I winced considerably at Mark Carney's offering of a "worst case scenario" yesterday, warning that a No-Deal Brexit could result in UK house prices collapsing by as much as a third. Not only as a homeowner myself, enslaved to a sizeable mortgage I'll be paying off for the next twenty plus years (regardless of whether my home becomes worth less than plywood). But also because I literally visualised the thousands of people who'd greet the news with untold joy, and even smug satisfaction.
To those who desperately want to get onto the property ladder, but can't currently afford to, it must seem like a tantalising proposition. Contrary to bad news, a price crash would be a cause for their celebration: an end to justify the means in some cases. Worse still, to my mind, it will likely confirm (or reignite) for some the idea that this Brexit calamity is a good thing.
It's really not, and I'd like to try and debunk that particular theory.
Fake carrots for would-be home owners
(a real stick for existing ones)
A housing price crash is very much a symbiotic part of the "Disaster Capitalist" plan: a term now widely recognised, and virtually coined/alluded to by author and activist Naomi Klein in her book 'The Shock Doctrine'.
All a crash will do is drag the middle class - arguably the bedrock of a healthy economy - down to the status of being impoverished too. And that "middle class" wealth... where does it go? Well, it's transferred to the coffers of the financial elite. That's quite literally the whole point. The poor won't get squat.
All a crash will do is drag the middle class - arguably the bedrock of a healthy economy - down to the status of being impoverished too. And that "middle class" wealth... where does it go? Well, it's transferred to the coffers of the financial elite. That's quite literally the whole point. The poor won't get squat.
In other words, the one group I virtually guarantee will not benefit in the slightest, are the poor and fiscally unstable. The cold harsh reality is if you haven't got a decent job and can't afford a sizeable enough deposit to purchase a home now, mortgage lenders are not going to suddenly be hurling mortgages at people absent that collateral, even if they are considerably cheaper.
But the poor will be somewhat placated, as they'll see all the middle class people around them falling like dominoes. They won't see or care how the gap between rich and poor has been vastly increased overall, because it won't have affected them. A neat ruse.
But the poor will be somewhat placated, as they'll see all the middle class people around them falling like dominoes. They won't see or care how the gap between rich and poor has been vastly increased overall, because it won't have affected them. A neat ruse.
Owning a home is not simply "slightly" out of reach for millions in difficulty - it's nigh on a pipe dream. Even a price crash won't change that; it's other economic issues and priorities that need to be addressed, such as wage and job security, wages rising with inflation, lending criteria and priorities for banks, lower interest rates, day-to-day living costs for exorbitantly priced services... there's a whole load of things we could look at before just demolishing the housing market, and ruining millions of people.
A surprisingly courteous conversation on Twitter revealed to me all too clearly that some folks simply don't get HOW a simple price crash can, and will, ruin average people. And that curious little financial trap, unnoticed by any other than those who've borrowed to purchase a home or business, is the lynch-pin of the Disaster Capitalist's plan.
This was the argument presented to me:
"People with mortgages were going to have to pay back that loan amount any way, so it makes no difference - and their next home will be incrementally cheaper too. Meanwhile, the young and first time buyers will be able to get on the ladder."
That overlooks so many technicalities, it's unreal.
Bricks and Mortar
The first thing to understand, the most fundamental thing, is the ONLY homeowners who get screwed by a housing crash are those who owe considerable amounts, and have mortgages on them. People who've bought into, and relied upon the financial system. The truly rich, the super-rich and elite percentile everyone's always referring to, don't need mortgages.
If you buy a home for cash outright, exclusively to rent out, and it plummets in value... no, it doesn't matter all that much, as your yield will likely be unchanged. You just ride it out, making as much as you can in the process. If you hold on to it long enough, it will - eventually - return the monies paid out. And if you simply bought it as a holiday/alternate home, again, it makes no difference. It was money you could afford to splash out, after all.
The super-rich deal in cold hard cash. Whereas you or I might buy a home, or even a property investment to let if we're so fortunate, the super-rich property mogul buys up whole portfolios and estates... sometimes whole housing projects. It's arguably the best place for hordes of money, and will always provide a return from rental. "People will always need bricks and mortar" is the saying: no other investment pays for itself in quite the same way, and is usually also worth vastly more after decades of bringing in a reliable, stable yield.
Middle class people with mortgages live in perpetual fear of losing their jobs, and possibly as a consequence, their homes. Whereas the super-rich are also the only ones shielded from a tempestuous, faltering economy. You don't have to worry about your job, or physically being given a mortgage by a bank if you already have more money than average people would earn in several lifetimes. It's simple maths.
And that element of physically being "given" the mortgage, is where it all gets messy - and the Disaster Capitalism really kicks in.
Number Crunching
The actual value of a property matters little to a bank in the long run. If prices are lower universally, they can always offset that hit to their profits, by raising the interest rate for borrowers. Yes prices seem lower, but customers may well pay around the same. Simply a greater portion goes to the "Disaster Capitalists" - the banks, who are the middlemen rubbing their hands with glee.
- A £250K loan over 20 years at 1.99% pays the lender £53,246 in interest. Total cost to borrower: £303,246. (Not including product fees, legals etc.)
- A smaller loan of £150K over 20 years, but at 5.99% for example, is £107,708 in interest. Total cost to borrower: £257,708.
Nobody thinks so much about that bit, as after all... a price drop from £300K to £200K seems far more significant than a couple of percentiles being shifted in favour of the banks.
I always wistfully smirk at discussion of interest rates, and Bank of England adjustments etc. I'm no qualified economist, and would not proclaim to be so - merely an interested civilian. But my general and admittedly simplified take on interest rates is "who shall we tip the scales in favour of today?" Low rates are in favour of borrowers, people with loans/mortgages etc, who need credit to survive. Higher rates are in favour of those who lend the money, who are sitting on pots of it, and the wealthier segments of society who have it tied up everywhere from high street banks to the Cayman Islands.
The Scourge of Negative Equity
The banks will literally take your home or business if you can't pay your mortgage, and they're also the ones who decide whether you get that mortgage renewed in the future. What a neat set up, eh?
Most deals have to be renewed and swapped over several times during the course of a lifetime mortgage, otherwise they roll over onto extortionate rates nobody can afford. ('Wonga' territory.)
So when your house you owe £250K on is suddenly only worth £200K, new lenders are going to say "no". Simple as that. The borrower is stuck with whatever terms and interest rates the existing lender has decreed: usually a "variable rate" (eg: the Wonga rate) vastly higher than they paid when they had a good deal, and their property wasn't in negative equity. The unfortunate borrower then either has to pay those exorbitantly hiked interest charges, interminably, or sell the home and possibly lose everything - including the equity they spent years accruing.
That "Loan To Value" category a borrower falls into is critical, eg: the more equity you own, the lower interest rate you'll pay. So even those who escape negative equity and financial ruin will still have that share reduced in the event of a price crash, and will be paying substantially more interest to the banks too. (Would you look at that? They win again.)
The Fattened Calf
When those homes and businesses are repossessed, who hoovers them up? Who do the banks sell them to, to recoup? Is it the poor first-time buyer, desperate to get on the ladder, who needs a loan? Or the super-rich guy and property mogul with a cheque book potent enough to buy a Caribbean island? (Who just happens to be mates with the bank manager.)
That is the mantra of Disaster Capitalism. The idea that when economic disaster hits - or rather, is engineered - those with the most resources and wealth close ranks, and are able to take advantage ruthlessly. Thousands, if not millions of people are ruined, and the super-rich take their assets at cut-price. The Disaster Capitalists' wealth and position, their very inherent and overt superiority is assured for yet another generation.
Then they "fatten up the calf" all over again, for a decade or two. They build a strong economy, pay well, and feed an emergent and wealthy middle-class. Until another disaster/financial crash hits, and the cycle repeats. It's quite literally a sowing and harvesting process that's occurred continuously in Western societies, whether "coincidental" or not, ever since the birth of Twentieth Century Capitalism. Let's just say the "Great Depression" of 1929-39 wasn't so depressing for the wealthy Wall Street types, banks, and landowners of America.
On the contrary, as it always is for a small minority, a time of housing price crash and economic collapse is "party time".
Just as Brexit will be for the likes of Jacob Rees-Mogg, Crispin Odey, and probably anyone loosely connected to the ERG. (For any who don't know, that's the 'European Research Group'. Eg: the hand up the puppet of Brexit, and this Tory government.)
And what nobody seems to want to mention, conveniently, is that a housing crash is usually precipitated by an economic slump. And if the entire UK economy has fallen off a cliff, nobody but the very richest will have the money to buy property any way.
