Flat market

Have we overdone it with city centre flats?

Or apartments as they are often called in the sales literature.

Arrive at almost any railway station - from Norwich to Nottingham - and you can't help but be struck by how many new blocks have appeared.

But there's some evidence the flats are not selling.

The tallest residential block in Britain is Beetham Tower, the iconic Manchester building that opened less than two years ago. Some colleagues of mine have found fifty of the flats in there are now on sale - getting on for a quarter of the 220 built.

The bulk were bought by investors hoping for capital gain. They can reportedly still get tenants to rent them out, but capital gain will be harder to come by if they try to sell them with so many others doing the same thing down the corridor.

In Leeds too, the situation is said to be bleak.

Estates Gazette has reported that a thousand flats lie empty - but many thousands more are in the pipeline to be built. One can only assume most will never be constructed.

And you don't have to go to big cities to find stories of the flat phenomenon going too far.

In Colchester, one surveyor told the latest RICS lettings survey that there are signs buy-to-let investors failed to do their homework; they believed unrealistic valuations. Investment clubs have been a problem, and surveyors acting for them had better watch their backs, he said.

Block of flatsAnother interesting piece of evidence is that housing associations are reportedly being offered new flats for social housing - at discounts of about 15%. A reversal of the principle of council house sales.

All in all, flats have been where the property market action has been most extreme over the last decade - prices have risen faster there, speculators have invested more in them, homebuilders have constructed them in ever larger numbers.

It suited the authorities, who produced numerical targets to build more dwellings…never mind how large they are.

And there was an apparent economic logic given the growing number of single person households.

Alas, it seems that the new singles are not urban youngsters enjoying a latte on the balcony as depicted in the hoardings. They are elderly widows and divorced dads, who aspire to having a family home with a garden.

And now the market seems to have turned against flats more ferociously than other types of housing.

It's patchy and anecdotal for the moment and local conditions certainly matter.

But when the dust settles watch for blame to be attributed by some people who will have lost money…in a market not so much flat, as falling.


Migrants go home

This title is not a BBC correspondent adopting a slogan the British National Party might use. It is a statement of fact.

Migrants go home, as well as arrive in our country, with consequences for the economy.

And at this conjuncture where many things we’ve been used to for the last decade are now moving into reverse (most notably house prices), it’s worth asking whether inward migration from central Europe is about to turn as well.

The starkest reason to think it might is that the Polish zloty has risen against the pound by 20% in the last year.

The earnings you can make here don’t look nearly as impressive to your friends and family back home anymore.

In addition, wages in Poland are rising fast: 7% in 2007 (with inflation at 4%).

So overall, UK wages relative to Polish wages measured in Zloty, have fallen by a quarter.

That’s a pretty big change in 12 months.

Polish adverts in a west London shop windowA second possible factor that will begin to bite, is that the UK construction boom has probably peaked. The latest data is inconclusive, but new construction orders in the second half of 2007 were down on the first half.

Anecdotally, it is demand in construction that has fuelled a good deal of the central European migration.

Reliable and up-to-date statistics on inward migration are hard to come by. The data we have on accession country workers registering here suggests the inflow peaked in the second half of 2006; but this gives us no bearing on the outflow at all.

The Times reported earlier this month that the Polish embassy had noted that a “tipping point” had been reached, with more Poles returning. But so far, the evidence is mainly anecdotal.

If it is hard to know whether the exodus is underway, it is even harder to assess the consequences.

The City consultancy, Capital Economics concludes that “potential GDP growth is likely to slow gradually from the recent rates of 3% or even higher, to more like 2.7%”.

That is undoubtedly possible. But it is worth thinking about the effects in more detail.

And surely the labour market is where to look. If the economy slows, outward migration might soften the impact. As the demand for labour goes down, instead of unemployment going up, the supply of labour might adjust.

In that sense, one could view migration as a buffer that has softened the inflationary wage pressure of a boom, and which can now soften the labour market effect of a slowdown.

It would almost be as though UK plc had chosen to hire temps for a few years, to see it through a rather busy period.

The outflow of workers might have less benign consequences too.

If migrants have held wage inflation down, an absence of migrants might drive it up, just at a time when there is a threat of inflationary expectations rising.

And away from the labour market, think about house prices! At a time when they are falling, a reduction in migrant numbers might intensify the difficulties faced by buy-to-let investors, and the market as a whole.

This is still in the realm of speculation.

In reality, it’s far too early to call an end to the accession migration boom. And it is undoubtedly the case that many of the recent wave of migrants will settle in the UK permanently.

But one can reasonably hypothesise that if migration reverses, the things that we have associated with migration over the last decade, will do so as well.


Banking parallels

Nationalising a bank is a big deal. But it is not unprecedented.

It is worth reading the history of Continental Illinois, nationalised by the US Federal Deposit Insurance Corporation in 1984.

You can get the full story from the FDIC itself here (pdf link). But let me give you a potted account.

The Bank was the biggest in Chicago and the seventh biggest in the US. It had grown very fast and had received glowing approvals from Wall Street observers in earlier years. (Not dissimilar of course, to Northern Rock which had, for example, been rated a “buy” by Deutsche Bank analysts less than two years ago when its share price was around £11).

A few voices had suggested that Continental Illinois was in fact simply engaging in an ancient banking technique for achieving short term growth – that of taking bigger risks than more cautious rivals would countenance.

Problems first surfaced in 1982 with the collapse of Penn Square Bank in Oklahoma. Continental Illinois lost more than any other bank, having participated in careless oil and gas loans.

Its share price dipped and its credit rating was downgraded. As a result, it became dependent on tapping the foreign money markets for its financing, borrowing short term to keep costs down.

It was not a bank that had secured a very large retail deposit base.

By the spring of 1984, problems in Continental’s loan book were mounting and rumours surfaced of problems. On May 9th, a Reuters journalist asked the bank whether it was true that it was on the road to bankruptcy (the suggestion was dismissed as “totally preposterous”). Foreign depositors didn’t wait to find out how preposterous it was, they started to withdraw their cash.

Even the Chicago Board of Trade Clearing withdrew $50 million and quickly the bank became victim to an “electronic bank run”.

The Federal Reserve ended up supporting the Bank through its “discount window”, but more support was needed.

On May 17th, the FDIC announced that all deposits at the Bank would be guaranteed. Extra federal support was provided, and some assistance from other banks too.

While this bought time, a permanent solution was sought.

The preferred option was for a private takeover of some kind, but it could not be arranged.

In the end, the FDIC itself constructed a complicated arrangement that involved it taking 80% of the equity, with the bank continuing to operate.

You don’t need me to tell you that there are some parallels to Northern Rock here: the bank run, a deposit guarantee, a delay while private solutions are sought, and nationalisation.

And that sequence is not fortuitous. At each stage of the process, there are only a limited number of options, and the ones chosen (then and now) are chosen for a reason – that the others look even more unattractive.

The good news is that when the last pieces of Continental Illinois were eventually sold off (seven years later!) the FDIC had apparently netted a profit. Whether that profit truly compensated for the state’s backing I’m not sure.


Splitting the difference

Today's decision was unusual in that it could have gone three ways - it could have conceivably been a half point cut or no cut at all.
The reason there's such a wide span of options is that the economy is sitting at a crossroads. It could take one of three routes from here, but we don't know which one it will be. Unfortunately, we know those three routes take us to three very different destinations with very different implications for interest rates.

One route is towards an unpleasant recession -- the kind of early 90s experience.. or even worse, the Japanese 1990s experience.

With the housing market falling and the banks suffering, you might reasonably worry about such a scenario. And if you do, you would probably think a half point cut is needed. i.e. the sort of central bank action that you get in the US.

But while the US appears to be on course for some kind of recession, the situation is far from clear-cut in the UK. We still face a second possible road that takes us towards inflation.

With the pound falling and global commodity prices rising, we might actually need some kind of significant slowdown just to kill off the pressure for prices to rise. If we knew we were heading in that direction, it would have certainly justified holding rates as they were.

In the event, the Bank opted to split the difference on rates, evidently hoping the economy will take the third road -- towards a rebalancing of the economy.

This involves a relatively gentle slowdown with only a temporary upturn in inflation. The rebalancing part of the story sees the economy shift away from its dependence on consumer spending towards exports.

We can be sure that this third road is the one we want the economy to take. Unfortunately, we can't be sure it's the one the economy will take. Economists are divided over which direction we are moving in.

The Bank of England's statement -- released with the quarter point cut -- makes pretty clear that they recognise the economy is sitting at a crossroads, and all three routes are still possible.

Their job is simple: to navigate us towards the good rebalancing route, away from the bad inflation and ugly recession.

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