Thursday, Apr 24, 2008
Will BoE please BTL and let inflation rip?
Telegraph: Bank of England's dilemma: A house price crash or soaring inflation
Which would you rather face: a recession and house price crash or years of soaring seventies-style inflation? Two options; one nasty dilemma for the Bank of England. In particularly stark and simple terms, this is the question tearing a major split through the Monetary Policy Committee, which decides interest rates. As one central banker said, inflation is like toothpaste - easy to squeeze out of the tube; almost impossible to shove back in again. Expect more food riots!
Posted by who stole my pension? @ 04:52 AM (1530 views) Add Comment
36 Comments
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1. hpwatcher said...
Normally, it would be inflation.....but we are dealing with a group of people who are in denial about it i.e. only last week GB was in America saying UK inflation is low.
I think these people may continue to cut rates, like in the US, whom they have been in consultation with for the last week.
2. alan said...
I agree hpwatcher, The dilemma was predicted on this site well before last Christmas. Economics students can look through the old posts and confirm the Telegraph's options.
However, as the Telegraph's article says:" If the very institution in control of the economy can't agree on what it should be doing, how much faith can we have that it will help drag us out of this increasingly uncomfortable credit crunch?"
3. bystander said...
Everyone who has visited this site regularly, know there is only one course of action for th government to lead the BoE - protectionism (HPI protectionism), 'slashing rates', and this will lead to higher inflation, which Merv warned us all about before Christmas, "CPI" above 3% by July and likely to stay there for many months. Standard of living massively compromised, union unrest, commodity bubble inflated (millions pushed over the poverty/starvation line - worldwide) through speculators hedging against the dropping dollar and now the demise of sterling.......................all to save a condemned housing market in the US and now the UK, and maintain votes. Sick 'innit. Where is Michael Moore when you need him?????????????
4. growler said...
Maybe they should learn from Japan and now the US. Huge cuts in IR clearly do not stop crashes when the causes for the boom were not the IR in the first place. I know it's my mantra, but the irresponsibility of lenders has caused this credit mess - and they need pay for it.
They'll cut rates as this is a populist move. HPC will still happen as noone cares how low a mortgage is if you think the house price will crash. Since HPC will happen, there will be a slowdown in consumer spending. And since noone can afford to go abroad due to the worthless Sterling, expect outrageously cheap holidays before some holiday companies go bust due to the double whammy of cuts in spending on non-essentials and exchange rate difficulties. And in case you thought a cheap sterling will help exports - the days of 100% local content are long gone.
5. japanese uncle said...
It is all too obvious that cutting base rate would not mean a thing in helping the distressed houseowners and borrowers, thus preventing HPC as lenders simply would not care to pass on the reduction in the cost of money to their borrowers, but dedicated to bolster their capital base taking advantage of the situation. This dichotomy is a sheer con.
6. hpwatcher said...
It is all too obvious that cutting base rate would not mean a thing in helping the distressed houseowners and borrowers, thus preventing HPC as lenders simply would not care to pass on the reduction in the cost of money to their borrowers, but dedicated to bolster their capital base taking advantage of the situation. This dichotomy is a sheer con.
Cutting interest rates would be seen as popular, where I work all are moaning about cuts in interest rates....perhaps they haven't noticed what inflation is doing......
The question is which one will they choose. The answer could have [serious] consequences for sterling.
7. taffee said...
The reality is there is no solution to the problem other than the boe and government had the opportunity to control things many many years ago.
The fsa should have recommended bank capital ratios are increased.
legislation to make btl less attractive after the first one
raise interest rates in 2005
Its not rocket science and thats why I believe those in charge must have had a vested interest
8. little professor said...
They will inflate their way out of this mess. It's their only option.
9. planning4acrash said...
Of course they do taffee, its because the government and banks get to spend the extra money (that they have generated from thin air) before it feeds into higher prices. Its self reinforcing because, to sustain the same or growing spending, they must further boost money supply later down the line to compensate for the inflation that they themselves caused.
10. planning4acrash said...
Banks obviously have a vested interest in spending new money to make new profit and to hook consumers and industry into borrowing that money at interest. Governments get hooked because the boom and bust cycle has social outcomes that can only be overcome by sound money or a socialist state. Most of the social housing we see today is only necessary because of housing booms stretching back to the beginning of Fiat money. Much of the unemployment benefit is only necessary because of exchange rate fluctuations and boom and bust in the industries, which ensures that no country with silly money can ever have full employment. I could go on,,,
11. taffee said...
planning.....I am more making the point of peronal interest.
i.e if you have a portfolio of property you wouldn't necessarily want to control property prices
12. night said...
House prices are crashing now, but the effects of inflation on the man in the street (read: voter) might not gain mainstream media coverage for a while. I expect that policy makers will address short-term concerns before long-term ones.
13. malct said...
teachers union rep on Sky this morning
" we know the money is there, the Government have just bailed out the banks!"
"Also they didn't have trouble finding money for Iraq and Afganistan!"
14. bystander said...
Malct: this is huge. Maybe the BBC will be drowned out by the real media strength coming from the independents. I am sick of paying for GB propganda, through my ever increasing TV licence.
15. talking rot said...
The Telegraph's article is wrong because it is not a case of either or. The UK is experiencing inflation today - personal inflation is decoupled from the CPI and the RPI. All that remains is whether or not the UK will experience a recession. If a recession does occur, will it be short, long, shallow, or deep.
I think the article does not make the point explicitly that cutting interest rates may stave off a recession in the short term, but at the expense of the long term inflation outlook. If the BoE has any independence, then cutting interest rates now will result in increased inflation, which will necessitate higher interest rates in the future then they otherwise could expect to be.
I think with UK debt levels, over-dependence on the service industry, over-regulation and taxation, the UK is likely to enter a recession.
But UK house prices are not crashing yet! Has trhere been a decline in values Year-On-Year? When I see a decline in house prices of 20% over 3 years then I'll believe the market has turned. And when I can afford a home, then I'll believe the marjet has crashed!
16. renting2 said...
talking rot @ 15 - "And when I can afford a home, then I'll believe the market has crashed!"
Agreed, that'll be the ultimate test for me whatever has happened to apparent house prices and/or inflation.
17. greytornado said...
The clue as to what will happen is in the final remark by King............................The BoE do not want a return to 70's style inflation.
18. Freefall said...
@malct
Yup - heard the same thing, and this from a group of folks who are among the highest paid from the governement coffers (more than nurses, police etc) - IIRC the average teacher takes over £33k pa - shows what a mess we're in if these folks are striking over pay. Heaven help us if they ever get a taste of poverty.
19. sold 2 rent 1 said...
As usual the mainstream press fails to inform us of the reality of the situation.
It is NOT recession v inflation (or 1970's v early 1990s)
It IS deflationary depression v hyperinflation (or US 1930s v Zimbabwe 2008)
IMHO there is only one way we can avoid a deflationary depression in the end.
Hyperinflation requires ever expanding debt (money supply).
Now if lenders wont lend and borrowers wont borrow, the only way debt and money can be increased is if this process is taken over.
As we wont take on more debt ourselves (with the free market) the BoE has decided to kindly take over that role by taking on debt on our behalf.
But can this process of debt creation go on indefinitely?
Yes. But it does involve the destruction of money.
The question is NOT deflation v inflation.
The question is when ARE WE going to have CHANGE?
WE ARE CHANGE
20. An Bearin Bui said...
When are these commentators going to get over their obsession with house prices? It is much, much more important to defend the currency and maintain fiscal stability than it is to prop up the value of a bloated asset class that has long needed trimming.
The housing market needs correction: if there is a correction in real prices (as is happening in the US now) it will be painful but it will ultimately be a short, deep recession. If is only a nominal correction in house prices and inflation takes off, then the economy will still be in tatters in a decade's time.
Why is it referred to as the ''inflation/stagflation of the 1970s'? Because it took a whole decade to work through and contain. On the other hand the housing crash after 1989 only lasted about 5 years while the accompanying recession was relatively brief. By 1996 we were heading into the tech boom and fantastic growth both in wages and productivity gains. I know what I'd choose.
21. letthemfall said...
This is a rather technical article that passes over the main problem - inflated house prices due to massive debt. I can't see the housing boom being reignited by interest rate cuts, although I can see inflation taking off. In which case we will see a deflation in house prices instead of a nominal crash, as in the 70s. The question is whether wages would keep up with inflation. I have my suspicions they would not (eg today's teachers strike); savers and employees will end up suffering the most.
22. Greenbay said...
Feel like saying i told you so :-) come on you must be thinking Greenbay was right after all?, trust me ive been through many types of booms and busts over the years an this market will not crash....
23. Greenbay said...
Sold to Rent,
Correct the boe are taking on the debt (mortgage debt) with this in mind do you think they will increase rates etc to add downward pressure onto house prices?... doubtfull they need stabilisation as a minimum to enable this new debt they have taken on to be a wise move...
you are all kidding youselves im afraid, the boe are in effect now heavily invested in property.
24. renting2 said...
Hi Greenbay, good to see you back,
Sorry, but I must be a bit slow here. Can you explain to me why house prices are falling everywhere, but still no-one's buying? I know many savvy property developers and they're hanging back and waiting. I assume from your absence that you've been busy buying all those properties yourself?
I just cannot see how the current divide between wages and house prices can be sustained. Surely either severe inflation or a sudden drop in prices is the only outcome? What other alternative is there?
25. theboltonfury said...
greenbay
the Boe may be heavily into property but the buying public don't give a sh*t about that. General sentiment now is that property is dying and the market will correct as a result. I'm afraid politics don't influence this anymore. Look at America, and yes we are like them, if not worse
26. Greenbay said...
People tend to get caught up with the annual income divided by house prices, this is generally not the case as much as it was, the majority of people simply look at what the monthly payment is rather than wage multiples.
We are in a different market than we have been, property will only crash if people have to sell due to much higher interest rate just like the 90's where they were double digit (albeit prices dropped 10%), however people now do not HAVE to sell so they are sitting tight, buyers are not buying sellers are not selling at reduced prices as they are not motivated to do so. We have a stagnation in the market which is healthy, a stagnantion that could last 2-3 years (who knows), but during this stagnation the rental market will pick up. During the next 3 years if the market stagnates and rpi increases 4% pr annum, then in real terms the market could be said to have dropped 12% however the reality is house prices will remain stable.
27. letthemfall said...
Bearin Bui:
Yes, a relatively short-lived nominal fall in house prices would be far preferable, not least because the thrifty would be less likely to be dragged down. The stagflationary 70s was a dreadful period economically. I can't help feeling that whatever the govt does, the market will take its own course. They may start slashing interest rates, which they would have to do if banks start to look even shakier (we still don't know how big their losses might turn out), but look to the US to see an equivalent situation to that. If they were foolish enough to cut interest rates to try and maintain the house bubble, which despite the mealy mouthings of the govt I doubt they would do, then we will get inflation, which ultimately will mean putting rates back up (to avoid economic destruction), which will still hit the heavy borrowers hard. In the end debt has to be repaid; there is no escape from that.
28. Greenbay said...
bolton fury,
You are right sentiment is a huge factor, sentiment is a cycle within many cycles, and currently sentiment is not great, but this does not mean people will sell thier house at a reduced price to buy something else at a reduced price? the majority will just sit tight. Sentiment will perhaps minimise first time buyer activity, but the boe will continue to cut rates and banks will eventually follow. Prices will stabilise and sentiment will sway to the positive side. Remember alot of working class people are not as aware as the market as we generally are, they will look at what they can afford on a monthly basis and if its affordable they will purchase, in layman terms its generally as simple as that.
I think this website bring to many theories and complex arguments into play, but it is the simplicity of the market that the general public see..
29. Greenbay said...
Lettheefall,
to a point your right but dont forget inflation erodes debt, as simple as it is the governement would like to see real infaltion to increase to reduce its massive debt, but obviously they dont want to report the true figures. Right or wrong this is happening.
30. sold 2 rent 1 said...
Greenbay,
Just as Cilla Black used to say to her newly matched "blind date" couple, "Promise me you will come back on the blog after the crash".
31. Greenbay said...
sold to rent, sure but i hope you dont think me and you will get it on... your falling for me arent you :-)
32. Orwell said...
Hi Greenbay, WB!
"..you are all kidding youselves im afraid, the boe are in effect now heavily invested in property..."
Truer words never said. The problem is how long can they deny the inflationary problems that exist. At present everyone is saying that inflation is at least 4% (save for The Economic Guru / Economist Laureate, David Smith of course). Inflation in non chav items like basic foodstuffs is as much as 15%. I know David Smith thought oil inflation would be down to $40 on the barrel in this new year but it has remained stubbornly high at $118 last I heard.
Teachers and the rest of the public sector are NOT stupid (idle maybe). Teachers are out today and will go out again. Refuse collectors (I understand) some Civil Servants... are also out this week? Interesting times indeed that we live in... It might be that this whollly discredited crowd of clowns in 'power' will have to go back to the IMF soon and they will dictate their social (election bribery) project such as the concreting over of the Thames Gateway....
Methinks that vested interests with savings/capital will out manoeuvere highly leveraged mortgagors and in particular Buy to Letters any day.. I think Buy to Let will be thrown to the dogs... And don't forget a slight downwards fall in IR's leads to much greater inflation and hence a cyclical spiral... and Mortgagors are already borrowed to the hilt and facing negative equity.... Although the Special Liquidity measure is (apparently) to improve the domestic (not Buy to Letters) access to new Mortgage deals, at least that is until after the next election, banks are also not passing these on and can you realistically see that when negative equity increases the banks won't foreclose?
Any way WB nice to hear from you.... your views are interestingly anticipated...
33. crash bandicoot said...
Greenbay, it will be new builds that start the crash. Already "executive" appartments are 35% overvalued. These are homes plain and simple and there will come a point (particularly from BTL investors) when they will be sold at whatever price just to get rid of them. This follows through to the Persimmon news today. There is only so long that home builders can decide not to build homes. Once they need some cash to pay for materials or wages they will have to continue with their business. If they can't build a house at a price that people can afford then they will go out of business. The last few years have been the exception not the norm.
34. Greenbay said...
crash bandiccot,
Absolutely right new build flats are overvalued, i have said this from day one, i would simply not buy a new build property and yes we may see a crash purely on new build prices. But the traditional second hand 2/3 bed properties will not suffer to any notable degree... im not sure what % of new build there are to traditional but im sure its a very small percentage of the market.
35. techieman said...
Greenbay, i thought Cardiff was in Wales not in Cloud Cuckoo land!
36. Greenbay said...
techieman,
No i wouldnt invest in cloud cuckoo land prices are sky high as it is...