Stamping the housing market


Last week the Financial Times used the latest Office for National Statistics (ONS) housing price figures to assess the impact of the stamp duty raise on the housing market. Since the beginning of the month, purchasers of buy to let property and second homes indeed face a 3% stamp duty surcharge. Some experts believed that prospective second home buyers would rush to complete their transaction before the deadline and would thus generate an artificial and temporary price increase.

The FT article took the opposite view and concluded that “UK house price growth weakened slightly in the year to February, to 7.6 per cent […] meaning that a boost reported by mortgage lenders and estate agents ahead of stamp duty changes for buy-to-let investors is yet to show up in official data”. This statement surprised me and I decided to dig further into the data. My take is the following: although the statement may be true at a global level, by performing the analysis for each Government Office Region separately, one could conclude that the impact of the stamp duty reform was actually much more significant.

k12985080To perform this exercise, I used two publicly available sources of data:

  • ‘Number of residents with a second address in a region, who are usually resident outside of that region’ and ‘Number of usual residents in a region with a second address outside of that region’ as per the 2011 census;
  • ‘Mix-adjusted average house prices by region’ published monthly by the ONS.

First, we need to understand that all UK regions are not equal. The more second houses a given area hosts, the more impact the stamp duty reform should have had. The most recent information on the topic comes from the 2011 Census which gives us the number of residents elsewhere with a second address in a given region – e.g. in 2011 184,616 people had a second address in the South East.

Number of usual residents elsewhere with a second address in the area (2011). Source: 2011 Census

Separately, the ONS data gives us the year-on-year house price evolution in each area from July 2015 to February 2016.

Year-on-year housing price evolution by region. Source: ONS
Year-on-year housing price evolution by region. Source: ONS

Nonetheless we are not interested in the price growth rate but by the increase of the growth rate as the stamp duty implementation deadline approaches. I have therefore compared the average housing price increase (in percentage points) in January and February 2016 with the one witnessed in July and August 2015 in each region – I have taken a two-month average to smooth out any shock. The analysis shows wide discrepancies between regions – for instance the growth rate increased by 5.0 percentage points in London over the period but actually decreased by 2.7 pts in Yorks & Humber.

Increase in housing price growth rate by region, January-February 2016 vs. July-August 2015. Sources: ONS, author analysis

Finally, I look for a correlation between the number of second addresses and the increase in housing price growth rate.

Correlation between housing price growth rate increase and number of second addresses

The correlation between the two variables is clear and we could therefore conclude that the stamp duty change has ‘warmed up’ the housing market in the regions with a high number of second addresses. The stamp duty effect was indeed pushing buyers to complete the transaction as fast as possible, even if it meant paying a higher price (up to 3% more actually). The surge in gross mortgage lending witnessed in March by the Council of Mortgage Lenders supports this conclusion. On a side note, this is another piece of evidence illustrating the fact that the UK housing market remains a ‘seller’s market’ – in a ‘buyer’s market’ you would have conversely seen a drop in prices as sellers try to get rid of their property before having to pay the surcharge.

Stamp_Duty_Paid_mark_for_British_cheques_from_1956It would be interesting to keep an eye on the market prices in the future. Given that purchasers have by definition a limited purchasing power, was the bump just bringing forward future increases (in that case the market should cool off for at least a few months) or will future sellers be able to maintain enough competitive tension to use the ‘overheated’ prices as the new normal?

A plan B for point C

Hinkley Point C (artist view). Credits:

The debate about Hinkley Point C, although not new (the project has been on the table since 2008), has got passionate over the last few weeks, involving incessant decision adjournments, a CFO resignation, diverging positions from two engineering groups both operating within the same company as well as the usual high volume of well-intentioned statements from politicians sitting on both sides of the Channel. The current situation stakeholders are facing could appear surprising and complex; however, this tension could have been forecast from the beginning by simply paying attention to each one’s incentives.

For the UK government, for instance, the optimal behaviour is straightforward: they should keep championing the project, which features as a prominent part of their ‘cleaner’ energy strategy – the UK government intends to cut carbon emissions by 60% by 2030 – and acts as a strong relationship builder with China – which indirectly owns one third of the project. Furthermore, under the current contract terms, the UK government does not bear any financial risk linked with the construction of the plant – actually, the longer the delay, the higher the compensation penalties EDF will have to pay. The only itching point is the high purchase price promised to EDF for the electricity generated: £92.50/MWh, i.e. more than twice the current electricity wholesale price and the equivalent of $150 per oil barrel according to Deutsche Bank. That being said, the first bill will not come before 2025, which leaves room for 2 successive governments, including the current one, to put this point back on the table as (and if) the project moves forward.

EPR project in Flamanville (France)

For EDF Energy’s employees, the situation is as straightforward, but in the opposite direction. Combined together, the size of EDF Energy’s initial financial commitment (£18bn), the back-and-forth movements the Hinkley Project has been subject to as well as the unproven nature of the European Pressurized Reactor (EPR) technology and the delays that the other projects using the same technology are facing throughout the world appear as great ingredients for a disaster recipe which could wipe out a significant portion of EDF Energy’s equity value – Areva_Logo.svgvalue which already got weakened by EDF Energy’s acquisition of Areva’s distressed nuclear reactor business in January. That is in substance the point Thomas Piquemal, EDF Energy’s CFO earlier this year, defended to the extreme by summarily resigning last month – pouring additional oil on the fire.

Delays and overruns of EDF's other 2 EPR projects. Source: Financial Times
Delays and overruns of EDF’s other 2 EPR projects. Source: Financial Times

China General NuclearDespite its strong financial interest in the project through General Nuclear Power Corporation, the Chinese government has stayed mum. At first sight, this is surprising. With hindsight, it clearly appears that the Chinese stakeholders do not need to make any effort or take any decision. Financially speaking, they are in the same boat as EDF Energy, which also needs to fight to defend its wallet. Politically speaking, the Centrica withdrawal has reinforced their minority investor position. As a first-of-a-kind cooperation in the nuclear energy sector between China, France and the UK, one can expect that the last two will do anything to keep the relationship afloat.

Dr-Jekyll-y-Mr-HydeThis leaves us with one torn – and sometimes schizophrenic – entity, namely the French government. The ‘Dr. Jekyll and Mr. Hyde’-type behaviour of the French State as shareholder is not news and already got criticised by the Cour des Comptes in 2008As a 85% equity holder in EDF Energy, it should depress the brake pedal. The project’s current estimated return on investment (9.2%) is not exceptional and relies on (i) the perfect completion of the project from now on and (ii) unchanged energy purchase prices from the UK government, two factors whose strength is not unquestionable and which have already been flagged by the Cour des Comptes, France’s state audit body. The government seems to have already forecast trouble ahead by indicating that it could inject fresh capital into the company. As a champion of French industrial excellence, it should push the accelerator. Hinkley Point C is a massive project that could showcase the French capabilities in last-generation nuclear power plant building, an increasingly competitive arena, while strengthening our ties with the ’emerging world’, whose energy needs will undoubtedly be called to further grow over the next decades. Last but not least, the government pushing for the project will not be the one paying for damages at completion – in 2025, President Hollande will not be in office any more. Unfortunately, any driver will know that pushing the brake pedal and the accelerator at the same time makes a car spin


So where do we go from here? The usual three options are envisaged: Hold, Drop and Change. The first one is the official line, championed by governments as well as EDF Energy’s CEO, and consists in keeping the project going as it is, despite all the risks previously highlighted. Others call for a full withdrawal of the project which would open the door for renewable energy and alternative nuclear power plant builders, although this would entail significant adverse consequences on UK’s future energetic independence, on the ability of France to remain a nuclear know-how pioneer and on the appetite for Chinese investors to support and collaborate on large projects in cutting-edge industries. Finally, the most reasonable option could involve a further delay to enable engineers to design an alternative solution, made of a number (4 to 6) smaller and thus more highly mastered plants. This would enable France to save face while minimising the risk of failure. The latter option seems to gain momentum following the publication of an internal white paper written by senior EDF engineers late last month.

27976819-Un-match-de-bras-de-fer-de-bande-dessin-e-avec-l-homme-mince-vaincre-l-homme-muscl--Banque-d'imagesThe Hinkley Point C project is an interesting example of apparent conflict between politic imperatives and economic logic. The next few weeks should indicate us which side (if any) takes over.

Burning down the house

The purpose of this post

Readers living in South West London may have seen the opposite poster featuring prominently in a real estate agency’s (Acquire Estate Agents not to mention any names) shop front. It was probably designed with the best intent, but this is actually a very bad promotional mechanism.

Let us dissect the proposal. At first sight, the offer seems appealing. The poster indeed advertises a “flat fee of £700” which “includes VAT, EPC, floorplans and pictures” for home owners willing to sell their property. With the average London house costing as much as £531,000, a £700 fee is equivalent to 0.1% of the average transaction value, whereas other major real estate agencies typically charge around 3% of the priceIn that case, why should the prospective seller think twice before walking into the lion’s den?

The reasoning is detailed in-depth and supported by empirical evidence in Levitt’s and Dubner’s Freakonomics  – a book I have already had the chance to write about – and relates to the role of incentives. In a nutshell, with a flat fee, especially a low one, the real estate agent is not incentivised to maximise the transaction value on behalf of the seller but to complete the transaction as quickly as possible, even if it means making sacrifices on price. Quantity prevails over quality.

For the seller, the ‘great offer’ may thus backfire and leave him worse-off overall after the transaction. He will save an average of £15,230 in agency fees (3% * £531,000 – £700), but this saving can be easily more than offset by performing a marginally higher number of visits or by spending a little bit more time negotiating the buyers’ offers – especially given the fever surrounding the London housing market.

A good alternative mechanism could have consisted in offering lower fees as a percentage of the transaction value, which would have maintained the agent’s incentive – albeit at a lower scale.

Daniel Kahneman

I have not been able to assess whether this marketing campaign ultimately proved successful for the agency or not. In any case, and to paraphrase Daniel Kahneman (2002 Nobel Memorial Prize in Economic Sciences) in Thinking: Fast and Slow, this is a perfect example of our ‘rational’ System 2 overriding the gut feels emitted by our ‘impulsive’ System 1.

P.S.: More on Kahneman and behavioural economics will be covered more in-depth in a later post.
P.S. 2: To finish with music…

Brexit won’t happen – Just ask the bookies


Recent surveys about Brexit depict a very close race between the supporters of ‘Brexit’ and ‘Bremain’. Basing itself on the last 6 polls, The Telegraph asserts that the gap has narrowed to a thin 51-49 majority in favour of remaining in the UK. The Week has drawn similar conclusions: the 2% difference between ‘In’ and ‘Out’ supporters is insignificant if we consider that 4% of voters admitted to be unsure about their vote.


The question now becomes: to which extent can we trust surveys? And are there alternative, more reliable sources of wisdom? In the UK, the answer is ‘definitely yes’ and is in the hands of the likes of Ladbrokes, William Hill and Betfair.

James Surowiecki
James Surowiecki

As explained by James Surowiecki in his book The Wisdom of Crowds, betting markets are great ways to aggregate heterogeneous opinions across a given population. More importantly, by putting their own money at stake (by definition), bettors should not focus on their own views but predict the outcome of the vote instead. Provided that the market is liquid enough, academics such as Justin Wolfers built on Surowiecki’s work to demonstrate that, actually, those markets were the most accurate predictors of future event outcomes – and were given the name of ‘prediction markets’ as a consequence.

Betfair_logo.svgWhat are the odds then? Well, all bookmakers concur to assert that the situation is much clearer than the polls suggest. The odds of a ‘Bremain’ on Betfair, the leading betting exchange platform (i.e. a platform where players take bets against each other), have been fluctuating between 1.30 and 1.60 over the last few days, which translates into a probability range of 62% to 77%. This takes into account the recent bombings in Brussels which slightly revived the ‘Eurosceptic’ sentiment – see green arrow in the chart below. According to the same bookmaker, the exact split as of yesterday was 65-35 in favour of ‘Bremain’, with more than £2.7m worth of matched bets.

Historical evolution of ‘Bremain’ odds. Source:

Beyond bookmakers, the world of finance also provides us with a number of prediction markets. The evolution of the GBP/USD exchange rate, for instance, is another way to assess the relative ratio of power between the two sides if we believe that a Brexit would translate into a significant depreciation of the pound. This type of analysis, however, does not allow us to deduct a precise probability of ‘Brexit’ happening but can only track its relative evolution.

Historical evolution of USD/GBP FX rate. Sources: Oanda, author analysis.
Historical evolution of USD/GBP FX rate, with selected time averages.
Sources: Oanda, author analysis.

Given the high stakes, the political establishment will undoubtedly keep a close eye on these indicators over the next few months. Will they prove accurate?

For those unfamiliar with Betfair, here is a short corporate video presenting the basics of the betting platform.

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