Quantitative Easing For Property – Inspirational Policy or An Act of Insanity?
Facts & Figures
- International buyers now account for 39% of the prime London residential market. Most of them (85%) live and work here (Savills)
- The prime residential sector is up 58% since 2008. Savills estimate that approximately £37 billion has flowed into London property from overseas buyers since 2006
- The Council of Mortgage Lenders estimates that total gross mortgage lending in July increased to £16.6 billion, representing a monthly rise of 12% and 29% higher than in July last year – this is the highest monthly estimate for gross lending since October 2008
- The Bank of England revealed the number of mortgage approvals hit their highest level for five-and-a-half years in August
- The Sultan of Brunei has spent £500m buying up premises on Queensway including Whiteleys with the view to creating a new “estate”. His group has allegedly earmarked another £500mto improve the area
- Sealed bids are becoming more frequent for properties under £2m in Prime Central London
- The Centre for Economics and Business Research said prices across the country will rise 2.9 per cent to an average of £225,000 this year, followed by a 3.9 per cent jump in 2014. Between now and 2018, the average UK price will jump 23.7 per cent to a record of £278,000. In London house prices will leap 43.5 per cent by 2018, pushing average values in the capital up to a staggering £566,000.
I was watching Sky News a few months ago and Jeff Randall was interviewing Danay Gabay of Fathom Consulting about the state of lending in this country. His verdict: funding for lending has not worked. It should really be called “funding for letting” as the only part of the economy that has benefitted is “buy to let” while lending to SME’s and businesses has plummeted.
The plan, if you didn’t already know, is to allow those who can only afford a 5% deposit to borrow 95% because the government will guarantee 15% of the loan – therefore encouraging lenders to give mortgages to those who would otherwise not be eligible. Does that sound like sub-prime lending to you? Damn right it does. Is this exactly the type of lending that the government was so keen to stamp out a mere three years ago? Err, yes. But think of the people who can now buy homes even if they can’t really afford them! An Englishman’s home is his castle, don’t you know. What could possibly go wrong…?
Just as QE is a euphemism for saving the universe printing counterfeit money, help-to-buy is a political mechanism to effectively win votes. In the first instance it was designed to encourage house builders to build because only new build properties were eligible for the scheme. House builders were obviously very happy that the government was effectively giving them a guarantee from taxpayers that could help them sell their properties.
However, the second phase, which has been brought forward to coincide with the Party Conferences, means that any property under £600k can be bought using Help To Buy. The inevitable effect is that there has been and will continue to be a surge in mortgage lending while property prices below £600k are likely to rise dramatically as demand strengthens.
But, consider this: the government has decided to guarantee mortgages to the tune of £130 billion. This is supposed to support 74,000 sales over three years. The chances are this sum will be used much more quickly. But what happens then? Well if the feel good factor lasts until the election in 2015 then the Conservatives will be extremely happy. However, if it seems to be wearing off then they are likely to suggest further guarantees (the great thing is the guarantees do not show up in government figures as they have not actually lent the money. Theoretically there is nothing to stop them guaranteeing another £1 zillion or more. Except that if these loans start failing to perform then all hell will break loose).
So in answer to my original question, help to buy is an inspirational short- term political credit card used to buy votes policy. In the long term I expect it to be a massive blunder. Look what happened to the stock markets when the US stopped QE1 & QE2. Instant price drops. Hence QE Infinity (and don’t even talk about tapering let alone stopping…). Therefore, I think it is not unreasonable to suggest that there is a high probability that prices will fall soon
after the artificial stimulus has been removed. Whether this will lead to another bout of Help-To Buy (probably named something very 2013 like H2B2 (or is that a chess move?)), we shall have to wait and see.
The other less obvious effect will be that it is likely to drive down yields for rental investors as a proportion of the rental demand will disappear as tenants suddenly discover that they can afford to buy thanks to the taxpayers’ government’s largesse. This could in time dampen the value of those properties too, exacerbating the effects of any withdrawal of property QE. Of course, the government’s policy could mean that the market goes gangbusters for the next five to ten years, but as this is what the government wants it is highly unlikely to happen (well according to the law of unintended consequences something else unappealing may happen…).
Of course with an election looming one wonders what other vote buying carefully considered policies the politicians will promise.
What has this got to do with prime central London?
It is likely that we will see prime central London under-performing compared to other areas over the short term as hardly any properties in prime central London will directly benefit from Help to Buy. This is not to say we will see price falls. There is still a vast amount of money desperate to buy property. As one contact in Singapore said: “London looks cheap to the Singaporeans”. This is a sentiment that has been echoed by clients from across Asia and Russia (although it should also be noted that there has been an increase in the number of UK buyers in the market too).
The attraction of prime central London property has been highlighted by an interesting piece of research by Lonres comparing the performance from 1991 to 2012 of an apartment in Cadogan Square against a number of assets.
- Cadogan Square +748%
- Gold +349%
- S&P 500 +330%
- Crude Oil +312%
- FTSE 100 +151%
- Fine Art + 26%
Now this is slightly disingenuous as some shares in the FTSE 100 will have performed better than the index as will have a painting by Van Gogh presumably appreciated a touch more than 26%. Nevertheless the performance of prime London real estate over this period shows why it is considered as such a safe haven asset.
Of course different markets within prime central London have performed very differently. Savills has recently produced some excellent research showing how the best properties (the top 10%) have seen values nearly triple since 2005 “rising by 190%, whilst the worst performing (bottom 10%) have seen growth of a relatively modest 63%.”
This highlights the importance of focussing on those properties that will always outperform. Tragically too many buyers fall prey to desperation and end up acquiring properties that are decidedly average rather than waiting for the best properties. Over time, this can be a costly mistake.