By Adrian Lucas
Th Guardian article Tehran landlords and tenants lock horns in heat of property boom highlights what I consider to be the financial nemesis of our time: capital (=savings+speculation) pouring into property buying, creating dysfunctional property markets throughout the world. The policies to control property speculation are failing (in many countries tax policies perversely incentivize property speculation), with the consequence that, throughout the world, more and more people are spending higher and higher percentages of their income on rent/mortgage payments. No wonder there is no economic growth: how can there be growth if workers have to adjust to the rent/mortgage payment increases by decreasing their discretionary spending?
In the 1960s a working man could pay the rent for a family of 6 persons, and the mother didn’t have to work. Increasingly rent/mortgage payments are only payable if 2 of the unit dwellers are breadwinners: and if one loses a job, things immediately get tight. And precisely because there are so many privileged double-income couples (she works for a bank, he works for a university), and triple-income WGs (sugar-daddy students of wealthy), plus wealthy people who can afford the rent/mortgage payments for pied-à-terres in each of 3-6 locations, the dysfunctionality is not coming to an end. And if real-estate prices would ever fall (because policies against speculation eventually bite), then any fall in prices is liable to set off a 2007 crisis: which is precisely why money goes into property: investors know that a policy change would wreck the economy, and which politician would risk that? Hence the famous remarks of the Citigroup President ‘we’re still dancing’: no politician wants to turn off the music. Bernanke is doing everything possible to get US real estate prices to start moving upwards again. Likewise for Britain.
Most of the dwelling units along the top residential streets of London/NYC/Paris are now owned by non-working absentee plutocrat landlords, who spend, at most, a few days at their trophy addresses. The acquisition of such trophy property has less to do with use value, and all to do with safe haven investment, and upmanship. Britain/London doesn’t dare to stop such inward investment, because if capital flows reversed, Britain could easily be in the situation of SouthKorea/Thailand during the Asian crisis.
What is happening is the following: capital is flowing so copiously to non-domiciled plutocrats (in the form of corporate dividends, bond coupons, real estate rents, capital gains) that plutocrats are desperate for all types of possible safe haven: gold, real estate, art, jewellery, watches (Switzerland’s largest export sector), vineyards, yachts.
Meanwhile Internet, far from being a rational and emancipating alternative to centralization, seems to be accelerating the processes of urbanization (Internet increases urbanization, because to get anything like a decent job, and a substitute job once you are fired from that job, you have to live in global cities and know lots of people), hence Internet is intensifying the run on real estate (at least until young people re-invent a new way of living…perhaps a generation will ‘buy up’ deserted villages 1-2 hours from a metropolis, and get by entering the city 1-2 times per week).
Almost all debt is secured by assets of some sort (bank overdraft is not explicitly secured; but implicitly it is secured by next month’s pay, hence overdraft limits tend to be in the range of monthly salary), and the commonest form of debt is debt secured by real estate. Corporate debt (=debt secured by the assets, tangible and intangible, of corporations) is a fraction of real-estate debt. And large IT corporates have no debt: instead they swim in cash (e.g. Apple, Google, MS).
Real-estate debt is either held by banks (Europe’s banking model) or it is securitized (US banking model) and held by funds. The US real estate banking model resulted in the 2007 sub-prime related crisis (US banks mis-sold BBB securities as AAA securities; banks and rating agenncies will be taken to court and probably settle up); the European real estate banking model resulted in the 2010 PIGS banking solvency crisis (the assets of European banks are 2-4 times GNP vs. assets of US banks are in the order of US GNP). It is because the banks of Ireland, Greece, Spain needed to be saved, and because the construction industry came to a grinding halt, that the state finances of those countries is in such disarray: before 2007, the state deficits of Ireland and Spain were lower than those of the more diversified Germany economy.
The paradox is this: the financial well-being (of banks and of States) is dependent on real-estate prices holding up, as opposed to tumbling: but the more real-estate prices go on rising (because of policies designed to prevent, at all costs, prices from tumbling), the greater the likelihood that real-estate prices will rise excessively, therefore increasing the likelihood of a future real estate price tumble.
It is a myth that banks give credits to corporates: commercial and savings banks only ever gave credits for real-estate purchases, and it was only merchant banks which organised credits for corporates. But merchant banks (MeesPierson in Netherlands) have been functionally replaced by venture capital funds and private equity funds, which is why investment banks had to find other, eventually non-sustainable, ways to make money (trading, and hedge fund financing).
So many people are doing well from the current system, so who has the incentive to change anything?