The missing links: Why shut down the housing market?

Thank you to Truth Reporter for submitting this opinion piece.

The missing links.

The current COVID19 situation continues to generate headline after headline but one facet of the government’s measures to control the spread of the virus was unfathomable. This was the decision to bring the housing market to a halt by preventing the land registry from processing the transfer of property from the vendor to the purchaser.  This measure has received relatively little coverage in the mainstream media but on more careful analysis there is something incongruent about this decision.

If you think carefully and are prepared to use a few basic cautions then there should be nothing that prevents the housing market from proceeding even during the current lockdown.  Most initial house hunting is done online so no problem there. Viewings should be able to be facilitated using the same social distancing measures being employed in shops and other places where people from different households have to occupy the same location.  Moving house again could be done without compromising social distancing if a few sensible precautions were used.

Effectively all the other processes in the housing market become irrelevant once the ability to transact has been removed. Viewing homes has been deemed ‘unnecessary travel’ and therefore can be prevented by the police under their new regime – so essentially the whole housing market is frozen. 

If you think about the economy carefully you will quickly see that the lubricant that allows the different components of the economy to slide against each other in the giant interconnected machine that our economy represents is housing. When people aspire to own a house they commit to paying for it via a mortgage for a substantial proportion of their lives, they therefore commit to decades of productive economic activity to fund their purchase. They also invest that time and productive output into their home and therefore use even more resources to maintain and improve their homes over the period of their mortgage. 

If you’ve ever read Milton Friedman’s analogy of the production pencil and his description of the processes and markets that coalesced to enable you to hold that pencil, and then used that same paradigm to analyse the housing market you’ll quickly discover that a massive percentage of the economy of any developed culture is dedicated to servicing the property market. Given this evidence coupled with the enormous measures that have been only relatively recently been introduced to keep the housing market buoyant like help to buy and the relaxation of planning rules to release more building land we keep hitting the same paradox – why would a government that has always had homeownership at the centre of its economic credo suddenly want to shut the whole machine down?

This confusing situation was mystifying to me until this morning when I had a conversation with an old acquaintance who I always knew previously as an IT contractor. Since we last spoke he changed careers and is now in commercial property sales. His firm has (had) a simple but lucrative business model. They purchase office space or other commercial property and then convert it into flats which are then sold or let. 

Up until the shutdown he described business as ‘frantic’ – the demand for their housing units was insatiable and especially from one type of purchaser – Chinese investors paying cash. 

Many aspects of the COVID19 discussion have become emotive and highly disputed over the past weeks – talk of bioweapons laboratories, wet markets, civil liberties, toilet rolls – all have been endlessly bounced around the increasingly hysterical media like toxic hot potatoes. Initially there were social media trends combating negativity towards China and the Chinese but over the last few days even senior UK government members are openly questioning both China’s handling of the outbreak and the accuracy of their statistics in the face of evidence made available from third parties that falsifies the Chinese government’s narrative.  Credible analysts have suggested that the infection and fatality figures may be under stated by factors of 10 to 40.

So how do these two issues join? – The link is simple and predictable – money. The Chinese economy is vast – from 2019 statistics China’s GDP is 5 times larger than that of the UK. If you’ve been reading the financial press over the past few years you’ll be aware that there is concern in the markets that China’s economy is based on massive money creation, necessary because China’s huge industrial base must be kept working or their growth rate will slow and their debt dynamics will overwhelm the economy as a whole. 

Chinese central authority is far more pervasive than we experience in the West. The recent Huawai controversy has exposed how interlinked the Chinese Communist Party and the economy are. It should not be underestimated how willing the CCP is to enable printing of fiat currency to keep their industries working above their stall speeds. 

Invariably the result of this expansion of the money supply is excess money – excess money will always find its way into consumption somehow – you only need to look at the market for supercars, diamond encrusted watches and $10,000 handbags to understand this. Prudent investors will look to store their hypothecated wealth in more tangible and long-lasting goods – property being the hardest of hard assets.

So in simple terms – why shut down the housing market? Because the UK government fears that the monetary expansion from China necessary to preserve their industrial base through the COVID19 outbreak will spill into the UK via the foreign exchange markets.  This excess capital will result in Chinese investors being able to secure vast swaths of the UK housing and commercial property stock at a time when UK citizens are in a time of financial stress and less likely to be willing or able to transact. There is also the question of the banks that make the loans to house purchasers, in these times of economic uncertainly they are having great difficulty assessing the long term credit worthiness of home buyers and are cancelling their more generous mortgage products along with demanding much higher deposits – a clear sign the banks are reducing their risk.  Lower availability of mortgages will further suppress house prices – pushing more and more property into the hands of voracious cash buyers looking to solidify their assets.

The UK government fears that with prices trending downward due to the stresses of COVID19 that Chinese and other capital will flood into the UK and absorb so much property that foreign interests will be able to exert unacceptable levels of control over the future of the UK property market and the shutdown is a safeguard against this outcome. 

The discussion as to whether this set of circumstances is accidental or by design is beyond the scope of this article but I do hope that this analysis has helped people understand just one of the complex effects of the current crisis. 

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