Britain and ItalyThe Economist (UK)

22/10/2022

BRITAIN HAS long thought of itself as being part of the same economic club as America, France or Germany. It is, after all, the third-biggest economy in the West. So it is a mark of the glum mood in the country that commentators are now drawing comparisons to Italy instead—a place that, aside from la dolce vita, is known for interminable political drama, economic stagnation and nervous bond markets. The two countries’ economies and fiscal positions differ considerably, not least because Italy uses the euro and does not have its own monetary policy. A comparison is revealing nonetheless.

Both Britain and Italy have an economic-growth problem that stems from underinvestment and lacklustre productivity, which in turn reflects deep-rooted structural factors. But Italy’s disease is considerably more advanced. Its living standards, measured by real gdp per person, have not risen since 2000. That in part reflects an ageing population. Italy has 37 old people for every 100 of working age, compared with 30 in Britain and 26 in America. Its courts and public administrators make decisions at glacial speed, which impedes business. A thicket of regulations is one reason why the country’s many small, often family-run firms do not expand.

Britain’s decline is at an earlier stage. gdp per person is still growing, although it has fallen behind America and Germany since the mid-2000s. Impeded credit flows after the financial crisis, restrictive planning rules and a poorly skilled workforce mean that investment and productivity growth is nearly as low as in Italy (see chart 1). Investment as a share of gdp was 18% in 2019, below 21-23% in America, France and Germany, but in line with that in Italy (see chart 2). All of this has dire consequences for living standards in the future.

The malaise is apparent in stockmarkets, too. As companies elsewhere, chiefly in America and China, have innovated and swelled, Britain’s stockmarket has shrunk in importance. Its share of global market capitalisation has fallen from 8% to 3% over the past 20 years. Its importance in Europe’s total market value has declined, too. Italy’s share of the world’s stockmarket was never as big as Britain’s was, but it has shrunk at a similar pace.

Both countries have serious regional imbalances. In Italy, the richer manufacturing-oriented north has long left the south in the dust. In 2019 gdp per person in the south was about half of that in the north. Britain is also unbalanced, with output per worker in London around 70% higher than that in the north-east of England. It is possible to construct lots of other measures of regional inequality, depending on the size of the region and the measure of income used. In 2019 Philip McCann, then an economist at the University of Sheffield, put together 28 of them for 30 of the mostly rich members of the oecd. He concluded that Britain was the most geographically unequal large advanced country, with Italy a close second.

When it comes to the countries’ financing positions, however, the picture is more complex. Italy has high net public debt, of around 138% of gdp in 2021. Its slow economic growth means that those debts risk becoming unsustainable. Moreover, it is a member of a currency union with shared monetary policy, which means it cannot benefit from a weaker currency to boost its economy or prevent a run on its public debt. Its failure to implement reforms, revive growth and lighten its debt burden means that investors tend to worry about its creditworthiness. As a result, they demand a premium, or a “spread”, to hold Italian debt over safer German Bunds. Over the years, fears about spreads widening have led the European Central Bank to devise various schemes to buy government bonds in times of trouble.

Britain has far lower public debt, of 85% of gdp. It has its own currency and a central bank that sets interest rates for the country alone. The government’s mindless mini-budget jolted investors into expecting higher inflation, and therefore higher interest rates from the Bank of England, which pushed up government-bond yields. It also prompted an emergency intervention by the bank to stop a fire-sale of assets by pension funds. The market turmoil has prompted the government to reverse its plans, rather as bond markets forced Italy’s governments to change course in 2011 and 2018. But few investors worry that Britain will default on its debts (see Buttonwood).

The kindness of strangers

Britain relies more on external financing than Italy does, however. According to the imf, it is likely to run a current-account deficit of nearly 5% of gdp this year, meaning that it is a net borrower from abroad. (Italy’s deficit is expected to be 0.2%.) That means financing conditions rely in part on the appetite of foreign investors for domestic assets. And the less the country does to fix its growth problem, the less attractive it becomes for investment. Political paralysis has consequences. 

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House prices The horror showThe Economist (UK)

22/10/2022

OVER THE past decade owning a house has meant easy money. Prices rose reliably for years and then went bizarrely ballistic in the pandemic. Yet today if your wealth is tied up in bricks and mortar it is time to get nervous. House prices are now falling in nine rich economies (see Finance and economics section). The drops in America are small so far, but in the wildest markets they are already dramatic. In condo-crazed Canada homes cost 9% less than they did in February. As inflation and recession stalk the world a deepening correction is likely—even estate agents are gloomy. Although this will not detonate global banks as in 2007-09, it will intensify the downturn, leave a cohort of people with wrecked finances and start a political storm.

The cause of the crunch is soaring interest rates: in America prospective buyers have been watching, horrified, as the 30-year mortgage rate has hit 6.92%, over twice the level of a year ago and the highest since April 2002. The pandemic mini-bubble was fuelled by rate cuts, stimulus cash and a hunt for more suburban space. Now most of that is going into reverse. Take, for example, someone who a year ago could afford to put $1,800 a month towards a 30-year mortgage. Back then they could have borrowed $420,000. Today the payment is enough for a loan of $280,000: 33% less. From Stockholm to Sydney the buying power of borrowers is collapsing. That makes it harder for new buyers to afford homes, depressing demand, and can squeeze the finances of existing owners who, if they are unlucky, may be forced to sell.

The good news is that falling house prices will not cause an epic financial bust in America as they did 15 years ago. The country has fewer risky loans and better-capitalised banks which have not binged on dodgy subprime securities. Uncle Sam now underwrites or securitises twothirds of new mortgages. The big losers will be taxpayers. Through state insurance schemes they bear the risk of defaults. As rates rise they are exposed to losses via the Federal Reserve, which owns one-quarter of mortgage-backed securities.

Some other places, such as South Korea and the Nordic countries, have seen scarier accelerations in borrowing, with household debt of around 100% of gdp. They could face destabilising losses at their banks or shadow financial firms: Sweden’s central-bank boss has likened this to “sitting on top of a volcano”. But the world’s worst housing-related financial crisis will still be confined to China, whose problems—vast speculative excess, mortgage strikes, people who have pre-paid for flats which have not been built—are, mercifully, contained within its borders.

Even without a synchronised global banking crash, though, the housing downturn will be grim. First, because gummed-up property markets are a drag on the jobs market. As rates rise and prices gradually adjust, the uncertainty makes people hesitant about moving. Sales of existing homes in America dropped by 20% in August year on year, and Zillow, a housing firm, reports 13% fewer new listings than the seasonal norm. In Canada sales volumes could drop by 40% this year. When people cannot move, it saps labour markets of dynamism, a big worry when companies are trying to adapt to worker shortages and the energy crisis. And when prices do plunge, homeowners can find their homes are worth less than their mortgages, making it even harder to up sticks—a problem that afflicted many economies after the global financial crisis.

Lower house prices also hurt growth in a second way: they make already-gloomy consumers even more miserable. Worldwide, homes are worth about $250trn (for comparison, stockmarkets are worth only $90trn), and account for half of all wealth. As that edifice of capital crumbles, consumers are likely to cut back on spending. Though a cooler economy is what central banks intend to bring about by raising interest rates, collapsing confidence can take on a momentum of its own.

A further problem is concentrated pain borne by a minority of homeowners. By far the most exposed are those who have not locked in interest rates and face soaring mortgage bills. Relatively few are in America, where subsidised 30-year fixed-rate mortgages are the norm. But four in five Swedish loans have a fixed period of two years or less, and half of all New Zealand’s fixedrate mortgages have been or are due for refinancing this year.

When combined with a cost-of-living squeeze, that points to a growing number of households in financial distress. In Australia perhaps a fifth of all mortgage debt is owed by households who will see their spare cashflow fall by 20% or more if interest rates rise as expected. In Britain 2m households could see their mortgage absorb another 10% of their income, according to one estimate. Those who cannot afford the payments may have to dump their houses on the market instead.

That is where the political dimension comes in. Housing markets are already a battleground. Thickets of red tape make it too hard to build new homes in big cities, leading to shortages. A generation of young people in the rich world feel they have been unfairly excluded from home ownership. Although lower house prices will reduce the deposit needed to obtain a mortgage, it is first-time buyers who depend most on debt financing, which is now expensive. And a whole new class of financially vulnerable homeowners are about to join the ranks of the discontented.

Dangerous properties

Having bailed out the economy repeatedly in the past 15 years, most Western governments will be tempted to come to the rescue yet again. In America fears of a housing calamity have led some to urge the Fed to slow its vital rate rises. Spain is reported to be considering limiting rising mortgage payments, and Hungary has already done so. Expect more countries to follow.

That could see governments’ debts rise still further and encourage the idea that home ownership is a one-way bet backed by the state. And it would also do little to solve the underlying problems that bedevil the rich world’s housing markets, many of which are due to ill-guided and excessive government intervention, from mortgage subsidies and distortive taxes to excessively onerous planning rules. As an era of low interest rates comes to an end, a home-price crunch is coming—and there is no guarantee of a better housing market at the end of it all.

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Turmoil in Britain Welcome to BritalyThe Economist (UK) 22/10/2022

IN 2012 LIZ TRUSS and Kwasi Kwarteng, two of the authors of a pamphlet called “Britannia Unchained”, used Italy as a warning. Bloated public services, low growth, poor productivity: the problems of Italy and other southern European countries were also present in Britain. Ten years later, in their botched attempt to forge a different path, Ms Truss and Mr Kwarteng have helped make the comparison inescapable. Britain is still blighted by disappointing growth and regional inequality. But it is also hobbled by chronic political instability and under the thumb of the bond markets (see Britain section). Welcome to Britaly.

The comparison between the two countries is inexact. Between 2009 and 2019 Britain’s productivity growth rate was the second-slowest in the G7, but Italy’s was far worse. Britain is younger and has a more competitive economy. Italy’s problems stem, in part, from being inside the European club; Britain’s, in part, from being outside. Comparing the bond yields of the two countries is misleading. Britain has lower debt, its own currency and its own central bank; the market thinks it has much less chance of defaulting than Italy. But if Britaly is not a statistical truth, it captures something real. Britain has moved much closer to Italy in recent years in three ways.

First, and most obviously, the political instability that used to mark Italy out has fully infected Britain. Since the end of the coalition government in May 2015, Britain has had four prime ministers (David Cameron, Theresa May, Boris Johnson and Ms Truss), as has Italy. The countries are likely to stay in lockstep in the near future. Giorgia Meloni is expected to be sworn in as the new prime minister in Rome; Ms Truss’s future could not be more precarious. Ministerial longevity is now counted in months: since July Britain has had four chancellors of the exchequer; the home secretary resigned this week after just 43 days in office. Trust in politics has declined as chaos has increased: 50% of Britons trusted the government in 2010 and less than 40% do now. The gap with Italy on this measure has shrunk from 17 percentage points to four.

Second, just as Italy became the plaything of the bond markets during the euro-zone crisis, so they are now visibly in charge of Britain. The Conservatives have spent the past six years chasing the dream of enhanced British sovereignty; instead they have lost control. Silvio Berlusconi was removed from power in Italy in 2011 after falling foul of Brussels and Berlin; Mr Kwarteng was kicked out of his job as chancellor of the exchequer because of the market reaction to his package of unfunded tax cuts. Traders in gilts are the arbiters of British government policy at the moment. Jeremy Hunt, the new chancellor, has eviscerated most of the tax cuts and rightly decided to redesign the government’s energy-price guarantee scheme from April 2023. The decisions he must take to fill the remaining hole in the public finances are being designed with markets in mind.

Just as Italians fret about lo spread between benchmark government bonds and Bunds, so Britons have had a crash course in how gilt yields affect everything from the cost of their mortgage to the safety of their pensions. In Italy institutions like the presidency and the central bank have long acted as bulwarks against politicians. So it is now in Britain. By ending its emergency bond-buying on October 14th, the Bank of England forced the government to reverse course faster. There is no room for Mr Hunt to disagree with the Office for Budget Responsibility, a fiscal watchdog. These institutions were constraints on elected MPs before, but now the chains bind tightly and visibly.

Third, Britain’s low-growth problem has become more entrenched. Political stability is a precondition of growth, not a nice-to-have. Italian governments struggle to get anything done; the same is true of brief administrations in Britain. When changes of leader and government are always round the corner, pantomime and personality replace policy. Mr Johnson was nicknamed “Borisconi” by some; by continuing to hover on the political scene, he may make this comparison sharper still.

And although fiscal discipline should calm the bond markets, it will not by itself increase growth. Mr Hunt is racing to balance the books as part of a medium-term fiscal plan to be unveiled on October 31st. Saving money by spending less on infrastructure would be fine for gilt yields but is not going to help the economy grow. There is little room for swingeing cuts to public services. Better to phase out the “triple lock”, a generous formula for raising state pensions, and raise money in more sensible ways: scrapping “non-dom” tax status, for instance, or raising inheritance taxes. A rise in income tax would be better than reinstating the increase in national-insurance contributions, which fall solely on workers.

For now, things are turning ever more Britalian. Tory MPs are in disarray—evident in a chaotic vote on fracking and rumours of more resignations—and again consumed by intrigue about how long their prime minister can last. Ms Truss has become the human equivalent of Larry the cat, living in Downing Street but wielding no power. If (or rather, when) Tory MPs decide to bin her, they need to find a replacement themselves rather than outsourcing it to Conservative Party members. The odds of their feuding factions alighting on a unifying figure are low.

Spaghetti junction

The case for an early general election is becoming stronger as a result. It is unlikely to happen: why would Tory MPs vote for their own demise? The argument that Ms Truss or any successor lacks a mandate is flawed in a parliamentary system. But if Parliament is unable to produce a functioning government then it is time to go to the voters. That moment is drawing closer.

Holding elections has not resolved Italy’s problems. But there is reason to feel more hopeful about Britain, where political instability is now a one-party disease. The Tories have become nigh-on ungovernable, due to the corrosion from Brexit and the sheer exhaustion of 12 years in power. Ms Truss is right to identify growth as Britain’s biggest problem. Yet growth depends not on fantastical plans and big bangs, but on stable government, thoughtful policy and political unity. In their current incarnation the Tories cannot provide it.

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Norwich Property Markets

Traditionally, if you had not sold your Norwich home by the first week in November, you would normally have to wait for the house sellers to return in the famous Boxing Day rush on the portals (Rightmove, Zoopla, etc) to get potential buyers interested.

Yet matters have been different this year as the various lockdowns have caused a surge in house buying right up until when the Christmas edition of the Radio Times goes on sale.

So, the question is, how will 2022 look regarding the Norwich property market?

The last couple of years in the Norwich property market have been different in many ways. So much so, many Norwich homeowners are presently deliberating whether they should put their Norwich home on the market in January or wait until later in the summer.

Speaking to many Norwich buyers and sellers, (and in fact Norwich buy-to-let landlords) in the last couple of weeks in the run-up to Christmas, many were asking the very same question.

What is going to happen to Norwich house prices in 2022?

Some people asking this question are Norwich buyers troubling themselves that they are about to buy their Norwich home just before a potential property crash, yet others are Norwich homeowners wanting to know where the top of the market is before they sell. Even a handful of Norwich landlords are unable to either start buying or start selling some of their rental portfolio.

Therefore, let’s see what has happened in 2021 to make a better judgment of what should happen in 2022.

Nobody has a crystal ball that can tell what 2022 holds, however most property experts are not forecasting doom and gloom for the British property market.

Whilst the final numbers won’t be known until Easter 2022, it is estimated that in 2021 one in fifteen privately owned homes in the UK are expected to have changed hands, being the busiest year in the last 14 years. Locally,

3,979 properties have changed hands in the last year in Norwich

Although that is only up to October 2021, so numbers will be much higher once all the final counts are in by March/April.

The pandemic made many Norwich families re-evaluate what they wanted from their Norwich home, with many wanting bigger rooms (and more of them). Many in the press dubbed this ‘the race for space’, meaning the property market was flooded with home buyers, most bringing forward the home move they had planned between now and 2025.

The issue was, there weren’t enough Norwich properties on the market to satisfy every Norwich buyer, meaning Norwich house prices have unsurprisingly been driven up.

The average price of a home today in Norwich is £304,800

Although it is still premature to say what will happen in 2022, most property commentators seem assured that we are not heading towards a house price crash, mainly due to one reason.

There aren’t enough properties on the market in Norwich. Simply supply and demand economics!

The property crash in 2008 was caused by everyone dumping their property on the market.

In January 2007, there were 1,642 properties for sale in Norwich, one year later in January 2008, that had risen to 3,932 properties, whilst today, that stands at 863

And I can’t see that changing for 2022.

In 2007, mortgage interest rates were 6.5% to 7.5%, so when the economy started to falter, everyone looked to sell their homes to reduce their outgoings as unemployment rose by over 60% in just a couple of years. This time around most people have mortgage rates of around 2% to 2.5% and unemployment is dropping, meaning they don’t need to sell their Norwich home.

Now of course the stamp duty tax holiday came to an end months ago, and Bank of England base interest rates are expected to rise moderately in the coming year, yet not to the level they were in 2007 (5.75%).

Nonetheless, demand for Norwich homes will still be there. I have even read some reports suggesting that more than 20% of British households are seriously thinking of moving between now and the summer of 2023, and this will support Norwich house prices whilst demand continues to exceed supply.

Norwich house prices will be 3.8% higher by the end of 2022

Another reason why I believe that will be the case is the return to home working. If, as a country, we will need to work from home each winter for the foreseeable future because of new variants, then this will cement the need for people wanting to move home for remote working.

It might be that Norwich buyers are looking for a dedicated office at home or that they feel they now no longer need to be in large built-up areas that are near to their work.

This increase in Norwich house prices is expected to entice even more Norwich house sellers onto the market, which will steady Norwich house prices slightly (as supply increases), yet I still believe there won’t be enough properties coming onto the market to satisfy the colossal demand.

What about the Norwich rental market?

Rents tend to grow in line with tenants’ wages. So, with many people getting decent pay rises and not enough properties being built, many economists are suggesting rents will be 14% to 19% higher by 2027. Even with the house price growth, the numbers for rental investments still look rosy.

Is it the right time to buy your first property in Norwich?

This rise in Norwich house prices has had many people asking whether 2022 is the right time to buy their first home? Should they buy now before Norwich prices rocket even further or delay in the hope that house prices come back down?

As with any important decision in life, this will mainly depend on your own personal life and your motives for wanting to move.

If the Norwich home that you want to buy is on the market, available and you can afford the mortgage, then delaying could be detrimental. It’s like holding off for the ‘next generation TV’, it then coming out; then just as you are about to buy the TV, the next ‘next-generation TV’ gets announced for six months’ time … and the cycle is constantly in motion – so you end up never buying a TV … just like you will never buy your own home!

Buying property is a long-term game

Sometimes you just have to make your decision, get something bought and start the journey of the next 25 to 35 years of living in your family home whilst paying off your mortgage.

The present low-interest rates for first-time buyers mean that there are some very low mortgage deals available for those with a decent deposit, making it a good time to buy a Norwich property, especially if you fix the interest rate.

If your deposit is humbler, the Government’s 5% deposit mortgage guarantee scheme will still enable you to buy a property, albeit at a slightly higher interest rate.

Looking at the bigger picture, these are only my opinions. If inflation doesn’t get too out of hand and interest rates don’t go above 2% to 3%, it looks like Norwich house prices will, for 2022 and a few years beyond, continue upwards albeit with a slower trajectory than 2020/21 and probably with a few short, sharp up and down spikes on the way.

The bottom line is, ensure that any Norwich house move that you intend to make is something that you can afford, allow for future rises in interest rates and make plans for as many eventualities as possible. Do that, and you should be just fine.