Thread by @2mod2

A #personalfinance view of the #BuildingSafetyCrisis:

Anyone household with less than £31k in savings on 1 Jan 2020 faces the strong prospect of going bankrupt based on the current direction. That’s at least 80% of us. #EndOurCladdingScandal A thread 👇 (please read and RT)

(IMPORTANT: I don’t want this to give any leaseholder a sleepless night unnecessarily. I am confident the government and industry will see sense and stem this chaos, but if they don’t I am highlighting the shocking prospect this country genuinely faces)

I did some rough analysis on the house of cards that now exists through making leaseholders liable for the remedial works on and will embolden investors to scoop up property bargains.

Firstly, I am so sorry for those this has already happened to. You absolutely did not deserve this and it is an absolutely disgraceful failure of government policy that it has been allowed to happen.

I used to do more fun things with my Friday evenings than model the personal finance prospects of UK leaseholders (of which I am one btw), but it has been a bloody funny couple of years.

It astounds me that I am even having to write this logic down to demonstrate how morally wrong the approach of making INNOCENT leaseholders personally liable for the remediation work.

It should be the developers who cut corners and government who changed the rules that cough up in full.

So how did I come to these numbers. Let’s begin with my assumptions which I welcome to be challenged.

1,000,000 affected dwellings (Jun 2021 estimate, number is increasing by the day).

Let’s assume 100,000 are owned by HNW individuals (>£1m assets) who won’t be financially affected. This is still unfair on them, but this is about establishing genuine bankruptcy prospects.

The remaining 900,000 are either owner occupied or owned by small scale landlord with one or two properties. Lets assume an average of 1.8 person per apartment, this is 1.62m people

Median UK household disposable income (not salary) is £29,900 (for flat owners due to high proportion of young, single occupier it is likely much lower than this, but let’s stick with this assumption)

Median UK household cash savings is approx. £11,000

For 2 years already leaseholders have been facing higher costs due to increased insurance, service and mortgage charges driven by profiteering in many cases. The properties are meanwhile valued at £0 and leaseholders can’t raise capital.

In my case, these additional costs are currently around £5,200pa. (£433 per month).

This in turn affects savings rate. I can save less than before.

The average affect on savings rate is tricky to calculate, but we can assume some impact on cash savings, after all the additional expenses leaseholders have been able to save less than the national average or have had to deplete their savings to meet these costs.

Let’s assume since 2020 this has reduced leaseholders average savings by 20%. Their median is now £8,800. Let’s also assume this rate is depleted at a further 10% pa, as long as the crisis continues.

At some point, leaseholders are expected to pay cash towards remediation. Average amounts suggested are difficult to obtain but let’s assume a cash hit of £25k at some point. Some are much higher.

For simplicity let’s also assume that the majority of remediation will take place over the next 5 years, i.e. other non-remediation related direct costs as above go back down to £0 in January 2027 (some will be less but some longer).

This is a crude way of making the calculation but it is the only reasonable way to do so across the population, without very complex modelling.

My conclusion is that, if nothing changes (i.e. leaseholders are not absolved of this ridiculous liability), on average, any leaseholder with less than £31,000 in cash savings on 1st January 2020 (not pension) will have less than £0 in cash at some point over the next 5 years.

A £0 cash balance at any point suggests obligations cannot be met, this suggests bankruptcy.
(Btw, leaseholders cannot release equity from their homes because capital raising is banned)

It's hard to determine how many had less than £31k in their account on 1st Jan 20, but my estimates based on ‘Net Financial Wealth’ figure published by FCA is that at best, 80% of households had less than £31,000 cash savings on this day ( Source: bit.ly/2XghEY3 )

This means roughly 80% of the original 900,000 households face the genuine prospect of going bankrupt over the next 5 years. The rest will see a severe dent to their savings.

That is 720,000 households. 1.3 million people (including children) who will be effectively thrown out of their home through literally no fault of their own, if nothing changes.

This model does not consider the consequential rise in cost of remedial work that is then spread across only 20% of the remaining leaseholders rather than the original 100%, but safe to say very few would still be left standing. It’s a house of cards.

If the government has the ability to provide any form of credit for this they should do so upfront. They should then recover it from developers where appropriate, not keep leaseholders as the backstop.

The elephant in the room is that NONE OF THIS IS ANY LEASEHOLDERS FAULT. They don’t own a brick and had no hand in the design decisions. Their only fault was to trust the process that they would be treated fairly.

Then… what happens next. Affected properties will then be sold by banks to opportunistic investors for a fraction of what they are worth (due to the high volumes at which banks will need to shift off their books).

This crisis could genuinely wipe out a core component of the middle class layer, embolden the high net worth (through abundance in property deals) and polarise society for a generation.

This will of course come at a greater cost to this country longer term than any amount that can be attributed to ‘fixing’ these buildings. It doesn’t need to be like this.

I am open to comments on the model but feel the only thing that will make a difference is ensuring the people who are responsible for it are the people who pay for it. Nothing else will be any form of justice we want to witness.