Time To Bank The Banks

THURSDAY, AUGUST 05, 2010

Time To Bank The Banks

Taxpayers could use some of that

The banks are back in the serious money. Hurrah!

Well, hurrah if you're not a saver being ripped off on your bank deposit account, with near-zero interest rates in the face of 5% inflation. Or a borrower paying through the nose for a meagre sliver of credit. As long as you're a banker, you can afford a very loud hurrah indeed.

But bank shareholders, surely they ought to be cheering as well. And that includes us taxpayers, because we're still sitting on all those bank shares.

Just as a reminder - in case you'd somehow forgotten - we currently own not just the Crock, but also 27.6 billion (yes, I did say BILLION) shares in Lloyds, and an astonishing 90.6 billion shares in RBS.

Hurrah!

The question is why aren't we selling them yet?

We've blogged this before. Not only does the government have no business owning commercial banks, but the price of these things has moved right back up again. Indeed, Lloyds is now back above our 72.2 pence average purchase price - we're actually in profit!

Tyler's fag packet says that at current prices our stakes in Lloyds and RBS are worth £68bn. Money we could use immediately to reduce our gigantic national debt.

What's that?

Hold on because bank share prices are bound to head even higher?

My friend, if you feel that way, my strong advice is to remortgage your house and family and snap up some RBS shares while stocks last.

The truth is that nobody has the faintest idea where bank shares are heading. And governments should not be in the business of punting around in the equity market with our money.

********

Tyler is now taking a few days break.

But as a parting shot, let's just note the public appeal to help victims of the catastrophic floods in Pakistan (you can donate here).

Obviously we all want to help. But most of all we want our government to get emergency relief out there fast.

Is DfID up to that?

Why does it always seem that serious help takes so long to organise and arrive on site? Disaster zones seem to be crawling with western TV reporters long before the official relief effort finally gets into gear.

As we've blogged several times, the vast bulk of DfID's £7bn budget goes not on humanitarian relief of the kind they're dying for right now in Pakistan, but on economic development where the evidence of success is virtually non-existent (eg see this blog). The priorities seem entirely wrong.

It makes Tyler angry.

WEDNESDAY, AUGUST 04, 2010

Council House Sales - Another Taxpayer Rip-Off

Tyler will have bored you many times with his cigar-puffing reminiscences of growing up on a council estate in the 50s. Deprived? Of course not - back then, a quarter of all families lived on council estates. With another one-third renting privately, for the bulk of the population owner-occupation still lay well into the future.

Today, the percentage who live in council rented property has fallen to just 9% (England - facts here). But add in the percentage living in other social housing (Housing Associations etc), and the total is 17%.

Which is a bit surprising. Given that since 1979, around 3 million council and social houses have been sold to sitting tenants under the right-to-buy scheme (and note this wasn't all down to The Evil Tories - the sales continued under Labour).

What that means - and I do apologise if this is the bleedin' obvious - is that councils and other tax-funded landlords have built more homes to replace those they've sold. In broad terms, across the UK, they started in 1979 with 6 million homes, and now have 5 million. Given that they sold 3 million, that means they built 2 million.

In effect, the taxpayer has been funding a speculative property developer. The developer - S Shopper Homes plc - has built millions of homes in order to flog them off later.

Unfortunately, unlike property developers in the real world, S Shopper Homes has sold its properties at below market prices. Well below market prices. Sitting tenants have been allowed to buy at considerable discounts.

Over the last decade, the price discount in England has averaged 37%. Which works out at nearly £11bn in cash terms. And going back, discounts were even higher. As recently as 1998-99, the average across England was an astonishing 50%.

We haven't been able to track down all the data going back to 1979, but on the basis of what we know about the last decade, we estimate that the total cost to taxpayers of these discounts in today's money has been well in excess of £50bn (ie roughly one-fifth of the sales took place in the last decade, and they cost us £11bn... plus, the historic discounts were higher).

Now, we do understand that the original Mrs T had other reasons for flogging off council houses. And we do understand all that stuff about a property owning democracy. But what we want to know is WTF did S Shopper sell these things at such huge discounts? It's our friggin' money.

And there's something else about council house tenancies as well.

Whether we like it or not, there are some people who just aren't capable of funding and/or managing their own accommodation. Sure, we can let them sleep in a ditch, or reopen the workhouses, but realistically, the Major aside, most of us would not sign up for that. Realistically, taxpayers are are on the hook to house them.

The real choice is between funding them in private rented accommodation - with all the expense and problems we blogged yesterday - or putting them into social housing of some kind.

But we need to remember one very important thing. As Cam said yesterday, allocation should be on a needs basis. Social housing must be seen as part of the welfare safety net, and there can be no right for a tenant to occupy a particular house for ever.

And in future, there can definitely be no right for sitting council tenants to buy out the taxpayer at a knock-down price.

TUESDAY, AUGUST 03, 2010

Ripping Up The Rent Book

Good news for landlords

One element of the welfare bill that's got totally out of hand is Housing Benefit (HB). During the Labour government, it soared by 35% in real terms, and this year it will cost us well over £20bn.

There are currently 4.7m households receiving HB, which is getting on for one-in-five of all households. Or to put it another way, every family paying for its own housing is also paying a quarter of another family's housing costs.

In some areas it's even worse. 30% of all households in inner London are on HB, and in Hackney it's an absurd 43%. This chart shows the 11 Council areas above 30% (Aug 2009):

So what are we going to do about it?

In the June budget, George set out his plan. First, he imposed a fixed maximum cap on the reimbursement of housing costs, irrespective ofwhere they are (£400 a week for a four-bedroom property and £250 a week for a two-bedroom home). Second, he announced that from 2012, the maximum reimbursable rent for each HB local area (there are 153 of them) will be reduced from the median of market rents for that area, to the 30th percentile, and will thenceforth be uprated annually in line with the Consumer Price Index, rather than market rents. He reckons those changes should eventually save £4.2bn pa.

Needless to say, he's picked up some serious flak. The left-wing press warns:

"Thousands of people will be made homeless as public spending is slashed because of a dangerous combination of higher unemployment, increasing repossessions and cuts to housing benefit...

The retired, disabled people, carers and working families will be hardest hit and charities predict it will trigger the steepest rise in families living in unsuitable accommodation and individuals sleeping rough since the 1980s.

Those in London will be the worst affected, forcing an exodus of poorer people from the centre to outer boroughs... The homeless charity, Shelter, said that some households in London currently receiving housing benefit will have to find a shortfall of up to £1,548 a month to meet their housing costs. The result, say opposition MPs, will be "social cleansing" of poorer tenants from richer areas."

"Social cleansing" - a slogan worthy of the great Bishop Snow himself. To be frank, we've never been able to understand why poor families should expect to be housed in rich areas at public expense. Apart from anything else, doesn't the left's position on equality say we're all much happier if our neighbours are not miles richer than us?

But setting that on one side, why does the left automatically assume HB recipients will be rendered homeless or otherwise cleansed? Why don't they consider the possibility that many landlords may be forced to cut the rents they charge?

Because what we have here is another classic escapade of the Simple Shopper. The very same S Shopper who managed to bungle us into the ludicrous GPs contract and all those overpriced PFI contracts (see many previous blogs on both). And what he's done here is to bumble his way into the private property rental market and spray huge amounts of our money in the direction of Britain's buy-to-let landlords.

A recent article in the Investors Chronicle gives a good flavour of how it has worked out:

"Nathan is an experienced investor who bought a portfolio of five terraced houses in Burnley in Lancashire five years ago, paying around £35,000 in total. "The houses are well built. The problem is the tenants aren't," he says. "I didn't buy for capital gain, I bought for income. In this area, everyone is on housing benefit, and there are guaranteed rents of £65 a week." In theory, this adds up to an astonishing gross rental yield of 48 per cent...

...Graham owns a substantial portfolio of property in the north east, and says he's been letting to tenants on benefit for donkey's years. "It's like being a second hand car dealer," he says. "The mark-up is high, but it's the shitty end of the stick."

In problem neighbourhoods, it is possible to buy houses for as little as £6,000 from desperate sellers. Graham claims he can receive up to £3,000 a year in rent on these houses from local authorities - a 50 per cent return on equity."

Now gross rental yields of 48% and 50% returns on equity are telling you something. They're telling you someone is paying through the nose. And there are no prizes for guessing who. The S Shopper has come into the market with a fat wad of cash and pushed rents far above where they ought to be.

Consider the facts. As we noted above, since 1997 the cost of Housing Benefits has increased by 35% in real terms. Yet the number of HB recipients has hardly changed - 4.7m now compared to 4.6m in 1997. Which implies that most of the increase has been driven by a sharp rise in rent levels.

So what happens now George has grounded the Shopper? Now that he's imposed his own lower rent levels over the heads of the landlords?

Well, the landlords are naturally saying it could mean the end of their participation. After all, they're dealing with some pretty scummy tenants, and the least they deserve is a sensible financial return. As one of them explained to the Investors Chronicle:

"Every now and then you get a nasty shock. Drug dealers operating from a property; someone found dead after ten days; a tenant who hacked into the attic and sold the hot water tank for scrap metal. The RSPCA once boarded up one of my properties as the tenant walked off, and left behind a menagerie of reptiles...

You don't know the tenant has moved out until the housing benefit stops, then you find out your property's been empty for 30 days and invalidated your insurance. If a tenant trashes the place, you have to fork out £3,000 on magnolia and new carpets."

All of which sounds pretty bad.

And as the always instructive Mr S and M points out, the economic research in this area confirms that it is the landlords who will suffer the biggest hit. The evidence says that between half and all of the cut in rental subsidy ends up falling on the landlord not the tenant. In other words, rents fall pretty much in line with the cut in subsidy - just like George intends.

The question then is how much will the supply of private rented housing to those reptile owning HB recipients shrink in response?

And the answer is we don't really know.

But set against returns of 50% on equity, our guess is that rents could fall quite a bit before from current levels before we hit a big fall in supply.

George is quite right to rip up the rent book.