UK Housing Crisis and “Huge Issue” with GDP

Gary expands on his recent research note, revisiting the structural issues holding back supply before an unexpected turn raises another big question: is GDP still fit for purpose in today’s economy?

Link to Research Note (includes charts): Research note: Talk’s cheap – housing isn’t - Courtiers Wealth Management

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Transcript

SPEAKER_00 0:07

Chief Investment Officer Gary Reynolds is here to talk us through his recent research note. Talks cheap, housing isn't. Gary, hi. Do you want to give us an introduction and talk us through how you put this piece together, why and what it means?

SPEAKER_01 0:20

Yeah, so I part of sort of asset management, you want to keep up with the big themes. And UK, it's our own market, is uh an important market for us and for most of our investors. So you want to sort of stay up to date with the big trends. And clearly we're a country that has a very high level of home ownership. Um, and because of that, it plays a big part of in our economy. And of course, our population has been growing steadily over the last 40-50 years, um, but housing hasn't grown at a fast enough rate. Now, this was obvious to the Blair's new Labour government at the turn of the century, and they commissioned a report which was done by Kate Barker, a very, very good report, and looked at what needed to be done to reduce the rate of house price inflation so that the cost of housing didn't get away from new buyers. And um 20 years on, I wanted to see how successful it had been, and it's been a disaster, Leah. It's been a disaster. Okay, I knew that, but you when you approach research, you you've still got to approach it with an open mind and see what you find out.

SPEAKER_00 1:40

Well, you've presented chart too here, haven't you, that shows us that the Kate Barker targets and the Starmer government annual targets, and that the uh they didn't actually do that bad around 2005-6, but then it's dropped.

SPEAKER_01 1:52

No, and I I want to contrast the Blair government approach with the Starmer government approach. So the Blair approach was we think we've got a problem, let's look how we're going to solve it. Let's commission somebody to issue a proper report, let's see what we need to do, and then let's work out how we achieve whatever objectives are set for us by that report. And you can see from that chart and the article that the the Blair government were actually starting to get housing up to the le a new start, up to the level it needed to be. So we get a big increase in in new builds. Contrast with the Starmer government, which is why I put really the head of talks cheap. We're gonna build up 1.5 million houses. How? I'm gonna revolutionize the you know, then Reeves claims to have revolutionized the planning system. It's not revolutionized, it's not getting houses through. The data is clear on that, and you can't find a coherent policy that's gonna get extra houses built. Now I thought it was a good idea. 1.5 million houses built in this parliament, 300,000 a year, and new starts, Q3, 2025, 50% of the level needed to achieve that target. And anybody talking about it now? No.

SPEAKER_00 3:17

So what's the real cause of this only 50%?

SPEAKER_01 3:21

I don't think you can say there's one cause. I think it's multiple causes, which I sort of touch on in the article. Yeah. Firstly, we all know that the planning system's gummed up. You can get, you know, if there's a if there's a hint that a newt may have lived anywhere near your house in the last 20 years, you're probably gonna get restricted. Or a badger, or bats, or if there's any chance there's any relics or old bones buried anywhere near a building plot, it's all gonna get, it's all gonna be checked out. And so you you can the other point I made in the in in the piece was that you've got a you've got a statutory determination. So planning offices are targeted with getting planning permission issued or decisions taken within 13 weeks. And you can see over the last 10 years or so, the number, the percentage of getting dealt with within that period has dropped precipitously. You know, we're only getting one in five done within that period.

SPEAKER_00 4:20

And there's been a decline of the major decisions made full stop, whether it's in 13 weeks or not.

SPEAKER_01 4:24

Oh, absolutely. Well, there's a decline in major decisions, there's a decline in the number of applications going through for planning. So if you were going to see 1.5 million houses built, what would you expect to see? A big increase in the number of applications for planning. Are we getting it? No. Now, in fairness, there may be a big pickup post-Q3 last year, but bearing in mind we keep a close look on um uh companies like Persiman or Barrett and the big house builders. We've and we've got some really efficient house builders in the UK.

SPEAKER_00 4:57

Any at the moment?

SPEAKER_01 4:58

Uh we've got Persimen in the portfolio, I mean, and um and Barrett Red Row in the portfolio. So we we've we're happy with these businesses. So it they're they're they're very, very good, but you they need releasing. They need to be able to kick on and get things done.

SPEAKER_00 5:17

What do you mean releasing? Wellow the land to build?

SPEAKER_01 5:20

Absolutely, yeah. And we don't they don't need to be clobbered all the time. You know, you've got the um community investment levy, you've got a number of social housings got to be built. So we're making it more and more difficult for these businesses to make money when they're actually building new houses, because we we kind of we ask them to implement a lot of the government's social policies, and it makes things tricky. Um and and you can also see you know, if if supply was going up, the house price, house prices wouldn't have gone up as much as they have. And if you look over the last year, it and and in fairness, Leo, I'm not saying it's all on this government, it's been on successive governments, Tory and Labour. Um, it's not all on the Starmer government, you know, they've inherited a problem, in fairness to them, but you know, their way of dealing with it was to talk big, deliver small, and they've delivered very small, but it's been around for 50 years. So the point I make in the article is that the real cost of a house today is twice as much as it was 50 years ago. So put it this way around: say you've got a couple and they're they're wanting to buy a house, and let's say it's a semi-detached in an area, because the different the rate of the average price of housing in different parts of the country varies. But say they want to buy a house and the average price at the moment is 450,000, and they're scratching their heads wondering how they're going to buy it. There's no night, there's no 100%, very few 95% mortgages around anymore, because post-global global financial crisis, we've stopped the banks doing that. If you could turn the clock back 50 years, that 450,000 pound house would cost them 225,000. So anybody in the country think the house is half the price, that's more affordable, and that would, you know, that would enable a lot more people to get on the property ladder.

SPEAKER_00 7:13

This point you make in the article, Gary, uh fair question that a reader might ask. If there is such a large shortage of housing, then why isn't the price of mine rising? You're talking about housing being expensive at the moment, but then there's demand, so why aren't people's houses increasing even more? Similarly, there is a decline in applications. What does this all mean? A decline in applications, looking at a chart, would one would be forgiven to think that demand's dropping.

SPEAKER_01 7:43

Well, demand has dropped a little bit because but it for a different reason. Demand's dropped because people are worse off. You know, they haven't had another point I make in the article, the average rate of increase in s in real earnings means that you know every if you turn the clock back into the sort of 90s, then you were you everybody, every person in the UK per capita wealth was increasing at about 30% every 10 years. So every 10 years you were 30% better off than you were 10 years ago. Currently, you're just sneaking above 2% better off. And in some cases, wages have been rising a lot less than the rate of inflation. That's only changed in the past two or three years, you know, for a long period. They just they just weren't rising as high as inflation. And that means that people have less disposable income. Now, you turn the clock back 40, 50 years when, or pre-global financial crisis, when people could get 100% mortgages, you can't get that anymore. So let's take a let's take a typical couple or individual coming out of because the other point I make, a lot more people are living on their own.

SPEAKER_00 8:54

Yeah, we'll come to that as well, yeah.

SPEAKER_01 8:56

People come out of university, what do they come out with now? 60, 70,000 pounds worth of debt, they haven't got any money in their pocket, they get a job, the jobs, yeah, starter jobs are under a bit of pressure because of AI now. So, but they get a job and they haven't got the deposit, and unless the bank of mum and dad come and help them out, they're not gonna get on the housing ladder. It's really, really difficult for them. So that stampens demand because they've got less people coming in for the starter homes, but you've still got more people, need more people going to rented accommodation.

SPEAKER_00 9:29

I was gonna say this isn't a case of reduced demand, is it? It's accessibility.

SPEAKER_01 9:34

It's accessibility, yeah.

SPEAKER_00 9:36

It's not an option for a lot of people. No, you've got So what alternatives do they seek? Is this turning more available properties into rented accommodation?

SPEAKER_01 9:44

Well, it has done, hasn't it, the past 20, 30 years, because house prices have been rising because of this lack of new builds. So you've you've there are quite a few clients of ours that have built small property to portfolios very successfully over the last few years, and that's been essential because they've then been providing reasonably priced rental accommodation. But it doesn't, my book, it doesn't beat being able to get on the property ladder yourself and have your own property.

SPEAKER_00 10:16

You mentioned AI. AI can't build houses or homes. No. Certainly yet. No. But what about poor workmanship? A point that a client raised in response to your research notes. There's no mention of poor workmanship contributing to the lack of available homes.

SPEAKER_01 10:35

Well a lack of workmen, you mean, and and a lack of requisite skills. Yes, that's true. And of course what we what we did when we moved out from the EU and voted for Brexit, we have effectively cut off a stream of very, very highly skilled labour coming in from Eastern Europe, Poland, Bulgaria, Czech Republic. We were we had a lot of legal immigrants coming in, fulfilling the roles of certainly in the building trade. So that's been denied to us. But the the the number the potential for builds within our build within our building firms is high. They can build more houses than that. They've got the land banks, they've got seven, eight years worth of land banks in many cases. They they just need to be able to do it and to do it profitably. And to do that, the government needs to improve the planning system so it reduces the cost of getting planning through, and then stop saddling the building firms with so many social projects which they have to fund. And then we would we would unlock the you know we would bust the log jam and get our builders building. Great for the economy, Leo. Great for the economy.

SPEAKER_00 12:01

And if that was an objective and we would wholly determined to meet that, what measures would be in place to ensure that these home builders would employ a suitably skilled workforce to ensure we wouldn't end up with another Bellway, AKA Hellway, as reported in 2024.

SPEAKER_01 12:20

Yeah, that's a very good point. Um we don't own Bellway, by the way. That's a um I you you've got plenty of inspectors going round, but the the danger with this is that you get the type of government overreaction to that. And the thing is, they've they breached regulations. So the regulations are there, they just need policing. What you don't want is a knee-jerk reaction to that, and a government wanting to look like they're dealing with it, and piling loads and loads of extra regulation onto the building firms. That's that's a trait that this country has gone through in the past 40-50 years, and it's disastrous because it's meant that we've we're bogged down with far too much regulation.

SPEAKER_00 13:08

You mentioned property as an investment for some of our clients having created small property portfolios successfully. But that was off the back of rentals and the like. What does property investment uh present as an opportunity for intergenerational planning?

SPEAKER_01 13:26

Well, it provides a huge opportunity because the family home can be handed down free of a chunk of inheritance tax. It's one of the few assets now that gets any form of concessions on in on inheritance tax. That's very, very positive. Um so I think that's uh that's a good thing. Um in terms of what I would say, Leo, in terms of other, you know, those clients handing down those property portfolios to children, that's that's that's not gonna that's unlikely to happen. I know I know two or three of them who want to wind down their property portfolios now because they've got you've got the new legislation coming in that affects landlords, and they're they're finding that you know the the cost of borrowing is high, where they could borrow, build, or or convert, and then move on. So the danger with this government's policy is we're gonna make a bad situation even worse. Not only will we not get 1.5 million built, but we might get less built in this parliament than we got in the last, and that would that will be a disaster. And the way the way our our excellent building firms are sitting on their their land banks at the moment is is a cause for concern. You want them building.

SPEAKER_00 14:46

So how how much does all of this this subject form a factor, an important factor in wealth management for the long term?

SPEAKER_01 14:56

Well, it forms a it forms a big factor in that if you think about just just move aside from wealth management as being simply about getting the best return you can get on your capital. It's a lot more than that. So families that do this well manage their overall tax situation and their overall succession planning so that they organize in a structured way how money will pass through the generations, and they also decide who's going to get what and who's gonna organize what going forward. Now, property for most people is their biggest asset, so it clearly forms a big part of somebody's overall portfolio, and how that property is dealt with is key. And there are a whole range of issues, such as you know what happens when mum and dad want to go into a nursing home, or dad or mum wants to go into a nursing home. It frees up the family home because that then has to be sold if it's only if it's if it's um a last survivor and there's nobody living in the property anymore, and that's going to provide funds for the nursing home. So it can it can be useful in that regard, but it can also be useful at trying to keep that family home in place to get the benefit of the inheritance tax allowances. Now, let me say very quickly: my side is asset management and not necessarily the tax side. You need to talk to Cap and DEC or one of the other guys to get a real in-depth side of that, and that might be something you want to follow up with, Leo, because this is a fascinating subject, inheritance tax now, because the your Labour Party put it straight back up there on top of priority by attacking it so heavily in their first budget. So, but but property itself is something that we we like and we live in, and of course, the benefit of the family home is that you don't pay any capital gains tax on disposal and you get inheritance tax allowances when when the the asset's been dealt with as part of the estate.

SPEAKER_00 16:57

You mentioned single living, single-person households rising. And my question there is whether this is a result of technology. You know, AI is always the subject at the moment to technology technology, but what it's doing is enhancing connectivity. Is this fundamentally driving the way that we as individuals interact with the world and each other? And is that a driving factor towards the increase of single person occupancies?

SPEAKER_01 17:25

I had honestly not thought of the technology factor driving those increasing single occupancies, Leo, until you've just mentioned it. So I would say that I have no of no evidence to suggest that is why people live in isolation more these days.

SPEAKER_00 17:45

Is it isolation though, or is it a different way of connecting?

SPEAKER_01 17:47

It's a different, yeah, okay. I didn't mean isolation in a negative way. Okay. I meant it, I meant because in a let me but it could be right, so you could be right, but it could also be that as a wealthier country, we just feel more comfortable around. We don't need to live in big units anymore. We're not having to have massive families because the state will look after us, we don't have to re rely on having a number of children. Um, death in childbirth is reduced. So, you know, it e the poorest nations in the world have the highest birth rates because that's their best way of protecting them into the long term. Children will look after their parents, they hope anyway, into the long term. Sure. But the uh what I will counter on your AI thing. So you just conjured up an image of people living in their homes, gaming, online, doing social media and all the rest of it, and not wanting to go out, not meeting anybody, so not hooking up, not not needing to have a relationship, so not there, but the other side of it is social media is connecting people as well, in fairness. You know, I I've got all sorts of issues with social media, but it is getting people together, and I've got quite a lot of um sympathy for the dating apps. Um, I mean, seriously, hope I never have to do this. You know, I I the one thing I really want for the rest of my life, if you're at the top of my list, is I go first because I don't want to go onto the market. I you know, I wouldn't, I would be one of those people living on their own if anything happened to Calf. But I I think that there are two sides to that. So I'm yeah, I I wouldn't want to suggest that social media is creating because the trend in living in on our own was happening before social media really, really took off.

SPEAKER_00 19:37

Sure, sure. But I to make my point clear, I wasn't talking about technology separating people. I think the social connections as important as ever, the human-to-human interaction. We're obviously advocates of that with the wealth management relationships that we have with clients and their advisors, but the point being that it extends the capability to communicate with other human beings without the need to be necessarily so close to each other. Yeah, no, uh it would be an interesting statistic to see what the number of long-distance relationships is, for example, compared to what it might have been a generation ago.

SPEAKER_01 20:15

Well, my guess is going to be up significantly, because it's possible. Yeah, because you can you know you can hook in and be talking to somebody in Australia for free. Yeah. Well, go back 40, 50 years, that long-distance call cost you a lot of money. Yeah. So you didn't have the capabilities, you didn't have the money to be able to conduct that type of work. You were you were writing letters on airmail, which was lightweight paper, because it was costly to send letters on ordinary paper. That's that's all changed.

SPEAKER_00 20:41

The value of time, instantaneous, accessible, yeah, free via computer, not just relationships, but business as well, productivity. This is enabling access perhaps to greater wealth for individuals so they can afford it.

SPEAKER_01 20:55

Yeah, yeah, I agree. And and I think the other thing I'd point out is that we we monitor our wealth. So my statistics in this paper on GDP per head, i.e., how much we're actually earning per head, and therefore the real measure of whether we're better off, is on transactions. So they're in physical cost transactions. So work done um free in the home or charity sector doesn't necessarily get brought in. What you've just touched on is the fact that our lives have been improved in all sorts of ways, which are not only that not reflecting in improved GDP figures, they're actually pulling it down. Because now you're not sending airmail and you're just hooking online, that's not registering as a cost on the economy, so as a as a as an income. Therefore, it it knocks GDP back. So actually, some of the advantages we have don't even get measured in the figures. And that's because we're going off a little bit of tangent. Here, but I think it's important. GDP was introduced to count and measure the country's capability of producing, particularly weapons in wartime. It was really designed to measure physical output. Cars, ships, um guns, bullets, um, pans, all this sort of thing. We have a now we're we're mainly service-based. It never was really designed to measure that in this in in the way we're living today. So there's a huge issue. I reckon if we came back on, did it did this again in in 20, 30 years' time, by that time somebody's gonna have a better definition of GDP.

SPEAKER_00 22:48

Gary, we'll leave it there. I'm sure time has got something to say in between everything we've been discussing, and uh thank you for your insights within the tangents we've we've covered. Uh, if you do have any questions in relation to anything we've spoken about, please get in touch with your advisor or contact us through the website. Thank you.