The second-most costly four words in the English language
The cry of 'something must be done' about the property crash is ringing out around the country. But why subsidise those who want to buy or sell a house? What we should really do, says John Stepek, is help people pay off debt and build up their savings, not bail out the housing market. And that means cutting taxes.
The late great Sir John Templeton warned that the four most expensive words in the English language are "it's different this time."
He was absolutely right. You usually hear those words at the frenzy stage of an investment bubble, when there's no conceivable sensible reason for prices to go any higher, and vested interests have to clutch at straws to promote their arguments. Just ask anyone who bought property stocks a year ago, or tech stocks in 2000.
But in the wake of a bubble popping, you often hear another phrase, which may well qualify as the second-most expensive four words in the English language. And we're hearing it more and more from the property pundits, politicians and City hotshots who stand to lose most from the looming recession.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
It's that whiney little mantra, "something must be done!"
Property pundits are calling for government intervention
We have to do something to save the property market. Or so everyone who makes money from the property market is saying.
David Ritchie, chief executive of house builder Bovis, was among the latest to call for government intervention this week. "People need to be able to access finance to buy property and anything we can do to assist people getting on the housing ladder must be good."
The Government agrees it seems, even if it can't quite work out a plan yet. After all, nothing screams "get rid of this bunch of incompetents!" to a British voter louder than collapsing house prices. There's the vague rumours about stamp duty, which no one has stamped on yet, so they must be getting ready to announce something. And The Times reports this morning that the Government is also considering helping councils to buy "repossessed and unsold properties."
It seems that "something is being done."
But let's rewind a moment. Let's just examine that statement from the Bovis boss, particularly the second half. "Anything we can do to assist people getting on the housing ladder must be good."
Here's an idea. Why don't you give away your homes for free, Mr Ritchie? They're not selling anyway. That would get people onto the housing ladder. And that must be good, right?
Oh, wait, I forgot that would cost you money. In fact, it would bankrupt you. Why should you be expected to subsidise housing for the rest of the nation at your own expense?
Taxpayers shouldn't have to prop up the housing market
It's a ridiculous notion, of course. And yet, when it's taxpayers' money that's meant to fund other people's property purchases, it's apparently just fine.
Well, I'm a taxpayer, and I don't think it's fine at all.
Let me explain why. The Government takes money from your pocket and mine in the form of tax. The justification for this is that it spends that money on public goods, things that can't be provided more efficiently by the private sector. You can argue the point on what these things are, but we generally accept (in this country at least) that this includes the army, the police, universal health care, and some form of welfare safety net.
Enjoying this article? Sign up for our free daily email, Money Morning, to receive intelligent investment advice every weekday. Sign up to Money Morning.
I don't see anything on that list about propping up the housing market. A cut in stamp duty is simply taking money from people who don't intend to buy a house, and giving it to those who do. That's completely unfair. If the Government can afford to cut taxes at all, then it should be giving us all some of our money back.
How to make the recession less painful cut taxes
And this takes us to the bigger point. If we want to get out of this recession in one piece, what really needs to be done?
Interest rate cuts won't work. They haven't worked in the US, they didn't work in Japan. That's because as a nation, we're up to our eyeballs in debt. Banks can't afford to lend money; we can't afford to borrow it. All of us need to pay off our debts and build up our savings. So it doesn't matter how cheap money gets, we've snapped out of spending mode and strapped on our tin hats.
So the quickest route out of recession is to help people pay down debt and build up their savings. Inflation is one way to reduce the value of debt, but it generally comes with a hefty price tag currency collapse and economic meltdown. Higher interest rates might help build up savings, but they'd also make debt more expensive to service.
How can we help people save more without fuelling inflation or making our debt burden even worse? Simple. Cut taxes.
If you cut taxes, you almost automatically increase productivity, because you take money from a wasteful, inefficient organisation the government and reallocate it to someone who actually gives a damn about how effectively it's spent the individual. And rather than squander the money on property (as the Government is proposing), individuals would use it sensibly, saving it, or using it to pay down debt.
This isn't a magic bullet. It won't stop the recession nothing can. The looming bust is nature's way of telling us that we spent too much money on unproductive garbage during the good times.
Look at it this way. If we'd taken all the money we spent as a nation on property in the past ten years, and had pumped it into let's say our energy infrastructure, then maybe we'd have lower gas bills, and a nice, productive industry providing highly paid, specialist jobs that would be tough to outsource. Instead, all we've got is big debts, an unwanted pile of jerry-built buy-to-let flats which are already turning into slums, thousands of unemployed estate agents, and a national energy crisis.
It's depressing, yes. But what we can do now is put an end to the rot and the waste. The quicker those savings build up, the faster balance sheets are repaired and the quicker we can get out of this downturn.
Will this happen? I doubt it. The Government still believes the great lie, that you can spend yourself rich. It still believes that "something must be done."
Better get ready for a long, drawn-out, painful recession.
Our recommended articles for today
Why Citi shows that big isn't always best
Citigroup is America's biggest bank. But with over 380,000 employees, it became too big to manage. In the last year, it wrote down over $55bn in bad debts. So what could the future hold for this banking behemoth?
Why you should keep a cool head on commodities
Commodity prices are slipping back from the highs of earlier this year. It is likely to be a short-term correction, but there could be some great buys out there. Just be careful and don't bite off more than you can chew.
Sign up to Money Morning
Our team, led by award winning editors, is dedicated to delivering you the top news, analysis, and guides to help you manage your money, grow your investments and build wealth.
John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.
He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.
His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.
-
8 of the best properties for sale near ski slopes
The best properties for sale near ski slopes – from a luxury cabin in Geilo, one of Norway’s premier ski resorts, to a large chalet in Valais, Switzerland
By Natasha Langan Published
-
Cash hoarders take total UK savings to £2 trillion – why aren’t we investing?
Investment-shy Brits are hoarding huge amounts of cash in their savings accounts. We look at the case for saving versus investing.
By Katie Williams Published