There have been items in this blog about property in the past and a recent one on leasehold and freehold which mentioned CDO's and their role in the general property markets. Tom Brammar in CapX says that UK welfare is a CDO with property as its junior tranche.
Here is the article. referred to above. Considering that this a very difficult and intricate area of finance he does well to keep it readable and relatively simple, note the word relatively, and does tell you what a CDO is and for.
It is claimed that there are ways and means of dealing with the issue of parents or grandparents property that manage or minimise tax liability. You need to have the right lawyers for this and the set up they recommend. This may not be to everyone's taste. And the tax hawks will be hovering over every clause and footnote.
At one stage he says:
"To put it another way, let’s imagine a significant house price correction happens. (I know, it’s not possible, houses only ever go up in value — but just humour me.) Taking the example I outlined above the implication for UK government’s liabilities for the welfare system would be horrendous."
Unquote.
And counting....
Does this make the slightest sense to you?
ReplyDeletehttps://www.investopedia.com/terms/c/cdo.asp
The description of the welfare system as a CDO where the junior tranche is house prices is both financially fairly reasonable and utterly misleading from a substantive point of view and the explanation is simple, and I shall start with alternative illustration of the "house prices are the junior tranche of a welfare CDO" point of view:
ReplyDelete#1 There are many people who want to spend 20-25 years with a good income without working, starting at 65yo, and this good income can only come from workers, one way or another.
#2 Among other ways, one way is for the government to tax workers and hand out their money to retirees.
#3 Among other ways, one way is for the government to drive up house prices, so workers hand out their money directly to retirees via higher house prices and higher BTL rents.
Indeed if retirees stop getting handouts from workers in the form of higher house prices and rents, they will have to rely more on government taxing similar handouts from workers.
The two alternatives looks financially similar, but they are very different both economically and distributionally:
* While taxation funded retirement appear in the government budgets, property price and rent funded retirements don't, even if the loss to worker wages because of the latter may be larger, and even if the property prices and rents are the consequence of deliberate government policy.
* The pension-from-property way enormously favours affluent property owners, and in particular those in the south-east and London, that is it favours tory voters. Because property gains are the bigger the bigger the property is, and the bigger the closer to London it is, and property gains in those areas are often for retirees several times larger than the actuarial value of their state pension and potential other retirement costs.
* Property capital gains are totally unproductive and resolve in a pure transfer from productive activities to unproductive speculation. Instead tax-funded retirement is in effect paid for by the equivalent of the returns on GDP-linked government bonds, that is by government investments in education, infrastructure, etc. that help production to increase over time.
In the past 35 years of right-wing governments have sought eagerly the swing votes of the property-owning ageing upper-middle classes of the south-east and London, and english elections have reduced in practice to southern house price referendums.
This will probably cause a lot of trouble indeed.