Semi-Detached From Reality

The expression etched on my colleague’s face mirrored the words of frustration she had just spoken. She had just entered the chase to find and purchase a house in Edinburgh and I could fully sympathise with her having trodden that wearisome road some three years before.

House prices in Edinburgh have increased on average by 10% per annum over the last four years. Not as frenetic as London, I must admit, but not that far behind and I guess I should have some sense of satisfaction that my own house has probably increased in value by about a third in the last three years. Of course, such a profit would only be realised if I moved out of Edinburgh to a cheaper city such as Glasgow (about one third cheaper on average).

So, is this a triumph of capitalism and the free market? Is this a venture in which the common man can cut out his own slice of profitable real estate? I would like to say yes, but even here the dice are loaded and the cold hand of Statism has its ubiquitous influence; for there are several anti-competitive factors dovetailing together which stoke the furnace of houses prices here in Edinburgh.

Consider first the greenbelt policy of Edinburgh City Council. The greenbelt is a circle of fields, forests, etc which has officially enclosed Edinburgh since 1957 and is designed to be a remedy against urban sprawl, smaller satellite towns being swallowed up and the countryside being readily accessible to urbanites such as myself.

This is, of course, a price control imposed on surrounding farmland which can be sold for anything except housing development. So, whereas an acre of land could go for £200,000 in housing development, it stays at the rock bottom price of £2,000.

Unsurprisingly, this has the predictable pressure cooker effect of overheating the housing market within that arboreal ring as developers snap up remaining small plots of land at premium prices whilst traffic congestion increases apace as people who work in Edinburgh are forced to live outside. Who said asset bubbles were the exclusive domain of “unbridled” capitalism?

Thus, the three net effects of this are people mortgaged to the hilt, increased pollution due to traffic jams and the potential for a further excuse for Statist controls on traffic through road tolls and soaring parking fees. Let’s hope interest rates do not rise sharply in the next few years or a lot of people will be sorely burnt in this exercise in speculation.

But how would urban sprawl be handled in a deregulated real estate market? It goes without saying that Edinburgh has grown in size for centuries and the rulers of the time did not see this as a rural threat. The New Town with its fine Georgian architecture would never have seen the light of day if the councillors of the time had imposed current Statist policies. Economic success breeds geographical growth as well as financial growth and even though urbanisation in Britain has increased by about 60% since 1945; cities, towns and villages still only comprise about 13% of the total land area of Great Britain (Scotland is less than 10%).

The talk about preserving a belt of countryside around Edinburgh is nonsense when it is realised that even if Edinburgh doubled in size (a process that would take a very long time indeed), that would only add another 30 minutes or so transport time from the centre to the general countryside which stretches all the way south to the English border and even Glasgow would still be 30 miles away to the West.

Sociological factors would also kick in as more and more people would actually leave larger cities for satellite towns (as we see with London today) and as these towns expand and become more attractive and developed centres in their own right. So, there is plenty of room for outward growth and I trust the free market to respond to the transportational and amenity needs of an expanding urban population.

The contemporary Statist may frighten us with predictions of Judge Dredd Mega-cities in a hundred years if they do not act; but I would not trust the State’s prescience  to plan ahead for 100 days let alone 100 years. Neither could I trust them to engineer a soft-landing for this property mania - too many vested interests.

Now, though, that is the main contributing factor to property inflation, there are other practises to behold.

There is the lunacy of the bidding procedure for houses in Edinburgh which is most uncompetitive. It is called “blind-bidding” and is basically a Dutch auction wherein each bidder submits their best price to the seller’s lawyer and is not allowed to know beforehand what the other bidders are submitting.

By way of example, we put in a failed bid for a house three years ago. We were told we were third in the bidding and that the successful bidder was actually £10,000 ahead of the second placed bid for a house costing about £130,000. If we allow for only a £1,000 difference in an open auction, then this is a needless 7% rise in the house price which could be compounded on every sale of the house (about 5 years on average).

Suffice to say, the sellers will not be interested in changing such a lucrative but  uncompetitive system as will the estate agents who pocket a small percentage of the inflated house price. Edinburgh differs somewhat from England in that the solicitors are also the estate agents – they do everything apart from the structural surveys. This is a monopoly which accounts for over 90% of all transactions within Edinburgh and I am almost tempted to call it a passive cartel.

I say that because though such a practise may go back a long time, this well-connected network of lawyers are in no hurry to alter a practise they have complete control over. The mightily convenient practise of these solicitors in not telling the successful buyer how many thousands he or she was ahead of the pack intentionally perpetuates it in my not so humble opinion. It is time for the free market to assert itself, methinks.

Lawyers, barristers and solicitors. If any group is most represented in Statist governments, it is them. They find the transaction from interpreting and debating myriads of government laws to making them a most logical step. And in that there is no surprise, for in a libertarian government, there would be so few laws as to render most of them unemployed. Lawyers love interpreting rules and regulations as much as the bureaucrats do in making them. But, I digress too much.

So, in these two prime areas of inflation we have two simple solutions. Free the land up to the markets and enforce open bidding for houses (though the enforcement would be little required once the obvious benefits became apparent to all). With these liberties in place, we would see sanity restored to the markets. I would add, however, that it is best to implement these changes at the bottom of an inevitable property price crash (probably the next up-cycle in interest rates) lest the very changes designed to usher in reason are blamed for the crash itself.

There are two further complications to this mania which I should mention here.

First, as Edinburgh is very much the second financial centre of Britain behind London, we see the “golden handcuffs” of slashed interest rates being offered to employees of banks and other debt-issuing institutions. Armed with their ultra-low mortgages, these people can go out and bid up the prices of the properties even more.

Should this practise also be classed as anti-competitive or as much a perk of the job as company pensions or free medical insurance? I would say not, insomuch that it is no more anti-competitive than someone using a recently acquired inheritance to bolster their bidding power. Nevertheless, with potentially hundreds of Edinburgh employees benefiting from such a perk, it will have its effect on the bubble.

Finally, we must make mention of the structural surveyors of Edinburgh who also make a mint on the backs of buyers burdened with another anti-free market practise. I refer to the ludicrous practise of house valuations having to be paid for up front by the bidders and not the seller.

I remember well having to pay a total of over £1,000 on valuation fees for the bids we tendered on five different properties. My chief complaint here is that the price advertised by the seller should be a true reflection of the property’s worth (which it never is unless it is offered at “fixed price”). Once again, in my measured opinion, when the open auction is concluded, only then may the successful and conditional buyer pay for a structural and valuation survey to verify that the initial price offered is not fraudulent.

This would indeed deal a deathblow to the surveyors’ golden goose of multiple survey fees for the same property, but the free-market has no mercy on the profiteering oppressor once its forces are unleashed. We may note that, in contrast to the other anti-competitive practises, this scam probably has a deflationary effect on prices as money is diverted from mortgage capital to wasted survey fees.

One final mention should also be made of the unsurprising attraction all this has for the multi-billion pound pension funds which invest in growth property markets. Edinburgh is a magnet for them and they have the financial clout to outbid anyone on the planet for the best properties and thus contribute their own little offering to the asset bubble that is known as the Edinburgh housing market.

This combination of Statist land control and plain greed will probably end in tears. Crashes are not just limited to the stock markets as the thousands who entered into negative property equity in the early 1990s found out. Many are now mortgaging themselves up to the neck, as interest rates stay low at 6% or so. They hope that this asset appreciation will continue to grow and act as a financial investment to offset the large commitment to interest repayments on the capital.

They may be right; but, for the foreseeable future, I will assume my Edinburgh home is no more than that, a place to live in.