Britain’s house price addiction comes at a high cost
Rishi Sunak, Britain’s incontinent chancellor, is busy painting himself as the adult in the Downing Street room but, as they used to say on dud cheques, words and figures do not agree. This week, the bill for his bung to homeowners in the form of the stamp duty holiday came in at £6.4bn, with half of the saving going on houses costing over £500,000. It does not need a degree in economics to work out that if you cut a tax and make something cheaper to buy, the sellers will quickly adjust their prices to capture the change.
It is not as if we have no recent examples of this process at work. The Help to Buy scheme immediately allowed housebuilders to raise their prices, and effectively doubled their profit margins. The first-time buyer was helped, all right, but at the cost of having to pay more in the first place – now a record 5 1/2 times his income on average, according to the Nationwide Building Society.
The entirely predictable result of the stamp duty holiday has been another twist to the house price spiral, with last month’s Halifax house price index 8.1 per cent upon the year before. Quite why this form of inflation alone is considered good news betrays our addiction to domestic property, and a government terrified of the consequences of the fall in prices which is so long overdue.
The fall may come closer next month, unless the Monetary Policy Committee at the Bank of England bottles it again and fails to raise Bank Rate. It is hard to see what more the MPC needs before pulling the trigger, but like central banks everywhere, it is in thrall to financial repression, that process which demands trivial interest rates to keep the cost of government deficits (and mortgages) down. The prospects should this process one day end are so hideous to contemplate that it does not take much to defer a difficult decision for another month, whatever the statistics say. This is what Mervyn King described this week as “the King Canute theory of inflation”. Let’s hope the waves are paying more attention this time.
Don’t bother to protest at executive pay
It’s always sad to see another City tradition fading away, and the annual protest about executive pay will be missed more than most. It will not disappear entirely, as the business pages of the newspapers will continue to work up their conventional indignation, but they will not be joined by the market’s largest investor. Legal & General Investment Management has decided that it will no longer complain about boardroom fees, on the grounds that the companies take no notice of their complaints.
Here’s Angeli Benham, senior global ESG manager at LGIM, talking to the FT: “For example, they write to us saying they’re going to increase the chief executive’s bonus from 150 per cent of salary to 200 per cent of salary. Our feedback is to say LGIM cannot support that, but they do it anyway.” Ms Benham does not add that since the bulk of the £1.33tn under management is in tracker funds, the offending executives know that any suggestion the shares might be sold is an empty threat. However much fuss she makes, LGIM will hold the shares if they qualify for the tracker in question, and not if they don’t.
As she also does not add, the rewards to her colleagues at the top of L&G are, ahem, highly competitive, so a period of silence would at least avoid charges of hypocrisy. However, she is surely right to point out that boards take no notice of shareholder protests, even if we can understand why the payments are being made. In recent years a whole new industry has sprung up, specialising in setting executive rewards. The report from the rem. com. in the annual accounts is frequently 30 pages or more, almost impenetrable to outsiders, and justifying the happy outcome for the execs, whether or not the shareholders have prospered.
Ms Benham is finding other things to protest about, promising to “educate the market on areas like income inequality and climate change”, presumably because the average executive has failed to notice them. As one of comments to the FT article put it: “Raising important issues and then being totally ignored by management is exactly how most employees at LGIM feel.” Cruel, cruel.
How long have you got?
In between all the blood-letting at the Daily Mail (out with the new editor and in with the old) the Rothermere family is finding time to take the rump of Daily Mail & General Trust private on the cheap. Since they own a majority of the shares along with all the votes, it’s hard to see why they wouldn’t. One of the buyer’s most effective weapons is the complexity of the terms being offered to outsiders, and Rothermere is a serial offender here.
This offer is 155p a share in cash, 568p and 0.5749 shares in Cazoo (a second-hand car business) as a special dividend (subject to tax adjustment) for every DMGT A share. Compared to the last deal, less than three years ago, which squeezed the last voting shares from outside hands, this is quite straightforward. Then a holder got 0.19933 of a Euromoney share, 68.13p in cash, and saw precisely 0.46409 shaved off each A share he started with.
It was all a fine demonstration of the investment banker’s art, but it was essentially impossible to work out whether this division between insiders and outsiders was fair. This time the outside shareholders have the choice between accepting an offer which woefully undervalues their holding, or being locked in as a non-voting minority in the hope that one day the irritation factor will produce an offer closer to the value of the group. Given the timescale that the Rothermere dynasty works to, it could be a very long wait.