Boris Johnson ended a bleak political year with a smile on his face. “I’m off to vote for your deal,” Keir Starmer, Labour leader, ruefully remarked to the UK’s prime minister after an emergency debate on his post-Brexit EU trade deal.
“You won’t regret it,” Mr Johnson jibed, as they headed together into the same House of Commons voting lobby on Wednesday. After four years of Brexit acrimony, it felt like a chapter was closing on British politics.
Mr Johnson’s approval ratings were battered during 2020 over his handling of Covid-19, but on Brexit he ended the year on a rare high, praise ringing in his ears from Conservative MPs, for negotiating a new relationship with the EU.
During Wednesday’s emergency debate various Tory MPs put Mr Johnson’s name into the same sentence as Winston Churchill, Margaret Thatcher and Alexander the Great. Sir Keir grudgingly admitted that, while the trade deal was “thin”, it was better than no deal at all.
There was criticism. Theresa May, former prime minister, noted that Mr Johnson had secured a trade deal partly because he had set his sights so low: “We have a deal in trade that benefits the EU, but not a deal in services that would have benefited the UK.”
Sir Keir noted that Mr Johnson’s claim that his deal eliminated “non tariff barriers” was palpably false: business faced a raft of new customs bureaucracy, checks and delays to trade with the EU from 11pm on New Year’s Eve.
But Mr Johnson had achieved something that many had not predicted. He led a unified Conservative party into the division lobbies — alongside 162 Labour MPs — to support a new settlement with the EU. Neither Conservatives nor Labour want to revisit it any time soon.
“The leave-remain argument is over — whichever side we were on, the divisions are over,” Sir Keir said. Mr Johnson, for once able to rise above the morass of the Covid-19 crisis, said: “The destiny of this great country now resides firmly in our hands.”
Now Mr Johnson has his Brexit — the “hard” version that he has championed — the obvious question arises: what is he going to do with it? Given that Brexiters have had almost five years to answer that question, critics say the answer remains surprisingly sketchy.
The Office for Budget Responsibility calculates the country has already foregone growth worth 4 per cent of GDP, while companies will from Friday morning start grappling with the new trade bureaucracy spawned by Brexit.
The global free trade deals promised by the Brexiters have so far been little more than “rollovers” of the terms Britain enjoyed from EU trade deals that expired on December 31. Government figures suggest the recent flagship Japan trade deal would lift UK GDP by 0.07 per cent.
Exercising the “freedoms” of Brexit in a way that starts to make up for the economic hit will be one of Mr Johnson’s biggest tasks for 2021 and for now the details are unclear. He says he has asked Rishi Sunak, chancellor, to do a “big exercise” on business taxes and regulation.
The prospect of deregulation — notably scaling back EU social protections such as the working time directive, which sets workers a maximum of 48 hours a week — was a big driver of Tory Euroscepticism in the past, but not so much now.
A party that now represents swaths of working class northern England is unlikely to bolster that support by cutting workplace protections: in any event the EU-UK trade deal includes “non-regression” clauses to stop either party going backwards on regulation and standards.
Instead the government offers piecemeal ideas such as the abolition of the “tampon tax”: a new zero rate of value added tax will be applied to sanitary products from January 1, a move previously complicated by EU VAT rules.
Mr Sunak has a policy of “freeports” in train — souped up enterprise zones — but economists argue that such zones are allowed under EU rules and fear they will simply shift economic activity from one part of the UK to another.
Mr Johnson wants to raise animal welfare standards, for example banning live animal exports. He also said in his New Year’s message he wants to introduce nimbler regulation, helping “to turbocharge our ambition to be a science superpower”. But the economic arguments for Brexit seem less well developed than the sovereignty ones.
Mark Francois, head of the pro-Brexit Tory European Research Group, said: “Now that we have ‘cried freedom’ it must make sense for government departments to put their heads together and undertake a thorough analysis of areas where it makes sense of us to apply that freedom to diverge from EU regulation.”
The UK-EU trade deal has put in place a mechanism to deter either side from excessive divergence on regulation, but some wonder whether Mr Johnson’s primary interest was securing “sovereignty”, rather than having a coherent plan on how to use it.
Philip Hammond, former Tory chancellor, says he expects a few “cosmetic divergences” but nothing that transforms Britain’s competitiveness. “That was always my concern — that we are buying a notional right to diverge, which we will not use, at a very high economic price.”
Meanwhile David Lidington, a former Conservative deputy prime minister, said he expected the government to deploy a range of tax incentives and other subsidies to boost regional development — echoing the EU’s own €750bn Covid-19 recovery fund.
But Mr Lidington added there was “no doubt” Mr Johnson’s position has been strengthened by securing an agreement, as he faces a daunting 2021 with perilous elections to the Scottish parliament and in local authorities, let alone the economic and health crisis of coronavirus.
“It has been sorted,” Mr Lidington said, reflecting on a Brexit saga that has consumed the British government for almost half a decade. “And having had this success, it frees up time, energy and resource at a ministerial and official level to focus on Covid and the recovery.”
‘It has never been like this’: US house price spiral worries policymakers
House prices are rising in many major economies. This FT series explores whether these increases are sustainable.
A decade ago, the average house in Ohio’s leafy state capital Columbus would sit on the market for almost 100 days before being sold. Today, a similar property sells in just 10 days.
“It has never been like this,” said Michael Jones, a real estate agent at Coldwell Banker Realty with more than 20 years’ experience in central Ohio. “It’s unprecedented.”
US policymakers are becoming increasingly concerned about the rising price of housing for both homeowners and renters, as the broadest global house price boom for at least two decades drives up living costs.
“Today, it is harder to find an affordable home in America than at any point since the 2008 financial crisis,” Marcia Fudge, US housing and urban development secretary, said at a recent congressional hearing.
Nationally, house prices in May were 16.6 per cent higher than the year before, according to the latest S&P CoreLogic Case-Shiller index update — the biggest jump in more than 30 years of data and up from 14.8 per cent in April.
“A month ago, I described April’s performance as ‘truly extraordinary’, and [now] I find myself running out of superlatives,” said Craig Lazzara, global head of index investment strategy at S&P Dow Jones Indices.
The pace of price growth and sales has been particularly fast in smaller cities, suburban enclaves and towns.
Columbus’s housing market has exploded since the start of the pandemic, as historically low interest rates, remote working, increased demand for larger homes and a relatively limited supply of houses for sale sparked a feeding frenzy among prospective homebuyers and a windfall for sellers.
Homes in Columbus sold more quickly than in any other large metropolitan US area, according to Zillow, the property website. Almost three-quarters of Columbus properties were under contract in less than a week in April. Other fast-moving areas included Denver, Colorado, and Salt Lake City, Utah.
The fierce competition means many properties are selling at a significant premium to their listing price, favouring those on higher incomes or younger first-time buyers whose parents are willing to stump up the cash required to win a bidding war.
FT Series: Global house prices — raising the roof
House prices are rising in many major economies — but is it sustainable?
Part 1: How the pandemic has triggered the broadest global house price boom in more than two decades
Part 2: Buyers flock to smaller US cities, renewing policymakers’ concerns about affordability and risk
Part 3: Netherlands grapples with the social consequences of rapidly rising house prices
Part 4: Why Berlin’s renters want to expropriate their homes from Germany’s publicly listed landlords
Part 5: Should house prices count in inflation data, and what can central banks do about the economic effects?
Columbus’s average sale price has jumped 15.8 per cent in the past year, according to Columbus Realtors, the local industry body of which Jones is president.
“People say to me, ‘Don’t you love this market?’” he said at a recent open house for an almost 6,000 square foot family home with a listing price of just under $1m in a residential neighbourhood east of downtown Columbus.
“I say, ‘Not especially, because I represent buyers and sellers alike’,” he added. “Somebody is a loser here.”
Other places have experienced even more frenetic sales. Median home prices in Austin, Texas, have risen 40 per cent year on year, according to online real estate brokerage Redfin. Buyers have also flocked to Phoenix, Arizona, where prices are almost 30 per cent higher in the same period. In Detroit, Michigan, they have risen 56 per cent.
Suburban enclaves and smaller towns have also benefited. Redfin reported last month that median home prices in “car-dependent” US areas had surged at twice the pace of those in “transit-accessible” cities since the start of the pandemic — with the former gaining 33 per cent while the latter increased 16 per cent.
Across the 30 largest metropolitan areas in the US, Columbus, along with St Louis, Missouri, and Tampa, Florida, logged some of the biggest net increases in people arriving in the area, according to an analysis of US Postal Service records of mailing address changes by commercial real estate and investment firm CBRE.
Most moves came from the “surrounding area”, defined as a few hours’ drive from the householder’s previous address, the analysis suggested.
The house price spiral is feeding into the rental market too. According to Apartment List, a listings website, national median rent has risen 11.4 per cent so far this year, more than three times the average increase in the same period in the previous three years.
“The high cost of housing keeps millions of families up every night,” Fudge warned. “They wonder if they can afford to keep a roof over their head — and still manage to keep their lights on, to pay for their prescriptions, to put food on their tables.”
Industry experts say the pace of price growth is set to slow as supply begins to catch up with demand.
The number of existing-home sales rose 1.4 per cent month on month in June, according to the National Association of Realtors. Lawrence Yun, chief economist at the industry body, said supply had “modestly improved in recent months due to more housing starts and existing homeowners listing their homes, all of which has resulted in an uptick in sales”.
Real estate experts and economists surveyed by Zillow expect price growth to peak this year and then ebb.
“At a broad level, home prices are in no danger of a decline due to tight inventory conditions, but I do expect prices to appreciate at a slower pace by the end of the year,” Yun said.
Daryl Fairweather, chief economist at Redfin, said “homes that would have gotten 20 offers are now getting only two or three”.
But she added that while “we are already seeing demand start to stagnate”, prices were not coming down significantly — suggesting that policymakers’ concerns about affordability are likely to persist.
Federal Reserve chair Jay Powell recently said that today’s trend looked distinctly different to the one a decade ago that pre-empted what was at the time the worst recession since the Great Depression — but he called the problem of housing affordability “a big one”.
“Housing prices are moving up across the country at a high rate,” he told a congressional committee last month.
Although he acknowledged that it was “not being driven by the kind of reckless, irresponsible lending that led to the housing bubble that led to the last financial crisis”, he warned that it “makes it more difficult for entry-level buyers to get into the housing market, so that is a concern”.
Square’s $29bn bet on Afterpay heralds future for ‘buy now, pay later’ trend
Jack Dorsey’s biggest gamble to date has sent ripples around the fintech and banking world, with investors betting that Square’s $29bn all-stock deal to acquire Afterpay signals the “buy now, pay later” trend has staying power.
BNPL relies on an emerging thesis that millennials and Gen Z consumers distrust traditional credit, but still want to borrow money to buy goods. Afterpay allows shoppers to split the cost of goods into four instalments with no interest — but a late fee if payments are missed.
“We think we’re in the early days of the opportunity facing us,” said Square’s chief financial officer Amrita Ahuja, speaking to the Financial Times. “From a buy now, pay later perspective, we see, with online payments alone, a large and growing opportunity representing $10tn in payments volume by 2024.”
The deal sees Square join an increasingly crowded space, alongside big players such as Sweden’s Klarna, Silicon Valley-based Affirm and PayPal, with Apple also exploring the market. The sector also faces a brewing regulatory battle, as legislators question an industry that lends money in an instant, often without a traditional credit check to ensure a consumer will be able to pay off their debt.
“This decade is going to be the upheaval of the banking industry,” Klarna’s chief executive Sebastian Siemiatkowski, said on CNBC on Monday. “I’m a little bit surprised to see consolidation happening this early, at this level, but at the same point in time I think this is directionally what we’re going to see.”
BNPL has exploded in popularity over the past year thanks to the coronavirus pandemic-driven boom in online shopping, but industry executives said it had shown strong growth well before the pandemic, alongside a broader trend for more flexible financing among traditional lenders.
Leading into 2020, banks including JPMorgan Chase, American Express and Citigroup each launched flexible payment options tied to existing credit cards as an answer to point-of-sale financing.
The past 18 months have seen a meaningful uptick in the number of retailers willing to adopt the extra financing option. “There’s a little bit of FOMO setting in,” said Brendan Coughlin from Citizens Financial Group.
Afterpay was among the pioneers in BNPL. It was founded by Sydney neighbours Nick Molnar and Anthony Eisen in 2014, and today facilitates global annual sales of $15.6bn.
The company went public on the Australian Securities Exchange in 2016 at a valuation of A$165m (US$122m). In May 2020, Chinese tech giant Tencent paid about A$300m for a 5 per cent stake in the Australian group, which was by then worth about A$8bn.
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The Afterpay tie-up will enable Square to offer BNPL services to its millions of merchants, who processed payments worth $38.8bn in its most recent quarter, while also tapping into Afterpay’s clients, which include Amazon and Target.
The company will also integrate Afterpay into its Cash App, which has about 70m users and is slowly being built out as a one-stop financial services shop for payments, cryptocurrency, saving and investing.
“All of a sudden, you’ve got probably the most compelling super app outside of China,” said DA Davidson’s Chris Brendler, who is an investor in both companies.
Investors appear convinced. Despite the deal coming at a 30 per cent premium to Afterpay’s most recent stock price, the news sent Square’s share price up 10 per cent by Monday’s close.
“This is certainly a bull market deal,” said Andrew Atherton, managing director at Union Square Advisors. “People are rewarding Jack Dorsey for being bold and for making a big bet.”
Square’s entry into BNPL comes as the sector is becoming increasingly competitive.
Klarna increased its valuation from $11bn in September 2020 to $46bn in June of this year, making it the most valuable standalone company in the industry.
Shares in Affirm, the US online lender led by PayPal co-founder Max Levchin, rose 15 per cent on Monday following news of the Afterpay deal. Affirm, which went public in January and is now valued at $17bn, recently expanded its partnership with Shopify to offer BNPL services to the ecommerce platform’s US merchants.
PayPal first moved into BNPL back in 2008 when its then-parent eBay bought Bill Me Later. A year ago, PayPal launched Pay in 4, a six-week instalment offering that is free for both consumers and merchants, alongside its longer-term PayPal Credit service.
Earlier this year, Apple was recruiting staff for its payments division with experience in BNPL, as it looks to expand Apple Pay and its Wallet app. Bloomberg reported last month that the iPhone maker was working with Goldman Sachs to develop an Apple Pay Later service.
Industry executives warn, however, that the more crowded market could erode the businesses’ margins, while flustered consumers may also be put off by the rapidly growing number of checkout options.
“The current state of affairs, where you have seven buttons when you go to checkout, I don’t think is a sustainable state of affairs,” said one consumer finance executive at a top US bank. “I think we are in an interim period.”
A bigger threat still is the sector’s immature and inconsistent regulatory environment.
“It’s what everyone is calling the Wild West,” said Alyson Clarke, an analyst at Forrester. “There is no onus on them to make sure that you are of financial health to be able to repay that loan.”
Some companies do a “soft” credit check that briefly examines a person’s position but “not as much as they should be doing if they are lending you money”, Clarke said. “Afterpay doesn’t do any of that.”
A survey of Australian consumers, compiled by the country’s financial regulator in 2020, suggested 21 per cent of BNPL users missed a payment in the previous 12 months. Almost half of them were aged 18 to 29. Morgan Stanley analysts have estimated Afterpay makes about $70m a year on late fees.
The UK’s financial regulator has said BNPL players should be forced to adhere to its credit rules as a “matter of urgency”. In the US, a government consumer protection agency issued guidance urging caution around “tempting” BNPL deals.
In a hint at further possible tensions, Capital One in December became the first major credit card company to block its customers from using its cards to pay off BNPL purchases, calling the practice “risky for customers and the banks that serve them”, according to Reuters.
Afterpay board member Dana Stalder said the company welcomed regulation. “Buy now, pay later is just a friendlier consumer product,” he said. “Consumers understand that, they’re not dumb. This is why they are voting with their feet.”
Additional reporting by Richard Milne
UK pushes floating wind farms in drive to meet climate targets
In waters 15km south-east of Aberdeen, renewable energy companies are preparing to celebrate yet another landmark in the drive to end Britain’s reliance on fossil fuels.
Five wind turbines, each taller than the Gherkin building in the City of London, fixed to 3,000-tonne buoyant platforms have been towed to the UK North Sea from Rotterdam where they will form part of the Kincardine array, the world’s biggest “floating” offshore wind farm.
Wind farm developers have dabbled since the 2000s with floating technology to overcome the limitations of conventional offshore turbines. These are mounted on structures fixed to the seabed and are difficult to install beyond depths of 60m, which makes them unsuitable for waters further from shore where wind speeds are higher.
Floating projects, which are anchored to the seabed by mooring lines, are rapidly moving from the fringes to the mainstream as countries turn to the technology to help meet challenging climate targets.
Britain was the first country to install a floating offshore wind farm off the coast of Peterhead, Scotland in 2017. But existing floating projects are modest in size. The Kincardine array has an electricity generation capacity of 50MW compared to 3.6GW for the world’s largest conventional offshore wind farm.
Now the bigger wind developers are stepping up a gear with plans to build more schemes on a larger scale.
Denmark’s Orsted, Germany’s RWE, Norway’s Equinor along with the UK’s ScottishPower and Royal Dutch Shell are some of companies on a long list of bidders vying to build floating schemes in an auction of seabed rights for about 10GW of offshore wind projects in Scottish waters. The bidding round closed in mid-July with the winners expected to be announced in early 2022.
The UK is separately examining an auction exclusively for floating wind in the Celtic Sea, the area of the Atlantic Ocean west of the Bristol Channel and the approaches to the English Channel and south of the Republic of Ireland.
Developers expect the costs of floating projects to fall rapidly as more projects are deployed. In 2018 floating wind costs were estimated at more than €200 per megawatt hour, nearly double the cost of nuclear power in the UK.
The Offshore Renewable Energy Catapult, a UK technology and research centre, is hopeful developers will be able to build “subsidy free” floating projects at prices below forecast wholesale electricity costs in auctions as early as 2029. Conventional offshore wind developers reached this inflection point in a UK government auction in 2019.
UK prime minister Boris Johnson, who is hosting the UN’s COP26 climate summit later this year, has set a 1GW floating target out of a total 40GW offshore wind goal by 2030. He has underlined the importance of accessing the “windiest parts of our seas” as part of the UK’s goal to cut carbon emissions to net zero by 2050.
Other countries including France, Norway, Spain, the US and Japan are pursuing the technology, which experts said would particularly appeal to countries with limited access to shallow waters, or where the geology of the seabed makes it impossible to install conventional “fixed-bottom” turbines.
WindEurope, an industry body, predicts one-third of all offshore wind turbines installed in Europe by 2050 could be floating.
Countries pursuing floating wind are interested in it “not just as an opportunity to deliver net-zero targets. It has a real potential to be a driver of economic growth as well,” said Ralph Torr, a programme manager at the Offshore Renewable Energy Catapult.
Much like how the UK supply chain has lost out to foreign companies in the construction of conventional wind offshore farms — despite Britain having more than anywhere else in the world — there are concerns the mistakes will be repeated for floating technology. Manufacturing work for the Kincardine project was carried out in Spain and Portugal and the turbines and foundations assembled in Rotterdam.
Competition with other markets was already high as they all tried to gain a “first-mover advantage”, said Torr, who warned the UK government’s 1GW floating wind target by 2030 was not “going to unlock huge investment in the supply chain or infrastructure because it’s [just] a handful of projects”.
The Offshore Renewable Energy Catapult and developers are urging the government to commit to a second target in 2040 for floating wind, which they believe would provide confidence to industry to invest in the necessary facilities in Britain.
“Because floating [wind] becomes economic in the 2030s, it’d be much better to understand what the longer term pipeline is,” said Tom Glover, UK country chair at RWE. He added that in the Scottish seabed rights auction, developers had to “provide a commitment and an ambition for Scottish content”, which should benefit the local supply chain.
Wind developers are conscious that UK suppliers need time to gear up. Christoph Harwood, director of policy and strategy at Simply Blue Energy, which is developing a 96MW floating scheme off the coast of Pembroke in Wales, said projects that were larger than the earliest floating schemes but were not yet at a full commercial scale would be important in that process.
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“If the UK supply chain is to benefit from floating wind, don’t rush into 1GW projects, take some stepping stones towards them,” he said.
Tim Cornelius, chief executive of the Global Energy Group, which carries out offshore wind assembly work at the Port of Nigg on the Cromarty Firth in north-east Scotland, said the size of floating wind turbines offered opportunities to UK suppliers.
The floating turbines are much bigger than their conventional offshore counterparts so need to be built closer to their point of installation, which precludes using the lowest cost manufacturers in China and the Middle East.
The floating turbines require “an astonishing amount” of deepwater quayside space at ports, Cornelius explained. His company is looking at creating an artificial island for quaysides in the Cromarty Firth in Scotland, which he says would require a “material investment but is entirely justifiable as long as developers are prepared to commit”.
But he warned that “as it currently stands, the [UK] supply chain isn’t in a position to be able to support the aspirations of the [floating offshore wind] industry”.
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