Category Archives: house prices

Interesting Times

The government’s latest announcements are sounding increasingly like NuLab Lite: government to intervene in markets, to pick winners and losers, to pour other people’s money into selected places.  Selected by whom?  You can be sure the job of administering pots of public money like that will be a magnet for corruption!

  • Taxpayer to pour yet more money into housing (and the debt bubble) by underwriting banks losses on big mortgages.
  • Slush fund for lending to small businesses.

On a more positive note, I expect that they’re taking another leaf out of NuLab’s book, and that some of these announcements will lead to very, very little action.  Let us hope!

But something more interesting is happening.  Instead of the mainstream media cheerleading all these interventions, they’ve united to rubbish them.  Across the political spectrum, we have a remarkable degree of agreement:

Ian Cowie in the Telegraph (political right): You really could not make it up. Government proposals for taxpayers to underwrite looser mortgage lending for first time buyers may help buy-to-let landlords exit the housing market with handsome profits before house prices fall further. But they are unlikely to be of lasting benefit to anyone encouraged to take on excessive debt before interest rates rise from their current historic low and more homebuyers find themselves in negative equity.

Mary Ann Sieghart in the Independent (political centre-left): The one thing missing from today’s housing strategy will be an outright acknowledgment that lower house prices would be a good thing. It’s still too much of a political taboo. But ministers know that it’s exactly what the younger generation need. So do prospective buyers and their parents.

Matt Griffith in the Guardian (political left): While some of the initiatives – notably the government’s pledge to provide insurance for mortgages to new-build properties – are the equivalent of an intergenerational mugging: the state underwrites young people taking on a huge debt for an asset that is clearly overvalued.

Andrew Ellison in the Times (political right): A strange conspiracy maintains the high cost of homes – hence these weird schemes to help the first-time buyer.

James Saft at Reuters: Under the plan both builders and the government would contribute funds to partially indemnify lenders against what I am betting are the inevitable losses. Borrowers, who are almost by definition younger and less well off, will still bear all losses, but will be rewarded with the chance to take out the kind of loan which has proven time and again to be a bad idea.

Wow!  They really are all singing from the same hymn sheet.  Just a shame they took so long to notice the problem!  Evidently this blog was ahead of its time, for example in August 2007:  … the taxpayer money going into this helps inflate the price of anything nice, by lifting the market in general.

Eventually perhaps they’ll put the final pieces of the picture of overpriced housing together:  If chickens can’t come home to roost now for property millionaires and bankers, we’re transferring yet more burden onto the productive economy.  And that’s tilted towards the young (because fewer of them own property) and high-earners (who pay more tax).  That’s precisely the people who will be most welcome in other countries, when the burden of subsidising our fat-cats gets too much for them.   If we drive too many of them out, the economy is basically gone!

Prisoners Dilemma and Boom&Bust

Bank of England prints new money, up to 20%[1] of the money supply.

Stock market rallies hugely, on thin volumes of trading.  Well, that at least has some merit, given quite how far it had fallen.

— But —

an unheard-of 18% fall in investment!  A nominal fall: against what should have to be a 20% rise to retain its value in real terms!  The productive economy is dropping out of competitive measures other than cost-cutting (notably staff costs).

And that 20% of new money gets soaked up by housing, where the price crash has halted since the spring, again on low numbers of transactions!

It’s a prisoners dilemma: do individuals use their money for the overall good, or for personal gain?  In a healthy society, the two would be, well, if not fully aligned, then at least not in stark opposition to each other.

You take out a big mortgage, get security, big tax breaks, and government bailouts if you lose your job.  You rent and save for a house, you get poor security, and you have to live on the savings (including investments) if you lose your job.  So here’s the prisoners dilemma: if the job’s not secure, get the biggest mortgage you can, and put those savings into a house!

Repeat over lots of prisoners-dilemma-victims and the economy takes a real hit: the tax-and-benefits system has hobbled it.  Not once but twice: the money sunk into a house is not being invested in the productive economy, and the homeowner has lost flexibility to move!

It seems to me we’re on a timeline with this escalating boom&bust:

2005: house prices take a small fall, quickly “corrected” by low interest rates, ~15% underlying inflation (M4 money supply), and pouring public money in.
— leading to —
2007: lenders start going bust
2008: house prices take a bigger fall, “corrected” at mindblowing expense to the economy
— leading to —
2010? government starts going bust
2010/11? house prices take a proper collapse, taking the currency and much else with them.

What to do about it?  Well, emigrating again has appeal.  Short of that, I’m putting ever more of what I have into assets that derive value from outside the UK.

[1] and counting, until they pull the plug on Denial.