Us­ing a dif­fer­ent measure of in­fla­tion could raise value by 13pc

The Daily Telegraph - Your Money - - YOUR MONEY -

What ef­fect will the pro­gramme of mass house build­ing pro­posed this week by Sa­jid Javid, the Com­mu­ni­ties Sec­re­tary, have on house prices?

Any kind of pre­cise an­swer is im­pos­si­ble, of course. But let’s have a try at out­lin­ing a few broad prin­ci­ples.

First, let’s look at the po­lit­i­cal back­ground. I think it’s be­com­ing in­creas­ingly ac­cepted that part of the rea­son for the Con­ser­va­tives’ fail­ure to win a ma­jor­ity was that mil­lions of young peo­ple feel that they will never own a home.

If you think the ben­e­fits of a prop­erty-own­ing democ­racy are out of reach, and you are si­mul­ta­ne­ously sad­dled with large stu­dent debts, there is ev­ery chance that you will vote for the Labour promise of so­lu­tions to both, no mat­ter that they are based on fan­tasy economics.

So we can ex­pect that the Con­ser­va­tives will bite the bul­let and try to make homes more avail­able to young buy­ers.

Now this will sound like a state­ment of the ob­vi­ous, but if you want to change the hearts also find that the trans­fer value of their pen­sion is more sen­si­tive to fluc­tu­a­tions in in­ter­est rates, in­vest­ment re­turns and in­fla­tion.

By law, fi­nal salary pen­sions must rise in line with prices. The rules are hideously com­plex but the key point is that if in­fla­tion is ex­pected to be higher, trans­fer val­ues will in­crease. Hy­mans said the 50 yearold’s trans­fer value would rise by 28pc if as­sump­tions changed and minds of enough ugh young peo­ple in this way to shift ft the elec­toral land­scape, you willill have to en­able large num­bers of those cur­rently locked out of the hous­ing mar­ket to buy. And the only way to do this is to sup­ply homes that at are sub­stan­tially cheaper than those se avail­able on the mar­ket at the mo­ment. ment.

Af­ter all, gov­ern­mentsn­ments have al­ready done ev­ery­thin­gry­thing in their power to en­able house buy­ers to bor­row cheap­lyy with var­i­ous schemes. Mak­ing cheap credit avail­able and lean­ing ning on the banks to lend has reached the lim­its of its use­ful­ness.lness.

In fact, the pol­i­cycy is coun­ter­pro­duc­tive ve be­cause, if sup­ply y is broadly static, boost­in­gost­ing de­mand by puttingng homes within reach via cheap loans sim­ply serveses to push prices even higher,er, mak­ing them un­af­ford­able e once again to the peo­ple le you had in­tended to help.

So we can as­sume me that the Tories will, if theyy share this di­ag­no­sis of their heir vul­ner­a­bil­i­ties andnd take the ac­tion that fol­lows ws from it, in­deed try to em­bark bark on a pro­gramme of larg­ergescale build­ing of cheap homes.

Now I don’t see how this could d

Cre­ate af­ford­able hous­ing, or avoid a bank­ing cri­sis – can this mess be sorted?

to re­flect a rise in in­fla­tion ex­pec­ta­tions of one per­cent­age point a year.

Depend­ing on the scheme’s rules, your pen­sion will in­crease in line with ei­ther the con­sumer prices in­dex (CPI) measure of in­fla­tion or the re­tail prices in­dex (RPI), nor­mally around one per­cent­age point higher. In some cases schemes are al­lowed to switch in­dex and many have to cut costs. In our ex­am­ple, if the saver had his pen­sion linked to RPI the trans­fer value would be about 13pc higher than if CPI was used. be done with­out af­fectin­gaf­fecti the value of ex­ist­ing prop­er­ties. If you made the homes aimed at young­sters dif­fer­ent in some w way, such as smaller or pre­fab­ri­cated,pre­fabr the in­tended buy­ers wouldw shun them be­cause theythe would know that they would be harder to sell and more­mor likely to de­pre­ci­ate thantha the other prop­er­ties in thet area. You would also face even evenmo more fierce op­po­si­tion fromf ex­ist­ing res­i­dents thanth can al­ready be ex­pected. My ar­gu­men­targu is lead­ing to the con­clu­sion­con­clus that house prices in Bri­tain are poised­poise to fall ap­pre­cia­bly.ap­pre­cia­bly But there’s a prob­lem: the sol­ven­cyso of mil­lions of house­holds,hous and of sev­eral large­larg and vi­tally im­por­tant banks,ba de­pends on house price­spr avoid­ing such a crash.cras Which un­stop­pable force wouldwo give way first? TheT Tories’ bid for self-preser­va­tion­self thoughthou re­cov­er­ing theirthei ap­peal to the ever-growingeve ranksra of the hous­ing havenots? Or the eco­nomic Fi­nal salary pen­sions pay an in­come un­til death. Con­se­quently, the longer the scheme ex­pects its mem­bers to live, the more it has to as­sume it will pay out. If a cure for a ma­jor dis­ease were dis­cov­ered and pushed the av­er­age lifespan up by a year, this would raise the av­er­age trans­fer value by roughly 3pc, said Hy­mans.

Most schemes pro­vide a “de­pen­dant’s pen­sion” that con­tin­ues to be paid af­ter the orig­i­nal mem­ber dies. Trans­fer val­ues are based on the as­sump­tion imperative to avoid an­other bank­ing cri­sis? In other words, high house prices are ter­ri­ble and low house prices would be dis­as­trous. Is there a way out of this ter­ri­ble mess?

I think the best we can hope for is that mod­er­ate in­fla­tion, com­bined with house prices that are ei­ther static or in gen­tle de­cline in nom­i­nal terms, slowly erodes the real value of prop­erty.

This way, homes would grad­u­ally be­come more af­ford­able (as long as wages kept pace with prices) and banks would be in the clear be­cause the “as­set” fig­ures on their bal­ance sheet wouldn’t de­cline sig­nif­i­cantly.

The price would al­most cer­tainly be a con­tin­u­a­tion of the rock-bot­tom rates of in­ter­est cur­rently paid to savers as the Bank of Eng­land re­frained from the measure it would nor­mally use to rein in in­fla­tion, namely higher rates.

The hous­ing cri­sis among the young is one as­pect of our hor­ri­bly dis­torted econ­omy: ar­ti­fi­cially con­strained hous­ing sup­ply, along with ex­cep­tion­ally cheap money, has caused this vi­tal as­set to be­come un­af­ford­able.

Older peo­ple, mean­while, suf­fer from the lat­ter dis­tor­tion be­cause sav­ings pots that would once have pro­duced a de­cent in­come now yield next to noth­ing. For them, years of in­fla­tion will only worsen the pain. that every­one in the scheme is mar­ried and take no ac­count of the mem­ber’s ac­tual sta­tus.

Deb­o­rah Cooper of Mercer, the ac­tu­ar­ial firm, said that meant single peo­ple could find that a trans­fer rep­re­sented bet­ter value than re­main­ing in the scheme.

Each scheme sets a “nor­mal re­tire­ment age”. If our saver’s scheme had a nor­mal re­tire­ment age of 60 the trans­fer value would be around 24pc higher than if it was 65. This re­flects the longer time the scheme would ex­pect to be pay­ing out. Trustees have dis­cre­tion to ap­ply “fair value” to pen­sion trans­fers. This means that if the com­pany be­hind the scheme is in fi­nan­cial dif­fi­cul­ties or the scheme has a large fund­ing deficit, trans­fer val­ues can be re­duced. Trans­fers worth £30,000 or more are not per­mit­ted with­out proof that the mem­ber has seen a fi­nan­cial ad­viser. While this doesn’t af­fect the trans­fer value di­rectly, the cost of ad­vice will re­duce the fi­nal amount.

Sa­jid Javid, the Com­mu­ni­ties Sec­re­tary, needs to do more than en­cour­ag­ing cheap credit

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