Neil Collins’ Notebook – We’re addicted to rising house prices
Rupert and Samantha are rushed off their feet. The well-bred pair are the only ones wearing business suits, but as the estate agency game goes critical, they don’t mind. Their biggest problem right now is finding properties to sell to the queue of buyers with their noses pressed against the agency’s window. Leaflets boasting of achieved prices bung up letterboxes everywhere. It’s an old-fashioned British housing boom, and the whole industry is on a sugar high.
While it lasts, it feels wonderful. Just look at how much our house has earned in the last year! Weren’t we clever to have bought this place when we did? It’s the brave new world of WFH, with the occasional foray up to town replacing the scramble of the daily commute. Who knows, the weather might even start to improve soon. It is hardly surprising that the year of Covid has seen so many reassessing their futures, but government policy has essentially doubled the dose of sweeteners. Coming down from the high promises to be painful.
Prices have risen at a staggering rate, the fastest in 17 years, according to Nationwide, and have added almost 50 per cent since the low in 2012. Considering the rock-bottom interest rates, buying the average house on a mortgage has been an almost unbeatable investment. If you put up 20 per cent of the purchase price, which then rises by 50 per cent, you have made three and a half times your money. Considering, also, that more voters own homes than don’t, the temptation for any government to keep the party going is almost irresistible.
This administration, like its predecessors, has not resisted temptation. Help to Buy has made house purchase less of a financial stretch, at least in the early years, the stamp duty holiday has encouraged ditherers to get on with it, and the banking rules allow lenders awash with cash to treat mortgages as almost risk-free advances. Meanwhile, the cynical cartel of housebuilders used the subsidies to plump up already fat profit margins. Their interest lies in sustaining shortage, and they have little incentive to try and meet demand.
Then there is the sharp rise in compliance costs, post-Grenfell. Tougher building regulations, rigorously enforced, bear most heavily on so-called “affordable” homes, which builders hate putting up anyway. The government pledge to build back better makes a good soundbite, until it translates into actual projects, like Eton College’s plan to build 3000 (three thousand) homes on a greenfield site on the edge of the South Downs National Park. Resistance in the parts of the country where prices are highest will be a brake on development, which is locally considered as ‘build back worse’.
The only thing that is sure to spoil the fun is higher interest rates, and the key here is inflation. Thanks to the perverse way we measure it, dearer house prices do not directly contribute, so while the price of cat food is included, the price of the cat’s home is effectively excluded.
If you want warning signs of rising prices, there are plenty. The chips that power today’s economies are in short supply, most commodity prices are at or near all-time peaks, the US president has just poured monetary petrol on the flames of a bubbling economy, and small businesses everywhere need to work for themselves, rather than just for the lenders which sustained them through the pandemic. If inflation does take hold, the only known cure is higher interest rates, which would wipe out those borrowers who have stretched to buy even at today’s near-zero rates.
Roger Bootle of Capital Economics is something of an inflation specialist, having predicted the “death of inflation” when it was still very much alive 25 years ago. His current (long) view is: “Over the coming decade, real house prices are going to struggle at best. And just as in the Nineties, they could easily fall.” In other words, if you must buy a property today, buy it to live in, not as an investment. But don’t tell Rupert or Samantha.
CEO in jail? No problem!
It’s unusual to pay your recently-departed CEO a bonus while he’s in jail, but then Indivior, and its former parent company Reckitt (Benckiser) are unusual companies. Reckitt is best known for Cilit Bang and Dettol, and for paying vast rewards to its top executives. Indivior is neck-deep in America’s opioid crisis, and it is Shaun Thaxter, its former CEO, who has $1.5m of future shares to look forward to when he gets out next week.
Reckitt has already paid $1.4bn to the US authorities for doing nothing wrong with its opioid treatment, five years after it demerged Indivior and started rowing briskly away from Suboxone, a drug used to treat the addiction. Indivior itself has paid a further $600m. Awkwardly for both companies, the US justice department called Suboxone a “powerful and addictive opioid”. Thaxter pleaded guilty to allowing a state regulator to be fed false safety information, paid $600,000 and went to jail.
Perhaps to emphasise its pained air of innocence, Reckitt is pursuing a £1bn damages claim against the now-independent Indivior. As for Thaxter, he is a long-term beneficiary of Reckitt’s generosity with its shareholders’ cash. In charge since 2009, he was paid $2.1m in 2019, and as a “good leaver” (of the company, not the prison) will receive shares worth another $1.5m. As one wag commented to the FT: “I thought running your empire from prison was a noble tradition in the drugs trade. Escobar, et al.”
Indivior shareholders expressed their disgust at the annual meeting yesterday, but there was still a big majority for giving Thaxter the money. The share price has recently struggled back up to its level at the demerger in 2014, while it is worth noting how little Reckitt shareholders have benefitted from the gold poured down successive CEOs’ throats. Despite our increased consumption of Dettol in the lockdown, the share price has gone nowhere in five years. As a recent analysis from the FT concluded: “Reckitt’s heritage (is) a brand hothouse that sells things people do not really need.” The same could be said of the executives’ pay packets.