27 Oct 2017

There was a glorious time – and it was just a few weeks ago – that I had never heard of Harvey Weinstein. Apparently he was thanked over the years in thirty four Oscar acceptance speeches because although it was widely known “what he was like” there was some kind of implicit consensus that his behaviour, though reprehensible and pathetic, was a price worth paying for the chance of more Oscars. I may have misunderstood, but if it is true that many people knew or suspected and turned a blind eye then it was an inconvenient truth.

There is often a financial motive behind the ignoring of inconvenient truths. Enron was a notorious example. It was widely admired: according to various articles it was named “America’s Most Innovative Company” by Fortune magazine for six consecutive years between 1996 and 2001. When a lone Wall St analyst asked on a recorded conference call in April 2001 why the company hadn’t published a balance sheet, Jeffrey Skilling, Enron president, replied, “Well, thank you very much, we appreciate that … asshole.” The company filed for bankruptcy before the end of that year.

“As of last month, 13 analysts covered the company. Eleven recommended it as a “buy” or “strong buy.” Just one said “sell” and the other said “hold.” This was just one week before the roof fell in”.

(Forbes magazine on Enron, 29 November 2001)

There were a couple of brave analysts who waved a red flag about Enron just as there are some brave women who spoke out against Harvey Weinstein. But stating inconvenient truths does not make you popular at the time. Once the truth is out, the righteous mob surges forward like a tidal wave. Jeffrey Skilling was sentenced to 24 years in prison and Harvey Weinstein might lose his honorary CBE and who knows what else.    

How do we identify inconvenient truths that “everybody knew” before anyone realises that everybody knows them?

Merely holding a view with which everyone disagrees is not the answer. (Would that it were: making money would be so easy).  

It is important and potentially lucrative to question consensus views, if only to check that they make sense. A stock price is a manifestation of a consensus view. As I am sure I have written before, the best way to check a valuation is not to work out from the bottom up what an underlying asset should be worth (though good luck to you if you can do it) but to ask yourself whether the facts implied by the valuation are plausible.

We can do the same with big picture views.

Three weeks ago Hugo Rifkind wrote a very good article in The Times about how the Conservative party doesn’t understand that “Generation Rent” is relaxed about, or perhaps just resigned to, not owning things; no houses, cars, books, cameras, or CD players. Everything they need, from accommodation to transport to music to clothes to holidays can be rented with their smart phone, which is the only physical object they need to call their own (even if it’s on a contract).

It’s not just the Conservative party that finds this challenging to contemplate. The whole economy is arguably being transformed. It was not so many years ago that the contents of a family home would be passed down the generations.  Alan Clark, something of a cartoon snob, supposedly derided Michael Heseltine for having had to buy his own furniture. Were Mr Heseltine to buy his own furniture now he would be pleasantly surprised by the prices. Antique furniture has been a notoriously bad investment in recent years.

English pieces from the Regency period and the 18th century are worth 30 per cent less than 10 years ago and French 18th-century furniture has halved in value over the same period. Worst of all, the most recent figures from the Antique Collectors’ Club reveal Victorian and Edwardian furniture have lost more than two-thirds of their value since 2003.

FT 11 March 2016

Our children don’t want our stuff. They don’t even want their own stuff.

So where does this leave the property ladder that young people are supposedly so keen to mount? If they decline to put their feet on the bottom rung how are they ever going to be able to help me realise the investment that is sometimes known as my house?

Average UK house prices are now 8.4x average incomes (£27,000 est) (9.0x in England). In London, assuming that average income is £45,000, the multiple is 10.8x. Back in the days when houses were places to live rather than investments, a multiple of 5-6x was normal, and that generally involved the buyer putting up a decent percentage of the purchase price in cash.

Now throw in the demographics from this month’s updated ONS population forecasts. From this year to 2030 the ONS expects the UK population to grow by an average of 319,000 a year of which 323,000 or 101% will be 60 or over. All property owners over the age of 60 will ultimately be sellers, either directly or through their executors. And the net number of new buyers will be, roughly, zero.

If and when the selling of family homes starts to turn into panic dumping I suppose that we will say that everyone knew this was going to happen. But as I wrote earlier, there is often a financial motive behind the ignoring of inconvenient truths. I can’t think what else induces the consensus view that there is a housing crisis, with each political party competing to say how many new homes “they” will build.

In the UK we use our housing stock very inefficiently. Either it’s in wrong place or we are. The number of dwellings per head seems rather high to me. In 1951, when the UK was about to embark on a major home building era, there was a dwelling for every 3.56 people. That figure is now 2.3. If you exclude under 18s, we have a dwelling per 1.6 adults.



The government’s response to the “housing crisis” has been to create artificial demand from first time buyers (Help to Buy). The house building companies have eagerly taken advantage (asking for deposits of just 5%) with the result that new build properties command a substantial premium to resold housing stock.   

Plenty of people have a financial motive to turn a blind eye to the inconvenient truth that house prices are scarily high. The house builders, of course, the politicians because they don’t want to scare the home-owning electorate and the home-owning electorate themselves who have a huge interest in maintaining the consensus that property is a good investment. Sellers are never bears until they have sold.   

I am following the housing market with interest because property has become so expensive that it is now the UK asset in comparison with which all other assets can look good value. Property, bonds and equities are the three pillars of UK investment. Once one pillar starts to wobble, watch out for the roof.  

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