Future proofing the South East
03/07/09
Roger Bootle, Managing Director of Capital Economics and former Chief Economist of HSBC, was one of the key speakers at this year's CIH South East conference in Brighton.
He is one of the most highly-respected economists in the City and former Group Chief Economist of HSBC. His expertise is his knowledge of the world economy, specifically the monetary economy. This is evident in his books 'Money for Nothing - Real Wealth', 'Financial Fantasies' and the 'Economy of the Future'.
As part of his presentation, Roger first commented on the conference's optimist and courage in inviting a economist to give the opening presentation! He first examined the overall economy - past, present and future. 'I think this is going to be the worst economic downturn in the UK since the war, except for the one immediately after the war.'
'No one knows about the future, but we are very conscious of the uncertainties. My own view is that this downturn is going to be quite long lasting. The public sector has a key role in this - we can and should look to the public sector to help get us out of this. But the simple fact is that financial resources are becoming limited. With public borrowing rising to £200billion pa, the pressure will be on for cutbacks. There is a real feeling of scarcity.'
In terms of Roger's inflation outlook, it has a big impact on the housing sector in general, and social housing in particular. 'Whenever there's a problem with asset values, if there's inflation, there's hope. And it's a difficult outlook for pay - people have been taking on financial commitments at their current level of affordability. But pay isn't going up by very much. In fact a lot of people may be taking pay cuts, or becoming unemployed.'
He is pretty certain that Retail Prices Index inflation will turn negative year on year (ie deflation), and Consumer Price Index inflation will also tip into a negative figure. 'My own view is that, in the next few years, there is a danger of slipping down into more generalised deflation.'
Roger's interest rate outlook is for more cuts. 'My view is that the bank is moving on a path to move official interest rates down to 0, with basic interest rates remaining low over a period of years. Long-term interest rates will fall in this environment as well.'
He then focused on what house prices should and would be if people didn't think there was going to be a major change in the market, instead of being substantially affected by speculative influences. He felt housing market was 20% overvalued and may fall by that amount, or even further.'
'Current mortgage affordability doesn't suggest any real strain at all, which is encouraging. But that's only part of the picture - it doesn't account for the burden of a mortgage over the owner's lifetime. Initial affordability is completely different to what it was historically, with unemployment or a fear of becoming unemployed.'
The measure that Roger pays a lot of attention to is the house price to earnings ratio - the number of years' earning that the average person has to pay to afford the average property. 'Another thing to look at is the yield of property to rent, which has recently plunged, showing it isn't about supply and demand. Rents have to move higher to reach an equilibrium. Gross yields need to be something like 8-9% for them to be a viable proposition.'
And then there's the issue of affordability. 'If you assume current mortgage rates, house prices are already at a fair value. If you look at long-term mortgage rent, house prices have got 9% to fall. If you look at the house price to earnings ratio, they've got another 20-23% to fall. All in all, the housing market has a lot further to fall - my 'guestimate' is that it has somewhere between 25-35%.'
With capital values falling sharply, small pay increases, unemployment set to rise sharply, and job uncertainty everywhere - the degree of arrears and repossessions will reach the level of early 1990s. And the numbers of households experiencing negative equity will double the figure of early 90s (around 30m).
'I don't think the banking issue that will be resolved very soon. Balance sheets are weak, assets are falling, and the economy is weakening with the problem of further bad loans. And their culture is devastated. We are gradually moving to nationalising the banking system which, in my view, should have been done straight away. When house prices have perceived to have bottomed - that's the point when banks will start lending again.'
In terms of the social housing sector, is there a future for low-cost housing provision? 'Yes, our culture of home ownership is part of the problem, not the solution. It's just not suitable for some people and yet the government puts homeowners in a privileged position. And isn't that part of the problem? Home ownership has been at the centre of every cyclical boom or boost in this country. The sensible thing to do is stop the problem right at the start and stop the pandering to home ownership.'
Turning to the South East, Roger doesn't think it's right to imagine there's a major regional dimension to this downturn. 'This is a problem shared throughout the whole UK economy - although there are some minor differences, particularly the housing boom and financial services.
'If there's one good thing that could come out of this ghastly situation which could have been avoided, it's a realisation that we can't all get rich by buying and selling each other's houses.'