Parents, Pensions and Mortgages …

Well, the latest news is that Nick Clegg – our deputy PM – has come up with a scheme for parents and grandparents to guarantee the deposits for their children to buy a home.

This could be a really bad idea for so many reasons.

I’m going to leave aside the obvious – that this excludes everyone without a nice big lump sum stacked up in their pension fund (a whole different – moral – issue) and just address this for the housing market impacts.

I’m also only going to touch on the suspicion that accountants and lawyers will already be working on complex, “tax-efficient” schemes to let the 1% save for their little darlings pied-a-terre using their (tax relieved) pension schemes. I’d guess these may supplement the 12,500 who the Beeb report says could “potentially benefit”.
(Oh, OK then, here’s an idea how that would work – pay £60k into AVC’s, claim back the 40% tax to gross up the fund to £100k and secure as a deposit).

The Problem …

For decades, UK families have pumped any increase in disposable income into buying a new home. This has inflated housing prices (sustaining the problem), and means that people are working harder just to stand still.

Recent globalisation changes, however, mean that middle class incomes have been squeezed, and that there’s little real prospect of income (or – as a result – house price) growth in the foreseeable future. And price inflation is still positive, so we expect a fall in disposable income.

And a number of sources seem to support the idea that the UK housing market is overvalued. The IMF estimates that this could be by up to 30% !

So why aren’t prices falling ? Well, interest rates are ridiculously low, partly as a result of quantitative easing. The liquidity intended to boost the economy is keeping this – admittedly important – sector of the economy afloat.

Foreclosure and repossession – as we learned shortly after 1990 – means properties sold at distress values, which drives the market down. So – while the interest cost isn’t causing pain, the banks will be content to not kick off another round of negative headlines by evicting large numbers of their customers.
Of course, that may change if they have to start declaring losses …

“Doing the Math”

House prices move to reflect the disposable income available to meet mortgage payments (I’m ignoring the effect of the private rented sector, here, for simplicity).

So if  I have £800/month available, and interest rates are 4%pa, then I can afford a mortgage of £800*12/.04 = £240k.

If interest rates go up to 6%pa, however, those repayments will go up to £1,200/month – and I’ll have to find another £400 at a time when salary levels are static.

And in this case, a household with the same disposable income of £800 will only be able to afford a mortgage of £160,000 (£800*12/.06).

So there would be a lot less people able to buy my house (it takes more than one buyer to create market competition), and prices will fall – as people either need to move, or as banks eventually start repossessing. The move to fixed rate mortgages – not such a component in the 90’s crash – may spread this over time, but supply-and-demand means that prices will fall (especially in a thin market).
Interest rate increases may still be a year or two away, but they will come. And they’ll come as a shock to those who’ve made long-term decisions.

For those who weren’t around at the time, take a look at the Nationwide graph of the House Price Crash. 1986-1990 saw the “real” price increase by 56% – from £88k to £129k. Then interest rates went up. A lot.
And repossessions started.
By 1992 prices had dropped all the way back to £81k.
Of course, they’ve been trending down again since 2007, but when the banks think we’ve hit the bottom of the market, then deposit percentages will come down.

Trying to get a mortgage …

… has become difficult for first-time buyers, as the banks are asking for 20% deposits – over £30k for an average property, more in London. The narrative tends to be that the banks are being overly cautious, but, in reality, they’re probably being not unreasonable in reflecting the increased medium-term risk in the overstated market.

Buy to Let …

… on the other hand, is doing very nicely. If you already have properties, then you can buy more (being selective, at the right price) by leveraging the (over-valued) equity in your existing portfolio.

Interest rates are low, and – as more and more people need to rent – residential rental rates are going up.

There’s still that capital risk down the line, however…

Pester Power ….

You’ll be using your pension, ffs, to guarantee a house price in an overvalued market. So if/when prices do get more realistic, then that Round-the World trip you’d got planned for your lump-sum payout ain’t going to happen. Even if prices don’t fall, the mortgage is still likely to be running …

Then there’s all the acrimony with your children, when they can’t afford the repayments any more, and can only sell at a price that covers the mortgage.

Even for those with reservations about this scheme, it can be difficult to say “No” to those you love. But this scheme could mean “Pester Power” endures until your beloved offspring are in well into their 30’s.

I’m a Homeowner …

… and I’m in favour of people buying their own homes. Although I like the idea I’ve an asset, my home is somewhere to live.
I dont have children, or a lump sum to claim, so I don’t really have a direct interest.

But – as with any market – you should buy when prices are low and sell when they’re high.
Remember house prices don’t always go up.
Remember that early in life, you’re likely to move more often – crystallising any losses.
Remember and that buying / selling property costs money (stamp duty, estate agents, solicitors just to start with).

History suggests that using schemes like this to distort the market in the medium term have historically been liable to end in tears.
Like the 120% mortgages once offered by Northern Rock – which could never be covered by the sale of the house in a “flat” market.

And I include the government’s “NewBuy” scheme in these distortions. This offers a 95% mortgage to people buying newbuild properties. But, of course, once you move in, it’s not a newbuild anymore.
So if you need to sell, then your buyer can only get an 80% mortgage. Alternatively, they can still get a 95% mortgage on a “real” newbuild. Probably even for an identical house on the same estate. The payments may be higher, but the deposit isn’t the constraint.
And that’s without recovering the premium charged for newbuilds – together with the carpets, kitchens etc. that often go with the deal.
So this may be good for the construction industry, but it’s not necessarily a good idea for their customers.

The UK housing market over the last 30 years is littered with examples of housing equity wealth being stripped – from endowment mis-selling to HIPS. Now, with all the equity stripped out of housing, a new scheme turns up to pump more money into this mostly non-productive sector – by stripping out pension provisions (which are, apparently, already inadequate).

This may be suitable for some, but if you go for this scheme, make sure your eyes are open.

I’m not a financial adviser, and you shouldn’t make personal financial decisions based on this article. Seek independent qualified advice before making important financial or life decisions.

“The Markets won’t like it …”

If the influence of the Murdoch empire is truly a thing of the past, then there’s one remaining area of unelected influence. And that’s an influence over the whole world economy. The Free Markets.

Now, I used to believe that the market was a random interaction of buyers and sellers, striking a price. And that probably was – to some extent – the case when I did A-Level Economics a long time ago. Before computers worked as quickly as they do now.

But the “Free” bit (“Free” sounds good, doesn’t it ?) is the bit that’s misleading. “Free” in this context means “unregulated” – and we know how well that’s worked out. And what we’ve actually got is a game of Monopoly. Or Texas Hold-Em. And in the same way that all of those games end up with only one person winning, any free market will ultimately tend to a monopoly. Especially when it’s nothing tangible, or capable of differentiation – such as capital.

So Return On Investment  becomes the only acceptable criterion (apart from the Right to the Pursuit of World Domination). The effect of organisations like the World Trade Organisation ensures we aren’t allowed to choose companies that invest in our own nation. We can’t identify companies that make products ethically. Or those that don’t bribe police and blackmail politicians.
Because all that matters – to capital – is the exchange of money or goods and services. And growth in that exchange.

We can see that in the UK and the US (at least), the rich are getting richer. But everyone else is being reduced to minimum wage – the middle class is being destroyed.

And the market in capital is now dominated by a few players. So there isn’t just a consensus of capital providers; one or two of the big players can move the market enough to cause attention – and start a trend.

Now even Charles Moore in the Telegraph admits that he has his doubts. As the Murdoch scandal unfolds, it becomes more and more clear that the individual citizens – to whom governments are supposed to be accountable – have very little collective say when compared a foreign-based conglomerate, whose agents appear to have been willing to blackmail MPs and bribe police.

(An aside on Murdoch : Vince Cable – who, to his credit, voiced (albeit unintentionally) his opposition to Murdoch – spoke of this as “robust lobbying” when interviewed by James Lansdale on Andrew Marr’s show. While I’m sure that this is nowhere near on the scale of lobbying in the US, it still implies a proportion of influence perhaps denied to the people of the nation in whose name our government claims to act.)

So I’ve a lot of sympathy with the people of Greece who’ve been protesting. Not necessarily because their hard-work ethic has been betrayed, but because having fallen into the trap, they’re going to be wiped out, financially.
And after they agreed to the bailout, the rating agencies cut their rating. Effectively meaning that their interest rates will increase – and (in effect) just ratcheting up the deficit all over again..

But it was the markets that were discounting the probability of default. So, one could argue, it’s those who’ve taken that risk (the sovereign debt bondholders) who should suffer the pain. That’s the whole idea of a “Free” market, isn’t it? And as Robert Peston notes, the value of the debt is probably at around 50%.  But they’re only taking a hit of 21% – with the German workforce apparently taking up most of the difference.

And Lo! the markets were apparently pleased, because the EU support fund also increased. That effectively means that one of the players has topped up his stack. So there’s more to win.

But there’s a pattern to these things – and it was pointed out that the same happened in South Korea and Indonesia in 1997. The initial influx of funds was wiped out, as the bondholders took the money and ran – without giving the capacity to rebuild the economy. So a further bailout was needed, resulting in negative growth and a determination never to depend on the IMF again.

I think we can expect Ireland and Portugal to be targeted again after Greece settles down a bit.

And this does affect the individuals. Any government that tries to attract investment capital by declaring it’s country “open for business” is probably selling out its citizens. It’s sending the message that the welfare of its citizens, their conditions of employment, pensions and public services are all negotiable.

People are starting to understand this at a visceral level, although maybe the vocabulary isn’t there yet. It’s possibly rooted in the same intangible dissatisfaction that resulted in the Arab Spring. And it happens when a ruling class (in the broadest sense) becomes so used to manipulation that it becomes arrogant and complacent about the response it evokes in ordinary people.

I’m not sure that many politicians have recognised it yet …

The Hottest Ticket in Town ..

“Mr Murdoch – at what point did you find out that criminality was endemic at the News of the World ?”

Tom Watson’s question (on the lines of “when did you stop beating your wife ?”) was one of the highlights of the Media, Culture and Sports SubCommittee meeting for me. Leaving aside the foam pie and Wendi’s impressive defence. One of the most fascinating days (for me) was played down by many of the media analysts – who were perhaps expecting more dramatic exposées and cross examination.

Because of everything else that’s scheduled, that was never going to happen.

But this was Round One. There was a lot of sparring, and – as the John Whittingdale (the Chairman) said later – it was important to get this information on the record. Because there’s going to be a long enquiry, there’s still a police investigation running, and probably a few court cases. So that position has been set down, and it’ll be difficult to change it (unless, presumably, there are more solicitors with document stashes waiting to be discovered).

Those same analysts were pointing out that there wasn’t much information gleaned by asking Rupert questions he couldn’t answer, and characterised it as a failure. I couldn’t disagree more. It clearly showed that the person responsible for the Corporate Governance of News Corp. didn’t know what was going on. People let him down. People he trusted – or people they trusted – didn’t pass on the message.

I wrote on this subject just over a week ago, but I don’t think most of the journos have cottoned on yet – they’re looking only at the words, rather than at the overall picture that’s painted.

It looks like this is already delivering results, as Jeremy Hunt says he’s “shocked” that people at the top didn’t know what was going on. That’s likely to be taken into account when Ofcom review the “fit and proper” status.

And that’s the thing about Corporate Governance. you’re supposed to have systems and processes that force these things up the line. And the significance of the Gordon Taylor pay-off wasn’t in the amount of that settlement alone – it was in the risk posed to the organisation from all of the other – several thousand – claims that were still in the pipeline.

That’s a risk that could have run (at that rate) into hundreds of millions of dollars. An unquantified potential liability that (perhaps) should have been reported in the company accounts.
And the Chairman knew nothing about it.
Or about the criminal activities which – it is alleged – had been rife throughout the paper.

Now, NotW may not form that great a part of the News Corp. empire, but it formed a significant and influential part of the UK media, so we’re entitled to expect it to be run properly. Or why should we entrust its owner with BSkyB – our biggest broadcaster ?

Taxing Questions

The other question I found interesting came from Jim Sheridan MP. He asked if the witnesses were were aware of any investigations into News International by the SFO. Or the FSA. Or HMRC. I suspect that it’s the last one that’s of particular interest.

Of course, it has been reported that NI has arranged its tax affairs so that it doesn’t pay tax in Europe. But that might not be the point – the point may well be that PAYE wasn’t deducted from the bungs to coppers and sleuths. This is more “fit and proper” stuff. And – as I wrote in that last post – it’s the stuff that put Capone away.

So I wouldn’t be surprised if Wapping is visited by a plague of Inspectors in the next few weeks.

Who’s to Blame ?

Fair Play to Rupert for coming back to finish the session.

Louise Mensch asked whether questions were being asked in the other News Corp companies. Apparently not. So … it’s being taken seriously, then.

“Have you considered suing Harbottle and Lewis”. “That’s a matter for the future” (James). Of course, if the solicitors were sued, they may find documentation to throw the blame straight back.
James said that the company’s confidence rested on 1) the Police ceasing their case 2) Harbottle and Lewis and 3) The PCC decision (SERIOUSLY ?)

Now, I’ve not been able to track this down on the rerun, but I seem to recall Rupert being asked who he thought was to blame. My recollection is that he blamed competitors for stirring things up.
If I’ve remembered right, that suggests that – at heart – it’s the disclosure he resents, rather than the original acts.
He doesn’t understand that he should have processes which drive these things to the attention of the News Corp. Board.
And ultimately, that may be the sin of omission that leads to the collapse of his UK business – including satellite broadcasting.

News International and Corporate Governance

Just a warning – this is going to be one of the duller, less sensational articles on this topic. But try and stick with me – the tax evasion charges that sent Capone down were technical.

Coming from a background in the banking sector (which is still reviled on a regular basis by “professional” journalists) one thing that has amazed me is that News International executives could claim that they had no knowledge of the activities of their underlings.

The reason why this seems so wrong is that News Corporation is a public company, quoted on the NASDAQ stock exchange. As such, investors would be entitled to expect the organisation’s management to have implemented systems of control.

However, such systems appear to have been totally lacking, and for an industry that is leaning on the importance of press freedom as a way of holding governments to account, that’s unacceptable. As Bob Dylan said “To live outside the law, you must be honest”. The impression we’re building is that the various editors of the News of the World (and possibly other titles in the group) were concerned only with whether there would be a libel action. Which – like any other court case – would be bought off out-of-court. You may recall the statement from James Murdoch:

“The Company paid out-of-court settlements approved by me. I now know that I did not have a complete picture when I did so. “

Me ? I’d be asking about whether he discharged his duty as an officer of the organisation. Corrupt or incompetent ?

National Treasure ?

I’ll just digress for a minute …

The last issue of the News of the World has been met with much nostalgia (much of it self-generated), glossing over the seedier “achievements” of this rag. I never bought a copy, and I don’t buy this.

And yes, it’s unfortunate that 240 journos have lost their jobs, many of whom may not have been implicated. But mine was one of 40,000 jobs (either gone already, or on the way) to have been lost from the organisation I worked for. Most of whom also worked hard, and weren’t to blame for the mistakes of corporate strategy.

And let’s get it clear. NotW didn’t die because of the Guardian or the BBC. It didn’t die because of MumsNet. It didn’t even die to protect Rebekah. It died because Murdoch wants to secure BSkyB. Those may have been the messengers, but the message was that the title was toxic – ordinary people were repelled by the actions of the organisation. Paul Mason’s article explains that very effectively.

Anyway, this sort of thing happens in the free market. It doesn’t come with a fairness option. Get used to it.

And let’s not kid ourselves that even under the current editor, all of these guys were soft and fluffy – read this story in the Shropshire Star.

Now, back to the main topic …

Corrupting and Corrosive

As I write, Ed Miliband has been running a press conference, in which he talks of the “systemic” and “cultural” failings of the organisation. This analysis resonates with my own feelings.

The influence of the Murdoch titles over the last 40 years has had a corrupting and corrosive impact on public life over the last 40 years. And the problem is that those who’ve grown up with that dynamic as the status quo can’t see a different world – one where a politician doesn’t need to fear that retribution for upsetting Murdoch or his underlings will be visited by humiliation.

And the culture of bullying and abuse of power wasn’t limited to “big boy” politicians, however. It was there in the workplace as well – as the massively Twittered “Harry Potter” incident evidenced.

Through all of this, there was no sign that they had the capacity to look in the mirror. These self-appointed and (to all intents and purposes) unregulated “guardians of freedom” would rail against an unelected judiciary (who were – as a result – less subject to bullying) without a hint of irony.

I’m sure that one thing that’s upset people is that there’s been virtually no sign of remorse or contrition from the organisation or its executives. No sign that they understand how ordinary people see this arrogance as compounding the crimes.

The historic use of threats and bullying (and some are – reportedly – still being made), of spin and misinformation, of admitting to the bare minimum, only after it has already been revealed – all of these suggest that they just don’t get it. They don’t understand why people are upset. They still think it’s just about damage limitation and message management – because that’s all they understand.

Regulation

The politicians keep backing off from this, but if Her Majesty’s Press wants to claim exemption from government interference as “The Fourth Estate” – with a duty of calling the government to account – then it has to be able to show that it exercises that duty responsibly.

However, it’s shown time and again that it won’t do that, and the PCC is still wheeling out excuses. Miliband’s assessment of them as a “toothless poodle” isn’t going to surprise too many…

There needs to be statutory regulation, with real powers. That framework should be “endowed” by – and answerable to – Parliament, as opposed to being under the control of government. OfCom seems to represent a suitable model, but the journos seem to keep trying to push our attention elsewhere …

Or maybe there’s a role for the Upper House here …

The American Impact

As I noted, NewsCorp is quoted on NASDAQ, and so is subject (together with all of its subsidiaries)  to US law. And one of the most interesting ones is the Foreign Corrupt Practices Act (“FCPA”) – which prohibits US organisations from bribing officials of foreign countries (from where they are, the UK is one of those). Interestingly, the UK has just caught up with the Bribery Act 2010 – although that won’t be retrospective.

The Telegraph has picked up that the impact of this could be enormous – potentially imposing a massive cost and effort on the whole of NewsCorp. If stories about 9/11 victims being hacked gains traction in the US, then the administration may reluctantly (heh) have to take a long, hard look at Fox News …

So when the NotW hacks paid off police and – as has just been announced – Royal Protection Officers, they just may have created a world of hurt for the parent company.

Fit and Proper ? BSkyB ?

Although he dominates the organisation, it’s NewsCorp that’s bidding for BSkyB, not Rupert Murdoch. So even Rupie himself (in theory) doesn’t necessarily come into the equation.

But the way that the corporation behaves, it’s culture and (on the most generous interpretation) the lack of control and management structures that you’d expect from a major corporation, should raise major doubts as to whether anyone can be convinced that their corporate structures and culture give us confidence in any assurances they may have made about (the key test of) plurality.

[Edit – adding conclusion]

Particularly as those assurances come from a company whose officers apparently:

• Lied to the PCC
• Misled Parliament
• (possibly) Lied under oath – in order to convict a man of perjury !

IMF Review of the UK Economy

I’m sorry to keep banging on about this, but much of the deficit reduction pain would be mitigated if we were actually growing our economy. That would mean more taxes, less unemployment and less benefits. Although when it all goes wrong, we can expect our Chancellor to be surprisedly holding up his hands claiming all of this was unforeseeable.

Now all of this is very fraught. It’s a bubble that depends on confidence. So the journalists are telling us that as soon as the existence of a Plan B in admitted, then Plan A is dead. All of which means that we need to read between some especially wriggly lines when looking at reports.

The BBC has been airing a fascinating series by Adam Curtis – “All Watched Over by Machines of Loving Grace“. Which reminded me that the chief  function of the IMF seems to be to safeguard the investment of international bondholders – often at the expense of the economies of the individual nations.

And although the film highlights this in the context of the Far East crashes – particularly the Indonesian riots of 1997 – it’s easy to see the patterns repeated recently in Greece, Portugal and Eire. An initial “bail out” results in a capital exodus, and more assistance is then required. The taxpayers then have to pick up the tab.

A quick aside:

• There’s never actually been much risk of nations defaulting – it’s just another excuse to charge higher interest.
• Maybe the bondholders should carry some of the risk of the free markets they push us all into.
• Ironically, one of the benefits of debt reduction may be that we get out from under this tyranny – but I bet we still continue to borrow money
• According to Peston (from memory), our average debt repayment is 13 years. So there is no real reason to rush the cuts. 

But I digress … The IMF report is apparently supportive of our government’s deficit reduction plan. But once again, we’ve a downgrade of a growth forecast – down to 1.5% from a hardly spectacular 1.7%. But it’ll be alright “in the Medium Term”. Jam tomorrow, then.

Similarly, we’ve got inflation at 4%. And the IMF think this will return to 2% by the end of the year ( presumably as the VAT increase drops out). However, as we’re getting almost 20% increases in Gas prices, and world food prices aren’t reducing I suspect that this might be optimistic.

The IMF is keen not to rock the boat, but as the BBC report points out, the previous assessment of our economy as “on the mend” has been revised to “repair … is underway”.

Actually I’m not on my own here.  A whole bunch of economists have written an open letter to the Guardian suggesting that these policies might need a bit of tweaking. And Stephanie Flanders seems to be keeping real on her ‘blog.

Meanwhile, lots of the cuts have still to be fully implemented, and we’re also hearing that manufacturing output is dropping and confidence in the economy is down to 10%. Retail spending is falling. All suggesting that this experiment in reviving Thatchernomics is whirling us further down the plughole (just as a reminder – it didn’t work the first time).