhelm them. Moreover, long after the euphoria has disappeared in the face of 'middle class destroying' hyperinflation, or its twin along the polar continuum, deflationary collapse, we will also have to explain to our children why - in our state of 'house price intoxication' - we allowed the liberties that we once took for granted to melt away. Looking forward we foresee many 'scowls on jowls'.

In conclusion, we offer not our thoughts, but those of the man who made the England that others now seem so desperate to destroy - King Alfred The Great. Somehow, when we reflect on the 'house price obsession' that seems so ubiquitous today in the 'Anglo Saxon' world and beyond, his words from over a thousand years ago seem uncannily appropriate.

"In the midst of prosperity the mind is elated, and in prosperity a man forgets himself; in hardship he is forced to reflect on himself, even though he be unwilling. In prosperity a man often destroys the good he has done; amidst difficulties he often repairs what he long since did in the way of wickedness".

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