interestrateripoff

The Bank Of England Clueless Thread

2,684 posts in this topic

36 minutes ago, darkmarket said:

I'd have been very surprised if anyone were to recommend increasing rates in the current circumstances, there's been no data in the past month indicating a change was likely.

'data' 

 

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1 hour ago, Will! said:

Years ago, Carney did say (I think before the House of Lords Economic Affairs Committee, but may have been the House of Commons Treasury Select Committee) that when the time came to tighten monetary policy he would raise rates before unwinding QE because he thought the effects would be more predictable.  That was all hypothetical, of course. 

That would make sense, there does some to be an irrationality about the market response to any reduction in QE in the Eurozone, for example, that must be hard to quantify. My thinking was based partly on the perception of inequality created by QE, partly its efficacy, and partly the apparently growing likelihood of some kind of fiscal stimulus approach.

In any case, not much of interest in today's statement.

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1 hour ago, darkmarket said:

That would make sense, there does some to be an irrationality about the market response to any reduction in QE in the Eurozone, for example, that must be hard to quantify. My thinking was based partly on the perception of inequality created by QE, partly its efficacy, and partly the apparently growing likelihood of some kind of fiscal stimulus approach.

In any case, not much of interest in today's statement.

I'll believe they'll reverse QE when I see it. I remember them saying it would need to be reversed at some point when they first started it when people we're airing concerns about QE, but we're nearly 10 years on and there is no sign of it. My guess is they will reverse it once inflation makes reversing that amount of money a lot less painful, i.e. many years away.

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QE can't be stopped without exposing it's true affect, i.e. overdosing the planet on nonexistent money that's obscured the true value of everything.

So, it won't be stopped.

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2 hours ago, simon99 said:

My guess is they will reverse it once inflation makes reversing that amount of money a lot less painful, i.e. many years away.

Agreed there's no chance of it without inflation. I'm expecting that to be imported on the back of someone else's stimulus plans before any comes from the UK domestic economy, and add to that Carney's looking through period, so difficult to judge a timescale at the moment. Things are slowly moving in the right direction though, and with the tax changes etc already introduced it looks like there's already a squeeze out the rapidly shrinking door.

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2 hours ago, Noallegiance said:
40 minutes ago, darkmarket said:

Agreed there's no chance of it without inflation. I'm expecting that to be imported on the back of someone else's stimulus plans before any comes from the UK domestic economy, and add to that Carney's looking through period, so difficult to judge a timescale at the moment. Things are slowly moving in the right direction though, and with the tax changes etc already introduced it looks like there's already a squeeze out the rapidly shrinking door.

It's the fact that when QE was started, the fears of printing money were allayed by saying it would be reversed, like it would be a short term temporary measure. Yet there is still no sign of it almost 10 years on.

 

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Just now, simon99 said:

 

This Quote feature is hopeless, I can't make head nor tail of it, my last post came out totally wrong. I said "It's the fact that when QE was started, the fears of printing money were allayed by saying it would be reversed, like it would be a short term temporary measure. Yet there is still no sign of it almost 10 years on. "

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34 minutes ago, darkmarket said:

Agreed there's no chance of it without inflation. I'm expecting that to be imported on the back of someone else's stimulus plans before any comes from the UK domestic economy, and add to that Carney's looking through period, so difficult to judge a timescale at the moment. Things are slowly moving in the right direction though, and with the tax changes etc already introduced it looks like there's already a squeeze out the rapidly shrinking door.

Carney's difficult 'looking through' period.

Can't say when it will end but I've a good idea what the consequences will be.

3e7ace318953fac99104e0ed0b579ef0.jpg

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17 minutes ago, simon99 said:

It's the fact that when QE was started, the fears of printing money were allayed by saying it would be reversed, like it would be a short term temporary measure. Yet there is still no sign of it almost 10 years on.

I'd like to know what really was the expectation when it was first introduced, but I doubt we ever will. I've enjoyed all the discussion around ending though, throughout the national media. Relentless.

 

20 minutes ago, zugzwang said:

Carney's difficult 'looking through' period.

Can't say when it will end but I've a good idea what the consequences will be.

It feels a bit like this too:

wile-e-coyote-1-o.gif

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The only reason central banks have been able to get away with QE is because we are in a debt-deflation cycle (emphasis on deflation).

It's actually a toxic combination, as QE feeds asset bubbles like housing which create massive social division between the haves and the have-nots (increasingly the old vs the young).

The only thing which will stop the madness is if inflation returns (which I still don't see happening given the overcapacity in the economy) or some kind of social conflict which forces political change on central bank policy. 

I'm sorry to disappoint the posters on here, but a house price crash is virtually impossible, as interest rates will remain at historic lows, QE will be ramped up, and we will remain in a deflationary environment for many years yet. The situation is completely different from the early 90s, and I think a lot of posters are biased because of their experience of that period. This time really is different (unfortunately).

 

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3 hours ago, thisisthisitmaybe said:

The only thing which will stop the madness is if inflation returns (which I still don't see happening given the overcapacity in the economy) or some kind of social conflict which forces political change on central bank policy. 

I'm sorry to disappoint the posters on here, but a house price crash is virtually impossible, as interest rates will remain at historic lows, QE will be ramped up, and we will remain in a deflationary environment for many years yet.

Obviously a rise in interest rates would be the quickest trigger, but it's not as simple as you suggest.

Firstly, the regulations on BTL currently being introduced alongside the forthcoming Basel requirements on lenders will have a dramatic effect on the demand and supply sides of the market.

Secondly, the rates set by the BoE are important, but they don't determine mortgage rates alone. We're just seeing how a rise in fixes of 1-2% in the US has cut mortgage applications to warning levels. And that happened before the Fed intervention. Increases in swap rates in the UK suggest this trend is beginning here and HSBC has already risen lending rates in response.

Thirdly, inflation in the UK doesn't only depend on the UK economy. The worst-case scenario, which is exactly what is unfolding, is that Carney's inability to raise rates leaves the pound vulnerable to attack. That in turn leads to imported inflation. It's that imported inflation and the absence of the possibility of monetary policy and fiscal responses that are the biggest threat to the economy now.

It's not a simple equation of waiting for the economy to grow to levels where inflation requires a rate hike. It's that the economy is so vulnerable it can't protect itself from any change in outside influences. London claimed to invincible because it was a global city, and the UK strong because it was a global economy. Neither are true when 5% interest means failure.

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2 minutes ago, darkmarket said:

Obviously a rise in interest rates would be the quickest trigger, but it's not as simple as you suggest.

Firstly, the regulations on BTL currently being introduced alongside the forthcoming Basel requirements on lenders will have a dramatic effect on the demand and supply sides of the market.

Secondly, the rates set by the BoE are important, but they don't determine mortgage rates alone. We're just seeing how a rise in fixes of 1-2% in the US has cut mortgage applications to warning levels. And that happened before the Fed intervention. Increases in swap rates in the UK suggest this trend is beginning here and HSBC has already risen lending rates in response.

Thirdly, inflation in the UK doesn't only depend on the UK economy. The worst-case scenario, which is exactly what is unfolding, is that Carney's inability to raise rates leaves the pound vulnerable to attack. That in turn leads to imported inflation. It's that imported inflation and the absence of the possibility of monetary policy and fiscal responses that are the biggest threat to the economy now.

It's not a simple equation of waiting for the economy to grow to levels where inflation requires a rate hike. It's that the economy is so vulnerable it can't protect itself from any change in outside influences. London claimed to invincible because it was a global city, and the UK strong because it was a global economy. Neither are true when 5% interest means failure.

As somebody praying for a HPC (I am praying for some inflation) I hope very much that you are right. And thank you for your detailed response.

BTL may well be a fool's game now, although I wouldn't rule out the government backtracking on new BTL policy if they think they might be held culpable for a HPC. And recent form shows the gov will backtrack.

The Fed and the B of E have only raised rates twice in the last 8 years (or something like that). Their instinct is to lower rates whenever there are signs of trouble. Again, no government wants a HPC on its hands, so there will be pressure on central banks to lower rates if prices start tumbling. Negative rates are probably on the cards.

Deflation is now a global phenomenon. We are importing deflation, as there is so much excess capacity in the global economy. I think an attack on the pound to be unlikely, it is fairly valued now, whereas pre-Brexit it was far too high.

I think the best we can wish for is a tailing off in house prices. As long as 1) deflation rules the global economy, and 2) we have self-serving cretins in government and the central banks, the chances of a house price crash are very slim. I'd love to be proved otherwise and value all the responses on here. 

 

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Will BTL selling up there will be a flood of houses at the bottom end of the market. 

Bottom end end of the market will fall 20-30% easily

trapping all recent FTB from accessing the next 'step' so to speak. 

the middle market is going to get much better value. especially with many BTL forces to sell their own family homes also.

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From https://www.cml.org.uk/news/news-and-views/market-commentary-2017-and-2018-forecasts/

Quote

There is a large degree of uncertainty in how landlords react to the income tax changes; research commissioned by the CML shows only half of buy-to-let landlords surveyed felt they had at least a fairly good understanding of these changes. We expect limited or slower growth in landlord’s portfolios but will ultimately need to wait until the changes are in place to get a better idea of the cumulative impact on the sector.

Quote

The underlying picture for possessions still shows the number of cases falling, but as with our arrears forecast, we expect some deterioration in 2017 and 2018. The reason for this is a legal case that has somewhat distorted the headline figure for 2015 and 2016, meaning some possession actions were put on hold until regulatory uncertainty had been resolved.

We now expect this to unwind in 2017 and 2018, which is reflected in our forecasts.

Overall, we still expect the majority of borrowers to cope with a harsher economic condition from next year, resulting in forecast figures which still look favourable compared to the recent past.

Quote

Conclusion

Our forecasts are more pessimistic than a year ago, partly as a result of economic uncertainty, but also because of tax and regulatory changes in the housing and mortgage market. Having said this, the housing market is relatively well insulated from Brexit, compared with other parts of the economy, as most activity is driven domestically.

We expect property transactions to remain subdued going forward but, given strong demand for housing, we still do not expect to see national house price falls over the next two years.

The trajectory for buy-to-let is weaker than we expected a year ago, with stamp duty and regulatory changes both weighing on activity. Our forecasts imply 2015 was the peak for buy-to-let house purchase activity, with 2016 to 2018 all being weaker.

On arrears and possessions, we expect a limited deterioration in the underlying figures, as most borrowers cope with harsher economic conditions from next year, resulting in forecast figures which still look favourable compared to the recent past

Hmm so demand exceeds supply and this means prices will go up for ever.

People's finances are OK, they can spend spend spend.

BTL will be weaker.

I see a crisis ahead this report is crazily optimistic and has very little evidence of actual sums.

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55 minutes ago, thisisthisitmaybe said:

BTL may well be a fool's game now, although I wouldn't rule out the government backtracking on new BTL policy if they think they might be held culpable for a HPC. And recent form shows the gov will backtrack.

This is a misunderstanding of who's leading the adjustments to incentives around BTL. It's not just a government matter, it's primarily a BoE matter. That's why George Osborne agreed to hand greater powers over the matter to the Bank, which they now hold in reserve to add to the measures already announced, and that's why if the Treasury yields to the arguments of the BTL minority their influence will be countered by the BoE. And the underlying reason is the Bank controls the precarious balancing act between inflating asset bubbles via QE, and restricting the formation of systemic risks. The housing market is a systemic risk, and the recent innovation of BTL is a means of controlling that risk, at the greater risk of upsetting the wider balance.

1 hour ago, thisisthisitmaybe said:

The Fed and the B of E have only raised rates twice in the last 8 years (or something like that). Their instinct is to lower rates whenever there are signs of trouble. Again, no government wants a HPC on its hands, so there will be pressure on central banks to lower rates if prices start tumbling. Negative rates are probably on the cards.

Carney has come out time and again against negative rates. They don't work, have been proven not to work, have no foundation in economics and won't be introduced in the UK. The conditions that would allow for their effective introduction are the abolishment of cash, the commercial banking sector and introduction of direct consumer and business banking with the central bank based on digital currency. That's an ideological move too far, never mind the timeframe.

Low rates are a reflection of a problem. The US is moving beyond that stage, due to artificial stimulus. When the US exports inflation or crisis to a degree that creates crisis in another economy, the primary beneficiary is the US economy. See the actions of Cerberus mentioned in another thread. The US has a vested interest in being strong while other economies are fragile, and that's increasingly the case.

1 hour ago, thisisthisitmaybe said:

Deflation is now a global phenomenon. We are importing deflation, as there is so much excess capacity in the global economy. I think an attack on the pound to be unlikely, it is fairly valued now, whereas pre-Brexit it was far too high.

Deflation is not a global phenomenon, stagflation is and currency performances vary enormously. The drop in Sterling hasn't priced in leaving the EU and failing to achieve comparable trade agreements. It has further to fall against the dollar, and ground to make up on the Euro, which is under even more pressure. We're seeing inflation but in the form of asset bubbles which do little positive for the underlying economy but carry huge systemic risk.

1 hour ago, thisisthisitmaybe said:

I think the best we can wish for is a tailing off in house prices. As long as 1) deflation rules the global economy, and 2) we have self-serving cretins in government and the central banks, the chances of a house price crash are very slim.

I once believed in the myth of central bank omnipotence, and I still don't underestimate their influence in delaying the inevitable at unreasonable costs. What changed my mind is the inability of competing economies to maintain their precarious balance in concert, given the interests in misalignments. For the UK, it's simply not possible. A prolonged period of mild decline is unprecedented and would defy all the forces the decline represents. Endless denial of recession is impossible. There won't be a gentle solution - that's been the aim since 2001, and that's what's now under pressure. The only possible outcome is a major rebalancing of the domestic economy.

Thanks for your considered response too.

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So I emailed Mish (of Mishtalk) on the deflation issue and this was his response:

"The bubble in 2007 burst with low inflation (of course they forget the bubble itself was a representation of inflation)
Mish"
 
That's as good a response as I could have hoped for...but in the UK at least, the bubble was quickly reflated, which would not have been possible without ultra low interest rates. But Spanish property certainly did burst even though interest rates were dropped. 
 
I'm in two minds, I still think central banks will ramp up QE and go zero interest rates in the event of dramatic housing drops.
 
As others on here have pointed out, the underlying economic problems we face come down to the fact that central banks and governments have prevented recessions "on their watch" through manipulating interest rates, leading to huge pressures and mega boom and bust.
 
 

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Apparently about 70% of the land in Britain is 'owned' by about 1% of the population. We'll never have reasonable house prices whilst this remains unchanged.

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12 hours ago, hi5lo5 said:

I felt really discouraged after reading this. Let me know what are your thoughts.

Interesting report, few quick thoughts:

- I can't believe the BoE has to publish via Issuu.

- I'm surprised how calm and rational people's response to the referendum is compared to the media sensationalism.

- The drop in marginal propensity to consume based on a rate reduction is interesting (from £0.5 to £0.15 in every pound 'saved'). This suggests if the Bank really did save the day after the referendum, it was QE that did it not the cut. Perhaps consumption based on debt is less likely to increase when the burden of that debt is lightened.

- Charts 17 and 19 are sad. 80% are confident in their personal financial situation. 40% don't have enough savings for an emergency.

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4 minutes ago, Bland Unsight said:

I'm a bit puzzled as to why you're discouraged by that.

I am under the impression of the DTI is high as most people are deep in debt. But the people surveyed were unmoved or unaware of the brewing storm of Brexit. Another statement that puzzled me was the renters or the rental increases doesn't pose risk to banks. Does it mean that the BoE is well aware of the fact the rental increases are inevitable?

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On 12/16/2016 at 0:05 PM, darkmarket said:

I once believed in the myth of central bank omnipotence, and I still don't underestimate their influence in delaying the inevitable at unreasonable costs. What changed my mind is the inability of competing economies to maintain their precarious balance in concert, given the interests in misalignments. For the UK, it's simply not possible. A prolonged period of mild decline is unprecedented and would defy all the forces the decline represents. Endless denial of recession is impossible. There won't be a gentle solution - that's been the aim since 2001, and that's what's now under pressure. The only possible outcome is a major rebalancing of the domestic economy.

I think the issue is how we define "Recession". If we define it purely in terms of GDP, then we have not had a recession for a while. But the rise of the JAMs (just about managing) class suggests in real terms, people are experiencing a recession (insecure jobs, low paying jobs, zero hour contracts, and the need to take on debt to stay afloat). It all depends on your point of view.

Here are some further points I will add as to why I don't think we will see a hpc:

- Central banks on their own are not omnipotent, but they are extremely powerful institutions. They are also fully supported by the governing elite in politics (infact, they are largely the same people). You mentioned Obsourne granted more autonomy to the B of E, but the government retains the right to hire and fire the governor, and Obsourne appointed Carney because he thought the economy needed a "nice little housing boom" and Carney would give him that

- Furthermore, the central bank class is a global class. They do not identify with their individual countries, but with their own people - the elite. It is in the elite's interest to maintain "the precarious interests" of their host countries economies in concert. Hence the massive bank bailouts - which were undertaken on a global level

- Hence, whenever there is trouble on the horizon, central banks will work with governments to bail out the financial sector, which by definition means bailing out housing. That's why negative interest rates, more HTB, and never-ending QE is the next stage in our sorry saga. If Carney disagrees with negative interest rates, then he will be on the first flight back to Canada, and someone who does agree with them will be appointed. Unfortunately this policy will be accepted as the most active voting block in the country are home owners who do not want to see a hpc

If there is an endgame, it will be in the form of some popular rising. Brexit was not it (Brexit was the resolution of a long-standing issue in that Britain is not actually a European country). That rising will be by the young, as they compare their lives with that of their parents (massive student debt, no permanent well paying jobs, an inability to get-on-in-life vs home ownership, nice long retirement, holidays in the sun). I think this is what Labour under Corbyn is banking on.

I suppose the point I'm making is that markets do not always correct; they can be prevented from correcting, and that leads to social conflict, and all manner of evils like war. 

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2 hours ago, thisisthisitmaybe said:

Central banks on their own are not omnipotent, but they are extremely powerful institutions. They are also fully supported by the governing elite in politics (infact, they are largely the same people). You mentioned Obsourne granted more autonomy to the B of E, but the government retains the right to hire and fire the governor, and Obsourne appointed Carney because he thought the economy needed a "nice little housing boom" and Carney would give him that

Your argument on this point is made in defiance of the facts. Osborne stoked his own little boom with the Help to Buy scheme, entirely separate to the conduct of the Bank of England. There is plenty of suggestive evidence that a lot of the money inflating the post-2012 inflation in London was foreign money, buy-to-let and a little bit of Help to Buy.

Carney implemented the Mortgage Market Review pretty much in full (and certainly much more stringently than any of us had hoped) in April 2014, used macro-pru to put in the soft-cap on mortgage lending to owner-occupiers (July 2014), lobbied determinedly for powers of direction over buy-to-let throughout 2014-2016 and in the end pushed through the PRA review of buy-to-let underwriting and a supervisory statement before the Treasury granted powers of direction. The Bank of England has also materially pushed up the amount of capital the banks must employ in funding their lending. Earlier this month the FT were reporting how the lenders were telling them that the PRA had dropped round for a meeting to tell them to stop BTL lending.

In fact the entire case for Carney as an Osborne-appointed housing boom monkey rests on the level of interest rates. It might have escaped your notice, but the MPC's main remit is price stability of consumer prices. Perhaps in your world technocrats 'free-style' and chase down asset bubbles like Zorro chasing bad guys, but back in the real world technocrats do what they are appointed to do. Central banks everywhere have screwed policy rates to the floor. How exactly in your imagination did Osborne get the ECB, BoJ and Fed to go along with his plan?

(I also think that your analysis of the timing is wrong. Carney's appointment was announced in November 2012, and thus must have been lined up in mid-2012, latest. In January 2013 Cameron was talking about housing and finance as two of the four "unstable pillars" on which New Labour has constructed an auto-destruct economy. Help to Buy is announced in the March 2013 budget. The evidence has always lined up with the idea that Treasury policy pivots in early 2013 when Osborne starts to worry that austerity is not going to bring growth and that he'll be fighting the 2015 GE in the face or aftermath of a recession. It is a dangerous error of reasoning to ever and always see all the organs of state as a unified whole; the Treasury and the Bank do not always see eye-to-eye. They sometimes pursue conflicting policies in a separate pursuit of mutually incompatible ends. If Osborne wanted a lapdog, he picked the wrong man.)

(Also, it's Osborne, not "Obsourne".)

Edited by Bland Unsight

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1 hour ago, thisisthisitmaybe said:

I think the issue is how we define "Recession". If we define it purely in terms of GDP, then we have not had a recession for a while. But the rise of the JAMs (just about managing) class suggests in real terms, people are experiencing a recession (insecure jobs, low paying jobs, zero hour contracts, and the need to take on debt to stay afloat). It all depends on your point of view.

I think it's relatively simple if we stick to the agreed definition of recession, and avoid PR communications jargon.

1 hour ago, thisisthisitmaybe said:

Here are some further points I will add as to why I don't think we will see a hpc:

- Central banks on their own are not omnipotent, but they are extremely powerful institutions. They are also fully supported by the governing elite in politics (infact, they are largely the same people). You mentioned Obsourne granted more autonomy to the B of E, but the government retains the right to hire and fire the governor, and Obsourne appointed Carney because he thought the economy needed a "nice little housing boom" and Carney would give him that

I see, so the way to avoid a crash is to create a bubble?

1 hour ago, thisisthisitmaybe said:

Furthermore, the central bank class is a global class. They do not identify with their individual countries, but with their own people - the elite. It is in the elite's interest to maintain "the precarious interests" of their host countries economies in concert. Hence the massive bank bailouts - which were undertaken on a global level

The global central banks are represented by the BIS. You can do your own research to see how BIS positions align with BoE positions.

1 hour ago, thisisthisitmaybe said:

Hence, whenever there is trouble on the horizon, central banks will work with governments to bail out the financial sector, which by definition means bailing out housing. That's why negative interest rates, more HTB, and never-ending QE is the next stage in our sorry saga. If Carney disagrees with negative interest rates, then he will be on the first flight back to Canada, and someone who does agree with them will be appointed.

Yes, central banks will continue to try to prop up the economy. The point is the return on these investments is diminishing to the point where they are ceasing to be effective. Look at the uptake of the recently introduced ISA, look at the marginal propensity to consume mentioned in the report posted here yesterday, look at the London market's response to a quarter trillion of stimulus post-referendum. The problem is the absence of an effective response.

1 hour ago, thisisthisitmaybe said:

If there is an endgame, it will be in the form of some popular rising. Brexit was not it (Brexit was the resolution of a long-standing issue in that Britain is not actually a European country). That rising will be by the young, as they compare their lives with that of their parents (massive student debt, no permanent well paying jobs, an inability to get-on-in-life vs home ownership, nice long retirement, holidays in the sun). I think this is what Labour under Corbyn is banking on.

This remains purely speculative. It's barely worth discussing in the absence of any sign of protest other than the referendum vote and orderly conflict resolution via trade unions.

It seems that you're disagreeing for the sake of it now, your arguments are self-contradictory and contain the other logical errors outlined by Bland Unsight above.

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On 17/12/2016 at 0:36 PM, hi5lo5 said:

I am under the impression of the DTI is high as most people are deep in debt. But the people surveyed were unmoved or unaware of the brewing storm of Brexit. Another statement that puzzled me was the renters or the rental increases doesn't pose risk to banks. Does it mean that the BoE is well aware of the fact the rental increases are inevitable?

Just my take on things, so happy to have others pick holes in the following.

I think that the inference you're making from the para on p.191 is unwarranted.

Quote

The fact that rents tend to account for a higher proportion of incomes than mortgage payments does not necessarily translate into bigger risks to financial stability. Renters do not pose direct credit risk to banks if they struggle to pay their rent, although indirectly, rental arrears may impact on landlords’ ability to service buy-to-let mortgages.

As best I understand matters the Bank of England sees two separate channels through which the housing market can be a threat to financial stability.

In the first, if house prices fall and households are also unable to service their mortgages then mortgage lending generates losses. These losses reduce a bank's capital. Banks fund their lending by borrowing from others but also by employing their shareholders' equity. The balance of the two represents the bank's leverage. If a bank's capital is reduced by losses on mortgage lending then if it is to maintain a certain (prudent) level of leverage it must reduce its lending. Thus you have a credit crunch mechanism wherein banks sell off repossessed homes into a falling market. They book losses and cut lending, prompting more selling, weaker prices and further losses on subsequent sales. (In lots of ways consent-to-let and then buy-to-let were a solution to this problem from the banks' point of view. When the owner-occupier is unable to service their mortgage then the house is refinanced and moved into the PRS.)

In the second, when house prices fall some owner-occupiers end up in negative equity will cut their spending in order to pay down their debt and restore some equity. This is the mechanism explored at length in Mian and Sufi's House of Debt. If the price fall was due to an economic shock then this mechanism has a tendency to amplify economic shocks (because a contraction in demand which leads to a reappraisal of house prices then sets off a further contraction of demand).

Renters play no role in the second channel. In the first channel if the rented accommodation is unleveraged then again, renters are irrelevant because the house is not linked to a loan. Hence you are just left with that portion of the PRS that is leveraged. Much of the leveraged PRS is relatively low leverage and the lenders thus have the equity in the BTL and the BTLers separate net assets to eat through before they are booking losses. Hence the Bank is not so worried about the way the PRS behaves.

As to the separate point about rents going up, I thought that the survey data (and the way in which the Bank have modified the survey) was very bearish, particularly the introduction of a rental service ratio (RSR).

In terms of bubble mechanics, DTIs are less important that DSRs. Take the owner-occupier mortgage prisoners with their bonkers interest-only mortgages. Their DTIs are probably insane, but their DSRs are low. They are not going to blow up. If they keep their jobs they can probably ride quite a big rise in interest rates (not that anybody should expect one absent a currency crisis, which is a long-shot).

It's really interesting to see that renters comprise 36% of all households and mortgagors only 30%. The Bank is now collecting data on RSRs and they are grim. The Bank is also gathering data on the stimulative effect of cutting mortgage rates and saying it's damn near zero.

I'd argue that the subtext is that private renters are already tapped out, so you can forget rent rises, and that if you want to stimulate the economy via the housing market what you need to do is stop renting households having to spend so much of their income on rent (and you can forget mortgaged owner-occupiers, because if you cut their mortgage costs then they'll save the difference, not spend it). 

Edited by Bland Unsight

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