Originally Published July 19th, 2010.

According to the Nationwide Building Society, UK new home prices have risen 3% in the first half of 2010, following a previous flat year. This amounts to an astonishing recovery from the global pessimism that remains in most developed economies. So is it sustainable, and why? Like gold bullion, London realty appears to be a safe haven play in troubled political and economic times. Britain possesses one of the oldest democracies, a tolerance of extremists and, a language that is used globally in business, medicine, computing, movies and music. London specifically, has extensive cultural and leisure facilities and, the world’s busiest international airport. Wealthy Russians and Arabs, concerned Greeks, and many other nationalities, purchase holiday or rental properties in the Capital without due regard to the economic situation in the UK.

Whilst after the 1989 housing bubble burst it took four years, for new home prices in the UK to start showing positive gains; recent gains are in line with long term historical performance. Since 1964 UK new home price increases have outperformed US by an average 3.25% annually (in national currencies), however during the same period the pound has fallen an annual average of 1.62% against the dollar. This outperformance may have something to do with relative population density. So there may be some justification to believe that UK home prices can continue to outperform US.

Sources: US Census Bureau: Average Sales Prices of New Homes Sold in United
States, Nationwide Building Soc. Price New Houses (UK)

However, when we look at the affordability to nationals of their new homes (measured by the annual differential from the average new home price / GDP / population) justification for continued home price growth in the UK seems less justifiable. As at the end of 2009 UK new home prices were seven times the average gross domestic product per person.

Further source IMF: GDP/capita, current prices.

The battle lines between local and foreign residential house traders in the UK are drawn. Higher taxes, high unemployment, government austerity measures and, lack of credit, are holding back the British, while cash rich foreign buyers continue to invest. The question is, what do these foreign buyers know that the British don’t?

Published July 19th, 2010.


Originally published Thursday October 16th, 2008

Setting aside blame for the current credit crisis, the use of fiscal policy to remedy monetary problems continues to use 1930’s solutions to 2000’s problems. In addition if banks, that have the best understanding of each others problems, do not trust themselves, why should savers or government. In addition banks have been given access to borrowings by central banks but refused to accept it, due to stigma association, however banks share prices continued to fall. Therefore the commitment of greater and greater amounts of fiscal and monetary resources to the financial industry will only have a slow effect with drastic side issues, and is equivalent to throwing the whole universe down a black hole.

In addition financial institutions are only getting used to the implications of short selling, mark to market and capital ratios, all of which are reasonable and correct policies. Therefore a temporary suspension of these policies, of approximately a year, would give banks and regulators the time to adopt correct working practices for the use of financial products that are or have been developed.

The essential problem is that the velocity of money has shrunk to an unreasonable low level. Therefore to compensate the amount of money in circulation needs to rise to maintain the present global output growth at reasonable price growth. Addition problems are that: individual savings are at an unreasonably low level and job creating entities cannot gain access to capital in the form of borrowings.

The monetary solution requires that all individuals savings and deposits at financial institutions needs to be guaranteed by the respective central banks of that country and currency.

There needs to be a policy of immediately replacing all terminating borrowings of job creating entities, to reduce the possibility of a recession or depression. Securitised borrowings, from institutions with the necessary credit rating quality (rating), that have come up for redemption and that cannot be refinanced in the market at reasonable rates, should be refinanced by national central banks, creating new money. Assistance to inter-bank lending can continue to be given to through central bank lending windows (with the attached stigma).

Loan officers from financial institutions that have stopped refinancing non-financial job creating entities should have secondments to local central bank offices, with their pay still furnished by their permanent employers. Any loans not renewed by the loan officers present employers should be provided by central banks, again creating new money. This requires access to the data bases and records of banks that are not lending, the internet and, a new data base at central banks; with supervisory and approval officers at central banks.

Once problemed financial institutions and the regulators have established the correct working practices and are in the position to start to lending to non-financial institutions, increasing the velocity of money, central banks can then reduce the amount of money by selling their loan books back to the previous lenders or, in the
case of securities selling to the market.

The net effect will be a reduction in the size of employment in banking (fundamentally a structural issue) whilst maintaining the amount of employment in the rest of the economy. The penalising of future generations by increasing national debt would have been avoided, and any issues of moral hazard would have also been prevented.

Steven J Cohen, BSc (Econ) Hons CFA
Thursday October 16th, 2008
950 N Kings Road, Suite 151
West Hollywood
CA 90069