Blain: There’s A “Massively Larger Problem” In UK Homeownership

Authored by Bill Blain via MorningPorridge.com,

“All Political lives end in tragedy..”

They do say four little words can end any political career: “doesn’t he look tired?” 

The biggest mistake in Politics is to imagine it’s simply a game about popularity – it’s about effectiveness. Watch politics in action as consummate crowd pleaser like Boris Johnson makes a hash of it. He’s still great on the set piece annihilation of political lightweights like the current Labour leader at Question Time – but that’s a skill that has little use outside a parliamentary setting. Its not effective. When it comes to actually packaging effective government, and communicating his plans and strategies to the public, Boris has overpromised and underdelivered, while looking ill and ill-prepared. 

In contrast, Rishi Sunak is doing a startling and refreshingly competent job as Chancellor. He has none of Boris’ parliamentary theatrical baggage. None of the awkward poorly delivered jokes, and he doesn’t need to dress like a dishevelled clown to garner the attention of the crowd.  Yesterday’s stimulus package was another example of effective action – part of a swiftly assembled and adaptable approach to address the pandemic’s economic damage. 

It might look like Sunak is chucking the kitchen sink at the problem, but it also looks considered, pragmatic and effective. Step by step, Sunak is delivering the stimulus/rescue packages the economy requires to weather the virus. And he’s doing it well. How is this political new kid is coming up with genuinely smart initiatives? I am sure his treasury advisors deserve credit. 

It’s worth thinking about a moment… 

Sunak’s predecessor, ex-banker Sajid Javid was forced to resign because Boris’ consigliere, Dominic Cummings, demanded complete control of all his advisors. So how is Boris doing such a poor job when Sunak is doing so well – and Cummings is supposedly pulling all the strings? Perhaps Sunak is making such a decent go of the UK economy because Boris is still struggling to recover from the virus, and Cummings has been constrained by the consequences of his lockdown holiday back home in Durham? Or maybe the Boris/Cummings axis ain’t that great a combination after all? 

Sunak appears to be thriving because of the crisis, while it’s making Boris’ limitations more and more obvious every day. I’m told Sunak is impressing his fellow Conservative MPs. His stock is rising, while Boris’ star is descending. Watch that space.

Yesterday Sunak delivered a £30 bln kick-start package of measures to stimulate activity this summer. He gives a very strong impression he stands ready and able to do more – if the economy is still struggling in March when the stamp-duty holiday ends, then he won’t reimpose it..

A £1000 bonus to companies for each worker they un-furlough and keep on payroll will help stem a sudden loss of jobs later this year when furlough ends. Cutting VAT on hospitality and tourism, and the “eat out to help out” discount in August will make a terrible year merely bad for the sector – which employs a million people. 

Of course, I am willing to do my bit for the economy – in August I’m going to run weekly sailing days for clients. We’ll go for a sail, then go support the Solent economy via a “proper” lunch in the vicinity – Cowes, Hamble or Yarmouth! Let me know if you fancy a day out… and it’s a zero-cost option for compliance purposes, as you will be buying me lunch! (And.. remember… it will be half-price!)

The cut in stamp duty to zero for anything under £500,000 is an interesting decision. It will boost transaction flow and boost confidence. The surest way to make an economic crisis worse in the UK is to associate it with a fall in house prices. 

However, there is a massively larger problem in home ownership.

UK homes are expensive. Millions of Millennials and Gen Zs are being forced to rent because they can’t get on the housing ladder. But here’s the rub – they can afford to pay rents, which are invariably much higher than mortgage payments would be! 

The problem isn’t that houses aren’t affordable – the market failure is there is just no mortgage financing available! Mortgage lenders are stuck to the same 3 times salary and 80% LTV formula they used when interest rates were 12%! Traditional mortgage lending is going the way of the horse-drawn carriage.

We need a completely new approach to home ownership – which is something I’m working on now with some very credible partners. 

The lender will fund co-ownership where they own up to 95% of the property. The amount the borrower needs is effectively paid off as rent, and is set by what the borrower can realistically afford – and its a much higher multiple than mortgage backed purchases can offer. The deal is structured so the borrower doesn’t face a negative equity trap, but does pay an inflation linked “rent”. The borrower isn’t limited to only choosing homes from a pre-set stock, and treats the home as their own. If they want to increase their ownership stake or sell, they can. The deal offers investors a steady inflation linked return secured on the underlying property. 

If the co-ownership deal sounds interesting – please give me a shout. Historically UK residential property has always been a strongly performing asset. 

Meanwhile, there are a couple of issues with Sunak’s lavish spending plans. Yesterday I had a journalist wondering just how the country can possibly afford the upwards of £400 bln of pandemic packages. He’s expecting gilt yields to soar to double digits and sterling to collapse.

Why? 

The Bank of England is just as capable of yield curve control as any other central banks. Everyone is in same boat – QE Infinity is going to keep rates low. Problems could emerge in terms of FX if, as a nation, our credibility is absolutely blown… Inflation remains an issue – QE has created massive inflation in financial assets, but the risk the real economy remains deflationary – although we are keeping a weather eye on any signs of inflation returning. 

The second issue is just how much fraud has been going on around all the bailout/support packages. Its clearly been significant. It might be “timely” for the government to accelerate a couple of cases quickly to court and give the perps a show-trial with some pretty harsh sentences handed down. 

Last week a chum of mine was made redundant from his job running European M&A for an Indian conglomerate. He’s going to turn whistleblower. His Indian bosses, who have a few business interests in the UK, told him to go apply for each and every UK bailout package there was to get money from the government. My chum explained to him the money wasn’t on offer for the billionaire owner to repatriate back to India, but to support UK businesses and employment. The boss-man lost his rag, and my chum lost his job.