Property – three different answers to the same question
- High real estate valuations are leaving a large section of the global population feeling disenfranchised.
- The phenomenon is global, with new entrants to the market often priced out in the UK, the US and Hong Kong.
- In the UK and Hong Kong, a growing trend appears to be for more intervention by the ‘heavy hand’ of government.
The extreme and unprecedented policies such as quantitative easing that were implemented following the financial crisis of 2008 have, in turn, resulted in extreme and unprecedented market conditions. Governments across the globe are trying to solve the puzzle of how to ameliorate the price rises in property enough to let new entrants into the market without eating too far into the unrealised profits of those who are already ‘long’ the asset.
The extra liquidity in the global markets has seen an across-the-board rise in asset prices. The real estate market is one that has been lifted by the rising tide associated with cheap money, but residential property is also an abode as much as it is a financial instrument, which complicates the situation.
The S&P 500, Dow Jones Industrial Average (DJIA) and Nasdaq composite closed at all-time highs for the third day in a row on Wednesday. The Russell 2000 index of smaller companies hit its highest level in a year. US markets are closed Thursday for Thanksgiving and will be open only half-day on Friday. Some of the froth has been blown off the out-of-hours futures markets, but this represents little more than a pause for breath.
S&P 500 Index (SPX) 1981-2019
Another market that has rallied in the low interest rate environment is domestic real estate. Some of the relaxed borrowing terms, which had actually helped precipitate the financial crash, have been gradually tightened up sine 2009. Restricting the leverage terms on new domestic entrants coming on the bottom of the ladder appeared to address the problem of moral hazard for that demographic.
However, property prices continued to rise due to interest rates in some developed economies heading to zero or below – with the existing loans to the rest of the market being on more lenient ‘pre-crash’ terms.
In post-2008 UK, new entrants to the property market were finding it increasingly difficult to borrow on the scale needed to enter the property market on the bottom rung. This was just as international investors were looking to place their funds in relatively secure assets. The perceived good governance and rule of law in the UK, along with its accommodating approach towards international investment, made it an attractive target market for many. There were even tax breaks and greater anonymity associated with holding ownership through an off-shore corporation. This benign environment looks about to change.
Boris Johnson’s Conservative Party has released proposals intended to take the heat out of the UK property market by levying higher taxes on purchases by overseas buyers. The market that was once overseas-friendly has now swung to the other end of the spectrum.
The Tories state that as many as one in eight new London homes were bought by non-residents in 2014-16. The party’s plans to address the issue included a 3% stamp duty surcharge for non-UK tax residents. It would apply to companies as well as individuals, and even to expats wanting to move back home.
It is worth considering the degree of market intervention here. It is hard to imagine a comparative measure to charge overseas investors 3% to invest in UK-listed stocks – and this very interventionist move comes from the more business-friendly Tory party.
The absence of any uproar, on commercial or philosophical grounds, stems from the UK properties currently being valued on multiples that are many times the average incomes. Ordinary people are finding it hard to buy their own home.
It could also be that the genie of property market manipulation is already out of the bottle. Higher levels of ‘stamp duty’ are already applied on second home and buy-to-let purchases. The market is over the shock of the government introducing new policies, and the government has realised an opportunity to develop a relatively new and much-needed income stream.
CNBC crunched the numbers and established that:
“As an example, overseas buyers would need to find an extra £50,000 ($64,400) to afford the average house price in London’s Notting Hill, which currently sits in excess of £1.6 million.”
The Office for National Statistics data states that the medial annual gross wage in central London, the area where Notting Hill is situated, is £34,473.
The Conservative Party statement shares concern for this value/income multiple being at such an extreme level:
“This adds significant amounts of demand to limited supply, inflating house prices and making it harder for people in Britain looking to get a foot on the property ladder.”
Despite being home to the ‘sub-prime loan’, which gained such notoriety in the financial crash, the US market has remained relatively free from federal intervention over the last decade. Claudia Sladick and Norbert Michel, writing for The Daily Signal, said:
“Interventions were clearly present during, and partly responsible for, three disastrous time periods in US banking history: the 1920s, the 1980s, and the early 2000s.”
Source: The Daily Signal
The administration of President Trump faces a range of problems, including a trade war with China. The fact that they have bigger fish to fry means that there are currently fewer signs of new government policies.
The Hong Kong market differs from the other two because this prosperous region with a proud mercantile heritage is currently seeing protestors take to the streets and close down sections of the city due to property prices and a sense of disenfranchisement. Henny Sender, writing for Channel News Asia, reports:
“The widening focus of Hong Kong’s protests highlights the stasis of a sector out of step with the times.”
“A target of their resentment is the territory’s property tycoons, who with the help of a pliant local government have for years kept housing supply far lower than demand, amassing land holdings but developing them at a rate that ensured rising prices.”
Three different regions have come up with three very different answers to the same question. For the financial markets, it might be easier to establish why the question is being asked, and what might be any other unintended consequences of over a decade of cheap money.