The phrase "Capital idea old boy" was left ringing in my ears after discussing the 'Brexit' referendum, here in the UK, with an ex colleague who was undecided on which way to vote. Our proposition seemed to be whether a 'small island' like the UK, which is densely populated in London and the Southern home counties, can cope with more pressure when rental and house prices have already gone through the roof? There are, of course, two sides to this dynamic equation; one of supply and one of demand, where market clearing sets the marginal price of housing.
This very real phenomenon of rising rents and house prices hits many ordinary families deeply in the pocket at a time when real wages are stagnating, confidence seems low and uncertainty seems high. It has also lead to a situation where a staggering amount of money has moved into the second property and buy to let market. Partly because of the ultra low interest and mortgage rates, available to those who can afford them, and partly because property has once again become a one-way bet.
The situation is doubly if not triply perverse: low interest and mortgage rates are not bailing out the families that need it the most whilst those that can afford to invest in rental property or the 'luxury' of a second home have seen their capital values rise and as a consequence appear to be in the process of creating grounds for another property collapse. According to my old colleague most of the money withdrawn from his wealth management company has gone into London property and every second homeowner is now an expert!
The property squeeze is unequivocally down to too little properties being built and too much easy money chasing what is available. This increasingly means, without wage rises, those on the early stages of the property ladder can not compete with landlords and second home owners. It becomes a vicious or a virtuous circle depending on your point of view. The circuit breakers could be a dwindling population, rising interest rates or new supply bringing about a more socially acceptable and economically useful clearing price.
In my opinion, the dwindling population choice is not a policy answer and plays into the hands of those wishing to put up barriers to Europe and the rest of the world. That seems to be a defensive response rather than finding a way towards a capital market solution. It is also true to say that house builders in the UK can and do sit on land banks and prefer expensive inner city and town developments and that bank lending is constrained after their financial crisis.
At the same time the Government does little to reset the terms of trade in this domestic market preferring the market solution. However, there is one source of very long term finance that has come up with a 'capital idea' and it may well be an archetype for what sustainable and long-term investment looks like in the UK.
Legal and General, an insurance, investment and savings company, under the leadership of Mark Wilson, are doing what great companies have always done. That is spotting a gap in the market and innovating to meet social and economic needs and in the process earning a decent return for their shareholders (largely the savers who will become pensioners and need an income in retirement) and helping to ensure the longevity and purpose of the company.
L&G are deploying £15 billion to build student, starter and retirement homes to ease the housing crisis, using smart energy technology to tackle scarce resources and their low carbon goals and revive inner cities and urban areas. This is not a short term trade or tactical fluke it is a commitment that comes from knowing that everyone's economic, social and environmental prosperity are bound together.
This is truly a virtuous circle that is helping to break the mould.