Wealth Not Income Driving Hpi

[tomandlu]

Obviously, I have an extreme bias towards heavily taxing any form of inheritance, to narrow the wealth gap. Otherwise working hard and getting a decent job will be (is) a waste of time.

Wouldn't cheaper housing be a more direct solution? That said, I suppose 100% IHT on property would probably be a pretty good way of crashing the market.

[Starla]

Wouldn't cheaper housing be a more direct solution? That said, I suppose 100% IHT on property would probably be a pretty good way of crashing the market.

Cheaper housing would be the best solution, I agree. It's how to get there. If it's wealth driving higher prices and not income, then it takes a different tactic to lower prices than simply raising interest rates, building houses, affordability stress tests, wage stagnation etc. You need to tax the wealth at source. That would p*ss off a lot of people but create a level playing field. In reality I doubt it will ever happen, not at super wealth level anyway, for the same reasons agricultural land, woodland or heritage sites are free from inheritance tax.

[tomandlu]

Cheaper housing would be the best solution, I agree. It's how to get there. If it's wealth driving higher prices and not income, then it takes a different tactic to lower prices than simply raising interest rates, building houses, affordability stress tests, wage stagnation etc. You need to tax the wealth at source. That would p*ss off a lot of people but create a level playing field. In reality I doubt it will ever happen, not at super wealth level anyway, for the same reasons agricultural land, woodland or heritage sites are free from inheritance tax.

But what wealth are you talking about? If it's housing wealth (i.e. inheriting a house), then I don't see how that can be the driver. A situation where only people who inherit houses* can afford to live in them is a symptom, not a cause of HPI.

The proof would be that inheritance law hasn't changed much - just house prices.

* I'm talking about a 'normal' inheritance, not a large number of properties

Edited April 28, 2014 by tomandlu

[alexw]

IHT is not the solution. Consider two 40 years olds. Person A bought a cheap property in 1995, the Person B missed the boat but now inherits money equivalent to the equity Person A has, why is it fair that Person B pays tax on their "lottery win" whilsts Person A doesn't? The solution is land value tax instead of other taxes.

IHT is not the complete solution but is certainly part of it. LVT are another part.

Consider person C who has no lottery win inheritance. Both work the same jobs, work the same hours and are equally skilled, yet person B can easily outbid person C. Why is this a good thing?

[alexw]

But what wealth are you talking about? If it's housing wealth (i.e. inheriting a house), then I don't see how that can be the driver. A situation where only people who inherit houses* can afford to live in them is a symptom, not a cause of HPI.

The proof would be that inheritance law hasn't changed much - just house prices.

* I'm talking about a 'normal' inheritance, not a large number of properties

A large part of it is wealth in terms of prior earned wealth (income) in excess of what they need to live. Consider cornwall. Since incomes have skyrocketed in London for certain groups, relative to wider society, they have been able to outbid cornish residents for property. Thus the housing in large parts of it is not now owned by locals as homes, but by Londoners and home counties types as holiday homes. Now you might say we should prevent this, tax them out, etc. But that wealth concentration in combination with their votes gives them an outsized political heft. Thus it's been quite difficult to solve what is in reality an easily solvable problem.

The same thing happened to an extent to London due to it becoming internationalized in the early 2000's. But that has now metasized with the wealthy of east asia piling into London too and there is potentially millions of them. That cash flowing in has rippled out with those displaced buying further out and so on.

This is simply the consequence of a less equal society in which pleb incomes shrink relative to 1%er incomes, hereditary wealth, and return on assets. But honestly none of this should be a surprise. What do you think they do with this money/wealth that is in excess of their basic needs? They buy assets of course....and one prime asset class is housing. They outbid the average prole on housing to obtain an asset that can then be used to earn them a return. The same is happening in the US with vulture funds buying up housing that the poor live in. When we think of UK housing in the 1800's we think of slum housing owned by a rentier class, since we are going back to that society in terms of wealth and income distribution, it should not be any surprise that we are going back to the housing situation that prevailed then too. It's only prevalent in certain parts of the country currently, but it is gradually becoming more and more endemic.

Edited April 28, 2014 by alexw

[gf3]

IHT is not the complete solution but is certainly part of it. LVT are another part.

Consider person C who has no lottery win inheritance. Both work the same jobs, work the same hours and are equally skilled, yet person B can easily outbid person C. Why is this a good thing?

I remember when Osborne said he was going to scrap IHT and Gordon Brown called off the election. I am set to do alright out of inheritance. However Osborne made my blood boil I would rather workers pay less tax than the rich be gifted money. Some how we need to reduce the inequality.

[rentbug]

............... Otherwise working hard and getting a decent job will be (is) a waste of time.

HPI has made having a decent job and working at all a waste of time since 1997. Reason enough to want a correction in my book.

[John51]

Inheritance really is the key.

An only child whose parents own a detached house in the southeast could easily pick up a £0.5m inheritance tax free.

That is about 30 years after-tax income for an average wage earner.

Of course if that £0.5m is used to buy some houses to rent out the problem gets worse.

Unless there is a black swan event, I think housing is going to become a closed shop on the lines of 'landed gentry'. If more people want decent housing than what is available, lack of mortgage availability alone might not be enough to cause a crash. us = renters and them = rentiers.

Also, there seems to be a lot more transient lifestyles. My eldest prefers to rent fully furnished. He and his girlfriend looked at a lovely flat this weekend, £900 a month. In Liverpool! Scary number for me but it's their money. They said no to it because the maximum broadband speed is 10mb and he works from home on the net.

[Mikhail Liebenstein]

I've been a poster on HPC for many years and have been through many stages of optimism and frustration of ultimately buying the house of my dreams, without taking on the mother of all mortgages. Well I have the worlds biggest mortgage and have my dream house. I earn a very good salary yet buying the house wasn't a question of income because those I was going against weren't income rich, they were cash or wealth rich. It struck me that simply having a great job, great income and access to whopping mortgages isn't really always enough. What you need is a whopping inheritance, or to have bought a house for say 100k in 2001, ,sell it for 500k in 2014 and hence a 700k house needs a relatively modest mortgage.

Hence I came to the observation that the key determinant in stopping HPI isn't whether Houseprices and Incomes are out of kilter, it is whether the enormous flow of funds triggered by inter-generational gifting / inheritance / overseas sources stops.

As it happens, I got lucky but I was staggered how easily I could have lost the house.

Prices are set on the margins. As you identify if someone pays £x for a house, then everyone in a similar house thinks theirs is also worth £x even when there are no buyers left with a budget to be able to afford £x.

It's amazing, someone borrows £500k, to buy a house of a street of 40 identical homes where the previous highest price was £400k, and suddenly everyone assume 40 x £100k = £4m of net additional wealth has been created.

I am quite philisophical about this. Like you I have and have had a good job for while and have benefited from HPI over the last 14 years - probably paying something like £150k off the mortgages over that time probably £90k in interest - but could point to asset rise of £550k that I haven't worked for. Of course how real this is remains to be seen.

[wonderpup]

So.. is the transfer of existing wealth really the key fuel to HPI ? and incomes are becoming irrelevant ?

Without incomes to back it up that 'wealth' may simply be an abstraction anyway- I guess a man stranded alone on a desert island could build himself a mansion given time- but has he made himself any wealthier? I'm not sure he has- though he does have a better standard of living.

Wealth and incomes are interdependent if only because the only way to price something is to offer it for sale to those with incomes- so how much your assets are worth is a function of how much income is available to buy it. (Plus any credit the buyer can obtain- but that too is-at least in theory- constrained by his income- his ability to repay.)

The reality now seems to be be that that there is far more 'wealth' than there is the means to sustain it- people are sitting on vast stacks of IOU's or supposed asset values- but if the real economy is not able to deliver the growth and productivity and ultimately incomes to make good all those paper promises then many of them are not worth anywhere near their supposed value.

[zugzwang]

Unless there is a black swan event, I think housing is going to become a closed shop on the lines of 'landed gentry'. If more people want decent housing than what is available, lack of mortgage availability alone might not be enough to cause a crash. us = renters and them = rentiers.

Also, there seems to be a lot more transient lifestyles. My eldest prefers to rent fully furnished. He and his girlfriend looked at a lovely flat this weekend, £900 a month. In Liverpool! Scary number for me but it's their money. They said no to it because the maximum broadband speed is 10mb and he works from home on the net.

Don't need a black swan. Osborne's still borrowing 7% of GDP every single year to generate a paltry 2% growth. How much longer can he maintain the fiction of recovery?

[Economic Exile]

Yes Zugzwang.

I often wonder how long the illusion of recovery can be kept going.

Since 2000 my experiences have led me to question everything about the world I live in. For a while I thought I'd gone mad as people around me didn't question and I thought I was in error about a lot of things.

When 2008 came into the public arena I knew then that global economics weren't in a good state. I've also found that I'm not viewed so much as an eccentric, wierdo, nutjob etc. People around me seem to sense that things aren't good economically.

I don't know when it'll happen but I now believe that there will be bigger economic problems than there were in 2008.

[zugzwang]

Yes Zugzwang.

I often wonder how long the illusion of recovery can be kept going.

Since 2000 my experiences have led me to question everything about the world I live in. For a while I thought I'd gone mad as people around me didn't question and I thought I was in error about a lot of things.

When 2008 came into the public arena I knew then that global economics weren't in a good state. I've also found that I'm not viewed so much as an eccentric, wierdo, nutjob etc. People around me seem to sense that things aren't good economically.

I don't know when it'll happen but I now believe that there will be bigger economic problems than there were in 2008.

Might be a lot sooner than we think. Asia's Big Four exporters - China, Japan, Taiwan and South Korea - hit the skids in Q1. Is the Asian export model now irreparably broken?

http://davidstockmanscontracorner.com/the-global-boom-falters-asias-big-four-exporters-china-japan-taiwan-south-korea-hit-skids-in-q1/

[wonderpup]

Yeh- that 'decoupling' thing didn't work out as assumed by all the talking heads on Bloomberg.

A real bummer for the wall street guys too- they had this fantasy that they could dump the west with all it's problems and social liabilities and relocate the gravy train east instead, where billions of virgin future debt slaves could be led like sheep to the slaughter.

The funny part was that the same people who talked about the ability of the east to 'decouple' from the western economies also argued that Globalisation was great because of how integrated the world economy now was. WTF? Utterly incoherent.

[@contradevian]

Yeh- that 'decoupling' thing didn't work out as assumed by all the talking heads on Bloomberg.

A real bummer for the wall street guys too- they had this fantasy that they could dump the west with all it's problems and social liabilities and relocate the gravy train east instead, where billions of virgin future debt slaves could be led like sheep to the slaughter.

The funny part was that the same people who talked about the ability of the east to 'decouple' from the western economies also argued that Globalisation was great because of how integrated the world economy now was. WTF? Utterly incoherent.

They were discussing the China Paradox briefly on CNBC today (only have it on in the background to hear what they are ramping). China needs to pay its workforce more, but can't as then it can't make cheap tat for the West.

Meanwhile in the UK, the 19th century landowning Whig party coalition are trying to turn UK into a sweatshop of the World with record house prices.

There does seem to be a growing realisation that if the 0.1% continue to steal everything, then in the long run its not going to be very good for business

Edited April 28, 2014 by aSecureTenant

[alexw]

They were discussing the China Paradox briefly on CNBC today (only have it on in the background to hear what they are ramping). China needs to pay its workforce more, but can't as then it can't make cheap tat for the West.

Meanwhile in the UK, the 19th century landowning Whig party coalition are trying to turn UK into a sweatshop of the World with record house prices.

There does seem to be a growing realisation that if the 0.1% continue to steal everything, then in the long run its not going to be very good for business

There might be a realization but that does not mean there will be any change - at least not from them. That change will have to end up being imposed from without by the masses as has happened in the past.

Individually some of them realize their actions are leading to ruin, but how do you get a bunch of narcissistic pathological kleptomaniacs to agree to stop looting the world? One of those elites recently likened people complaining about inequality (i.e their looting) to "Kristallnacht". You probably have as much chance as of making a moon rocket out of disused egg-carton boxes, as getting the kleptocrats to agree to stop.

No it will have to be imposed from outside. But I think people are starting to finally wake up.....

[Venger]

Article just before this guy got offered the economics post on Newsnight.

http://touchstoneblog.org.uk/2014/02/what-credit-boom-bank-lending-the-recovery/

What credit boom? Bank lending & the recovery

27 Feb 2014, by Duncan Weldon in Economics

As the Bank of England have acknowledged, the current recovery has been associated with a decline in the household savings ratio (the percentage of their income that households save in aggregate).

As the latest Inflation Report puts it:

The UK economy grew by 1.9% in 2013, the strongest annual growth rate for six years. Much of that expansion was driven by consumer spending, as lifting uncertainty and easing credit conditions prompted households to reduce their rate of saving… The saving ratio is likely to fall further in the near term, but it cannot fall indefinitely. The future path of consumption will therefore depend on the pace of household income growth.

...(One important caveat to the following charts – they all show lending growth in nominal terms – as inflation was higher in the 1970s/1980s than in the 1960s/1990s/200s, one would expect higher nominal lending growth).

Starting with mortgage lending, despite a strong pickup in house prices there isn’t yet much evidence of booming mortgage lending.

Indeed there has been quite a striking divergence between house prices and mortgage lending since mid-2012, all of which suggests that quite a bit of the house prices grow we are now seeing is driven by cash buyers and/or foreign inflows.

Put these charts together and you get the following picture:

It is really hard to look at that and conclude we are in the midst of a generalised credit boom.

To give a bit of context the chart below takes this lending data and adds in the growth rate of nominal (i.e. money terms, not inflation adjusted GDP).

...The fundamental point remains that the UK’s recovery to date has been unbalanced- too dependent on household consumption and with that household consumption not underpinned by income growth but rather by a falling savings ratio.

As the Bank (and now the Chancellor) have acknowledged this is unsustainable in the medium term. Unless business investment becomes a larger driver of growth and unless household incomes starts to growth at a decent pace then the current recovery will peter out.

There are many reasons for caution about the nature of the current recovery (consumption driven, a weak trade performance, squeezed living standards, etc, etc) but fretting about a generalised credit boom isn’t one of them, in fact weak bank lending to firms (which may be constraining investment) remains a real worry.

[Executive Sadman]

Article just before this guy got offered the economics post on Newsnight.

http://touchstoneblog.org.uk/2014/02/what-credit-boom-bank-lending-the-recovery/

On the face of it, that chart looks shocking, but taken in the various context's of the time, it shouldnt come as a shock mortgage lending is subdued.

The 70s were a period of high price and wage inflation. Double digit annual increases in mortgage lending are merely keeping up with that

The 80s were a period when home ownership increased most acutely, so even as inflation fell from the 70s levels, more mortgages were being fowarded, ensuring continued double digit growth.

The 90s were similar to the 70s in real terms, but inflation was 5-10% lower

The 00s were an aberration, browns bubble. It should have really trended down from the 5% of the 90s to the ~1% today rather than spike up to 14% or so.

What that chart shows since 2009 should really be considered normal in a world of <5% inflation and stagnant homeownership levels.

That the author wouldnt attempt to frame it in these rather obvious contextual environments, but rather says it superfically looks different so therefore must be anomalous suggests he's about the same calibre as flanders and about as useful to listen to.

Give me faisal islam for mainstream TV news economic coverage any day of the week over these BBC clowns.

[Venger]

What that chart shows since 2009 should really be considered normal in a world of <5% inflation and stagnant homeownership levels.

Yes; lending 'growth' can't substantially increase y-o-y, from this point, after prices have inflated so much in a long wave from the 70s - 2014, can they?

Velocity of mortgage lending growth has dropped with topped out silly insane asking prices (tight supply).

Brown's bubble 'lending growth' was against ever higher silly insane house prices.

If banks want lending growth - standing still probably doing ok for them now against the mortgage-size the 'victim's want to take on - surely it will only come against lower house prices. Lot of malinvestment been caused by the low savings rates past few years, into BTL ect.

Can only hope it all catches up on itself... just been reading of that guyin his 50s still trying to sell his house for £570,000 ..... can't even afford to redecorate it after he opted to let it for a while to a tenant who stuffed him a little with the rent and redecorated it to his own taste.

[Guest]

No it will have to be imposed from outside. But I think people are starting to finally wake up.....

I think I've read this book. The revolution must come from the proles!

I think I remember the ending, too...

[iamnumerate]

Person B can get the hell out of the UK whereas Person A is stuck in this hole. You can't put a price on some things in life.

Being able to leave the UK depends on whether you have a job that will get you a visa in Australia or the UK. Wealth inherited otherwise won't help you (unless you have millions).

[tomandlu]

When we think of UK housing in the 1800's we think of slum housing owned by a rentier class, since we are going back to that society in terms of wealth and income distribution, it should not be any surprise that we are going back to the housing situation that prevailed then too. It's only prevalent in certain parts of the country currently, but it is gradually becoming more and more endemic.

I'm slightly less pessimistic. It's worth remembering that, essentially, in the 1800s you had to be a house-holder to vote, and universal male suffrage didn't come in until 1918. No doubt the elite would like a return to that (and don't we get a few posters on here who think that the right to vote ought to be 'earned' in some way?), but as long as they don't get it, there's only so far that they can push things.

UKIP, for all their faults (in fact, because of them), are a pretty good clue as to what happens when the main parties lose credibility.

[rentbug]

...... When we think of UK housing in the 1800's we think of slum housing owned by a rentier class, since we are going back to that society in terms of wealth and income distribution, it should not be any surprise that we are going back to the housing situation that prevailed then too. It's only prevalent in certain parts of the country currently, but it is gradually becoming more and more endemic.

I think this is the absolute core of the issue. In recent years a section of the population have been able to leverage up their paper "wealth" from HPI to move into BTL and the divisions in society are now within what you might broadly call the working class (self styled "middle") - that is people that (previously) made their income from selling their labour. It has long been understood by the top élite that if you can get the masses to fight within themselves you can get away with just about anything as they preoccupy themselves with something that doesn't really matter at all. This strategy is now in full force as the population forms up into groups divided by whether or not the EU is to blame for everything. Oddly enough if you look closely at the EU it is run by the same 1%

[crashmonitor]

It's not real wealth so cannot keep the market going in perpetuity. It's working for certain people at the moment but when the music stops their paper 'wealth' will disappear. They can only make it real by cashing out now.

It can probably be kept going longer than you think. Most homes are owned outright, boomers can play swapsy at what ever price they choose, the money doesn't have to be generated from anywhere.

You could take the props away by punitively taxing property, especially second homes. We could be more strict on inheritance tax. We could build more homes But hell will freeze over before any of this happens, the Metropolitan elite property speculators control policy.

[Starla]

But what wealth are you talking about? If it's housing wealth (i.e. inheriting a house), then I don't see how that can be the driver. A situation where only people who inherit houses* can afford to live in them is a symptom, not a cause of HPI.

The proof would be that inheritance law hasn't changed much - just house prices.

* I'm talking about a 'normal' inheritance, not a large number of properties

A large part of it is wealth in terms of prior earned wealth (income) in excess of what they need to live.

Tomandlu - I've really considered this point, where is all the money coming from? Competing with people with inherited property wealth is a factor, but as a main driver, I'd agree with Alex that there's a lot of wealth sloshing around from generations that had cheaper housing costs, and more cash than they actually needed. None of my aquaintances receiving handouts are losing their parents as yet. What's just driven this point home to me was at work just now. Two Cleaning Ladies, well into their 60's, hanging out having a fag together. One says to the other "Yeh, so my daughter needed to buy a property but couldn't afford to get enough of a deposit together, so I've just given her 50k of me own money..." I've gone and sat back at my nice corporate desk, to do my well paid corporate job, while contemplating the fact that I could be outbid by Office Cleaning Ladies.