The Economy & the Residential Market: When will it return to normal? Autumn 2019

1. The Economy & theResidential Market: When will it return to normal?Autumn 2019 Dr Angus McIntosh FRICS 2019

2. The Economy & theResidential Market: Why has this happened? What happened to the Home Owning Democracy? The Divide: Geography, Age, & Income? Supply & Demand & Town Planning? Current Trends in Prices, New Build & Volume of Transactions

3. The Economy & the Residential Market: Why has this happened? The housing market reflects how we manage our economy Sir Winston Churchill Harold MacMillan Harold Wilson

4. Roehampton Alton Estate, 1950sNear Putney, London

5. John Maynard Keynes: 1936 The General Theory of Employment, Interest and Money The post Second World War guru of economic DEMAND management “We are ALL Keynesians now” President Richard Nixon 1971 (Republican President) Fell out of favour – it was suggested it “must have created government debt & high inflation” BUT world oil prices trebled then doubled in 1970s.

6. Milton Friedman: “architect” of Monetary Policy from 1973 onwards Control the SUPPLY of money via bank interest rates + Privatisation + Financial deregulation “We are all Thatcherites now” Peter Mandleson, former UK Labour Party Minister 2002 BUT Monetary Policy failed the world: Global Financial Crisis 2008

7. Death of Public Funded Social Housing since 1980s Monetary Policy adopted. Sale of Council Houses Source: ONS

8. 17th February - Northern Rock, UK Bank “nationalised” 17th March – Bear Stearns bankrupt & “given” to J P Morgan for $2 per share 8th September – Fannie Mae & Freddie Mac “nationalised” ( USA National Mortgage Residential Banks) 15th September – Lehman Brothers allowed to go into liquidation 8th October – China, USA, EU & B of E : ALL LOWERED INTEREST RATES 13th October – UK HM Government bailed out RBS, HBOS & Lloyds TSB 27th October – STOCK MARKET COLLAPSE - FT SE100 index hits low of 3,665 Global Financial Crisis 2008: 7 Days that shook the worldSub-Prime Housing mortgage crisis engulfed the world

9. 2008 2006 Investment Appraisal Expectation Reality Equity (Cash) Negative Equity on Debt Equity (Cash) 10% increase in price Construction Cost Mortgage Debt Finance Mortgage Debt Finance Land Value Land Value Private Housing Investment: Expectation and Reality 30 20 -10 80 80 Market Price 80 70 Construction Cost 20 -10

10. The Economy & theResidential Market: What happened to the Home Owning Democracy? the challenge for the “Millennials” “ Wages, Home ownership, Pension Wealth and Old Age….” The Daily Telegraph

11. Current Economy- Quantitative Easing: March 2009 …… into Banking system saved economy BUT caused asset prices to rise.- Austerity: hit lower incomes.- Investment: dramatic drop in public & private investment- Under Employment:– Very low productivity: Labour cheap, investment risky

12. Real wages rising faster than Inflation but still much lower than in 2008,

13. Household Debt: 1987 – 2011 one of the fastest rates of growth in the world over 25 years – only equalled by Japan

14. Keynes, Monetary Policy & Austerity • SHOULD WE ….Expand the private sector? • OR …… go back to a planned Expanded public sector ? • How do we get “Better Scandinavia quality public services – with - American low taxation & expanded private sector”? Paul Johnson – Economist @ IFS • “after 40 year experiment not working …….. Controlling economy via Central Banks & Interest Rates ” Martin Wolf FT • World Real Interest Rates NEGATIVE – been falling steadily since 1980s • Modern Monetary Policy – not worry about Budget Deficits, Finance Ministries (Governments) should take more control, Today NOT UNEMPLOYMENT but UNDER-employment – Use Regulations, Controls & Taxation ….. to encourage long-term investment. • (Control Supply of Mortgages – Social, Affordable & Private Housing)

15. The Economy & theResidential Market: The Divide: Geography, Age & Income?

16. Income Share of Top 1% of earningssince 1980s steady increase … but what about the Middle Classes & the 99% Monetary Policy adopted UK Source: Based on Gini Coefficient Analysis

18. Geography: Price to Earnings London – the highest. Central London X 15+

19. AGE:Old folk – wealthy ownersYoung folk - poor tenants Source: ONS

20. Income:

21. The Economy & theResidential Market: Supply & Demand & Town Planning? Privatizing the Demand for Housing has radically changed the structure of the market House of Commons report stated “250,000 pa new homes pa to meet rising demand” ………..BUT “500,000 pa needed to make up 35 year back-log”.

22. Economics of Supply and DemandMoving from D1 to D2 and S1 to S2 has significantly increased prices, but not supply (quantity) very much S2 S1 P3 P2 PRICE P1 D2 D1 Q1 Q2 Q3 QUANTITY

23. New Supply & Town Planning • 2013 Policy: Office & Industrial conversions without needing Planning Permission • Mayor of London & RICS suggest need FULL Planning Permission – unbalanced market & loss of workspace. • Retail Planning Permission subject to “Sequential Testing” favouring Town Centres. Why not Residential? • NPPF 2019 – focus on Brown Field Town Centres before Green Field (Green Belt) schemes. • “The Conservatives catch-22” housing policies. Source: The Economist August 17th 2019

24. New Supply & Town Planning: Privatized Economy to pay for infrastructureNew Roads, Bridges, Schools, Hospitals & Social Housing:Taxing projects pushed up prices even fasterand reduces new supply • BIDs – Business Improvement Districts – very local taxes • TIFs – Tax Increment Funding – new taxes fund projects • CILs – Community Infrastructure Levy – on new building • Section 106 - Town Planning legislation (planning gain) • SDLT – sales tax inhibits sale of expensive homes and encourages mortgage loans for improvements (NOT new build)

25. New Supply & Town Planning: Climate Change Crisis, Sustainability & Housing - Population of wild-life decreased by 60% since 1970 - Human population has doubled since 1970 • Last 5 years hottest on record • More Floods, Droughts, Extreme Temperatures • Housing more expensive to build & maintain – we must adapt to changing climate • Make all houses electric – and net zero carbon emissions • Electric car plug-in charge points for all residents • New focus on: Environmental, Social & Economic sustainability

26. British Columbia CanadaPerkins+WillsWorld’s tallest hybrid wood tower120 metres

27. Public Housing despite financial restrictions:Golden Square, Norwich100% social housing built to a Passivhaus energy efficiency specification by Norwich City Council

28. New Supply & Town Planning:- the upward spiral; a summary • Monetary Policy cut new supply of Public Sector Housing • Town Planning Section 106 increased cost of all Private Sector new construction • Building Regulations increased costs = smaller dwellings & poor quality in some schemes (Parker Morris Standards abandoned) • GFC and then Quantitative Easing favoured loans to existing assets, NOT new construction, further reducing rate of new supply.

29. The Economy & theResidential Market: Current Trends in: Prices, New Build & Volume of Transactions

30. Economy • Economic growth will remain very low: Global Trade Wars, BREXIT etc.. • Under-Employment will dominate with many on very low incomes. • Average real wage remain below 2008 but continue to rise. • Retail price inflation may rise slightly. • Construction costs may rise due to BREXIT labour shortages. • Government deficit under control, but private debt a major worry. • Interest rates at, or below, inflation globally. • Privatization will remain dominant as an economic policy for some while.

31. Prices: % Change pa. Since 2012 “Housing outlook worst for 20 years” BBC/RICS

32. Prices: 2018 – 2019

33. Prices: by Region 2018 – 2019

34. Help to Buy Chartered Institute for Housing (CIH) report found, the Help-to-Buy scheme “a nonsense.”

35. Housing Market has stalled: New Instructions & Stock per Branch Source: RICS

36. Age: Housing Tenure under 35 years1978-2018 Owned Private Rented Social Rented All Rented Source: Based ONS Data for England

37. Capital Prices Changes % paImprovement by 2021 Source: CBRE, Savills & JLL 2019

38. Rental Price Changes % paImprovement by 2021 Source: CBRE, Savills & JLL . 2019 NB : Some only forecast rental changes for London & South East

39. SummaryPrivatizing the market has changed the structure of the Demand versus Supply of the marketRadically changing the market back will be very challenging to achieveFreeing up Local Authority finance structures could help£8bn. pa subsidises Private Housing construction – EG: Rent to Buy less than £2bn. pa goes to Social Housing construction.£15bn. pa to assist Social Housing rents.

40. Summary • ALTERNATIVE INVESTMENT CLASS • Living Investment Income Generating Portfolios: • Hotels, • Private Housing & Apartments, • Social Housing, • Care Homes, • Student Housing, • Co-Living Apartments. EG: Pocket 38m. community

41. The Economy & theResidential Market: When will it return to normal?Autumn 2019 Dr Angus McIntosh FRICS 2019