The London property ladder: are you kidding me?

Londoners earn more than citizens in other parts of the United Kingdom. And they spend a lot of time either moaning about how expensive property is in the capital (if they don’t own) or patting themselves on the back for being such fabulous investors (if they do own).

I earn more than the average Londoner and have done for some time. It still took some years of being super-frugal until I had a deposit large enough to lever myself to the hilt and buy a studio flat near Kings Cross when it was still all junkies, gangs and prostitutes. Given that property is more expensive than ever I wondered how different the savings calculus is for younger well-paid people today. (You know where this is going, but I’ve got some cool charts.)

The young well-paid people I have in mind just about sneak into the higher rate tax band. As such, they earn notably more than the median Londoner. And as a measure as to how low property aspirations are, I’m not going to pitch this young well-paid Londoner against the median London property. We all know that this wouldn’t be a fair fight and they’d never stand a chance. Instead I’m going to be pitching them against the property priced cheaper than 75% of all other London property (priced, incidentally, in line with my first flat).

I’ve got data only going back to 1997, which is fine for my purposes as that was the year I started earning.

The result is this graphic below:

London Savings

This shows, for a given year from which a higher rate taxpayer salary was drawn, when a lower quartile London property could be purchased for a given post-income tax savings rate (assuming that a 4X gross salary mortgage is also obtainable and obtained). So someone who started work in 1997 on a higher rate income (no, I didn’t get a higher rate salary in my first job), and who put aside 20% of their post-tax income could have bought a lower quartile priced London property after 12 years of saving. If they had put aside 25% of their post-tax income they could have had the keys after only four years. If they had saved 40% they could have moved in after only one year on the job.

I hope that by colour-coding it you will see quickly how things have changed over time. It basically backs up what any idiot knows: London is increasingly unaffordable not only for ordinary people, but also for higher earners.

Another way of showing a subset of the same data is to chart the number of years for which a higher rate taxpayer needs to save 30% of their post-tax income before the first opportunity arose to leverage themselves 4X into a lower quartile priced London property. I’ve slightly cheated on that last data point: the 2004 entrant still can’t quite afford to buy, but for the sake of the chart I’ve given them the deeds.

number of years London

So if you are lucky enough to own and you hear younger people complain about London property prices, it might be worth reflecting that they might genuinely have a harder time than you. And that you own your London home either because you are actually quite rich, quite old, or most likely both. The London property ladder now misses several rungs.

My take on RES Lecture: pursuing flexibility by way of inflexibility

I attended Chancellor Osborne’s RES lecture today where he outlined the three key goals he would take into the next parliament:

1. Enhanced financial stability, moving towards greater detachment of the real economy from asset price cycles;
2. Reduced debt-to-GDP;
3. Enhanced productivity.

These actually sound like quite laudable goals, motherhood and apple pie even (were they not time-based). I was persuaded that moving prudential supervision to the Bank, as well as establishing and empowering a FPC may have been helpful in moving towards goal number one (if less persuaded that HTB2 serves this end). Goal number three also sounds great – sign me up (and the factoid that London’s central line runs to a greater distance than that between Leeds and Manchester was terrific). But number goal two. Well, it sort of depends how it is done.

The Chancellor outlined a desire for lower debt not on a Rogoff & Reinhart high debt = low growth basis (although a nod was given in that direction). Also, although reducing the prospect of debt service costs rising are mentioned, the project does not rest on this aspect of debt reduction. Importantly for me, lower debt is advocated as a laudable end because it increases policy flexibility to respond to unanticipated future shocks that would otherwise rock the economy: debt levels could safely be raised without threatening the transversality condition. In other words, he wants dry powder. I like the sound of dry powder. That sounds like a good thing to want to have in the back of your mind if you are responsible for a large part of UK macroeconomic policy. (I suspend at this time doubt as to whether even much higher levels of debt on the part of a monetary sovereign would provoke a currency crisis, but see ad infinitum that this argument has merit.)

But the Chancellor has gone further than the aspiration for dry powder. He has committed to eliminate the budget deficit and achieve a budget surplus by the end of the next parliament. Furthermore, once he’s got there he plans there to be a new arrangement whereby a fiscal surplus must be delivered every year if the OBR green flags a few key (as yet unspecified) heuristic variables that signify ‘normality’. This is a commitment to tighten policy, seemingly come what may. It is the commitment to policy inflexibility in order to achieve policy flexibility. It is like the Bank of England committing to a five year path of rate hikes so that they can offer a credible response to economic shocks at the end of said period. It may be that such a policy tightening is absolutely warranted by unfolding economic conditions. But as Simon Wren-Lewis, Tony Yates, Frances Coppola and Chris Dillow have all blogged in recent days, committing to this tightening while monetary policy is at the Zero Lower Bound (ZLB) has the potential to deny a monetary response to a future shock. In summary, committing to fiscal tightening (policy inflexibility) to deliver fiscal policy flexibility at a time during which there is no monetary policy flexibility heightens the (I hope low) risk that the UK falls into a slump and policy rates are stuck at the ZLB.

Anyway, I got to open the questions which was a highlight of my day. I resisted the urge to look a complete idiot by inquiring as to the Chancellor’s understanding as to the nature of money for a monetary sovereign, purpose of taxation and debt issuance (which is a conversation I would love to have in private but the odds of which happening are exceptionally long). Instead, I asked whether the pursuit of lower debt levels and more dry powder while the Bank was still at the ZLB heightened the risk that the Bank would be trapped at the ZLB, and that as a consequence his first main goal would be undermined? I was thinking of Claudio Borio’s work here and here, as well as a bunch of Stein. Of course, my question was insufficiently well worded to elicit an answer going to the heart of the matter. Instead it was explained in quite a charming and kind-hearted way that the Bank was independent.

Marxist money & Bitcoin – quick notes

I’ve just finished reading Nigel Dodd‘s book ‘The Social Life of Money‘ and found it very interesting. The book is an examination of the idea of money from a variety of perspectives – starting with a flick through money’s myths of origin before looking at money through a Freudian, a Chartalist, a Nietzchian, a Simmelian, and a utopian lens amongst other. Some of these viewpoints were fascinating to me, some less so. In particular, I like that Dodd likes Simmel and keeps him pretty central to the enquiry, because Simmel is both pretty cool and under-read.

This isn’t actually going to be a book review. More notes-to-self regarding the outline of Marx’s ideas on money and credit that Dodd writes-up so nicely. Like lots of people I’ve read bits and pieces of Marx, and bits and pieces about Marx and his work. But I haven’t read Capital. I sort of assumed that Marx’s understanding of money was basically the classical Labour Theory of Value.

However, Dodd highlights Marx’s very social understanding of money: every owner of money “carries his social power, as well as his bond with society, in his pocket” (my italics). Which I think is interesting.

Furthermore, Dodd argues that there are six important steps in Marx’s account of money and credit (pp 50-58, which summarises pp49-57 if you’ve got the book):
1. Existence of money creates a gap between purchase and sale;
2. This gap means money can (and will) be hoarded;
3. Hoarding creates the need for Inside Money as well as Outside Money*, presumably because the alternative is massive deflation/ appreciation of money vs stuff;
4. Inside Money growth creates the impression that capital is self-expanding, leading to the formation of fictitious capital;
5. Existence of fictitious capital makes the cycle of bubbles and crashes inevitable;
6. Credit crunch always follows from the formation of a bubble, creating demand for Outside Money.

What is ‘fictitious capital’? @DrJoMichell tells me that fictitious capital is similar to prices as discounted future revenue streams. You pay today for tomorrow’s profits not yet realised. So, most capital markets I guess.

Points 1-3 came to mind when reading @pmarca‘s Twitterstorm yesterday, as well as @izakaminska‘s late-night tweets back. I have not really engaged in either Bitcoin Mania or kept properly abreast of FT Alphaville’s excellent BitcoinMania. In fact I have never thought about Bitcoin long enough to really rationalise a valuation. But I guess that the idea that a medium of exchange (BTC) embedded in a technology (the distributed block chain) that could reduce electronic transaction charges at point of sale should have value appears to jump from this Marxist expectation of hoarding in a candidate ‘money’ created without an Inside Money counterpart.

For what it’s worth, I’m not sold on Bitcoin being money. Although I can see it or something like it being a medium of exchange.

* Yes, I’m going to keep pushing this sensible terminology.