How far will London house values fall?

London has seen some of the most bullish house price inflation in the country as the nation's ceremonial centre has been in the process of going from a national capital to a world megacity. Everyone expects domestic property values to fall as a result of the Wuhan virus, but by how much? There at several factors at play, I think. One is the fall in values that mirrors a fall in GDP; we saw this in 2008, when a small drop in GDP saw a much larger fall in house values, which fell between 15% - 20%. Add to that in 2020 the increased biohazard risk driving a flight to the country. All those shabby, noisy, flimsy multistorey blocks thrown up in the past fifteen years that have been so profitable for the volume builders have just become about as desirable as Rio favela-shacks made of crinkly tin. My own guess is there's a long way to fall. Property in the counties and towns with gardens and fields within walking distance will fare far better.

A counter argument may be that London is ahead of the rest of the country in acquiring immunity - and recent research suggests that rather than 60% of the population having been infected, it could take as few as 10% - 20% to provide herd immunity, provided the right people, i.e. those most liable to infect others, have been infected. London's economy could therefore bounce back far more quickly than the rest of the country, and dampen a drop in values. I don't understand why crowded, rammed, jostling London should be better off than the post-industrial NE, but there it is.

I've constructed the chart below from the Land Registry HPI for London, taking the flats values, and the ONS quarterly GDP data series, both rebased to 1995 = 100. Interesting. And that verse by Louis MacNeice from 1934 always comes back to me -

Splayed outwards through the suburbs houses, houses for rest
Seducingly rigged by the builder, half-timbered houses with lips pressed
So tightly and eyes staring at the traffic through bleary haws
And only a six-inch grip of the racing earth in their concrete claws;
In these houses men as in a dream pursue the Platonic Forms
With wireless and cairn terriers and gadgets approximating to the fickle norms
And endeavour to find God and score one over the neighbour
By climbing tentatively upward on jerry-built beauty and sweated labour.

Britain's booming 'austerity' economy

Two charts that bear close study form the base of today's post. The RSA's Fabian Wallace-Stephens (who with a name like that should probably be standing for Kier Starmer's Deputy in the Labour leadership hustings) has looked at the fastest growing and shrinking occupations from the Labour Force Survey - here are the charts (clicky) and my comments below.

The first thing to note is the degree of substitution - occupations having the same skill sets and that enable workers to migrate from one category to another. This includes for example workers who move from sales and retail assistants jobs to call-centre jobs. Secondly are the changes in the structure of the labour market away from permanent employment by a single employer to a melange of self-employment and short term and temporary gig work; the full-time waiter is being replaced by a new breed of actress/waitress/whatever who may supplement their instagram enabler role with a few evening sessions carrying plates at the local pizza parlour. Without the counterpart to these charts - the charts that map the rise and fall of business and commercial activities - some changes are misleading.

However, a few trends are noteworthy. Supporting the Prime Minister's undertakings and undermining the NHS Cassandras, we have seen about 70,000 more nurses between 2011 and 2019 and an equivalent additional number of nursing auxiliaries and assistants. We have seen almost 80,000 additional care workers and 65,000 nursery nurses and assistants. Just those four categories have gained some 285,000 additional workers, demonstrating the growth in demand. What we must do now is work out how to pay for it.

The internet impact on retail is clear, with significant losses in shop and retail jobs offset by the growth of some 100,000 delivery driver jobs, and I suggest many more amongst the huge 4159 admin class gain* (nec = not elsewhere classified) are part of the internet shopping logistics tail. I'd suggest the one anomaly in class 7111 - massive female losses in retail sales but a modest increase in males - may be due to the blokeyness of mobile phone shop staffing.

The clear gainer though is what we used to call IT. As one would expect as we transition into the next wave of an AI economy. And the most visible impact is on central and local government - both clear losers, and not as the unions would have you believe from 'austerity' but from, well, change.

And one overall change that is inescapable - and confirmed by an unemployment figure that has dropped substantially during this period - is that employment growth overall greatly exceeds shrinkage; obvious in the images even given the exaggerated job-shrinkage scale in the graphics. And that really is good news.

Evening Standard, 21/01/2020 - * another increase for SOC 4159

The world turned upside down

An empty-nester in Bavaria, the acquaintance of a friend, sold the large house in which she had brought up her kids and undergone a divorce but had no choice but to commit herself to another large mortgage on a new property. Financial downsizing was not an option. "Why?" I demanded. Because. The Germans are incurable savers, and without harsh government measures to ensure they keep borrowing and spending the economy would be hit. So the German tax system effectively prevents homes being used as pension pots.

In a world in which negative interest rates are normal, in which central banks are printing monopoly money used only to inflate the asset values of the wealthy in a huge shimmering vulnerable bubble and lenders are drowning in cash to lend (I must check whether personal lease plans have been extended to powerboats and ride-on mowers ... there is no better way of parting a man from his wealth than ownership of a prestige planing vessel kept in a marina; and no, my old displacement fishing boats lived on a half-tide mud berth up an open creek). The Guardian is at least honest about Europe's problem -

Yet as one economist perceptively put it, the problem for the eurozone is that “weak credit growth is driven by the lack of demand from creditworthy borrowers rather than the supply cost of finance”. This can be solved in part by governments stepping up to boost demand in the eurozone.

That's it; the right people don't want to borrow. Lenders are desperate to lend. I wonder if we can look back to some point in history, say the oughties, to see what happened before ....

Have PLPs been extended to adult toys?

Debt

Reading Polly Toynbee's mind at work is almost heartbreaking. Today, she fairly and accurately describes a queue of debtors being dealt with by the civil courts; the list is pretty evenly divided between B2B debt and failed household credit, the major creditors HMRC, local councils and banks. The witness evidence could have formed the basis for an informed and constructive article, but instead Polly just can't resist the trite and bromidic - it's all the fault of gub'ment austerity. 

Many of you will also have caught on TV one of the rival fly-on-the-wall progs about bailiffs and sheriffs; again, a litany of business debt and evictions by private landlords mostly for failure to pay rent. If HMRC, councils and banks are creditors for these cases they stay clear of any mention, or perhaps they don't permit their bailiff actions to be filmed. Where creditors are revealed, they're frequently in no better financial position than their debtors - single-house landlords, other skint small businesses.

And we ain't seen nothing yet. We're still at the top end of the curve. It's said that in 2008 the banks weren't prepared and took the hit - but today they are, and it's their debtors that will feel the real pain this time. The ECB are already preparing for the next crash - measures are even now being enacted to staunch outflows in the event of bank runs and restrict depositor access to protected deposits (€100k). 

As far as I can see the victims of debt are not victims of government cuts - and every time a council wrings its hands and closes a library I am reminded that CIPFA valued local authority reserves at £21bn in 2016 - but of globalisation. Half the country haven't done well economically and are the first casualties. The other half - the public sector, universities, global corporates, legal and accounting megafirms, media, digital economy - have done comparatively nicely, but are by no means free of debt. Their turn will come when austerity really does hit. A metropolitan elite economy based on Amazon Prime, Netflics and Lloyds Gym memberships, a leased car and three designer coffees a day is built on sand.  

That's the bloody problem. We all know it's coming, but when? Until the storm hits, we're all just marking time and standing ready. And until it does come, growth just won't return.