Comment: The Fool - How much for how much?

Wednesday 25 July 2018

In this month's column for Connect magazine, The Fool discusses affordability and what the word really means.

"With the possible exceptions of ‘Trump’ or ‘BREXIT’, there can be few more ubiquitous words in the press than ‘affordability.’

"Be it schools, housing, healthcare, the latest Jaguar Nutter S, or that deal you had to hold your nose when making to achieve your personal political ambitions; whether we are conscious of it or not, we all play a constant game of assessing price and affordability.

"Defining the word is difficult, because, whilst ‘price’ is undoubtedly important, one’s own circumstances are an equally significant factor in the affordability equation. Indeed, where price is constant, one’s own circumstances are actually the sole determinant of affordability. In economic terms, we define affordability as whether the positive impact of an action outweighs the negative impact of that action upon our lives. (The Jaguar Nutter S has one price - my ability to keep a roof over my head, to eat, and potentially a new Facebook relationship status, determines its affordability to me).

"Of course, assessing the affordability of a new car, or ones colleagues’ evaluation of your personal integrity, is relatively simple, because the negative impact of the action falls largely upon one individual. Where it becomes more difficult is where we start to consider bigger stuff, like health, education, or housing.

Pictured: "We believe education to be largely affordable because of the potential outcomes of either paying or not paying," says the Fool.

"Take state education. Whilst arguments exist over the relative costs and benefits, the upside of having children who can read, write and add up to a reasonable level generally outweighs the down side of creating a generation who are unable to function within a society. Although there is a cost to each of us in terms of taxation, we believe education to be largely affordable because of the potential outcomes of either paying or not paying. (The assessment of the affordability of your offspring’s three-year interpretive dance degree might be another matter). 

"State provided healthcare operates on a similar basis. Everybody pays a price in order that each of us can hopefully be fixed relatively soon after something goes wrong. In this instance, there is both a societal, but also an individual, interest in the outcomes of our investment. Of course, the price which is payable for this service continues to change, as does an individual’s immediate requirement for the service, reflecting everybody’s own assessment of the relative affordability at any moment. Suffice to say, however, your social security contribution is likely to look pretty affordable whilst you are waiting for an ambulance to arrive for you, or your nearest and dearest. 

"Where things get a little more contentious is the apparent desire for the State to involve itself in the provision of affordable housing. On a societal level, we would all surely hope that everybody is able to afford to have a roof over their head. 

Pictured: Despite what people say, renting houses at a price higher than the market is not in the landlords' interest.

"Private sector property, whether to buy or rent, has an open market price, that price being determined almost entirely by demand and supply. In a small island, with a growing population, demand will usually exceed supply, and, with wages, certainly on a relative scale being high, the price of property is, in comparison to most other places, expensive. 

"Despite the regular accusations of exploitative landlords, somebody who wants to sell or rent their property will charge what the market will tolerate. Set the price of your property too high, and it is likely to sit empty, whilst you bear the costs of financing and maintaining it. Unless one is in the business of losing money, the price will generally be set at what people are willing and able to pay, even if that price appears to others to be unaffordable. The only person facing a loss of capital if the property fails to sell or rent is the owner. And henceforth market prices are determined.

"The other participant in the local property market is of course the State, who hold and manage, on behalf of taxpayers who finance it, a stock of property, which they rent out, or in certain cases, offer for sale. That stock of housing will have a market value, and if the State was truly intent on delivering the maximum value to taxpayers, as we have been assured under the gospel according to Parker is its intention, it would rent or sell at the maximum prices for which there is demand. 

"Which is where the State finds itself in a fairy invidious position of course, because in order to provide housing to those unable to afford private sector prices, it must sell or rent those properties at a value which does not maximise the value to taxpayers, those prices being below what it could achieve in the private sector. 

"With education and health, there is an acceptance that many will often pay for something from which they might derive no direct benefit. But as with such things as political promises that are made behind closed doors in somebody’s personal interest, or State-mandated minimum wage legislation, everything looks affordable if somebody else is picking up the bill."

You can read the Fool's column every month in Connect magazine, here.