Propping Up Property

The UK economy is so strongly linked to consumer confidence and (most importantly) consumer spending. It is the oil for the UK’s economic engine.

 

Countless studies have shown that when house prices are good, we spend. Conversely, when our treasured homes are worth less or are falling, consumer confidence falls, we spend less and the UK economy shrinks. It’s a pretty straight forward equation and politicians are only too aware of it. Property is a big deal in the UK from an economic perspective.

 

With first time buyers becoming all but extinct over recent times, Buy To Let investors have propped up the lower end of the housing market and kept property prices ‘healthy’. However, a series of tax changes to Buy To Let properties has dramatically reduced their appeal from April 2017. It feels like death by a thousand cuts.

 

Westminster is all too aware of the negative impact of the reduced appeal of Buy To Let investing and instead is looking to invigorate the first time buyer market with subsidised homes. Thirty areas across England are to receive funding from the £1.2 billion ‘Starter Homes Land Fund’ for new developments on brownfield sites. Buyers must be aged between 23 and 40 and will receive a discount of at least 20% below market value.

 

On the upside, this can only be a good thing for first time buyers and it will increase the appeal of property ownership again.

 

On the downside, this was launched in 2014 and it has taken until 2017 for the first property to be built. The Conservative pledge in 2014 to build 200,000 homes by 2020 looks very optimistic.

 

However……it’s a start……it’s progress.   

International Bank Bashing

Time to take my ‘bank bashing’ global……to the US shores no less.

 

The fallout from the banking collapse of 2008 / 2009 troubles me more and more as time passes. The financial and banking sectors have the worst memories of all and some of the current practices leave me at best bemused and at worst damn right angry. Clearly lessons have not been learnt.

 

Let me give a few examples of evidence that concerns me:

 

Wells Fargo

A US bank that is the most valuable bank in the world. Recent practices saw employees open more than 1.5 million fake bank accounts as they tried to hit sales targets. The bank took no action until the scandal became public……when they then sacked 5,300 staff. Alarmingly, not one of those sacked was a senior executive or manager. It took pressure from Senator Elizabeth Warren that some higher level sackings actually took place.

 

Prudential Financial

Another US juggernaut of a financial services company who have a corporate handholding arrangement with Wells Fargo (who sell Prudential Financial products). Prudential Financial decided to review sales practices of their products by Wells Fargo given the story above. You can guess the rest……less than desirable sales practices and another bout of sackings.

 

You don’t have to be Einstein to know that banking continues to be more than a little bit broken.

 

Here’s the thing……due to the integrated nature of banks across the world who are all so intertwined with each other, it is literally a domino effect when one fails and falls. Just look at what Northern Rock did in 2008 / 2009……the domino fell and it took others with it.

 

Creating fake bank accounts doesn’t bring the banking system down. Taking huge risks to meet sales targets does.

 

Until the banking sector uses the same moral compass as the rest of the world, we will always be looking over our shoulder for the next banking collapse.

 

I really hope I’m wrong.  

Bank Bashing

In amongst the Brexit and Trump hysteria, a little news story got ‘conveniently’ pushed under the mat.

 

If I am being honest, I haven’t been very subtle with my opinion on the banking crisis over the years and in particular, the propping up and rescue that occurred. The biggest target of my efforts has been the Royal Bank of Scotland banking group (which includes Royal Bank of Scotland, NatWest, Ulster Bank and Coutts). So few have been made accountable for poor risk management and yet at the same time there has been widespread acceptance that banks being morally corrupt is somehow the norm and acceptable.  

 

Recent figures from RBS have got me disproportionately excited about all of this……again. Let me show you where I am coming from:

 

• The banking group is 72% owned by us.

 

• RBS have posted £5 billion of losses for 2016.

 

• This is the ninth consecutive year of losses.

 

But here is the big figure for me……

 

• £370 million was paid out in 2016 in staff bonuses.

 

And for dramatic effect, that’s £370,000,000.00. Which leads me to a question I just can’t get my head around……has £370 million been paid out in bonuses because a loss of £5 billion is considered a ‘good’ result worthy of financial reward?

 

If you just stop and think about that for a moment, it doesn’t make sense on any level and actually compounds the losses. Yet as 72% public owned, why are there no demonstrations taking place? Or do we just accept that owning a loss making bank is very normal?

 

Perhaps only a Trump visit is worthy of demonstration now.

Economic U-Turn

You will be forgiven for missing a key economic announcement from the Bank of England last week given the excitement of MP’s voting in favour of commencing the notice period of Article 50 to the leave the EU and Trumps latest bemusing outburst. It was also a good news story which typically don’t get air time!

 

In short, the Bank of England made yet another dramatic rise in its growth forecast for 2017. It expects the economy to grow 2% in 2017, up from a November forecast of 1.4%, which was itself an upgrade from the 0.8% forecast made in August.

 

The raised growth forecast follows much criticism levelled at the Bank for being too gloomy when it drastically cut its growth forecast after June's vote in favour of Brexit and then subsequently cut interest rates.

 

The Bank said the improved forecast was partly the result of higher spending and investment contained in Chancellor Philip Hammond's Autumn Statement.

 

It also predicts "a significant fall in the savings ratio over the next three years as consumers take time to adjust spending growth to weaker income flows". The savings rate is expected to fall to 4%, the lowest rate since records began in the early 1960s.

 

Or to put that another way……we will continue to spend until inflation bites us on the bum later down the road.

 

So in the short term, the UK economy in 2017 looks reasonably good. Just the EU political malarkey to sort now!