Exodus 20:20 - London

 And so came the time of change upon the land. 

Ravaged by plague and the mass of humanity seething in the Metropolis. 

The welcome to strangers had pushed the sinews of London to breaking point. 

Mayor Khan, for it were he, enjoyed his state patronage, but was happy to see the City fall to ruin assailed by vagabonds, for he did not like King Boris and was happy too see his realm fall into anarchy.

But the people of London were discontent, they did not like the anarchy and the did not like the plague.

At first they stayed in their homes, awaiting the dark times to pass. But the dark times did not pass. 

So eventually, they began to leave. The newcomes could have the anarchy, the Londoners wanted it no more. They wanted the promised land, the land of the shires, where there was not anarchy, where there were green fields instead of burning concrete buildings and where they could hope to escape the plague. 

The Exodus had begun. 

(This post is inspired by my Estate Agent friends who assure me that currently any house in the home counties is selling at asking price within a few days of going to market)

Osborne's Housing Bubble and the New Mortgage Rules

Who could reasonably object to mortgage lenders stress-testing their potential customers' ability to withstand an interest-rate hike ?  The amazing thing is that this wasn't required back in 2008, after the last bubble burst.

The answer, of course, might be "the Coalition", who seem to have fallen back on a housing boom to boost their chances in 2015.  Because it seems to me there is a good chance that almost any tightening of the current set-up will bring mortgage lending to a near-standstill.

A younger family member has recently (and sucessfully) been through the 'old' system - but only just, and a chaotic process it was, too.   Objectively speaking, the 'complexities' in her case were minor, but the bank's in-house 'mortgage adviser' was deeply unprofessional and betrayed a striking ignorance of the bank's own rules.  (And it wasn't some kid-out-of-college either: he claimed years of experience.) 

Stew in the kind of additional hurdles being introduced, and it looks like a very messy few months ahead.  At very least, the approval process will stretch out significantly: but of course it is nigh-on guaranteed to result in fewer and lower mortgage offers, too.  Cash buyers will correspondingly benefit; but the bubble could be peaking in summer 2014 rather than summer 2015.  Which isn't quite what 'Genius' Osborne has in mind.

ND

Property: Bubbles, Bursting Bubbles and Better Markets

 
Real estate is clearly the topic du jour, if not du siècle, seeing as how the whole economy is endlessly to be pumped up like an old tyre with property inflation.

Now here's a thing, spotted by Timmy.  One of the new Nobel laureates, Robert Shiller, is an efficient markets theorist and Shiller, says our Tim,

"is certain that the housing crash was caused by not enough speculation, not too much. If there had been a futures market in housing, the ability to sell short, then the bubble would never have grown so big."

How so ?  Well, because derivatives would enable investors to go short, which is what is needed to correct a price ramp driven by long-only forces.  In the absence of a user-friendly derivatives contract, only heavy-duty professionals can conduct shorting operations, and even they may find it difficult to create the instrument they need synthetically or by proxy.  Some, we know, consider shorting as the work of the devil but they are wrong (see this exchange dating way back): the problems come when shorting is not available to all.  Markets need long/short symmetry to work efficiently.

In fact, lots of people could make use of a deep, tight-spread property derivatives market - and not just speculators (though they are ultra-important providers of liquidity):

• the house owner who needs to move elsewhere for a year: if he sells in order to be able to rent, he loses his position in the housing equity market and, if there is inflation, may find it difficult to re-enter at the same level.  But he can't afford the rent without selling; and doesn't want the hassle of letting his current property.  He needs a property-value forward contract (if he is content to be fully hedged), or an option (if he wants to retain the upside and is willing to pay the option-premium) 
• the London house owner who is moving to Manchester for five years, after which she expects to retire to the home counties.  She wants to buy in Manchester but fears prices in the South East may surge ahead of those in the NW.  She needs a 5-year basis swap on the SE-NW differential. 

There is in fact a UK property derivatives market but I've never heard of a retail punter using it for proper hedging or investment purposes (has anyone ?), suggesting that it's not sufficiently liquid.  Also, it doesn't yet offer the kind of instruments in (locational) basis I described above.
 
[History corner: just at the point it went bust, Enron was about to make a market in UK property indices, basis and all.  It was going to buy Canary Wharf as its anchor in the 'physical' market, as a prelude to offering paper.]


The beauty of property is that loads of people are willing  - only too willing - to take spec positions on both sides, which is what generates the liquidity and tight spreads needed by the hedgers.  Absence of such willingness is what did for the weather derivatives market, which has never really taken off as it was supposed to do.  The simple fact is, no serious punter really has a view on next summer's average temperatures.  

So - good on Shiller, and roll on the liquid property-values market.  And let's subject future property price ramps to the full rigour of the short-sellers.

ND

RICS suggests limiting house price rises

..By controlling mortgage lending via the Bank of England. Where do we start, probably by noting that the RICS is hardly made up of the world's best and brightest, I doubt too many people have dream of being a property surveyor from an early age. The key issues:

1 - SUPPLY AND DEMAND - simples really isn't it. If we built more housing (social or private) there would be a better, supply and prices would fall. Or we could further restrict immigration. Reform planning, tax breaks for new build etc. It's not hard is it...

2 - MORTGAGE RESTRICTIONS - Yes, its all the fault of those horrible young people and there pathetic demands to own their own home, their sad desperation. Punish them! That's what we need to limit, aspiration. Never mind the inconvenient facts such as mortgage lending is well down from the boom of the naughties and indeed, without Government support, it would be even further down. Look at the graph above, its not mortgage lending that is causing the nascent property bubble is it?  It's more likely overseas equity investors into London and a trickle down from there.

3 - INTEREST RATES - Terribly old-fashioned, but hey ho. Raising rates will help savers, make mortgages more expensive and take the heat out of any boom. This is a good idea, along with running down or stopping QE.

4  - HELP TO BUY - Why not just stop this or recommend this is stopped. It's a much easier way to cool demand as this policy is pure politics and does indeed risk stoking a bubble. Better to end this subsidy than to restrict mortgages.

It's rare for me to agree with George Osborne, but he said some looking at the facts rather than the Vince Cable populist approach would be a good idea. He is right in this case for once.