Landlords should be tenants’ servants, not their monarchs

How does the thought of renting your home for your entire life sound? For many Britons, it probably evokes a horror show of chronic insecurity and broken homeownership dreams. But for the typical German, lifelong renting isn't a nightmare; it's just normal life.

The UK home ownership rate has slumped from 73 per cent a decade ago, to just 63 per cent today. For those born after 1980 - the millennial generation - the ownership rate has, of course, collapsed even more dramatically, mainly thanks to fast rising house prices and pitifully meagre wage growth since the financial crisis.

Politicians of every stripe - from Theresa May to Jeremy Corbyn, to whoever leads Ukip these days - agree that the British aspiration of home ownership ought not to be snuffed out, and that this worrying trend must be put into reverse.

But must it? In Germany, the proportion of the population who own their own home is just 52 per cent.

The rest, of course, rent. And, for the most part, they rent happily too.

While most private renters in the UK aspire to buy, their German counterparts mostly do not. Why the difference? The answer largely lies in Germany's extensive guarantees of tenants' rights.

Indeterminate tenancy leases in the German private rental sector are the norm. That means that those who wish to stay in their rented house or apartment for their whole life usually can. And since 2015 German local authorities can now also cap rent increases on new lettings in their area if they see the market overheating.

Compare that with the standard rental contract in the UK of "assured shorthold tenancy", which gives landlords the right to remove tenants at just two months' notice. And think of the avalanche of opposition when Ed Miliband suggested a modest rent increase cap a few years ago - an idea since taken up by Jeremy Corbyn.

Basic economic theory suggests caution over any kind of price cap, with the warning that they can create damaging distortions. But there are grounds for looking at housing - especially the British market, where housing is regarded as a high-returning store of wealth, but which is historically prone to disruptive boom and bust cycles - as a special case.

Some form of mild, sensitively designed rent control could disincentive people from ploughing their savings into property, and curb the tendency for people to look on their rented-out properties as an excellent pension plan.

But the German divergence on housing is not just about different regulations; it's a divergence of political philosophy. It's said an Englishman's home is his castle. And that has come to apply to the various other "castles" owned by landlords too. The Thatcher government, in particular, was determined to enhance the power of landlords.

But in Germany, a different philosophy prevails. Article 14 of the Federal Republic's constitution states: "Property entails obligations. Its use shall also serve the public good." The upshot is that in Germany the landlord is not the tenant's monarch, but the tenant's servant.

In some respects, though, we are already becoming more like Germany here in Britain. A new report by the Resolution Foundation think tank estimates that, if current trends of declining home ownership continue, up to a third of millennials will be "cradle to grave" renters.

The social implications of that are stark. It is already exerting stress on families in their thirties who are starting to have children, but who often cannot find suitable accommodation - or who fear being asked to leave at a landlord's whim, potentially disrupting their children's schooling.

Resolution also estimates that current trends could ultimately lead to a near-doubling of the pensioner housing benefit bill, as low-income millennial renters need more support to pay their rent in their old age.

German-style renting levels and UK-style renting regulations will make for a toxic combination. 

With housing comprising a huge chunk of total wealth in the UK, the impact on wealth inequality of falling home-ownership rates are also likely to be profound.

Perhaps Theresa May's latest homebuilding drive will deliver such an expansion in the supply of new homes that the home ownership rate will return to the heights of a decade ago. But the recent history of politicians' promises to crank up construction rates is not encouraging.

And in an era of relatively low interest rates and tighter financial controls on how much people can borrow from banks to purchase homes, there are grounds to be sceptical about how much difference even a significant increase in supply would make.

Which leaves us with a simple question: if we are destined for German-style renting levels, don't we need German-style tenant protections too?

What Liam Fox and the Brexiteers get wrong on exports

Not long ago there was an official Government target for UK exports.

“We want to double our nation’s exports to £1 trillion this decade,” the former Chancellor, George Osborne, proclaimed in his 2012 Budget speech. Many said at the time that it was a foolishly unrealistic target. But ministers insisted it really could be done. Comparing it to Maoist pledges of a great leap in steel production was unduly cynical, we were told. So, five years on, are we nearly there yet? Not exactly.

Alongside Philip Hammond’s Autumn Budget last week, the Office for Budget Responsibility released its latest UK exports forecasts. The total value of overseas sales in 2017 is projected to be only £549bn, up just 16 per cent on the £473bn in 2012. And the forecast for 2020, the date when we were supposed to hit the magic £1 trillion number? £575bn. So a miss by a mere £425bn. Not exactly the kind of sum one finds down the back of the sofa.

It’s a safe bet that Osborne would blame the 2016 vote for Brexit, which he strenuously argued against, and the decision by Theresa May to yank us out of the EU single market and customs union in 2019 for this failure (although the reality is that we were well adrift long before the referendum vote).

But what about Liam Fox, the International Trade Secretary? This leading Brexiteer can hardly blame leaving the EU for Britain’s export underperformance relative to those 2012 targets, set by a government of which he was a senior member.

In February, Fox told a parliamentary committee that disappointing global growth was the reason we would not get there. Yet global growth is now picking up rather strongly, just as Britain slows down sharply due to the negative impact of higher inflation and an apparent investment freeze by many nervous UK firms.

True, British export values are up 15 per cent since the referendum vote. But this is actually pretty disappointing given the tailwind of a record plunge in the value of sterling, which instantly makes our goods and services more competitive overseas.

Brexit itself can’t possibly be the problem for its champions, so other culprits have been identified by Liam Fox. “I can agree as many trade agreements as I like, but if British business doesn’t want to export, then that doesn’t do us any good,” he said in an interview last week.

This was essentially a more sanitised version of his comments last September, when he was caught on tape accusing British exporters of letting the country down by being too “fat and lazy”.

“We’ve got to change the culture in our country,” he ranted. “People have got to stop thinking about exporting as an opportunity and start thinking about it as a duty – companies who could be contributing to our national prosperity but choose not to because it might be too difficult or too time-consuming or because they can’t play golf on a Friday afternoon.”

Leaving aside the aching hypocrisy, the flawed economic worldview such comments betray is notable. Fox seems to see strong export-growth as something that relies, fundamentally, on vigour and patriotism from firms. In fact, the evidence suggests it requires a dense framework of state support from above and below.

Dig around for the roots of the exporting prowess of Germany’s famed small and medium-capacity “Mittelstand” companies and one finds an active state-owned local banking system. It’s a system in which bankers actually encourage their corporate customers to venture into overseas markets, happily extending credit for the purpose.

It’s a far cry from here, where small firms’ trust in their banks is chronically low. Nothing that the Government is fiddling around with – on new export-credit guarantees and the like for firms – comes close to trying to emulate this German ecosystem of truly community-embedded, corporate-relationship banking.

The state trade support from above comes in the form of harmonised regulation. The evidence shows that joining the EU in the 1970s gave the UK’s exports a substantial boost. Part of this was the end of tariffs. But a larger ingredient was the harmonisation of product regulation and the licensing rules of what would eventually become the single market. Such licensing is especially important for services, which is the reason why pulling out of the single market promises to be so damaging for our service exporters.

These are the benefits of EU membership that the Brexiteers, with their 19th-century mental image of trade as merely the shipping of finished manufactures and raw commodities, refuse to acknowledge. In the 21st century, regulation is not the enemy of free trade; rather it helps create the market. As Sir Ivan Rogers, our former top Brussels diplomat, put it: “Contrary to the beliefs of some, free trade does not just happen when it is not thwarted by authorities.”

Sir Ivan’s candour was not welcomed by ministers and he resigned in January. Perhaps what they wanted to hear was that, thanks to Brexit, hitting the elusive £1 trillion export target will be a piece of cake.

This article was originally published in The Independent on 26/11/17

There’s much to admire about the German economy. But its massive trade surplus is not one of them

Even stopped clocks are occasionally right, albeit by accident. Donald Trump has been complaining that Germany is “very bad on trade” and that the country’s whopping current account surplus (which hit $294bn last year, the biggest in the world) is a problem.

He’s right. Germany’s surplus really is economically harmful for the US. And, indeed, the surplus is a drag on the wider world too, not least the other members of the eurozone. But it’s not for the reasons Trump articulates.

For Trump and his advisers the surplus is evidence German politicians have been unfairly boosting the German export industry at the expense of US manufacturers. Yet that boost is really a by-product of large domestic imbalances in the Federal Republic, rather than the protectionist trick Team Trump imagines.

Here’s why. German households spend a relatively low proportion of their collective income. Private German businesses, in aggregate, invest considerably less than their collective profits. The German state’s infrastructure spending is also exceptionally weak as a share of GDP.

This economy-wide underspending means there is a chronic excess of national domestic saving over domestic investment in Germany. It follows as a simple accounting identity that this excess has to be exported abroad. There’s nowhere else for it to go. So Germany, through various means, acquires foreign currency assets on a massive scale every year.

For the likes of the US this pushes up the value of the dollar relative to the euro, imposing a headwind against growth in America. The same happens to the other countries whose currencies the Germans buy, including Britain. If the capital-absorbing countries want to offset that drag they have no choice but to borrow and spend more than their aggregate incomes, running current account deficits.

One of the consequences of those deficits and the undervalued euro is that demand for many German manufactured exports is artificially stimulated. Many German exports are, of course, famously high quality. But what matters is that the international demand for them is higher than it would be if Germans were not running such a large current account surplus.

The crucial point to recognise is that, as the economist Michael Pettis has long argued, outward capital flows predominantly drive the surplus nation’s net export performance. And it’s the domestic under-consumption that drives the capital flows. In the case of Germany this isn’t about rigged trade deals, as Trump seems to believe. It isn’t about crude protectionist currency manipulation either. It’s about too little spending within Germany.

Does it really matter though? Not in the near term. And it’s not plausible to blame economic weakness everywhere in the world on current account surpluses in Germany (and also China and Japan). There are plenty of other things going on too, not least excessively contractionary fiscal policies in many countries.

But those surpluses do encourage unbalanced growth, both in the deficit and surplus countries. In deficit countries sectors such as real estate are artificially boosted, while in Germany, China and Japan the manufacturers get a lift. The imbalances also lead to excess financial indebtedness in deficit countries, raising the risk of a messy unravelling down the line – if, say, foreigners suddenly attempt to deleverage all at once, or they lose the confidence of their overseas creditors.

Martin Sandbu, an economics writer at the Financial Times, has pushed back at multiplying complaints about Germany’s large surplus by pointing out that as long as the German current account surplus is stable, rather than growing, it is not subtracting from demand overseas. While narrowly true, this glides over the fact that Germany’s surplus has been rising steadily as a share of its GDP for almost two decades, shooting up from a deficit in 2001 to an 8.3 per cent surplus in 2016, and thus imposing a serious drag for much of the time.

And while it may not be subtracting from growth at this precise moment, the sheer size of Germany’s surplus represents the extent of economic benefit in terms of stronger demand and rebalancing that ought to flow to countries overseas. Some of the primary beneficiaries of healthier German domestic consumption would be its still-struggling eurozone neighbours such as Greece, Italy and Portugal. Every year the German current account surplus remains so high, means more debt has to be accumulated overseas.

So why is Germany underconsuming and underinvesting? Part of the answer is that the admirable consensus approach between workers and employers in Germany that I mentioned last week has actually worked too well. Workers have accepted extreme pay restraint since the advent of the single currency in 2000 (often settling for awards below productivity growth) thus helping to squeeze down the share of wages in German GDP.

An outbreak of social anxiety about the ageing profile of Germany has also encouraged households to save well in excess of what is needed to meet the actual fiscal challenges of retirement. Weak household consumption has discouraged German firms from investing at home. And the German government has compounded this savings frenzy by taking fiscal prudence to a fault, running an absolute budget surplus, ignoring its responsibilities (and indeed long-term self-interest) to help keep demand strong and balanced in the eurozone overall.

German politicians often look on their large surplus with a sense of pride, seeing it as a symbol of national prudence and export success. Germany’s consensual post-war economic and political institutions do indeed deserve the world’s admiration. But its chronic underconsumption and large surpluses deserve to be buried, not praised.