Monthly Archives: February 2013

How might the UK housing market deal with its own toxic assets?

Following the 2008 crisis in banking and finance, one of the solutions taken was to separate out the toxic assets such as sub-prime mortgages and place them in a new ‘bad’ bank, leaving the existing banks cleansed and able to continue functioning.
The UK housing market is in failure, not least because it is over-valued. So, similar to the banking sector, maybe the housing market should be split into two markets. The first market would be for the over-valued homes which are not selling and will continue to slowly reduce in seller asking prices until the market starts to function properly again. The second market would include new building for rent and purchase at affordable levels, and it would function straight away. The risk is that this second affordable market would overheat because of the first over-valued market, because of the potential for hoarding and for intoxification.
Intoxification, and its super-profits, can be dampened by taxation. For example, any affordable home sold for more than three-times average earnings could have the excess charged as capital gains tax or repaid through covenants. Hoarding is harder to counteract. In the housing market there are laws which deal with hoarding, such as compulsory purchase and indirectly planning permission, but these are not straight-forward to apply. An extra rate (such as Council Tax) on hoarding empty buildings or land is easier to apply on a large scale.
The politics of ‘the art of the possible’ means that canvassing candidates don’t want to knock on doors asking for someone’s vote and then say, ‘of course, you know this house is only worth £160,000’. But when the number of voters excluded from the housing market starts to match or exceed the number currently included, then tenants rights and affordable housing become big enough vote winners to provide a platform for gainning power.
The ‘bad’, over-valued, detox market will then be in effect ring-fenced, slowly correcting itself over the years as more sellers slowly adjust their prices back towards more affordable levels. The danger is of waiting too long so that a future rise in interest rates will precipitate a further crisis in what is still an over-valued and over-mortgaged housing market.

Are super-rich cities sustainable?

Steve Lewis, the CEO of Living PlanIT, says that over 50% of global wealth is based in just 25 cities. Is this growing level of inequality sustainable, and if not, can we change it?
Political theorists like Ralph Miliband have observed that the essential driver within capitalism is that of Capital Accummulation. This driver creates the instability: the relentless growing bubble, the collapse, and then the next cycle starts. Karl Marx was an optimist when he said these cycles would eventually end with a paradigm shift (revolution) of fairness for everyone. A pessimist might wonder if instead there is no end to these cycles, no revolution, just repeated cycles of unstable accummulation.
In which case, will it be that the richest cities just keep getting even richer still, while the rest of the urbanised world gets left behind?
The answer to relentless Capital Accummulation is usually in the regulations, laws and taxes that chip away and partially constrain this growing capital, for example through anti-monopoly laws. But how could we regulate the growth of the richest cities, other than by pricing people out of these cities? Most capital controls are place-blind, and price pressures without regulation lead to issues such as overcrowding and slum housing. One alternative approach is being tried in China, where citizens who are authorised to live in a city receive additional civil rights when compared with workers who have migrated without authorisation from rural areas to find work. Whether this dual approach will rebalance the different growth rates of various Chinese cities remains to be seen, and at what personal costs.
And even if price pressures do become strong enough in Western cities to eventually limit the remorseless growth of the richest of the cities, it will be key workers in sectors such as mass transit / public transport, health care, education, security, that will be having to survuve under the most pressure, adding to the unsustainability of these elite cities.
Previously, one of the methods which acted as a safety valve was mass emigration such as that from Europe to the ‘new world’. However, with over six billion people living on the planet now, there are no more new worlds out there to take the strain. We have still to learn how One Planet Living will pan out for us, and this must surely include our learning how best to regulate the richest of the world’s cities for all our sakes.

What if … you could design a city? Jane Wakefield, BBC technology reporter.

The top 10 USA cities for urban trees

An American blog has an interesting discussion on urban trees. The writer generally applauds the compilation of the list of the top ten cities for urban trees, including New York and Seattle. However, they query the criteria used and suggest the additional items of the minimum soil volume allowed and the shape of the roots container.
Some cities apparently still allow 5′ x 5′ (1.5m x 1.5m) box cells, and not larger cells and trenches etc, and the lower standards limit the range and development of tree types.
Urban trees offer a range of benefits including shading, air cooling via water transpiration, noise reduction, air quality improvements; as well as aesthetic and wellbeing benefits. A good Green Infrastructure policy for a town or city will give strong support for urban tree cover. Link:

Affordable new housing is sustainable growth

Writing in The Observer newspaper today, Will Hutton is right to focus on the problems in the housing market, and especially on the lack of affordable new homes both to rent and to buy. A major housebuilding programme has long been promised but even the modest government targets have been missed by over 100,000 new homes, not counting the backlog of under-building in previous years.
We need a grown-up approach to new housebuilding – which is therefore not about a blame game, is not about favouring one sector only at the expense of the others, and is not only about land supply pressures in London and the south east of England.


Government Bonds for infrastructure and social housing are needed in the 20 March Budget: MENCAP leads by example

The Bank of England has injected £375 billion through Quantitative Easing, but mostly this has been injected into the City of London. Whereas the USA federal government has used its QE programme in a more targeted manner into the ‘real economy’ by linking it to more jobs as well as lowering inflation.

There is talk of more QE still being needed in the UK because of subdued growth. This should happen, but QE or something similar needs to be targeted into government-backed infrastructure works and social house building throughout Britain.

A social entrepreneurship is leading the way here by showing government how this can be done, bottom up. Mencap along with Golden Lane Housing and the Triodos Bank are offering a 5-year fixed term bond at 4pc interest to finance social housing, building small group homes, each one for up to four learning disabled residents. The majority of British councils are reporting a shortage of housing for learning disabled people locally. The minimum investment is £2,000 and the bond issue seeks to raise £10 million by the end of April.

QE is sometimes referred to as monetary policy (crudely, what the Bank of England does) whereas infrastructure spending is covered by fiscal policy (crudely, what government can do).

The UK Budget on 20 March is a golden opportunity to scale up exactly this type of responsible and sustainable investment in the economy and in communities. Maybe even for council house building programmes.



(updated, 24 February 2013)

Public procurement, grant appraisals and financial modelling spreadsheets: could we do better?

It is suggested that Whitehall wastes £70 million a year by struggling with complicated financial models to help officials decide on awarding contracts and grants.
A group of interested individuals and organisations – the FAST Standards Organisation – has produced guidelines on financial modelling which are said to be FAST – flexible, appropriate, structured and transparent.
The group is also now pleased that their work has “gone mainstream” as they comment on their LinkedIn page, with a good article on the BBC News website which summarises the issues raised by the FAST campaign: “Financial modelling: is the government wasting millions?” by Gavin Stamp, a BBC political reporter.
As well as there being interest in this approach within Whitehall, the news report also illustrates its use by Edinburgh City Council in appraising options for its Zero Waste projects, for example to improve support to residents to recycle more items. SOFTER PRACTICES
In addition to standarding the various spreadsheets to calculate discounted cash flow, net present value, and so on, it would also be useful to include an analysis of some of the ‘softer’, unwritten or tacit cultural aspects of financial modelling within procurement.
For example, there have been some workplaces where the tacit convention was to avoid awarding a contract to a bidder if the contract value was more than 10% of the bidder’s turnover. The reasons given were to avoid risks of instability and dependency.
However, the other risk is that smaller firms and social enterprises lose out to big name companies, despite instances where using the smaller, local organisation may bring far higher added value. Links:

“It will be our turn next” is no longer a good strategy for opposition, and humble community engagement works better: recent lessons from Ireland

Perhaps there are some useful lessons for UK economics from the current coalition government in Ireland? It used to be said, perhaps too cynically, that the only difference between Fine Gael and Fianna Fail was that one party was in power and other’s turn was next.
However, in the election following the banking crisis in Ireland and with heavy voter disenchantment with all the main parties, FF lost power massively but FG only gained enough votes to govern by forming a coalition with the Irish Labour party.
To date the policies of the Irish coalition government have usually been summarised as “hardship”, for example with reductions in benefits and with further job losses at a time of high unemployment.
However, recent polls indicate that FF in opposition to the coalition has managed to regain some credibility with voters through their humility in part, back from a very low point.
The economic position in Ireland has also changed a little following the Anglo Irish Bank debt deal with the European Central Bank.
This recent deal and Fianna Fail’s poll surge may now force the coalition government to ease up on hardship,with talk now of a “citizen’s dividend” in the press. Hopefully, this could be a welcome turning point for the Irish economy. Link:

Reporting Regeneration: a tale of two cities

In particular, London and Liverpool are both reported on today.
Concerning London, an article by Mark Easton on the BBC website has the headline ‘Why have the white british left London?‘. It is a good example of responsible journalism, looking at demographic changes between the census points in 2001 and 2011 and getting out to find the local stories behind the bare data.
And the back story he reports is of white working class communities which have changed over time, from arriving in the 1920s and 1930s into quality council housing and a job at Ford Dagenham, through to redundancy or retirement and moving out, being replaced by the next arrival communities, many now from the wider EU and from Africa. As he says, a success story of arrival or reception neighbourhoods and upward mobility.
Then Liverpool, which struggles to get a good press at the best of times. This is the full item from today’s Daily Mirror, page 8:

‘Regeneration Houses sell for £1 each
      Houses in a failed regeneration zone have been put up for sale – for just £1 each. But the boarded-up, empty Victorian terraced homes will only be sold to DIY fans or private landlords who vow to bring them up to scratch. The offer comes as Liverpool council has broken off talks with a contractor over a £25 million bid to transform the Granby Triangle area in inner city Kensington. Deputy mayor Paul Brant said: “This allows people excluded from mortgages but with construction skills to play a part in regeneration.”
And if space allowed, the back story here would be how the coalition government abandoned the Housing Market Renewal Pathfinder areas mid-programme to twist in the wind. Not so much rebalancing, more like cutting loose. Link:

Bringing Down the Deficit – trying to look beyond the slogans

The Credit Crunch started in February 2007 with reports of new problems in the sub-prime mortgage market in the USA, slowly pricking a wider bubble in innovative investment products which undervalued their high levels of risk of a payments default. This led to the collapse of Lehman Brothers in September 2008 as part of a global banking crisis, which is still unresolved and being called the Second Great Depression.
Yet to listen to many UK politicians and journalists, the recession is all because of “the last Labour government” left a deficit in the public finances by spending too much.
This is a good example of scapegoating. The credit boom up to 2006 meant many people, and especially home owners, experienced rising house values which could be used for new cars, holidays and even second homes abroad. The people spending too much was actually many of us, not the government.
The difficulty faced by governments generally since the banking crisis started is a loss of tax income. At its peak in the UK, nearly 40% of tax income was coming from the de-regulated financial sector. As the crisis developed, tax income fell away dramatically. Government spending on unemployment and similar benefits started to rise, which in normal economics is seen as helpful to the economy, because public spending rises to offset the fall in private sector spending, reducing the downturn and helping recovery: known as the counter-cyclical or automatic stablisers. It is classic Keynesian economics, developed from the lessons learnt after the First Great Depression which governments at the time, especially in the USA, made worse.
And the USA did learn its lessons. Since 2008 the federal government has injected over $1.1 trillion in new capital into the troubled financial sector as well as pushing on infrastructure, health and welfare spending, leading to modest growth and contained levels of unemployment. This was started under Republican President Bush and continued under Democrat President Obama.
But in the UK the coalition government has taken a reverse approach, and with a reverse outcome. The new capital for the troubled banks, starting with Northern Rock and RBS in 2008 remains in place, but instead of being built on it is denigrated as “Labour profligacy”, with infrastructure spending then cut, with health spending being cut in real terms, and with welfare benefits under enormous pressure. The outcome is 2.5 million people unemployed and a fine debate on whether the UK recession will be double-dip or triple-dip.
President Obama spelt it out recently in his State of the Union address to Congress: “You can’t cut your way to prosperity.”
Some people are beginning to say that history will judge Gordon Brown more kindly than the press do now. His role in 2008 in stablising the banking crisis was ahead of all other countries, and has been said to have given the USA authorities the courage to intervene similarly on Wall Street. However, and perhaps unfairly, his time in leadership is judged more broadly on character and not for his decisive economics – the ‘would you have him round for dinner?’ test.
So, rather than give any degrudging credit for work done, rather than learn the lessons from the First Great Depression, and rather than look at ourselves and how we lived in the boom years to ask how sustainable was all that, instead … it must be all the fault of the last Labour government and the mess they left behind.

Andrew Ross Sorkin, Too Big To Fail: inside the battle to save Wall Street, (2010), Penguin. New York Times financial journalist – Hank Paulson – Lehman Brothers

Housing Crisis: how much worse can it get?

An article in The Guardian by Polly Townbee is depressingly spot on about the current housing crisis and the even higher levels of homelessness that will occur when the ‘bedroom tax’ kicks in.
Her analysis is that the root cause is based on many years of not constructing enough new houses, but she also notes that currently voters do not see the public sector as being able to fix their housing problems.
We could also add that the UK has shied away from rent controls; even though these controls would limit housing benefit payments without hurting tenants, and would help people on low incomes just above the benefit thresholds. One estimate has nearly 60% of MPs also earning income as private landlords, and its a shame that they don’t have to ethically abstain on any votes to re-instate rent controls in the UK. Link: