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Thursday, 3 January 2013

Calculating the 'true market value' of Jersey property

I have been looking again at the Jersey Property Market, let's look at what the 'bottom of the market' value of property in Jersey (as supported by the income support scheme) truly is:

The Income Support (Jersey) Regulations 2007 currently set the rates for housing component as follows (please note that these are the old rates, the subsidy was increased by around 6% in October 2012 but the website has not been updated so the verifiable rates are utilised):

4      Rates for the housing component

(2)    The rates payable under this sub-paragraph are –
(a)
in the case of a hostel
£76.30
(b)
in the case of lodgings or a bedsit
£109.41
(c)
in the case of a flat with 1 bedroom
£156.31
(d)
in the case of a flat with 2 bedrooms
£196.63
(e)
in the case of a flat with 3 bedrooms
£223.37
(f)
in the case of a flat with 4 bedrooms
£236.88
(g)
in the case of a flat with 5 or more bedrooms
£245.77
(h)
in the case of a house with 1 bedroom
£177.59
(i)
in the case of a house with 2 bedrooms
£231.28
(j)
in the case of a house with 3 bedrooms
£258.02
(k)
in the case of a house with 4 bedrooms
£279.16
(l)
in the case of a house with 5 bedrooms
£303.73
(m)
in the case of a house with 6 or more bedrooms
£318.29.

So using our trusty reverse mortgage calculator on the sums above multiplied by 52 and divided by 12 (to convert from weeks into months) the values can be calculated as follows (assuming a 3% interest rate) some rounding occurs for ease of reading but you can work it out exactly should that be your desire.

One Bedroom Flat (maximum monthly subsidy £675) £142,500
Two Bedroom Flat (maximum monthly subsidy £850) £179,000
Three Bedroom House (maximum monthly subsidy £1,100) £232,000

There are two important points to note here...

Firstly the availability of mortgages which is limited to 4.5 times your earnings, so on average wages of say £40,000, the maximum mortgage you can get is £180,000 so with a 10% deposit that will give you £200,000. So Deputy Duhamel's plan for £200,000 homes is bang on the money, that is what houses need to be sold at to be 'affordable'. By contrast the Housing Minister plans to build 113 homes for £13 million, at a cost of around £115,000 each shows that there is still considerable profit (60%) to be made even when selling houses at £200,000. I know I am not including the cost of the land, but then the cost of agricultural land is negligible, even/especially in Jersey where farming has not been a viable proposition for many years.

Secondly if the interest rate were not being artificially held down by the Bank of England and were allowed to stand at say 10%, as the economic situation demands, a two bedroom flat would only be worth £93,500, and a three bedroom house would be worth £121,000. There is a massive and some might say inevitable risk to the downside.

2008 and 2011 statistics for average (mean not median) wages showed some interesting results which I feel certain were at the maximum range of the stated error in the statistics but still did not show any real increase as the figures were no doubt skewed by a few high earning individuals who got rather large bonuses and were not indicative of any general increase in wages. We know that the wages for the majority of the individuals (those paid by the States or their subsidiaries who make up the majority of the workforce, even higher than under Soviet Russia) will not increase for the next few years. The banks are simply not going to lend at the low rates mandated by the government.

The risk in property is exclusively on the downside. The States of Jersey are incompetent at the best of times. Taking the incompetence and the inherent risk in property speculation at the moment, we are better off passing the risk on to the private sector than allowing the government to play at being a property developer with our money. It's your pension they will be risking, not their own money.

Looking to the official statistics for house prices for Q3 2012 I am struck immediately by the lack of synergy with the asking prices offered on estate agents websites. The clues to how these statistics are manipulated is in the footnotes, firstly 5 bedroom houses are excluded now these are the Victorian homes which make up the majority of St Helier which I can find on estate agents websites for £375,000. Share transfer properties (which were 60% of all flats and generally were the lower priced flats) were not included until 2011 when the mean price started to fall. The survey also excludes 'apparent' family transactions, retirement home and first time buyer developments or in other words any property which sells for a low price, which may of course include sales necessitated by impending financial disaster at substantially reduced rates.

It would make more sense to remove 'new builds' and 1.1(k) properties from the statistics as these appear to be vastly overpriced compared to the larger and better constructed Victorian buildings but ONLY if the aim were to produce reliable statistics and not 'we're not in recession' propaganda.