Lack of housing, not credit, is root of property problem

A closer look at year-on-year figures shows that the market is still some way from another crash, despite Help to Buy fears

Farquhar Road, a leafy address in Birmingham's Edgbaston suburb, has homes selling for north of £1.5m. In Glasgow's West End a five-bedroom Victorian terrace can command a seven-figure price tag, while there are hundreds of streets in London where a family will struggle to secure a purchase without £2m to spend.

It seems to confirm that Britain is experiencing a house price boom that will, in a couple of years, lead to another spectacular crash.

Already opposition politicians and housing experts have warned of the dire consequences of the government's speculators' charter, otherwise known as Help to Buy. The scheme gets round the need for a 20% deposit by offering a taxpayer-funded 20% top-up loan in combination with a buyer's 5% deposit and 75% mortgage.

Combined with the Bank of England's funding for lending scheme (FLS), critics argue that it provides yet another sugar rush for a market that is already enjoying a good deal of stimulation.

Some economists put the average price rise this year, and next, at a combined 15%. Others have pencilled in more than that. And in the topproperty hotspots, prices seem to be rising almost every week. As a topic of dinner party conversation, the vaulting price of a half-decent flat or house is back at the top of the menu.

Recent evidence also points skywards. The Council of Mortgage Lenders (CML) said last week there was a marked pick up in mortgage advances in May, adding that surveys show the housing market is moving out of first gear. Property website Rightmove revealed on Monday that "all regions are up year-on-year for the first time in nearly three years contributing to the positive national picture".

Yet a closer look at the figures shows the UK is still some way from another crash. There are many ways to judge house price inflation. If we use the Bank of England measure that marries the Halifax and Nationwide indices, the fall in average values since the 2007 peak is 15%. So the expected rise in prices between now and 2015 will only take us back to the previous peak.

More importantly, the number of people buying today at the newly inflated prices is small compared with the peak, which means if prices fall, only a few people will get in trouble.

A look at the number of transactions adds support to this view. The CML has pencilled in 950,000 transactions in 2013/14 compared with 1.6m in 2007. Repossessions, which are another measure of trouble ahead, are roughly static at around 35,000 a year and the CML expects a small rise to 37,000 next year.

The supply of new homes, or lack of it, is particularly important in keeping prices high. Building remains at levels last seen in the 1920s. The construction data for May showed output down almost 5% on the previous year, with private and social house building hardest hit.

Private builders reported a surge in profits last week and pointed to Help to Buy and the FLS as key drivers of the buying spree. But they are adding to the housing stock at a snail's pace. Far from sensing a market that can withstand thousands more homes at top prices, they are drip-feeding them into what they perceive to be a relatively fragile situation.

Then there are the housing associations. There are plans for them to increase their programmes, though not while austerity is the order of the day. A lack of social housing heaps more pressure on an already over-stretched private home market, pushing up rents and prices further in a way that economists find, in the short term and in the narrowest gauge of supply and demand, entirely justifiable.

Hundreds of London streets are off-limits to families with less than £2m to spend on buying a house.So at a time when banks are restricted from offering the kinds of crazy loans available before the crash and are better capitalised to deal with unforeseen shocks (and the supply of new homes is atrociously small), there is a certain amount of justification for this price level. High prices, a small number of transactions and restricted supply have many social, political and economic consequences, but are not a reason to panic about a possible crash.

No wonder George Osborne told MPs last week: "The purpose of [Help to Buy] is to repair an impaired mortgage market that is clearly not functioning properly. I don't think the situation at the moment looks like an asset price bubble."

The problem is that we seem to be at a crossroads where the UK either continues its lost decade of low growth, low wages and severe restrictions on the supply of credit, or we allow a consumer boom built on the credit available through Help to Buy, the FLS and looser ties on bank lending to rescue the economy.

Rob Wood, an economist at the private German bank Berenberg, watched the previous boom from his position as an analyst inside the Bank of England. He is concerned about the outlook beyond 2015 when house price rises will take the UK average to new highs. If that occurs without any noticeable degree of wage growth or cut in unemployment, then we will be back in bubble territory.

"House prices thus reach the heart of Britain's current policy paradox," Wood said. "Loose monetary policy works by boosting asset prices and encouraging households and firms to spend now and save later. That boost can prevent depression. But it can only delay the inevitable adjustments of saving, spending and house prices.

"To keep the economy alive today, policy has to do the opposite of what is needed to keep it alive tomorrow. The positive way this plays out is that UK adjustment is less painful in the future. Eurozone austerity is due to ease off next year and the US will be through the fiscal cliff. With a stronger world, UK adjustment could be less difficult in the future".

Wood says relying on other countries to bail out the UK is a risky strategy when the best way to avoid a house price bubble is to build more homes. In fact, he would embark on a wide range of infrastructure projects to bring down unemployment and stabilise house prices.

But the British disease could be embedded to the extent that a bubble is inevitable without more far-reaching reforms to a tax system that already encourages speculation in property.

Former Bank of England adviser Kate Barker wrote a report for Gordon Brown that said Britain needed around 400,000 extra homes a year to keep house price rises in line with general inflation of 2%. That seems like a pipe dream when the government refuses to back public house builders with cash, relying instead on the private sector.

Consumer lobby group PricedOut agrees with the CML and most housing groups that Help to Buy will do little to ensure that more house-building happens over the longer term. It says: "Boosting buyers' access to credit simply allows house-builders to raise their sale prices to match. This means bigger profits for developers, but even higher house prices for struggling first-time buyers to contend with."

Only public housing built on publicly owned land, of which there is still plenty, especially in the hands of the Ministry of Defence and local authorities, can save the day.

Article Source : http://www.guardian.co.uk

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Economic recovery hopes boosted by drop in failing firms

40% fall in companies in financial distress raises in second quarter, according to restructuring specialist Begbies Traynor

The number of companies in financial distress dropped sharply in the second quarter, in the latest sign of improvement in the wider economy.

Businesses in a "critical" condition fell 39% to 3,001 between April and June compared with the same period a year earlier, according to a report by restructuring specialist Begbies Traynor.

Julie Palmer, a partner at Begbies, said it was the "first real sign that the UK economy has turned a corner towards a sustained recovery".

She warned however the worst may yet be to come for so-called zombie businesses, which are smaller companies that have survived there cession but are chronically underfunded and do not have sufficient cash to take advantage of a recovery.

"We have real fears that many small and medium-sized enterprises will have serious financial difficulties at the time they least expect - during a recovery.

Construction industry saw a big drop in companies in financial distress. "Our experience has shown time and time again that many SMEs run out of cash during the recovery phase, as there is a real temptation to over trade," Palmer said.

The Begbies red flag report, which monitors early signs of financial distress among companies, said that businesses in critical distress also fell 9% in the second quarter compared with the first.

It added that distress levels fell most sharply in the construction, professional services, and financial services sectors, while manufacturing also improved on the back of increased demand both at home at abroad.

Separate data has supported the picture of a strengthening UK services sector, but manufacturing has performed below economists' expectations.

However, official figures to be published on 25 July are still expected to show that economic growth accelerated in the second quarter to about 0.6% from 0.3% in the first quarter.

Begbies Traynor said that businesses depending on discretionary consumer spending were among those to see some of the biggest rises in critical financial distress levels, including hotels, bars and restaurants.

"The consumer-facing industries continue to struggle as shoppers maintain tight control over their purse strings at a time when disposable income has remained under pressure," Palmer said.

Article Source : http://www.guardian.co.uk

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China accuses GlaxoSmithKline of paying £300m in bribes

British drugmaker under investigation by Chinese authorities for alleged bribery and price fixing

The British drugmaker GlaxoSmithKline used travel agencies and consultancies as vehicles to bribe officials and doctors and illegally boosted the sales prices of its drugs sold in China, police said on Monday.

Since 2007 the company had transferred as much as 3bn yuan (£323m) to more than 700 travel agencies and companies, Gao Feng, a police official in charge of the investigation into the company, told a news conference.

The investigation had found GlaxoSmithKline was chiefly responsible for the bribes, including instances of sexual bribery, Gao said. Four senior Chinese executives have been detained.

Police said they had taken no action against any British nationals, adding that no information had been received from GSK's UK headquarters.

GSK, which says it was only told of the grounds of the investigation in early July, has said it found no evidence of bribery or corruption in China, adding it would co-operate with the authorities.

GlaxoSmithKline research centre in Shanghai. The company is under investigation over alleged briberyThe ministry of public security said on Thursday that GSK executives in China had confessed to bribery and tax violations during one of a string of investigations into foreign firms in the world's second-biggest economy.

The ministry said the case against Britain's biggest drug maker involved a large number of staff and a huge sum of money over an extended period of time, with bribes offered to Chinese government officials, medical associations, hospitals and doctors to boost sales and prices.

Article Source : http://www.guardian.co.uk

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US blocks crackdown on tax avoidance by net firms like Google and Amazon

France fails to win backing for tough new international rules targeting online companies in run-up to G20 summit

France has failed to secure backing for tough new international tax rules specifically targeting digital companies, such as Google and Amazon, after opposition from the US forced the watering down of proposals that will be presented at this week's G20 summit.

Senior officials in Washington have made it known they will not stand for rule changes that narrowly target the activities of some of the nation's fastest growing multinationals, according to sources with knowledge of the situation.

The Organisation for Economic Co-operation and Development (OECD) has been told to draw up a much-anticipated action plan for tax reform at the gathering of G20 finance ministers this Friday, but the US and French governments have been at loggerheads over how far the proposals should go.

While the Americans concede that the rules need to be updated, they are understood to be pushing for moderate change. They are believed to want tweaks to the existing wording of international tax treaties rather than the creation of wholly new passages dedicated to spelling out how the digital economy should be taxed.

This has put the US at odds with several G20 nations, particularly France, which in January published radical proposals for new concepts in international tax treaties designed to counter some of the avoidance measures deployed by internet firms. Officials at the G20 governments have been working closely with the OECD, a club for the world's industrialised nations, over the proposals.

Google chairman Eric Schmidt and French president François Hollande, who has been targeting internet companies that pay little or no tax in France.Despite opposition from the US, the French position – which also includes a proposal to link tax to the collection of personal data – continues to be championed by the French finance minister, Pierre Moscovici.

The OECD plan has been billed as the biggest opportunity to overhaul international tax rules, closing loopholes increasingly exploited by multinational corporations in the decades since a framework for bilateral tax treaties was first established after the first world war.

The OECD is expected to detail up to 15 areas on which it believes action can be taken, setting up a timetable for reform on each of between 12 months and two and a half years.

Among the areas expected to take longest to produce results is in which jurisdiction a multinational group should pay tax on its business activity, under "permanent establishment" rules. Many internet firms' tax structures, such as those of Google and Amazon, exploit loopholes in this area.

While the case for broad reform of the international rules has been made repeatedly by top politicians around the globe, in many areas there is limited common ground on what shape new rules should take.

As a result, because of its consensus-driven nature, the OECD action plan is expected to contain watered-down recommendations in some areas.

Nevertheless, the OECD has already made clear it regards aggressive tax engineering by internet multinationals to be among six "key pressure areas" it will address.

In a report to the G20 in February it said: "Nowadays it is possible to be heavily involved in the economic life of another country, eg by doing business with customers located in that country via the internet, without having a taxable presence therein.

"In an era where non-resident [corporate] taxpayers can derive substantial profits from transactions with customers located in another country, questions are being raised as to whether the current rules ensure a fair allocation of taxing rights on business profits, especially where the profits from such transactions go untaxed anywhere."

However, tensions are thought to have surfaced in the OECD working party looking at how to address the permanent establishment rules in the light of the burgeoning internet economy. This working party is being jointly led by US and French teams – representing the extremes of opinion among G20 nations.

France has been among the most aggressive in responding to online businesses that target French customers but pay little or no French tax. Tax authorities have raided the Paris offices of several firms including Google, Microsoft and LinkedIn, challenging the companies' tax structures.

In the case of Google, in 2011 French tax officials demanded €1.7bn (£1.47bn) in back taxes. In February this year Google settled the case, agreeing to paying €60m to help France with digital innovation and other issues. The French president, François Hollande, said it was "a model for effective partnership and is a pointer to the future in the global digital economy."

In the UK, outcry at internet companies routing British sales through other countries reached a peak in May after a string of investigations by journalists and politicians laid bare the kinds of tax structures used by the likes of Google and Amazon.

Margaret Hodge, the chair of the public accounts committee, called Google's northern Europe boss, Matt Brittin, before parliament after amassing evidence on the group's tax arrangements from several whistleblowers.

After hearing his answers, she told him: "You are a company that says you do no evil. And I think that you do do evil" – a reference to Google's corporate motto, "Don't be evil".

Last month, the Treasury minister David Gauke told backbench MPs who had called a short debate on multinationals and tax avoidance that the government did still hold out hope that shortcomings in international tax guidelines – specifically in what constitutes a business taxable in the UK under permanent establishment rules - would be addressed by the G20.

"We are leading the way in encouraging the OECD to look at what needs to be done to ensure that the tax rules are brought up to date for the internet world," he said.

Writing in the Observer in May, the Google chairman, Eric Schmidt, appeared to drop his previously unapologetic defence of existing international tax rules.

In the face of building public anger, he conceded that rather than taking up tax incentives offered by governments, his firm and others had built tax structures that had not been foreseen by those who drafted the rules decades ago before the advent of the internet.

"Given the intensity of the debate, not just in the UK but also in America and elsewhere, international tax law could almost certainly benefit from reform," he wrote, describing this week's OECD action plan as "hotly awaited".

Article Source : http://www.guardian.co.uk

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