Saturday, January 28, 2023

How London’s property market became an inheritocracy



How London’s property market became an inheritocracy 
Without inherited wealth or a leg-up from the Bank of Mum and Dad, prospective first-time buyers are forced to abandon dreams of home ownership

illustration of people climbing up a wall using a ladder

As a professor at the London School of Economics, one of the world’s top universities, Paul Cheshire earns well above the average Londoner’s salary. And yet his home, in Islington, has made even more. “We’ve generated housing equity that’s more than my salary throughout my life,” says Cheshire, whose specialism is economic geography. His daughter, who attended Oxford university and is now a practising lawyer, “lives in something the size of a couple of our bedrooms. And that’s with parental help,” he adds. In the time between Cheshire buying his home in 1996 and helping his daughter buy hers in 2010, average local prices roughly quadrupled, according to the Land Registry, and have continued to rise since. Prices have shot up as real wages have stuttered; the supply of new homes has not kept pace as demand has steadily risen and regulations governing mortgage lending have tightened, limiting access to finance. Without a leg up from parents, first-time buyers on average earnings are stuck looking up at the bottom rung of the housing ladder.

Forecasts of falling property values have given some would-be buyers hope that an era in which wages have decoupled from prices might be drawing to a close. But the higher interest rates that are a drag on prices are also pushing up mortgage rates, a scenario that tends to hit first-time buyers particularly hard. The cold reality is that life has rarely been so hard for a first-time buyer in London as it is today. Cheshire describes this state of affairs as a “distortion” with grave consequences for the UK capital — damaging London’s competitiveness by driving talent further afield.

Would-be buyers interviewed for this article describe a choice between accepting much lower living standards than they currently enjoy in order to get a toehold on the ladder, enduring the precarity of a rental market in which prices are rising fast or turning their backs on the city they would like to call home. Their experiences are backed up by data that emphasise how profound the shift in London’s housing market has been over the past 30 years. Together, they paint a stark picture of a city that has become more inhospitable for the young, talented and aspirational, where equity-rich parents have increasingly become lenders of last resort. There is little argument that life has become harder for first-time buyers over the course of a generation. This is not exclusively a London phenomenon, but the jump in prices has been far more pronounced in the capital than elsewhere in the country. Thirty years ago, the average property bought by a first-time buyer in London was worth £122,000, roughly 1.5 times the UK average price, according to Nationwide building society. Last year, the average first-time buyer in London spent £462,070, double the average price around the rest of the country. That has been good news for anyone who bought a London home in the early 1990s, but ruinous for many young people who harbour aspirations of owning today.

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Michael Seal, a 28-year-old vice-principal at an east London school, is one of those people. “I studied hard, went to LSE, then went straight to teacher training. I don’t really know what society wants from me if not to be a hard-working teacher in a deprived school. But I’m still eating hummus sandwiches in a leaking flat. I’m angry about it.”

Seal is in one of the highest earnings brackets for teachers across the UK and has saved since he started work so that he could achieve his “dream” of home ownership. Now, he feels, “on balance it’s not worth it . . . I can get on there [the housing ladder] but not somewhere I’d want to raise a family.


He grew up on the north-eastern fringe of London but Seal and his partner are now thinking of moving to Germany in pursuit of a better foundation from which to build a life together. “The solution for me personally is to get out of London,” he says. The ratio of house prices to earnings in London hit a record level in 2021, at just under 14 times, according to the latest official figures. “You’re totally obliterating the possibility of owning in London for most people. It’s why we see people leaving London — they can’t move there or can’t afford to be there in the first place,” says Anya Martin, a housing expert and campaigner for more homes to be built.
 Prices in London have in fact fallen almost 9 per cent over the past seven years, according to Nationwide figures. But that is of limited help to buyers, because Londoners’ inflation-adjusted earnings are 8 per cent lower than they were when the financial crisis struck in 2008, according to official figures.

High prices represent the most obvious hurdle for first-time buyers, though one which would be surmountable if finance were readily accessible. But having been pushed to the brink during the financial crisis, banks are more heavily regulated and reluctant to take on more risk than is necessary, lending at relatively low loan-to-value ratios. 
That means mortgages are the preserve of those with big deposits and high incomes — the second reason why London’s housing market has become accessible to a narrower pool of buyers, a rising proportion of whom are tapping their families for support.


According to an analysis of official data by estate agents Savills, the average first-time buyer in London last year had a deposit of just under £150,000 and a household income of £92,000. “The great financial crisis did two things: it lessened the availability of high loan-to-value mortgages which then substantially increased the deposit requirement.
 Then, when mortgage regulations were introduced, that became entrenched. It was no longer about whether the banks were willing and able to make the lending available, it was whether borrowers could meet the stress tests,” says Lucian Cook, head of residential research at Savills. Tighter regulation was understandable in the aftermath of a financial crisis triggered in part by reckless lending, says Cook, but “regulation to avoid a debt bubble has reduced accessibility to housing”.

Lenders are uncomfortable loaning first-time buyers high multiples of their incomes, wherever they are in the country. But in London, where homes cost twice the national average, that is a more serious impediment. That is in part why the government’s flagship Help to Buy scheme came with more generous terms for those borrowing to buy in London. 
The initiative was launched by the Conservative-led coalition government in 2013 and intended to support buyers of newly built homes by providing a government equity loan of 20 per cent of a property’s total value, or 40 per cent in London. That meant purchasers required a deposit of as little as 5 per cent. The scheme, which ends in March, has been used by well over 300,000 people, most of them first-time buyers, to clamber on to or up the housing ladder.
 “Those who were unable to fall back on the Bank of Mum and Dad at least had an option to raise a deposit or bridge the deposit gap,” says Cook. But the £29bn scheme’s legacy is also higher house prices, according to a House of Lords report published last year which says Help to Buy has failed to “provide good value for money”. In some boroughs of the capital where new building has been relatively high, such as Barking and Dagenham and Newham, prices paid by first-time buyers have doubled over the past decade, according to official figures. We froze the supply of space in London [with the greenbelt]. So you have a long run of rising demand for housing and an incredibly inflexible supply Paul Cheshire, LSE professor Now Help to Buy is in its twilight, and private-sector alternatives are unlikely to pick up the slack in the short term. 
“The aspiration for home ownership remains very strong, it’s just become that much further out of reach,” says Cook. Buyers in London must pull together huge deposits if they want to get on to the ladder. But how? Thirty years ago, the average first-time buyer in London needed a deposit of less than £24,000. That has increased six-fold since, to more than £147,000, adjusting for inflation. Nationally, average deposits have fallen almost £16,000 since 2009, but in London they have increased by close to £12,000. That has made owning a home harder. Fewer than a quarter of Londoners owned a home with a mortgage in 2021, a drop of 10 per cent from a decade earlier, according to data from the census published last month. 
More and more would-be buyers are instead being pushed into a rental market in which prices have risen sharply over the past year, hampering their ability to save for a deposit. “For a lot of people the only way to buy is inheritance or the Bank of Mum and Dad,” says Cook. More than two-fifths of buyers in London received help from parents in 2020, according to a report by Legal & General financial services — a far higher proportion than anywhere else in the UK. “Those figures really drill home the extent to which London remains dislocated with the rest of the country, with real issues in access to property,” says Cook.


Mark, who chose not to use his real name, is facing these problems first-hand. He and his partner want to buy, but are struggling to see how. “We’ve been living together since the start of Covid, renting privately for some time, and it’s knackering not knowing how long you plan to be somewhere,” he says. 
A combination of inheritance, the windfall from his partner’s grandmother’s house sale, savings and some parental help should give the couple a deposit of £140,000. On top of that they hope their salaries — both work for charities — will allow them to tap a lender for a mortgage of £210,000. Fearful of the impact of rising rents, they would rather take the plunge. “If we were unable to buy now that might put it out of reach until our parents die. They are not mega-rich, but they have property they have paid the mortgage off on,” says Mark, who acknowledges how macabre that consideration is.

After doing the sums, Mark and his partner feel that trying to buy is the least worst option. Despite the contortions involved, he is quick to emphasise the privilege of circumstances that enable them to even consider buying. “Without support we could maybe manage shared ownership or a studio in Zone 8 [but] we’d rather stay renting than scrabble on to the bottom rung for the sake of it . . . We’re not looking to have kids. If we had to make this sort of compromise it would be horrible.” Paul Cheshire, the LSE professor, describes the parlous state of London’s housing market as “a self-inflicted injury”: a strain that has been exacerbated by a failure to release more land and build more homes. He highlights the greenbelt — a ring of land circling London that is protected from development — as the main cause of the city’s particular housing crisis. “We froze the supply of space in London. So you have a long run of rising demand for housing and an incredibly inflexible supply.” 
Anya Martin, the housing campaigner, is also highly critical of the inflexibility of the greenbelt, which was introduced in 1955 to prevent London from subsuming nearby towns, and other planning rules. “The greenbelt stops London from growing out into areas we wouldn’t consider green. Then you have height restrictions. Then more informal restrictions; local authorities have restrictions to maintain local character or reject stuff above a certain [height] level,” she says. All of that prevents London from building its way out of the problem.


Long term, if house prices flatline and wages catch up, or if housing supply in London increases, affordability issues might be addressed. But none of those interviewed for this article are confident of that outcome. Instead of waiting for an improved market, they are weighing their options. 
Martha, who chose not to give her real name, works in public relations and rents with her boyfriend. “Our combined salary is £110,000, enough to get a mortgage and we have some savings. We feel the pressure to [buy] but wonder if it will be worth the effort. What can you buy in London if you want a family and have to pay childcare?” she says. “I don’t think we’ll be in London in five years if we want kids — it’s just so expensive.”
 Michael Seal, the teacher, goes further, saying the inaccessibility of housing is one part of “the social contract breaking down”. He can’t tap the Bank of Mum and Dad and sees little prospect of the ratio of wages to house prices falling dramatically soon, so is unlikely to buy in the city where he grew up, studied and works. “People say I’m trying to get too much but for the past 30 years we have had our cake and eaten it [with house prices rising fast from a relatively low base]. It’s a fairness issue. I just want to be playing a fair game,” he says. 
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Van Gogh : ChatGPT is all the rage

 I met the oldest woman in the world—who shared her memories of Van Gogh in Arles


ChatGPT 


 As noted, everybody seens to be talking about (and with) ChatGPT -- see, for example, now also John Naughton in The Observer, making the case that The ChatGPT bot is causing panic now -- but it'll soon be as mundane a tool as Excel, and Paul Taylor On ChatGPT in the London Review of Books


       ChatGPT is all the rage, as with it the potential for real-world applications of AI suddenly hits much closer to home for many people, especially those whose livelihoods depend, in some way, on reading and writing. 
       At Marginal Revolution Tyler Cowen has some interesting thoughts on GPT and my own career trajectory -- beginning with: "For any given output, I suspect fewer people will read my work". 


       Abdulrazak Gurnah Q & A 

       At Scroll.in Sayari Debnath has a Q & A with the Nobel laureate, in ‘The win makes time more precious’: Abdulrazak Gurnah, winner of 2021 Nobel Prize for Literature


       Bestselling in the US in 2022 

       At Publishers Weekly Jim Milliot looks at what the bestselling books in the US in 2022 were, finding Colleen Hoover Was Queen of 2022's Bestseller List
       Helpfully, the top twenty-five sellers are listed with the number of copies sold (as counted by NPD BookScan). The top-selling title, Hoover's It Ends with Us, shifted 2,729,007 copieds; books by her also took the next two places, and she had six of the top ten titles. (Meanwhile, I have never seen one of her books ....) 
       I'm afraid I haven't reviewed any of the top twenty-five (and don't expect I ever will). 



Friday, January 27, 2023

Ian Klug, Michael O’Neill etc: How a paper tiger mauled PwC

 

How a paper tiger mauled PwC

Shock revelations by the tiny Tax Practitioners Board offer the government a major reset of how it takes advice on tax policy from the big four accounting firms.

As government outrage deepens over leaks of secret tax policy consultations by PwC personnel, industry figures were describing the scandal as a watershed event for the government which is wrestling with whether it can trust advice from big four firms on whom it relies to help shape new tax laws.

The Tax Practitioners Board went almost entirely unnoticed last November when it deregistered PwC’s former head of international tax, Peter Collins, and sanctioned the firm for its failure to monitor conflicts of interest by partners who shared confidential information with clients.

Treasurer Jim Chalmers faces a rare opportunity to change the relationship the government has with big four firms. Alex Ellinghausen

But the TPB set off shockwaves in Canberra this week after it published its reasons for the decisions, triggering a furious response by the government. Insiders say it has created a rare opportunity for Treasurer Jim Chalmers to change the relationship the government has with big four firms as it consults over tax laws in future.

It is also looking at past advice. The wider issue the government is struggling with is whether the advice it got about the Base Erosion Profit Shifting (BEPS) policies from big four firms was flawed, and whether weaknesses were baked into the new laws or loopholes ignored.

“These are serious questions the government will need to consider given how established this process has become,” according to a tax insider familiar with the process.

Dr Chalmers called the PwC scandal a “shocking breach of trust” which put the quality of economic decision-making and policymaking at risk. He asked Treasury, the Tax Office and the Board of Taxation to advise on how to stop further leaks.

The TPB found that Mr Collins, despite signing three confidentiality agreements between 2013 and 2018, shared government documents with other partners in Australia and overseas, who in turned shared them with current and prospective clients.

PwC says the TPB findings related to a consultation with Treasury and the Board of Taxation in 2014.

The TPB doesn’t say what was leaked. But OECD plans to fight tax avoidance by global companies were a red-hot issue in 2014, with intense international interest in what the Australian government was doing.

The first of these BEPS measures was the multinational anti-avoidance law (MAAL) legislated in 2015.

The TPB says the PwC partners who received the leaked information were aware it could be used to circumvent proposed BEPS laws, though PwC says the TPB report does not state that it was used in specific schemes.


It is not just Australia where PwC is accused of leaking. A High Court trial in London this week heard claims by the Watchstone software group (previously named Quindell) that a senior PwC partner divulged commercially sensitive information about its financial position and deal strategy to an investment banker in 2015, who then shared the information with its client Slater and Gordon, which was bidding for an arm of the group.


PwC denies that its UK head of restructuring shared confidential information and says that an email written by the investment banker after a meeting was not an accurate account of what was said.

This week’s furore is all the more remarkable because the TPB, which oversees Australia’s 80,000 tax agents responsible for more than $500 billion a year in tax and GST returns, is such a tiny operation. Its limited legal powers make it a paper tiger when dealing with the big four firms.

In 2019, then assistant treasurer Michael Sukkar commissioned a review of the TPB led by tax lawyer Keith James. The review noted that the TPB is the only regulator that can discipline wayward tax agents or tax firms, imposing either a written caution, making an order (like training sessions), or suspending or terminating registration.

It can also sue for civil penalties in the Federal Court, but rarely tries because this is slow and costly, Mr James noted.


But deregistering or suspending a big four firm is the nuclear option. In reality it probably isn’t feasible.

Mr James recommended (as did the Inspector-General of Tax in a separate report) that the TPB have a wider range of possible sanctions, including infringement notices, enforceable undertakings and quality assurance audits and more flexibility in running investigations.

“Our recommendations were made after extensive consultations with all interest groups,” Mr James told AFR Weekend. “There was a common thread that the independence of the TPB should be strengthened, the consequences for breaches of the code be extended and the TPB be resourced to improve ethical standards.”

Went nowhere

Despite support from the profession, the Tax Office and the TPB, the 45 recommendations by Mr James went nowhere for three years.

This week Mr Sukkar was one of the few voices in support of PwC, which signed contracts worth $329 million for government work last year. He saw no role for further sanctions against the firm: “Sanctions administered by the TPB are rightly imposed against individual tax practitioners, as has occurred here.”


By the time Labor won power last year a process was already well in train that resulted in Treasury releasing draft legislation on November 18 for five minor James recommendations.

So when the TPB met to decide on its PwC investigation six days later, board members knew the three-years struggle to overhaul the TPB had failed.

The TPB decided PwC’s failure to set up a structure to oversee conflicts of interest merited more than a written warning but less than deregistering the firm. So it ordered PwC to run training sessions.

The decisions came into effect on December 22. The TPB is legally required to remove sanctions notices from its register after 12 months, so by Christmas there’ll be no public record that PwC was ever disciplined.

But on Wednesday Dr Chalmers said he had written to Treasury, the Tax Office and the Board of Taxation on how to implement the recommendations, and on whether other additional steps were necessary.

It is a watershed moment. At least until Christmas.

Read more about the PwC tax leak

Neil Chenoweth is an investigative reporter for The Australian Financial Review. He is based in Sydney and has won multiple Walkley Awards. Connect with Neilon Twitter. Email Neil at nchenoweth@afr.com.au
Edmund Tadros leads our coverage of the professional services sector. He is based in our Sydney newsroom.Connect with Edmund on Twitter. Email Edmund at edmundtadros@afr.com.au




Internal staff survey at the FTC finds huge plunge in trust of senior managers

 Internal staff survey at the FTC finds huge plunge in trust of senior managers


Top Stories

 
WSJ: State of Arizona has database of money transfers over Western Union, MoneyGram and RIA for 20 countries, and law enforcers can consult it without a warrant
 
Review and recommendation/Courtroom Drama of the week:   The last one I will recommend is To Kill A Mockingbird.   Released in 1962, it stars Gregory Peck, which won him Best Actor, and was nominated for best picture.  It is a powerful movie, involving a trial of a black man, and if by chance you’ve not seen it do so right away.    Do you have a favorite? Send it in to steve@bakerfraudreport.com
 
Basic Fraud:  Con Man is short for Confidence Man, someone who gains your trust in order to fleece you.   Guest post by Anthony Pratkanis. This blog post by Jeff Smith provides an overview of how con criminals of the 1880s found their victims and began to establish the trust needed to enact their crimes. Jeff is the great grandson of Soapy Smith and has gathered extensive information about Soapy's life.  As such, we have more information about Soapy Smith than any other con criminal -- a gold mine for those who research the modus operandi of confidence-grifters.  https://soapysmiths.blogspot.com/2023/01/how-soapy-smiths-gang-obtained-their.html
 
From a social-psychological point of view, the methods are remarkably similar to those used by today’s confidence-grifter:  (a) secretly profiling and obtaining information about the target (hotel registry and information books whereas today’s cons use a list broker, maintain and trade lists, and gather information via social media and other media) and (b) using that information in an initial contact and thus creating an instant relationship via ostensibly shared similarities and a false familiarity.

 
New links!
Fraud Studies: Here are links to the studies I’ve written for the Better Business Bureau: puppy fraudromance fraud; BEC fraudsweepstakes/lottery fraud,  tech support fraudromance fraud money mulescrooked movers, government impostersonline vehicle sale scamsrental fraud, gift cards,  free trial offer frauds,  job scams,  online shopping fraud, and crypto scams
 
Fraud News Around the world

Humor 

FTC and CFPB  

Virus Benefit Theft 

Ransomware  

Data Breaches 

Bitcoin and cryptocurrency

ATM Skimming

Romance Fraud and Sextortion




Houston: Man from India illegally US gets 29 months prison; collected money from victims who had been threatened with arrest by supposed government investigators; sent money off to India; ordered to repay $635,000

 


Inside the Underground Economy of Solitary Confinement The Marshall Project


Bangladeshi Politician Close to Prime Minister Hasina Secretly Owns Over $4 Million in New York Real Estate

Mohammed Abdus Sobhan Miah worked as a cab driver, pizza cook, and drugstore clerk while living in New York City, but a few years after returning to Bangladesh to serve as an aide to Prime Minister Sheikh Hasina, he started secretly snapping up properties in the city worth millions.


Houston: Man from India illegally in the US gets 29 months prison; collected money from victims who had been threatened with arrest by supposed government investigators; sent money off to India; ordered to repay $635,000; to be deported after sentence served
 
Kentucky: Romanian man gets 7.4 years prison for scheme that “sold” nonexistent used cars, boats, and RVs on line but just stole victim funds; part of a RICO case; 24thman sentenced; he laundered $3.5 million
 
Five countries responsible for the most fraud: Nigeria, India, China, Brazil and Pakistan
 
Review and recommendation/Courtroom Drama of the week:  12 Angry Men.  Released in 1957 it involves a jury’s deliberations in a criminal case.  It stars Henry Fonda, but the entire cast is great, with many familiar faces. Truly a great movie.  Do you have a favorite? Send it in to steve@bakerfraudreport.com
 
Question of the week:  How is it that air traffic systems in both the US and Canada go down at the same time the Royal Mail is crippled with computer problems? There has to be more to these stories than just "we'll look into it."

 
New links!
Fraud Studies: Here are links to the studies I’ve written for the Better Business Bureau: puppy fraudromance fraud; BEC fraudsweepstakes/lottery fraud,  tech support fraudromance fraud money mulescrooked movers, government impostersonline vehicle sale scamsrental fraud, gift cards,  free trial offer frauds,  job scams,  online shopping fraud, and crypto scams
 
Fraud News Around the world


Humor FTC and CFPB  Virus Benefit Theft IRS and tax fraudRansomware  Data Breaches Bitcoin and cryptocurrencyATM SkimmingJamaica and Lottery FraudRomance Fraud and Sextortion