Thursday 28 October 2010

Falling UK houseprices are essential for the economy

For the decade of 1997 to 2007, buying a house was a surefire way to get rich. Lots of people did it, older people had already bought in and saw bubble profits. The only losers were younger people without the wherewithal to join in and the poor who did not have the funds either.

However, for the last 2.5 years the story has changed. No one is now treating their house like a cash machine and Phil Spencer and his crew no longer sully the airwaves (his firm appropriately went bust last year).

People not using their houses like cash machines means there is less consumer spending in the economy. Also less activity in the market means the housebuilders are not doing so much construction, sparing up capacity in that sector. Then of course there are the poor volumes for those highly cherished estate agents.

Furthermore people are paying back their mortgages, this is profitable for the banks, but leads to an contraction of money supply, as money paid back is not replaced;  the banks are using this money to offset losses, not to re-lend on property where they are massively over-exposed.

So it would seem falling prices are not a good thing. This is what you can read across a range of economic commentators.

However, all of the above should be the normal state of affairs. Trying to have policies which move us back to igniting a property bubble would be insane as there was huge waste of valuable capital and easy profits for people do nothing; non productive speculation is not a long-term basis for a large economy like the UK. At least the City Speculation skims the world markets and not other UK citizens (they register as collateral damage only).

Already we have negative real interest rates, if we have these and still house prices fall it suggests they have a lot further to go. Managing this decline so that it does not distort the economy too much is crucial but falling prices are in many ways essential to a healthy economic recovery - it will show the economy re-balancing to a more stable state.

The takeaway here for me is that it means interest rates are going to stay low for a long time; if only to preent a housing crash that will occur if they are moved up swiftly. There will be a strong correlation with falling house prices and low interest rates (until rampant inflation gets our of control, but that is a story for another post).


Steven_L said...

Managing this decline so that it does not distort the economy too much is crucial ...

Is it? Isn't 'managing the decline' what Gordon and Shriti tried to do and ended up leaving us in this situation?

Why drag it out? Anyhow, hho is this genius who is going to 'manage' it? Mervyn King? George Osborne? You're having a giraffe!

Mark Wadsworth said...

Not really.

Falling house prices are bad for the economy, but throwing ever more taxpayers' money at trying to keep them high and unaffordable is worse.

A short sharp crash followed by a period (preferably for all eternity) of low and stable prices would be best, known in the trade as "Doing a John Major", which is economic gold but, given the Home-Owner-Ist tendencies of the UK electorate, political poison.

Mark Wadsworth said...

Which could easily be achieved by replacing ALL taxes (income tax, NI, VAT, the lot) with Land Value Tax; liberalising planning laws and proper banking supervision.

A bit like in the 1950s and 1960s, when we still had Sch A tax and Domestic Rates.

Anonymous said...

Mark, that horn is rusty, worn out, and stupid.

Change the tune.

hovis said...

The short sharp shock solution wont be tried given the politixcal fall out. I'm also not sure whether the Bank's be affected due to mark to market rules ?

If they come into play I would have thought they would take down a few more of the banks and in that respect the cupboard is bare...

Yes house prices need an adjustment, but I thin inflation willbe let rip for a while and interest rates kept in the lower end of the spectrum.

Sebastian Weetabix said...

@Anon - hear hear. The way Wadsworth bangs on you'd think Land Value Tax cures everything up to & including cancer. But not monomania, clearly.

I suppose I'm just an incurable "homeownerist", whatever the f*** that is.

CityUnslicker said...

As pointed out, a crash is a disaster as it will take RBS and Lloyds out too; as well as all the struggling building societies. That would be a double dip.

Using inflation to undermine values plus 10% price falls over a couple of years will mean real depreciation of 20%.

Anonymous said...

"At least the City Speculation skims the world markets and not other UK citizens (they register as collateral damage only).": that is what I used to comfort myself with when I flogged Jap equities and derivatives to continental investors in the 80s. Then again some UK investors bought the stuff as well. And of course it is bad news when if the speculation is done with borrowed money which ends up not being repaid.

Mark Wadsworth said...

? When has anybody ever sais that LVT would cure cancer? The topic was house prices.

@ SW, there is a difference between being a 'homeowner' and being a Home-Owner-Ist.

Steven_L said...

Using inflation to undermine values

Only works if wages keep up with inflation and unions are too weak for that to happen these days.

It'll just be a nasty squeeze :)

Old BE said...

In the long run it makes sense for house prices to be a more sensible multiple of earnings. In the short term negative equity and the inability to move house can be very painful.

I am all for personal responsibility, but I do dislike the glee which some commentators advertise.

Budgie said...

We are back to Wilson's 1960s: devaluation and inflation to 'cure' all our economic woes.

CityUnslicker said...

Budgie - yup, devaluation already happenend, inflation at a lower but still painful place.

Steven_L - I don;t agree with your point there. Inflation eats away at real wages and Real assets values equally. we all get poorer in every way unless you have invested in inflation beating assets.

Anonymous said...

"a crash is a disaster as it will take RBS and Lloyds out too; as well as all the struggling building societies.

Using inflation to undermine values plus 10% price falls over a couple of years will mean real depreciation of 20%."

So what you are talking about is using inflation to transfer (steal) wealth from house owners and savers to the banks.

The fact is these bankers made bad bets and they lost their money, to hell with them, let them burn.
I don't believe it would be the end of the country, anyone with enough capital to loan out can become a bank.
Most banks throughout history were much smaller than those today.
We don't need the Oligarchy of bankers that rule the West, we'd be better off without them.

And I do believe in market capitalism, but with sound money not this con job that is happening today.

Anonymous said...

From your banking contacts... how long is HSBC expected to survive?

Steven_L said...

"Inflation eats away at real wages and Real assets values equally. we all get poorer in every way"

So going back to your original point, how is us all getting 'poorer' 'essential for the economy'?

I've think you've lost it unslicker! That little oil drilling bubble you're invested in has clouded your thinking on this.

Houses and wages are already 25% or so less against a mixed basket of currencies, but that does not help affordability, which in turn gives lenders little confidence and dents credit availability.

Only a price/wage sprial coupled with devaluation erodes the consumer and corporate debt burden. I don't think this will happen unless Bernanke can stoke some real inflation and the unions can increase their membership dramatically.

CityUnslicker said...

Anon - the wealth in houses was always illusory. Your alternative has huge collateral damage - killing hte banks kills all our companies too as they are all in debt to the banks. A functioning banking system is key to any economic recovery.

Anon - HSBC, err the world's strongest bank, I think it will be just fine.

SL- What is essential for the economy is avoiding another bust. As mcuh as lwo interest rates and inflation hurts, it is the least worst option. A house price crash will cause another market collapse and a general economic slowdown.

Whilst I see what people are saying, my point is that we are where we are and have to manage out of it. I think a real wage/price spiral would get out of control and require quick interest rate rises that would push the economy off a cliff.

As said before, the best answer would be large QE with interest rate rises to bring a semblance of normality to savers etc. This is far too radical for any policymaker to accept.

Anonymous said...

Housing is still massively overpriced, and credit is unavailable so I can't see how it will go anywhere but down - all the pressure on it is downwards. I'm sure the ideal situation would be a static house market with a year on year devaluation of the pound and wage inflation, but I don't see that happening when every country is racing to the bottom and there are greater pressures on wage inflation.

They are going to crash. Violently.

Anonymous said...

The wealth wasn't illusory to those who got out while the going was good.

I realise there is a lot of short term pain with banks failing, but I don't believe it would be as bad as many say. There is going to be some value left even in banks which totally collapse.
And not all banks are as badly affected.

The moral hazard in what you suggest is huge, as if the bankers can behave as recklessly as they want and will always be a protected species.

What you are effectively suggesting is that the banks are defacto nationalised protected companies.

I would rather see a proper working private banking industry, with much smaller banks so if they make bad desisions they wont bring the whole system down at once.

Look, If I suggested the best way to solve the economy problem was to reintroduce slavery, no one would agree, because even 'if' it was true it is morally unacceptable.

I feel the same about the government intentionally devaluing our money, even if it was part of the solution which I find highly doubtful in the long-term, its just morally unacceptable for a few elites to actually be trying to manipulate the value of peoples money after they have earnt it.
They have no right.

Anonymous said...


I asked about HSBC knowing its status.

Your answer was insulting.

Of all persons, you should know what is happening in the world!!!!!!!!

Look at its derivatives exposure, look at its naked shorts exposure.
Look at a few other things, like risk management techniques, perhaps, and counter parties abilities.......

For ANY western bank so placed to continue in existence, QE must be infinite for all practical purposes. Any attempt to control via interest rates will result in the same end game via interest rate related derivatives that will blow

The compass points from where a Black Swan could originate are increasing exponentially.

The stupid fuckers have nuked the planet.

BofE will QE when the Fed does, as will the ECB. (they are doing it via the back-door now!) and it will be far more than just gov't debt that they buy! The nations will go down together...banks may survive on the backs of the populations and their progenies once again.....if this be so, and if the populations in general have collectively more than one brain cell, all directors/executives and politicians will be lynched, or crucified.....even earlier if the many class-actions currently sitting waiting in lawyers offices fail to be heard honestly.

All other debate is leading the sheeple away from the problems.

Tick tock, tick....