Here is a little mathematical conundrum for you. What number, if compounded at 6% per year, becomes 800m… but if compounded at 16% per year becomes worth 1.8bn? And how many years would this take? And if multiplied by 20% per year, would this number be 3bn?
These are some of the questions posed by recent revelations that, in order to pay for the Olympic Games, money will be ‘borrowed’ from the National Lottery Fund; to be repaid from land sales once the great sporting jamboree is over. Sorting through the tangled maze of last week’s statements on this matter it appears that the government needs to recoup £800m from land sales post 2012, in order, says Ken Livingstone ‘to repay all the debts that we have incurred.’ I wonder whether this includes interest on the borrowed money? Somehow I doubt it.
This figure, described as ‘conservative’ – I’ll come to this in a moment! – assumes 6% annual appreciation of the value of the land. Ken, though, reckons that the sale of land is more likely to bring in £1.8bn. This is based on annual appreciation of 16% per year, a figure that should have every investor rushing to Stratford, but which is bizarrely described by Ken as ‘quite cautious’.
We can derive from these calculations that the land is presently worth about £470m. But to confuse the matter still further the London Mayor’s director of planning and regeneration, Neale Coleman told the Commons’ Culture, Media and Sports Committee that ‘using the average land price inflation of 19% over the last 20 years, the LDA could make £3billion.’
This cannot be the case. If the land is now worth £470m then 19% annual appreciation takes its value to £2.3bn. You would need 23% annual appreciation before you got £3bn.
This little political spat raises all sorts of questions, of which whether or not Ken Livingstone and his henchmen can do maths is the least important. The two big questions are: what is conservative? And, is the past any guide to the future?
A ‘conservative’ consumption?
The so-called conservative assumption that the value of land in the Stratford region of East London will grow at ‘only’ 6% per year is based on the fact that this apparently was the appreciation recorded in the worst year of the last twenty.
That may be true, but anybody who assumes that the value of anything will appreciate above the rate of inflation and above the level of long-term interest rates is, at the very least, not allowing for the possibility that something could go wrong. This has echoes of Northern Rock, whose chief executive Adam Applegarth said that its business strategy worked very well ‘until the credit crunch came along’.
The reason that we conservatively put a roof on top of our houses is because we cannot be sure that the sun will always shine. That is conservatism. Was the possibility of a recession between now and 2012 not considered? Or was the possibility that there might be a hiccough in the property bull market conveniently forgotten in the urgency of siphoning off the Lottery money?
Did it not strike anyone that 6% per annum is actually quite a high figure? And that Ken’s ‘quite cautious’ 18% is just fantastic? The justification is the apparent 20% or so annual rise in land values in the area over the last twenty years. But might this not have been because land values in Stratford have been bid up in anticipation of the Olympic effect? For sure, this has been the case.
Taking London as a whole, the price of a hectare of land has risen from £759,000 in 1983 to £5.5m now. That represents an annual rise of less than 9%. So Stratford has already far outpaced the capital. Is this because Stratford is a wonderfully attractive place to live? Or could it be because several sharp property speculators have seen the Olympics cruising into view and have been busy buying up land in anticipation?
I think you know the answer to that. So will land values in Stratford rise by 6% per year, allowing the Lottery Fund to get its money back? Perhaps – but it is by no means certain. Will land values continue to rise at 16%, or 19% or 23% per annum. Not a hope!
This article is taken from Tom Bulford’s free daily email Penny Sleuth