The housing supply problem: Part 4

This is an audio transcript of the FT News Briefing podcast episode: ‘The housing supply problem — Part 4’

Marc Filippino
Good morning from the Financial Times. Today is Wednesday, June 14th, and this is your FT News Briefing. 

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There is a big shake-up at a Big Four accounting firm. And a banking behemoth is paying for its relationship with Jeffrey Epstein. Plus, in the final instalment of our housing series, we look at how much the government can do to bring down prices.

I’m Marc Filippino, and here’s the news you need to start your day. 

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The global head of audit and consulting giant EY is retiring. Carmine Di Sibio spearheaded EY’s ambitious plan to split its auditing and consulting businesses. The costly project led to bitter infighting and ultimately failed. Di Sibio’s future at the company has been in doubt ever since the plan was called off in April. Di Sibio said he planned to leave now that he’s reached the mandatory retirement age at EY. The company says it expects to name a new CEO this fall. 

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JPMorgan Chase on Monday agreed to pay up to $290mn to settle a lawsuit accusing the bank of profiting from human trafficking. The suit involved JPMorgan’s long-running business relationship with the late convicted sex offender, Jeffrey Epstein. The bank, which made nearly $40bn in profits last year, will pay the settlement to a group of Epstein’s victims. Here’s the FT’s Joshua Franklin. 

Joshua Franklin
I think a settlement was always the most likely outcome in this case. You’d seen Deutsche Bank settle a similar case to this just a few weeks ago, paid less than JPMorgan, about $75mn. And the reality is these high-profile legal cases involving big corporate names rarely make it to trial. Just the risk of, you know, what could come out at trial and just the uncertainty about what the verdict is, means that a settlement is often the most likely outcome. The main question was how much JPMorgan was gonna end up having to pay in this case and how much damaging information could come out in the meantime. 

Marc Filippino
And this isn’t the only lawsuit JPMorgan is dealing with as a result of its business relationship with Epstein.

Joshua Franklin
So this was the legal case brought by an alleged victim by Jeffrey Epstein, who claimed that JPMorgan should be held liable for crimes committed by Jeffrey Epstein while he was a client of the bank. She went under the pseudonym Jane Doe during these cases, and she ended up building it out into a class action case against JPMorgan. And then the other case has been brought by the US Virgin Islands, where Jeffrey Epstein had a home, and makes similar allegations to the Jane Doe case. The US Virgin Islands case is still ongoing and is actually scheduled for trial in October. We’ll see whether or not JPMorgan settles that case as well before then. 

Marc Filippino
Joshua Franklin is the FT’s US banking editor. 

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We’ve been taking a close look at housing over the past few weeks. Both the US and the UK have shortages that have driven up home prices, making it really hard for people to afford one. We met a young man in London who’s sharing a home and doing chores for an elderly woman in order to avoid the expensive rental market. 

Isaac
I needed something that was gonna take the financial pressure off, at least for the short term. 

Marc Filippino
And we met a couple in North Carolina who spent about nine months searching for a starter home. 

Caitlin Friedman
In our price range, it was either just outdated, too much work to be done or it was just straight up ugly. And I just didn’t really wanna live in it, you know.

Marc Filippino
The irony is that we are in an era of rising interest rates, which theoretically should dampen demand and lower prices. To talk about why that’s not happening, I’m joined by the FT’s US economics editor, Colby Smith. Hey, Colby. 

Colby Smith
Hi, Marc. 

Marc Filippino
So, Colby, this is . . . this is weird, right? I mean, that prices are staying high even though borrowing costs are moving higher. 

Colby Smith
Absolutely. I think that’s what people would expect. But it goes back to the point you raised about supply. And that’s a really, really big issue. You know, limited inventory is keeping these national home price declines relatively modest for the most part. Redfin put out a recent study that said for a typical home, prices have only declined about 1.6 per cent on a year-over-year basis. I mean, that’s not a significant improvement in affordability whatsoever at a time when it is still quite expensive to use borrowed money to buy a new home. 

Marc Filippino
Is there anything the government can do to make homes more affordable? 

Colby Smith
So, I mean, economists think about slowing down the economy a little bit more broadly. But one thing that you hear from policymakers and economists is that, you know, the government can help this process to a certain extent by not pumping additional stimulus into the economy. And the Biden administration has made it a point that any, you know, additional spending or infrastructure plans or whatnot are deficit-neutral. But that being said, that also could mean any given American is less able to buy a home in the first place if the economy as a whole is slowing down, if let’s say, they’re not getting the wage gains they need to see. You could also be confronting job losses in and of itself. So it’s all connected. 

Marc Filippino
So, Colby, where do economists think the housing market is headed? 

Colby Smith
I think it depends on how much more the Fed is going to do here. If, you know, you think inflation is coming down and you think that it’ll do so quite quickly, that basically suggests the most likely next move is a, interest rate decrease rather than an increase. But if you think that inflation is a more of a persistent problem, that there’s too much momentum in the economy, the Fed does, in fact, need to do more. You know, you could well see mortgage rates rise, which is going to take a bigger bite out of the housing market. And you could see more substantive price declines. It’s a pretty unsatisfying answer, but I think it’s just too soon to say. 

Marc Filippino
And we’ll get a sense of what the Fed is thinking later today when it announces its next interest rate decision. Colby Smith is the FT’s US economics editor. Thanks, Colby. 

Colby Smith
Thank you. 

Marc Filippino
Now let’s turn to the UK, where people also struggle with a housing shortage and high prices. I’m joined now by the FT’s London-based property correspondent, Joshua Oliver. Hi, Josh. 

Joshua Oliver
Hey, Marc. 

Marc Filippino
I guess the question I have for you is: the solution seems to be easy, right? Build more houses. Why isn’t it that cut-and-dry? 

Joshua Oliver
It would seem like it would be easy. And also, you know, if you’re talking about a housebuilding industry, you know, everybody wants this product. But of course, it’s more complicated than that. The UK planning system is slow, it’s under-resourced, and it’s very, very kind of detailed and exacting in this country. So it takes a very long time to get from “We have some land, we’d like to build houses on it” to “OK, we can go ahead and put shovels in the ground,” and that is to do with, you know, the red tape. But then you have other issues after that. You’ve got financing. Cost of debt has gone up a lot this year. So it’s harder for, you know, developers to get financing. Most real estate development is debt-fuelled and there’s more projects where you say at the end of the day, “Look, we just can’t do it.”

Marc Filippino
What’s the government doing to fix this issue? Anything? 

Joshua Oliver
So the government has a housing target. We don’t seem able to reach it and we’re getting further from reaching it very likely this year. The housing target was made advisory towards the end of last year and so that gave local government in the UK more flexibility to not build the amount of houses that they would need to build in order for the national-level housing target to be met. That reflects that in a lot of local areas you have the famous Nimby interest — not in my backyard — people who are very happy for houses to be built, but as long as it’s not near them. And this is a big political constituency with a lot of clout. We have a Conservative government, there’s a lot of influence from the Conservative party that was worried about too much building in particular areas. And so you know, you had less pressure from central government down to the local government saying the building targets need to be met. 

Marc Filippino
Yeah. Josh, can you tell me a little bit about the politics here? 

Joshua Oliver
Yeah, the housing politics in the UK is getting very interesting right now, I think, with an election, you know, very much now in view, I think there’s a perception that the Conservative party has made itself vulnerable on the housing front. There’s kind of an opportunity it’s opened up for the Labour party and the opposition to portray themselves as the being the party of building, the party of home ownership. And I think with the phase where you see a lot of different ideas getting floated it’s not totally clear what the policy is going to look like when you know when we get to an election. But what we are seeing is that the Labour party has definitely spotted the opportunity and are gonna try and make the housing question an issue in the election. 

Marc Filippino
Joshua Oliver is the FT’s property correspondent. Thanks, Josh. 

Joshua Oliver
Thanks, Marc. 

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Marc Filippino
You can read more on all of these stories at FT.com. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news. 

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