I wrote an article yesterday for TMS Solutions with regards to why we do not need a trade agreement to conduct most of the City’s financial services activities within the EU.

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For the last 10 years, London has been experiencing a massive rise in house prices. It’s practically impossible for a first time buyer to get on the ladder – banks don’t want to lend with as much leverage (the money borrowed relative to salary, credit rating and initial down payment) and this is seriously pricing out buyers young and old.

The issue is certainly countrywide, however, London buyers face the biggest hit as seen by the following chart.

Source: Hometrack.com

The dashed line is the UK housing price index; the filled line is London’s housing price index. There is roughly a 75% difference between the two measures (at current levels).

But why has this happened? If we note the above chart we see that the recent acceleration began from about 2009/10. During this period, the Bank of England had decreased interest rates to their lowest level ever and had introduced something known as Quantitative Easing. I won’t go too deep into the intricacies of it*, but they end up increasing the amount of money in circulation to boost consumer spending and increase inflation to try and normalise the economy after the 2008 crash. If you can’t get a good return on your money by leaving it in a bank account (interest rates are too low) then where is the next best place? Property. London is the draw for these people with cash holdings in the UK.

*For those who may understand this part: during QE, the central bank purchases bonds from institutions (banks, pension funds, hedge funds) in order to stimulate the economy. This suppressed bond yields and incentivises the desire to seek yield. Therefore, we have stock markets hitting all time highs, and cheap financing of housing which pushes prices up.

So what happens when you can’t afford to buy? You’re forced to rent. Home ownership last year dropped to its lowest rate in 30 years. In February 2016, it had fallen to 58% in London. London’s peak ownership during the housing boom of the early 2000s was 64% and England’s was 71%. Peak ownership and the new ownership as of Feb last year is shown by the following chart.

Source: The Guardian (data from The Resolution Foundation)

I don’t want to get too political/ideological here, but what this shows is a transfer of wealth to the ‘haves’ (landlords, pension funds who own property etc) from the have nots (first time buyers, young people). Additionally, remember Margaret Thatcher’s ‘Right to Buy’ scheme? People were able to buy their council houses at a massive discount – 20 years later they’re worth 4/5 times more. This disturbance of the supply/demand dynamic has not helped with the velocity of long term price increases.

Additionally, foreign investors have caused a massive rise in London house prices especially. Above I mentioned investors using property as cash holdings, but why else? Well, the appreciation of London property far outweighs the rate of inflation in a relatively short time horizon. This means that the cash they have used on the property appreciates by the difference between inflation and annual appreciation, minus any costs from taxes/solicitors etc. For them, it’s merely a bank account which is going to give a better rate of return than a traditional account, be less risky than investing in stocks or shares and much of the time, and they can get around capital controls in their countries (see Russia, China etc).

What this also shows is another massive longer term issue which is low wage growth. Relative to our (I was born in 1992 so pretty much anyone from 1988-1999) parents, we earn 20% less on average.

Source: Trading Economics

You can see that the marginal weekly increases in wages over the last 16 or so years have been in constant decline. We have not been above 4% since 2010.

This is where a slight bitterness comes in, since it is the baby boomers (those born just after the war) and our parents who have kind of gotten us into this situation (more so the baby boomers though)! Now if we combine that with rising house prices, do we really stand a chance of getting onto the ladder.

So what can be done about this problem?

Many say that building more houses will fix the issue. This is merely my opinion, but this is not a long term solution. What needs to be done is for global central banks to re-assess their strategies of programmes such as Quantitative Easing and increase their respective base rates. By increasing the base rate, you are simply increasing the cost of investment by restricting the supply of credit. You may say this is a very bad idea since growth is still quite low, but I think that has been equally as bad is the no interest rate policy that has been followed post 2008, where the majority of people have not been able to save while cheap money has been given to the ‘haves’.

Alternatively, we could introduce a land value tax. This is the main overriding feature of something called Georgism.

This is an economic system whereby all taxes are abolished for one single tax on land.

The reasoning behind this is that no one created land. No one created natural resources. Land should be everyone’s within a state and therefore we should have the ability to argue for optimum use of this land.

I am right leaning centrist but this is not a left nor a right issue. The reason being is that we would have no corporate tax, VAT or tax on income. In my view, that is freemarketeering in as best and most efficient way that we can reach, since other taxes impose large inefficiencies on the payer.

In simple terms, imposing a tax on land focuses all members of a society towards conducting activities that are individually productive. Being a rentier (landlord) is not a productive activity, since there is a lot of deadweight loss.

Just to let you know, half of the value of the U.K. is made up of land, at roughly £5 trillion.

The same occurs when one borrows from a bank for 20 years. No real value is made and there is huge deadweight loss in interest payments, maintenance and exogenous factors that may even make your house not a good investment at the end (I have certain thoughts on that as well, which you can view here: https://davidbellefx.com/2017/02/14/is-it-better-to-rent-or-buy-the-big-question/).

Here’s a quote from Daniel Ricardo, a famous economist and social scientist from a few centuries ago…

”A tax on rent would affect rent only; it would fall wholly on landlords, and could not be shifted to any class of consumers. The landlord could not raise his rent, because he would leave unaltered the difference between the produce obtained from the least productive land in cultivation, and that obtained from land of every quality.
—David Ricardo, On the Principles of Political Economy and Taxation

This essentially means that the landlord cannot offset an increase in rent to balance his costs. That’s a win win for those who wish to rent, and one of the ways in which house prices will be lowered in general.

We must remember that this housing issue is not just a UK problem. Scandinavian cities, Vancouver, Toronto, San Francisco, New York, Hong Kong, Singapore, Tokyo are all experiencing the same problems. When you see such a correlation, you have to begin to wonder as to what is causing it, and since most central banks in the developed world have been following the same monetary policy process, or are highly interdependent on each other’s economy, some bells have to start ringing.

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Thanks for reading.

Dodd Frank was introduced after the financial crisis to prevent excessive and dangerous banking practices that partly caused the 2008 meltdown and the requirement of taxpayers to bail out large investment banks and other institutions.

I think to answer the above question, the mechanism by which the 2008 crash occurred must be explained. Here is a very simple note on why it happened. 

I won’t go through all of the terms of the legislature because there are so many, and quite frankly, I don’t have the relevant experience to comment on some parts of it, but the parts that I do understand I will do my best to explain and evaluate.

In short, Dodd Frank is there to increase moral hazard on banks to protect the end consumer.

Moral Hazard – lack of incentive to guard against risk where one is protected from its consequences, e.g. by insurance.

Banks were deemed too big to fail. They knew that the taxpayer would have to bail them out. Dodd Frank’s introduction makes them more susceptible (in theory, but I’ll come onto this later) to accountability. The introduction of The Financial Stability Oversight Council and Orderly Liquidation Authority and Consumer Financial Protection Bureau 1) force banks to increase capital base (increase liquidity) if they are deemed to hold too much systematic risk and also break up banks for the same reason (ha, as if that would ever happen) and 2) the CFPB prevents mortgage brokers from earning high commissions via predatory practices (giving out subprime mortgages like they’re sweets) whereby they earn higher interest payments but the assets end up having a higher default risk.

What could Trump possibly benefit from by deregulating these areas? Well, he has quite a few ex Goldman executives around him. He has some of the biggest tech firms and conglomerates on his advisory team. These firms need access to capital and credit. Trump is a believer in trickle down economics (stupidly) whereby firms who provide jobs will eventually have their wealth trickle down to the workforce that they have created jobs for. This is absolute rubbish and has been proven not to work – look at the increasing disparity between executive pay and lowest paid workers in the majority of large firms.

The issue here is that repealing Dodd-Frank may mean rejecting the accountability measure that should be placed on banks when dealing with a product such as mortgage backed securities where everyone who owns a home or is renting from a landlord can be affected when they are traded – or when the system fails.

I think there has been too much emphasis placed on Dodd-Frank being the main development in banking regulation and process, however. Basel III has been a far greater and more far reaching introduction. Whether you want to attribute the following to Dodd-Frank or Basell III is negligible, because all that is really apparent about the following quote is that systematically, the risk is essentially the same if not subjectively worse:

Just how much has bank capital increased since the passage of Dodd-Frank?  It all depends on what you mean by capital.  According to the FDIC, at the end of 2015, commercial banks had “total equity capital” of $1.8 trillion.  This is certainly higher than the $1.5 trillion that existed at the time of Dodd-Frank’s passage.  But bank assets also increased.  What matters is the ratio of bank capital to total bank assets.  At the passage of Dodd-Frank that ratio was 11.1.  At year-end 2015, it was 11.2.

Some apparent increases in bank capital relative to risk-weighted assets are due to the fact that banks have massively shifted into low risk-weight assets.  Under a system of risk weighted capital, the required capital is a function of the target capital level times the risk weight of the volume of the asset.  For example whole mortgages have historically had a risk weight of 50%.  So if one holds $100 million in whole mortgages and the target capital is 8%, then actual capital is not $8 million but rather $4 million (8 x 0.5).  Needless to say the risk weights have come under considerable scrutiny, especially since assets like Greek government debt were given risk weights of zero.

Since Dodd-Frank, commercial banks have more than doubled their holdings of U.S. Treasuries, which require zero capital.  Banks have also increased their holdings of mortgage-backed securities and municipal debt, which also have low risk weights.  The point is that banks haven’t really raised lots of new capital as much as they’ve gamed the risk-weights to appear to have more capital.

https://www.alt-m.org/2016/03/18/did-dodd-frank-increase-bank-capital/

So the argument that repealing Dodd-Frank based on reducing systematic risk actually vanishes pretty quickly, since nothing has really changed when looking at the books. I would argue it has actually been made worse, except the introduction of Dodd Frank has simply allowed a veneer of respectability and accountability to be placed onto banks.

If this is the case, then Dodd Frank is merely protecting consumers via bureaucracy – which in this case isn’t necessarily bad. I would argue that the necessity to prevent practices such as being able to buy naked credit default swaps on failing assets while selling that failing asset to someone else (imagine being able to buy insurance on your neighbour’s house, setting fire to it, then collecting the insurance money – Goldman were doing that with collateralised debt obligations), which only Europe have done is necessary. Increasing pre and post trade transparency and reporting on bank risk is vital to be able to monitor systematic risk.

But let’s think of this. Has Dodd-Frank prevented Deutsche Bank or Santander from repeatedly failing stress tests in the US? Nope.

I think that repealing Dodd Frank won’t make much of a difference to systematic risk at all by looking at the last paragraph of the quote. So Trump is a madman, but this isn’t really a time which is going to absolutely wreck the world.