Letter to FT – Housing prices are a threat to London’s standing

In an earlier post I mentioned the very interesting column Michael Skapinker published in the FT 3 weeks ago on the impact of house prices on London’s influence. I took the liberty of sending him my thoughts and a shortened version got published in the FT last week. You will find the full version below.


Dear Sir,

As regular reader of the Financial Times, I would like to thank you and congratulate you for your very wise column in yesterday’s paper entitled ‘House prices in London must fall if the city is still to be top’. I largely share your opinion and I am thus writing you to share some of my observations.

First, let me give you a bit of context. I am 29 years old and I arrived in London from France almost 7 years ago. I started my career as a strategy consultant and I am now working for a private equity fund – like tens of thousands of my compatriots here. I got married in 2012 and I am now the father of a 2-year old kid.

My friends who stayed in Paris told me that the first step on the rent or property ladder was usually the hardest: the Parisian housing market is narrow, landlords are asking for a ridiculous amount of guarantees when they are renting to young professionals and flatshares are often prohibited. The situation, nonetheless, seems to get simpler as they get older: higher salaries, more confident landlords and, for many, the possibility to get a foot on the property ladder when they are in their early 30s.

In London, my impression is that the situation is reversed. In one hand, it is indeed easy and flexible for a young talented professional with a job in London to find a room – albeit most often in a flatshare as you rightly pointed out. The situation remains largely unchanged after marriage – although ‘Double Income No Children’ couples can afford to rent their own studio rather than staying in a flatshare.

On the other hand, the situation gets increasingly complicated when you have a kid. The school system in London is either prohibitively expensive or prohibitively complex depending on the path you choose (public or private). Households relying on a single income (e.g. if the mother stays at home) or not working in the financial services sector financially struggle to rent a 2-bed flat while coping with the demands of the expensive ‘London way of life’.

Personally, I have come to London with many of my fellow students and I have since then witnessed two waves of departures: the first one took place 3-4 years ago, when some decided that a first experience in London of 2-3 years was enough and they decided to look for a stable family life in Paris. The second one is happening now, where I see married couples with young babies deciding to pack because they cannot make it work financially.

Root causes are multiple and have already been largely covered, including in your newspaper. I am convinced that London primarily suffers from a strong housing supply-demand imbalance and that the implementation of a bold housing construction programme would partly alleviate the tension. I also believe that the way London is organised and the high transportation costs play a role. London is a very vast city and, despite a tight bus network, the tube is certainly the safest way for Londoners to cut their commute time. As a consequence, the price of houses located near tube stations tends to soar. Similarly, tube fares are among the highest in the world and some Londoners are ready to pay more in their rent if this helps them save money on their transport budget – this drives the price of centrally-located houses up. Those two factors combined create a huge variance in house prices depending on their location. A couple of weeks ago, in an article entitled ‘London homeowners dig down as property prices shoot up’, the Financial Times mentioned that the average price of a home is 2.5 times higher in Chelsea than in Battersea, which is located just a few minutes away. As a matter of comparison, the ratio between the most expensive and the cheapest areas in Paris is no greater than 1.8 times – and we are talking about opposite sides of the city.

Last but not least, you mention in your article that sales of £1m-plus properties have fallen. Only time will tell whether this drop is the sign of a wider ‘market cooldown’ or just a pause until uncertainties surrounding the financial place of London (e.g. Brexit, stock market crisis) are dispelled.

I cannot agree more with your conclusion. London needs structural change to maintain its worldwide leadership. Time alone will only worsen the situation and could in the long term transform the city in a giant ‘gentlemen’s club’, where only those who invested early enough would be financially able to stay.

I would be delighted to continue the discussion if you wish – in the meantime, I thank you for your time and your consideration.

Best regards,

Quentin Toulemonde


On red boxes and helicopters

George Osborne
George Osborne and his case

George Osborne, the Chancellor of the Exchequer, will present the next Government’s budget tomorrow. Although it is not official yet, this year’s Budget has already triggered a general outcry given the various alleged tax increases that have emerged in the press, including an increase in fuel duty, and has raised fears about the return of ‘austerity policies’ – which Mr. Osborne’s interview video below will not alleviate. We will have the opportunity to discuss the key measures once they have been made official. In the meantime this post presents the difficult conundrum Mr. Osborne has to confront.

Firstly, Mr. Osborne bets a large chunk of his political credibility on this budget. After hinting a fiscal surplus – a result that has rarely been achieved in the past -, boosted by promising economic prospects in sight, the Chancellor got caught by the real world and a disappointing economic recovery in the UK, whose 2015 GDP has been revised downwards by £18bn in December 2015. And yet, an apathetic economic activity translates into lower tax receipts for the government – up to £50bn over the course of the parliament. In order to partly offset this unexpected ‘black hole’, Mr. Osborne has to rely on a mix of public spending cuts and tax increases. The first lever will consist of “50p [of cuts] from every £100 the government spends” by 2020. The second lever will be further detailed tomorrow but, beyond the fuel duty increase we mentioned above, tax on insurance premiums and banks are also on the agenda. Mr. Osborne nonetheless proved his political instinct by softening the bitter pill with an announced reduction in income tax – the most visible and universal

Historical UK general government deficit as a percentage of GDP. Source: ONS.
Historical UK general government deficit as a percentage of GDP.
Source: ONS.
Credits: www.abceconomics.com

Secondly, the looming Brexit threat adds uncertainty to the state of the UK economy at least for the year to come. In the short-term, this uncertainty translates into deferred investment decisions (‘sit and wait’) and ties the hands of the Chancellor, who has been publicly urged by David Cameron not to do anything that could complicate the referendum campaign. This phenomenon would however become marginal if the country decided to leave the EU. In that case, there is little doubt that the road to a fiscal surplus would significantly steepen.

Credits: www.moneymetals.com
Credits: www.moneymetals.com

Lastly, this political stance is challengeable from an economic perspective. Central Banks have struggled to revive inflation despite injecting thousands of billions of pounds/euros/dollars in the economy. The result has been mixed to say the least – inflation in 2015 in the UK will end up close to 0% – and has conducted some economists to bring the notion of ‘helicopter dropback in the spotlight. This measure consists in giving money directly to households in an attempt to encourage private spending. This decision would be a sensible way for the ‘fiscal stimulus’ to reach individuals, given that, as accurately diagnosed by Joseph Stiglitz, banks prefer to leave cheap money sleeping on their accounts – even if it means paying for it – and that companies have benefited from the low interest rates to buy financial assets – including their own shares – instead of investing.

Are helicopter drops the ultimate solution? They could be, provided that households are confident in the future enough to spend part of this gift rather than piling cash in the bank. By putting ‘skin in the game’ itself, the State could facilitate individual decision-making by highlighting trustworthy investments. Higher taxes – leading to lower disposable income – and lower public spending both go in the other direction.

Unfortunately, as we see today, the political agenda is too much focused on short-term deficits to account for longer-term economic benefits. This difficult (and inefficient) trade-off could have been avoided, at least partly, if governments had been bold enough to implement structural cost-cutting reforms in good times. This has not been the case, as the chart below shows. Another thing to think about for the Maastricht Treaty advocates.

Correlation between UK GDP growth and UK budget deficit as % of GDP. Sources: ONS, World Bank.

To understand what will happen tomorrow you can watch the video below extracted from the UK Parliament website.

Update (16/03): The US banking industry body called for a rate rise yesterday, arguing that the key root cause of the current poor economic conditions was more the lack of business confidence than the availability of funding.

8 similarities between MBAs and the Premier League (2/2)

[continued from last week]

5. The importance of diversity could lead to artificial price disconnects: In the article mentioned in the first part of this post, Bhavik Trivedi, managing partner of Critical Square, an MBA admissions service, put it simply: “Gender diversity is important to schools and competition to attract top female talent is steep”. Practically speaking, one could expect that, all other things being equal, business schools will be more willing to stretch their offer to attract talented female students. In Premier League, the ‘Home-Grown Player Rule’ requires any squad to include at least 8 (out of a maximum of 25) players who have played at least for 3 entire seasons or 36 months in English or Welsh leagues before the age of 21. And yet the depth of the England-raised talent pool has varied over time and this has led to episodes of relative supply shortage, and therefore inflated prices for English players. One may remember the £30.75m Liverpool paid to lure Andy Carroll away from Newcastle in January 2011 to replace Fernando Torres. Experts judged at the time Liverpool overpaid Carroll, primarily for two reasons: (i) having lost Torres, Liverpool was short of a striker 24 hours before the end of the transfer window and (ii) the club was also close to breaching the ‘Home-Grown rule’. Ultimately, Carroll scored only 11 goals in 58 games under the Reds jersey before being sold to West Ham in 2013 for £13m – probably not the best return on investment.

Andy Carroll celebrating one of his £2.9m goals for Liverpool

6. The price to pay will increase for the general public: Tuition fees for MBAs have increased over the last decade much faster than inflation or growth for MBA salaries. In a 2013 article, The Economist criticised the London Business School (LBS), UCLA Anderson and the Hong Kong University of Science Technology for having excessively raised their fees since the beginning of the decade – +250% between 2000 and 2013 for the latter. The trend has not slowed down since; for instance LBS raised its fees from £57,000 in 2012 to £70,800 in 2016 – a 5.6% CAGR, well greater than inflation. The Premier League has also become increasingly onerous for all stakeholders since its creation in 1992. On the media right side, BSkyB and the BBC managed to broadcast the 1992-1993 season paying less than £65m in rights. This era is over. In the most recent round of negotiations, Sky and BT together had to pay a total of £5.2bn to secure TV rights for 3 seasons, from 2016 to 2019, representing a 71% increase compared with the price for the period 2013-2016 and leading each game to cost on average £10.2m in rights only. Spectators and TV viewers were not left out of the spiralling inflation, with ticket prices and TV subscription prices sky-rocketing. Even the English people’s legendary composure proved not sufficient to digest the bitter medicine. In Liverpool, fans organised a ‘Walk out on 77’ a couple of weeks ago to protest against the price of tickets for the game against Sunderland – the cheapest were priced at £77.

7. Coaches/teachers are highly paid but their impact on performance remains to be proven: The salary comparison website Glassdoor states that an Associate Professor at the London Business School earns an average of £155k, although the quality of teaching has a limited impact on the MBA graduates’ future career prospects. In football, coaches are very often pointed out and they are usually the first – because least expensive – fuse to be replaced when their team performs below expectations. Conversely, coaches with outstanding track records have seen their quote soar over the last few years, and ‘stars of the bench’ have nothing to envy with the likes of Messi and Ronaldo when it comes to salaries – Guardiola and Mourinho make close to €20m a year. Academic studies have nonetheless demonstrated that a mid-season change in coach has ‘no statistically significant impact’ on a football team’s performance, i.e. the performance evolution post-change is not better than the usual ‘regression toward the mean’ the team would have witnessed anyway, irrespective of the coach.

Merit or statistical artefact?
Merit or statistical artefact?

8. Clubs/business schools entering a downward spiral will struggle to survive: All business schools cannot brag about an impressive alumni network, state-of-the-art buildings and glossy school magazines. ‘Top-tier’ business school are just the trees that conceal the forest. Indeed, behind this handful of stellar brands, a significant share of the post-graduate education market struggles to survive financially, despite the aforementioned increases in fees. As explained in a Financial Times article dating back from 2012, some of the key reasons are simple to understand: if not protected by the ‘power of their brand’, MBAs face increasing competition from alternate ways of learnings, primarily MOOCs (Massive Open Online Courses), which offer highly customisable, great quality programs at a fraction of the cost of an MBA. Furthermore, MOOC platforms have developed a system of official certificates to ensure that students can get recognised for completing these online trainings. In football, a series of disappointing performances or poor (not to say unlawful) club management practices can lead a formerly European title contender to the abyss of minor leagues. Numerous examples have emerged over the last few decades across Europe, including Parma in Italy (which went bankrupt twice in the space of 10 years), Leeds United in England and the Glasgow Rangers in Scotland. Despite their old glory and impressive number of fans, it will take years for those three clubs to get back on their feet and play the top roles again.

The Glasgow Rangers playing a league game in 2015 against Alloa, a town with a population of 19,000.
The Glasgow Rangers playing a league game in 2015 against Alloa, a town with a population of 19,000.

Any other idea? Feel free to share it as a comment below!

Updated: The Financial Times reported this morning that Liverpool was indeed offering the most expensive Premier League season tickets when adjusting prices for local income levels.

8 similarities between MBAs and the Premier League (1/2)

A cynical mind could defend that the ultimate goal of both education and sports is to rank people according to intellectual or physical ability, and this at all levels. At the top of the pyramid, MBAs tend to be regarded as the most prestigious diplomas, while high-flying professional leagues, such as the Barclays Premier League in football, dominate the world of sports. Interestingly, interesting parallels can be drawn between those two areas. I have listed 8 points, but I am sure there are many others. I have split this post in two parts to make it more digestible. The second half will follow early next week – in  the meantime please feel free to comment and add your own.


  1. The objective economic value of both MBAs and the Premier League is debatable: For MBAs the question has been around for years, and actually a straightforward Google UK search for the terms ‘Is it worth doing an MBA?’ will return an excess of 24 million results. The opportunity cost of taking one or two years off often outweighs the accelerated career progression an MBA promises – and even when it happens it is never possible to cleanly delineate the benefits directly attributable to MBAs. When it comes to the Premier League, one could adopt a relatively harsh viewpoint and declare that this competition does not manufacture any product or does not create any value-added service – although this statement obviously neglects the economic activity induced by the organisation of such events as well as the social and health benefits of physical exercise.

2. Competition between top schools/clubs is increasing and happens on a worldwide basis: MBAs have been fighting against each other for years, trying to make it to the top of world-famous rankings such as the Financial Times’ Global MBA ranking. Competition has undoubtedly reached a worldwide scale if we look at the origin of the business schools contained in the latest FT ranking: 19 countries are represented in the top 100, from the US (50 schools) to the UK (13), China (6) and more ‘exotic’ locations such as Portugal (1) or South Africa (1). In football, the 1995 Bosman ruling facilitated the transfer of players within the EU and the net has since then widened to allow clubs to recruit a limited number of non-European players.

3. The price for top talent will keep rising: In football, the globalisation of the market for top talents, coupled with the development of football as an economic powerhouse, has led to an explosion of the price paid for top players. A Wikipedia article has listed the highest player transfer fees over time. Even when adjusting for inflation, some of the best players of the past decades would be considered as bargains by today’s standards: Johan Cruyff’s 1973 move from Ajax to Barcelona cost the Spanish club the equivalent of a mere £922k and no transfer fee had ever exceeded the £15m mark before 1996 with Alan Shearer – the same mark would apply to an ‘average plus’ player today. Since then inflation has been more and more pronounced, culminating with Cristiano Ronaldo’s and Gareth Bale’s transfers to Real Madrid for £80m and £85m at the beginning of this decade. The rising role of Mid-Eastern and Asian clubs witnessed during the recent transfer windows – in particular China last month – will only accelerate this trend.

A £165m hug

Competition for MBA students has not reached this extreme – and will likely never do so -, although an interesting article from the Financial Times concludes that business schools are more and more using their scholarships as a way to attract the best students rather than broadening the pool of potential applicants. On top of fiduciary benefits some schools also offer ‘benefits’ such as “preferential access to certain faculty members or guest speakers” according to the same article.

4. Schools/clubs are building a strong intake/team not only to reign now, but also to facilitate recruitment in the future: The quality of the alumni network is a key component of the MBA offering and top business schools need to maintain their status as a regular supplier of blue-chip executives. The recruitment of high-quality students can therefore be considered more as a long-term investment aiming at improving the executive pipeline in the future – for an example see this page listing selected famous Harvard alumni. For football clubs, the recruitment of a star is a way for a club to signal a step change in standing and to lure other strong players as part of this ‘transformation project’. Putting aside Real Madrid, who has been spending huge amounts in top-class players for years, Fulham for instance (unsuccessfully) tried to do so in the early 2000s, then Manchester City, and more recently Paris Saint-Germain with the recruitment of Zlatan Ibrahimovic, without whom PSG would certainly not have signed the likes of Di Maria, Cavani and Thiago Silva.

Zlatan and his gang of lads
Zlatan and his gang of lads

[To be continued…]

Is the Western oil & gas ecosystem collapsing?

Cartoon from Russia-Insider.com

As the crude oil prices start their second month under the $40 a barrel barrier, the large-scale effects of low oil prices are starting to become apparent. Chesapeake Energy, the second-largest gas producer in the US, and Saipem, the Italian oil services company, took well-covered large hits in the stock markets yesterday and today – Chesapeake’s stock is now down 51% over the last month and Saipem’s is down 48%. Chesapeake had to dismiss rumours that it hired Kirkland & Ellis to restructure its debt while Bernstein advised investors to stay away from Saipem’s planned capital raise, according to Les Echos.

We may thus be entering a new phase in the ‘deep pocket’ war that the oil market has become over the last few months. The cash reserves that oil companies had put aside for ‘tough times’ are running empty, and the cracks we are witnessing today are probably only the first ones in line.

The risk of contagion is indeed not negligible. As rightly pointed out in this article from Reuters, Chesapeake is legally bound to oil infrastructure providers, for instance pipelines, through significant (several billion dollars a year) long-term contracts. No surprise then to note that Williams Companies’ share price was also down 35% for the today (9th February) and almost 50% down over the past 30 days.

So why not a pure write-off? First, these companies can rely on a cushion of tangible and partly re-deployable assets. Since the start of the year, companies in the industry – including Saudi Aramco – have been said to consider either raising capital (including through an IPO in the case of Aramco) or selling assets – both methods have equivalent impacts on net debt. The latter is a short-term solution that Chesapeake could well be tempted to consider. Second, the evolution of the share price is also a proxy for the expected evolution of the oil price in the future: shall the share of unprofitable US production sources remain high in the long term, the investors will lose faith in the potential recovery of the market and may decide to further turn their back on O&G stocks.

Update (10/02): This very interesting piece of analysis from Wood Mackenzie confirms the $30 a barrel environment leads a very large share of oil fields to be run at a loss.

Update (29/02): Chesapeake reported last week a $14.9bn loss. At the same time, Les Echos reported that petrol funds were to sell $400bn in assets.