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1st January 1999
” it is hard to see any support coming from the US housing market fany time soon”
a Freudian slip?
Ooops. Apologies I will correct it.
As someone who is currently buying a house outside of London I can confirm the reason house prices are not falling is because the only people selling are those who have to move. The rest sit tight with prices at around 10-15% down on pre-crisis levels. Houses simply sit on the market waiting, with asking prices being dropped but no buyers coming along as they simply cannot afford the 20% deposit + 3.5 times LTV. Those in trouble are on interest only mortgages and so are not forced to sell.
Basically the market is frozen and will only unfreeze once inflation, wages and interest rates have risen sufficiently. Interest rates need to rise in order to pull in savings to fund more mortgages, banks are now only funding lending from their own balance sheet.
Is it any wonder the BoE policy is high inflation…….
Another take on the US economy.
A Nobel Economist Says Globalism Is Costly For Americans
By Paul Craig Roberts
It has long been evident to me, since the 1980’s actually, that the whole housing system in the UK was a ticking time bomb. We all know folk who have seen themselves as miniature Rackmans and somewhere along the line too many people were sucked into the spiral to acquire, to buy the new Merc on the back of an artificially inflated house “worth”. Was this not, surely, the main cause of our more recent problems all along?
In my ‘brilliance’ I was about fifteen years premature in my ditching of property…….hmmmm but I can say I was right in the end as I peer from my cardboard box. What now though? Is it time for a complete re-leveling of prices? One so severe that housing becomes affordable to most working men and women and not just a very small minority in a first time buyer situation? I have a 22 year old son living with his true love in the UK and they both work in decent jobs. There is no way he can afford a house or flat even with this supposed reduction in prices. I bought my first house by the time I was 21 years old.
Can our country survive, what I consider to be, a brutal and necessary slashing of prices? Or would too many votes be lost from those in mediocre occupations living superior lifestyles funded, in the main, by the re-mortgage mentality? Is it not time that the British accepted that a house is for living in and raising families, it is not a portfolio! And time too that we accept that Mercedes et al are for the rich?
Just today I had my own micro-economic disaster in the Philippines…….My online banking decided to give up the ghost after two years of faultless service and thus leaving me rather short of pesos for the time being. Unlike the problems afflicting the industrial nations I am sure my piffling problem will be resolved in a matter of days if not hours.
Love the blog Shaun, but by gum it scares me to death sometimes.
Hi Noel; does that mean you now live in The Philippines?
@ Drf………Live is perhaps rather grand. Subsist might be more accurate. Yes I am giving it a go, expanding economy and wild opportunities do exist here in this neck of the woods.
Good idea. I am looking at giving it a go. Much lower cost of living. My wife was originally a Filipina and she and my two kids have acquired Philippine nationality again, so we do not have a problem. Cebu is where I am thinking of locating.
I am based in Cavite province south of Manila on the main island of Luzon. I wish you the best of fortune in your adventure.
Hi Noel; Cavite is quite nice and it is convenient that it is on Luzon
(for Manila), but looking at natural hazards like typhoons etc. it seems Cebu
is less hazardous. Cebu also has a lot of Spanish influence particularly
since it was there the Spanish first invaded (Lapu-Lapu) and increasing
industry is encouraged now. We are not certain where yet though.
I agree with your concluding section but not with the earlier implication that the Bank of England (BOE) should continue indirectly with special help for the housing market. One of the greatest moral hazards we have in this country is the idea that buying a house is a one way bet where the government, banks and central bank will do whatever is needed to support the market with ZIPR, QE, SLS, etc…a government funded put option if you like. If people viewed buying a house as similar to buying any other commodity, equity or bond then asking prices would likely reflect a more sensible multiple of average salary. What happened in the decade up to 2007 was that people’s expectations changed so they viewed it as a right to buy a home on next to no deposit. At least in previous times it was understood that you would have a few years hardship whilst saving the deposit (as Kirsty Allsop pointed out on newsnight yesterday) so there was some filtering of buyers going on there.
The issue about allowing a large increase in interest only mortgages is that banks are simply extending earlier ruses such as the self certified “liar” mortgages to help keep things upright a little longer. It will be interesting to see if the FSA takes any action over this now that they’re supposedly more proactive about stopping banks errant behaviour in advance.
The 2007 figures for mortgage approvals related to the boyant madness still in the market so a permanent reduction should be welcolmed even if the numbers have temporarily overshot on the downside.
On the special liquidity scheme I think running it down is the one and only thing that the BOE are doing right. If they don’t stop breast feeding the banks with this and other special arrangements there are two problems. First the banks come to see it as a semi permanent way for them to avoid the more difficuly route of raising funds from private sources and the discipline that forces on them from having “real” creditors. Secondly the BOE needs to shake off special arrangements as quickly as possible so as to stand ready to deal with the next credit shock which may well not be long in coming. If that dampens credit availability and GPD growth in the meantime so be it. The party’s over and an unpleasant hangover is needed to scar us to remember the folly of the boom decade. Most people still seem to think that by saying a few magic words (eg QE) and some other fancy footwork that the authorities can banish all the consequences to the debt bubble and that’s no incentive to stop from repeating it all again.
Actually I am generally in agreement with you. Let me explain my position. If we accept that the SLS exists then we need to wind it down with as little damage to our economy as possible. My contention is that this needs to be staged considering where we are at as otherwise it could lead to a further credit shock.
I am not saying I am a fan of it merely that it neeeds unwinding carefully as will QE when the time comes.
The Bank of England chose to accelerate its withdrawal which I do not agree with. Mind you there is a long list of its decisions I do not agree with!
What I particularly disagree with is the way that the UK banking system remains completely unreformed. In my opinion that is the thing that would need accelerating if it had actually started…..
I hardly dare read your blog any more – I am almost at the stage where I would like to be a Eorpolitician, i.e. ignoring all reality.
One question that I did have and that is, if the banks have only provided 0.1% of their loans on property and , if they take no provisions on foreign sovereign debt, where have they managed to lose all of thier money. It’s not in normal lending to businesses, not in property, not on sovereign debt. Is it all in derivatives? Foreign property?
Reality is not always pleasant is it? But one of the purposes of this is that to plot a course out of trouble you need first to figure out where you are…
As to your question I think you are confusing the purpose of the provisions. They are against future losses and my contention is that they are too small.It is a different matter to ask where they have lost money. Indeed if we take the case of what was HBOS they seem to have lost it almost wherever they went…..
Houses are only really worth what we are told they are by mortgage lenders once first time buyers are paying mortgages at today’s prices, if they can’t afford to then whatever the Halifax keeps telling us prices will have to come down. The supply and demand argument to justify high prices only takes you so far, in the end it hits the wall of reality that is hardly anyone can afford to buy into this mess and take on the entire cost of a house as a debt. Certainly not in the numbers to ensure a healthy housing market.
The thing to watch for is how much government support in the form of taxpayers money is being pumped in at the bottom end in order to ‘help first time buyers onto the ladder’. We already have the government and developers offering part rent/part buy mortgages, but now local councils are getting in on the act as well using council tax to pay people’s entire deposits.
Will the result of this be that bit by bit the taxpayer will be left supporting the entire housing market? A taxpayer underwritten housing bubble…Once you start doing it how do you stop?
What about all those whose tax is used to provide an affordable mortgage for the lucky few but who still can’t afford to live anywhere themselves, are they not in danger of being priced onto the streets with their own taxes as house prices start rising again? And what happens when they realise this?
The housing market is in a real mess in this country, too many vested interests coupled with a lack of open discussion about what is being done to hold it all together in the interests of bank’s balance sheets.
Hi William; surely the base of this is though what it costs to build a new house? If prices fell to what the market can now bear in terms of mortgage affordability, then at today’s costs it would not be possible to profitably build new houses. The market would then have to wait for inflation and incomes to catch-up before it would become profitable again to build new houses.
Of course building land is the largest cost, but if the major builders have to sell off their land banks many of them might become insolvent. Who then would build the new houses, when demand for them would be increasing but at the new lower prices?
Back in the inter war years of the twentieth century many people built their own homes. If land was cheap I can see this making sense again. Instead of a deposit and then loads of interest over your career why not take a break or work part time (after saving for the land) and build something you wholly own.
Hi Kit; the reason that few people do attempt self-build now is simple: intensive difficulty getting planning permission to build a new house on a separate plot and all the regulation and bureaucracy involved. This also adds to the cost.
Local councils prefer large builders to build all new houses and cram them onto small plots of land. This is because they then get funding from these large building companies under legal agreements as a condition of getting the planning permission and high density houses produce more Council Tax! etc.
I presume you are talking about ‘planning gain’, 106, monies
which I can only equate to old fashioned ‘key money!’ Yes there has to be recompense for communities
losing their amenities/land but this whole issue is rather clouded once you try
and examine it. Try and find out what it
has been spent on!
Of course the more houses in a district the more tax revenue
is raised locally but there is another point to consider. It was the case, and still might be, that the
central government grant took into account house numbers therefore the more
houses the more cash your local council either retained (non-domestic rates) or
was granted. This led to an explosion of
house building where I lived but no investment in infrastructure services leaving
our Town with the descriptor, Dormitory. So instead of building/investing for the
future they took the money and ran!
I do think better use of QE would be to invest in low cost
and/or social housing.
Hi Mac; Yes Section 106 agreements are one example, and low cost housing included in the development (subsidised by the other purchasers and paid for by the developers out of their profits) is another example of the conditions imposed on large developers as a “price” for obtaining planning permission. Of course, as you point out what the councils spend the 106 money on is another thing, but this is why they favour large developers over single self build..
I agree that spending QE fake fiat money on low cost or social housing would be a better use of it, at least for some of it, but of course that would not help the Banksters! There is thus no chance of that happening.
The cost of rent has an impact on house prices. I remember in 1995 calculating that a mortgage was cheaper than my monthly rent, so I saved up and bought a house. There is a limited supply of building plots in the South East. Self build becomes impractical due to expense for most of the population and you just have to buy something adequate or rent.
The probable future of the housing market is to muddle along for a while until inflation gets too high for Merv or his successor and then hurt for a while with high interest rates until English average salaries and wages rise to a third or a quarter of average house prices. Some readers will remember a 15% base rate from about 1990. If repeated, this will cause many repossessions. If you want to buy a house for the first time, you could try to save a deposit and wait for houses to become affordable.
This is another readjustment that needs to happen. BBC’s Newsnight did a piece on home ownership last night. The subject of it was a survey revealing the young have given up on the idea of owning thier own home. As with all the readjustments facing the western world there will be pain felt by many but I hope in the long run it at least it will enable first time buyers to enter the market.
Friends of mine would appear in a new 4×4/prestige car etc purchased by remortgaging when the credit conditions were too loose in the mid noughties and I could not see the sense in paying for it over the next 20 years! Pretty soon it will soon be rusting away at the vehicle dismantlers. The tragedy is that because of this sort of daft behaviour we’re nearly all feeling the pain now-even those of us who only ever spend a few grand on a car from our savings which are now being eaten way by inflation of course.
As ever good points being made but last year saw a 90 year low in new build with new building starts falling well below government assessed needs. Planning permissions are running well below pre-crisis trends. Over supply in the US, undersupply in the UK. Whilst I accept credit supply, unemployment and the economy all play their role in curtailing prices, its the undersupply matched with explosions in housing need which will permeate unless new forms of ownership can be made affordable and available. By the look of the government balance sheet those homes wont be coming from that direction.
I can only speak for my own situation, but my current attitude as a result of the BoE stance is as follows:
1. Interest Rates – when interest rates of 5, 6 or 7% were available, I regarded the interest on my savings as essentially free money (although I know in reality only a portion of it was free, the rest compensating for inflation) and while continuing to add to my savings pot, I was willing spend a large % of the interest and this contributed to the ecomony. With interest rates nearer zero, I’m keeping a much tighter grip on the purse strings, and spending less.
2. Inflation – with inflation running officially at 5% and IMHO much nearer 10% in reality with food and fuel taken fully into account, and a total lack of belief that the BoE will do anything about it in the near term, I’m saving like crazy to compensate for the prospect of higher prices in future when I come to retire – taking more money out of the economy that I would otherwise be happier to spend now.
3. House Prices – prior to the housing bubble popping (well, semi-deflating) I was looking to move up from my wonky, subsided, old solid-brick, turn of the last century cottage to something more modern and less expensive to run. But as it seems clear that the housing market still has a further correction of, say 20-30% to go, I’m hoarding the cash and certainly don’t feel confident enough to invest. I’m happier with a wonky old cottage than I would be with a house that immediately drops in value.
The result – from my personal perspective, I’m doing what makes perfect sense: hoarding cash, adding to savings, and not spending on luxuries or active in the housing market. Is that what the BoE intended?
What is the point in hoarding cash in the situation we are in? It inflates away.
Commodities? Better off here if you don’t choose a bubble!
What isn’t in a bubble at the moment? UK housing is stuck in a half-dead limbo, precious metals are nearing bubble territory, UK/US shares seem to be nervously awaiting the next shock from EU sovereign default or further bank shocks or retail sector implosions, BRIC shares are volatile – where’s the clever money going? Spanish or US property perhaps?
“For example yesterday the Chicago Purchasing Managers Index fell from
67.6 in April to 56.6 in May. Now whilst any number above 50 shows
expansion that was a fair drop and many eyes will turn in a few hours
time to the Institute of Supply Managers Index to see if it confirms
It is commonly assumed that the various Purchasing Managers’ Indices and the Insitute of Supply Manager’s Index indicate economic activity. I do not feel that is a justifiable position. These indices in reality indicate only purchases by enterprises, and then only their own members’ enterprises, so they are inevitably limited in sample and biased. In addition they are not properly adjusted for real inflation. As you observed “If you take the view that the official numbers under- record US
inflation as I argued back on the 2nd of July last year then you are
left with the view that they are back to the levels of an earlier date
than even Mr. McBride thinks…”. If that is true in that case it is just as true of purchasing managers’ indices, and it is just as true of GDP “growth”. Now in any case the rising or falling levels of purchases do not directly indicate real economic activity in the short term; they may principally indicate a significant portion of investment in replacement of depreciated items. They thus only give any associated indication of economic activity in the longer term, and because they are based on, as previously pointed out, an unrepresentative and biased sample they cannot be relied on to do so even longer term.
I do not thus believe that relatively short-term changes in purchasing managers’ indices are a significant indicator of any overall rise or fall in real economic activity.
I take your point. There are bigger fans of these measures than me. What I was trying to say was that in the current environment where it looks as if the US economy may be slowing substantially than any information helps. Whilst these PMI/ISM numbers have problems they are timely. It was ever thus with economics…Whats really useful you get with a lag and what is not as reliable you get more quickly…
However in a day like today they ended up adding to a theme of economic slowdown and does nothing to change my view that more asset purchases or QE3 remains a distinct possibility.
Hi Shaun; well of course that is true with all these numbers essentially. I certainly agree with your latter point.
In fact Shaun, Simon Ward is arguing that the present purchase of Gilts by banks with money effectively borrowed at only 0.5% is akin to QE MkIII already. I think he has a point? See http://www.telegraph.co.uk/finance/economics/gilts/8550716/Banks-buy-bulk-of-39.8bn-of-new-gilts.html
In Japan didn’t house prices continue to fall during their lost decade?
I can envisage buyers holding off purchase if they believe further falls in price are likely from distressed sellers. So if prices were to fall substantially then it may be self reinforcing & rapid before a new equilibrium is reached?
Pretty much. I was looking earlier at some statistics for land prices in Japan. Since 1991 each number seems to have been negative for commercial,residential and industrial land. Now not every year is now shown for the 1990s but the graph simply shows a continuous decline.
Your second point is what I am trying to avoid and I fear that the Bank of England might create. We could yet see further bank rescue schemes because an existing one was withdrawn incompetently.
Take the average income of an 18 to 30 yr old, and multiply it by 4 (the old adage of 3 x salary +1 x the partner’s salary) to give a rough idea of what a first time buyer (as a couple) can expect as their permitted mortgage value. Now look at the average cost of the bottom 20% of housing stock. Subtract 25% from that (this is the deposit needed these days) and this tells you the amount a first time buyer needs to be able to borrow. The difference between these two is the amount the housing market needs to fall before things start moving again, since most house moving chains are founded on a first time buyer at the bottom.I used this simple tool to predict the crash of the early 90’s by plotting the graph and extrapolating, and I used it in 2008 to make my decision to sell and NOT to buy a house yet.It is only low interest rates that are maintaining a semblance of normality in the UK housing market.
UK Housing – Is there a solution in which taxation on income (whether rent or capital gains on a sale) on second, third and fourth homes just increases each time until it becomes punitive to the point of becoming a loss making exercise?
If this could be implemented in a 12 to 18 month window, you’d surely see the following:
Flood of houses onto the market
Reduction of overall prices
No detrimental impact to those who have bought at ‘home’ and not an investment
Avaricious part-time landlords, and property speculators being appropriately limited in the dame they do to the wider economy/society
A reduction in the number of people feeling they can only rent, allowing…
…A reduction in rental charges – more disposable income..?
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