paradox

Just read this article very carefully. Three things occur to me. 1) the only way to protect yourself in this situation is hold commodities, a coffee farm or a tin mine in a cheap place to live would be ideal. That way you are protected both ways - if the Fed is successful in ramping up inflation to meet the overvalued asset prices then the price of your coffee will go up with it. If they are not successful then you are not going to be hit by the collapse of equity and housing bubbles. 2) Could the arguments in the article be linked to the decision of the Fed to stop publishing the M3 figures. 3) I am scared!

Mark, that was a very interesting story. Good luck to you m8. I did the opposite, we moved out of our one bedder in London to a 2 bedder with a tiny box room which I used for my office. I had a tiny mortgage (by todays standards) and lot of equity + savings. I swapped it for a massive mortgage when I moved up the ladder in an expensive part of London at the peak (2003). Now I am renting - having extracted as much equity as I could. When the initial 2 year deal ran out and the full repayment mortgage kicked in we were ready for it - but it was tougher. Then doing the sums, analysing our feelings and just looking at our small posh flat we thought - "do we want to be stuck here for ever" Answer - no. So we sold and are renting a house for less money (albeit in a slightly scruffier area) Our stories are exactly why HPI is a BAD thing. The only people who benefit are those who manage to cash in and emigrate or something like that.

No - nobody is missing anything. Why do people persist in assuming that all wealth must be related to residential property. The first 250 grand or whatever is tax free. Good. This is the case whether the inheritance comes from property or from anything else. A rich parent would still be a rich parent, its just that the property value would not form the main part of their estate. Instead they would pass down other assets (tax free) to their children. However in Britain people think of property as a store of wealth - in fact as THE store of wealth. They may be right and certainly in the last 20 - 30 years it has been. As other posts have shown, this has not always been the case and may not always be the case in the future.

Two things. On the tories - just be careful... we dont know whether Cameron would be the Willets style tory people seem to like or one of free market ideologue types. My gut feeling is that the tory party has not yet reformed and is essentially full of the same types as Nu Lab, but just a bit more right wing. They are just as bad on debt, PPP / PFI, defence of UK jobs, defence of our freedoms, etc There is NO political party that currently espouses the views of many on here. Another thing... London Landlady, inheritance is not all about property, life is not all about property. I dont care if my parents house is worth nothing when they die, because that will mean that my house will also be worth nothing. If my house is so cheap it will mean that I will be able to (or will already have) bought it with no debt at all. London landlady, please remember this. It would be far better if all houses were dirt cheap, and savings were ploughed into other more productive areas. We would still have rich and poor - but both would invest the majority of their savings into things other than housing. A pipe dream??? not at all, there are many economies where this is the case.

My problem is this. The tories are just as bad, if not worse, than labour on some of the issues close to my heart. I am not a wishy washy liberal - for example I have a very strong opinion on benefits / fraud / and the tax - benefit system in general. However I do think it is really important that a state is organised in a way that provides real limits on the power of authority over the citizen. Some tories are equally bad in this respect. For me the basic legal principles of the magna carta and the US consitution must be upheld AT ALL TIMES. If they are to be ditched when bombs go off and people get killed then they were worthless in the first place. These principles are the eternal and essential benchmarks of civilisation and we disregard them at our peril. If we had more tories that were less spineless in this direction it would be a start. Unfortunately many of them are as blinkered as labour. Likewise on housing. What is wrong with a decent strong state rental sector for families? The tories built thousands of lovely houses under in the 1950s only to sell them off. We are now seeing the shortcomings of that foolish decision. A family now is sometimes at the mercy of an amateur BTL. Likewise on utilities. There are some things that work better as integrated systems. Once you start to muck about with these systems and introduce gaps between them you increase the transaction costs and decrease the operational efficiency of the system. Once train companies lease trains from rolling stock providers and buy track time from a track provider which itself contracts out the management and maintainance of the stations and the track you have a recipe for legal, financial and administrative disaster. This was pointed out at the time and many tories knew it in their hearts. Yet they spinelessly voted for it and people died at Hatfield - possibly as a result of that decision. The tories in power were too ideologically pro market. Many of their reforms were based on ideology and the way the market should work in the textbooks and not the way it does work in practice. Lets not forget what awful things happened under the last tory government. PS This is not a defence of nu labour - it is simply a warning against amnesia Maybe what we really need is a govt of HPC regulars instead!

Splatthefly - This is very interesting. Based on your experience, what would be the effect of a 1 percentage point increase in interest rates? Do you think that the current housing market can be likened to a ship sailing on calm waters but with lots of holes just about the water line. All it will take is a few waves and the whole thing starts to go under fast. What do you think is the level of sensitivity of these investors to interest rates? That is the crucial question.

I am a labour voter from a labour voting family and I am 42, so on the cusp of middle age. But the more I think about it the more I think that the Tories would be onto something if they pushed this line. They might even convince me. There is something smug and distasteful about the Nu Labour crew - particularly those of my age and above, many of whom I worked with in the 1980s when I was active in politics. They have lost the fire (some of them never had it) and have become quite self congratulatory and managerially fascistic in their approach. It is interesting that they can capitulate so readily on some of the crucial issues that have defined this country for centuries Eg: - The right to remain silent and for this not to be used against you - The presumption of innocence until the proof of guilt - The essential notion that humans are free to go about their business, and if authority detains them in a confined space then they need to be told why and given the opportunity to defend themselves - The idea that saving up is a good thing and should be rewarded by society - The notion that everyone is entitled to a roof over their heads at a reasonable cost and that this is a healthy thing for society as a whole Amazing, I was born in a country (the UK) with all of these principles stoutly defended by all political parties. This country had relatively recently emerged from a terrible war. The record number of council houses was actually constructed under a Conservative government. Even more amazing - I live in a country in which all of those principles have been slowly dismantled by both parties - but in accelerated fashion by New Labour. When I point this out to my new labour friends they have only one response. Its different now Is it? There are a variety of arguments (terror + new technology, we cant afford it, public spending, blah blah blah) Yet I believe that a fiscally responsible government managing a capitalist economy in a dangerous world should be able to adhere to the basic principles outlined above. If it cant - it has failed. Failed in courage, failed in imagination, failed in intellectual insight. For me - this is why the Blair / Brown era is failing.

I think that a profound shift has occurred and many, if not most, now go down the instant gratification line. I know too many people that have borrowed themselves into the lifestyle that they think they deserve. The de-stigmatisation of debt has something to do with this. I remember talking to an old school friend a few years ago (in 1999 or 2000) who said she borrowed 2000 to go on holiday. At the time I was not living in the UK and I was shocked, on my return I notice that this is actually the norm. But something else is happening too - and this is more worrying: There is a narrative - a life story - that we all aspire to. It involves studying, having kids, living in a nice place with a garden front and back, having a car and going on nice holidays. We all want it. Yet in playing out this story we fall back on the experience of our parents and grandparents. They did these things in post war Britain during a period when the Welfare State was being set up as a service "from the cradle to the grave". In addition there was the post war boom of the 50s and 60s followed by the inflation of the 70s and 80s. This combination gave people like my parents a favourable set of circumstances in which to acquire a free education, move up the property ladder unemcumbered by excessive debt, and retire on chunky final salary pension schemes. Middle class expectations are based on copying this progression. Yet as the pensions debate shows, we may be entering a period when the old rules do not apply. Instead of basing the next 50 years on the period 1945 - 1995 try basing it on 1900 - 1945 for example. That would provide a totally different life narrative. Who knows what the next 50 years will bring but one thing is for certain, it will be very different from the last 50 years. I find it very offensive that those who benefited from the post war period are turning round and pulling up the drawbridge for those following behind them. "Its different now" - they say as they introduce student loans, whittle away the welfare state and reduce pension entitlements. They may be right - it may be different - but an element of contrition and recognition of the way that they benefitted in the past would be welcome. - It is the lack of this recognition that contributes to some of the bitterness felt by some people on here. Finally, for those who do not have middle class expectations (and even for some who do) the world of celebrity has produced a dumbing down of monumental proportions. Plenty of non university educated people used to take an active interest in politics, philosophy and science. People were inspired by socialism, trade unionism and some by conservatism and even fascism - Ideology was important and ideas were valued. Now all "isms" are seen as dangerous and outmoded. Aspirations have been reduced to hoping to win the lottery or a talent contest or anything to become famous. Even my daughter aspires to be famous. When I ask "What do you want to be famous for?" - she doesnt understand my question. Strange times indeed.

Good question. As I have mentioned on here before. The last flat I "owned" was lovely and it a "good" area but it never felt like home because the mortgage was too big. Sitting in the living room looking out of the bay window I always used to feel a sense of insecurity, knowing that the bank had a hold over those slowly rotting wooden frames and the London stucco that surrounded them. It was home - but never felt like it was "my" flat. On the other hand for a long time I lived in a four bedroomed south London council house with garden front and back. Their I felt completely and utterly secure and content and only left when I went to work abroad to make (and lose) my fortune. There we stayed in countless places from sea front villas to months in hotels. So in conclusion - generally home is where my wife is and where I feel secure. This has nothing to do with property ownership or certainly not with mortgaged property ownership. Right now home is a rented house.

IMHO what happened in Ireland is connected with it joining the Euro. The Irish are property mad, like the British, yet they have got even lower rates than we have. Unless they have a healthy dose of inflation there will be a lot of debt paid off over a long period of time. I suppose if there is a one off and long term change from high to low interest rates then people become comfortable with large debts and a new equilibrium is formed based on servicing those debts - together with higher nominal house prices. However if rates should rise!!!

That is a very good point Charlie - it might even be worth investigating that. What this will do is create a stickyness to the prices of those properties and mean that they will only be sold below a certain level if the owner is facing absolute calamity. This wont stop other properties for being sold at a lower price, but it will reduce the liquidity in the market and mean that some people may just never sell - even if they really want to move. I can think of people I know who may be in that situation.

Tricky one. I reckon that 2006 will show 5% falls YoY by the end of December. However this will mask bargains in certain parts of the country. I suppose it depends where you are planning to buy.

Mate, it is far from academic. I bought some Gold and Gold Shares two months ago. I am pleased I did !

Today is my wife's birthday. I was just thinking how lucky I was to be married to her. And then I read this post. ..... ! Does anybody remember that New Seekers song that they turned into a Coke advert? Today is feel good day.. spread it around

Well said Dr Bubb. That was what was great about the meet the other day. Massive age and wealth difference in the room. Yet we were all human beings enjoying each others company. That is the the way it should be. Life has its ups and downs. People do what they think is best at the time. Sometimes it works out sometimes it doesnt. TTRTR - be grateful for your good breaks and don't gloat. Firstly, you demean yourself as a person Secondly, do you know the meaning of hubris?

Under 50 so maybe delusional. I actually agree with you. I was trying to argue for housing market reform and increased savings for MY OWN pension. I am with you on the generational thing. I think it is a real issue that is not being addressed

Gordon Bennet -- That is coming from a Reserve Bank!! Dear LL, on the subject of FTB without a good deposit. You are right, in such a position may never be able to buy at todays prices. I suppose what you are saying is that you believe we are now in a trough and that they should stretch every sinew to get on board whilst they still can. Before they really do miss the boat. Now lets assume they follow that advice. What next. Sinews have been stretched, they have done the Ikea thing and are now living the dream, what next? Sinews are still stretched, kids arrives, sinews stretched even more.... until when. In the past this was dealt with by wage inflation reducing the relative cost of the mortgage. Mortage payments of X become cheaper in relation to wages of Y. You have benefitted enormously, immensely from this phenomenon - as did any homeowner in the 70s, 80, and early 90s. This is the bedrock for the Brit invasion of French villages and Turkish Villas. What has happened now is different. Extraordinarily low interest rates have made very high levels of debt become affordable (servicable). For your dream scenario to come true for this generation of FTB you need a large dose of wage inflation again. Only there is a problem now. Who suffered from the last dose of inflation? Well of course it was people a little bit older, retired even, who saw their savings decimated. Now, look at the age of the golden generation, those who benefitted from the 70s and 80s. My parents for example. Would their pensions keep up with a few years of 20% inflation again??? of course not. This is just one reason why I believe that the current crop of oldies, my parents generation, will be reluctant to let inflation rip. Conclusion DON'T BUY A HOUSE RIGHT NOW.

The contradictions in your argument are horrendous. Who will never get a second chance? If the STR guess it wrong all they need to do is to make sure that their savings + profit keeps pace with HPI and they can jump back in whenever they want. All an FTB has to do is to make sure that their savingsd and deposit fund keeps pace with HPI and they can still buy. Are you suggesting that for some reason house price inflation will outstrip all other forms of saving and investing and will also increase in real terms (faster than price inflation and wage growth) for ever and ever??? This has never happened for any other asset in the history of the world. In fact the relative price of most primary commodities - Gold, houses, diamonds, coffee, sugar, salt, milk etc has remained relatively stable for the last 100,000 years. They fluctuate in relation to each other, but none has oustripped all the others. If it had, only Bill Gates and the Sultan of Oman would be able to afford it. Are you my mum in disguise? When I told her I was selling up she said "But darling, house prices ALWAYS go up!"

I am an STR and I dont feel I will "never get a second chance" Like many FTBs I could buy now, but I just dont want that much debt. I did not sell my London flat for a gigantic profit I did not sell my London flat due to financial stress I just sold it because I reckoned that it was overpriced, I regretted buying it (I bought relatively recently, not way back). My flat was too small and poky and I wanted to live in a larger property for a change. Now I live in a house. And I pay less mortgage than for my poky flat. My savings are tucked away. London Landlady - why might I miss out??? even if property rises at 5% a year for ever and ever amen. I still havent missed out because such rises would condemn me to spend the rest of my days in my poky flat because I would it would be even more expensive to upgrade to a more expensive property also rising at 5% a year. And if it does go on rising like that then I would rather be a renter with financial and material mobility than stuck in the housing market with ever increasing paper profit that is totally useless to me unless I want to emigrate. The more time goes on the more I am convinced that there will be a long period of slowly falling house prices punctuated by the occassional accelaration in falls in certain areas.

I am just talking about fixing the housing market and about personal credit. The argument about overall public sector spending is very different. It is only the Anglo Saxon economies that are so liberal about personal debt. Public spending is actually higher in some continental economies where personal debt is lower. I dont think the two are directly linked from a policy perspective. From an economic perspective they obviously are. Isnt it strange that in the 80s M3 was the all important measure and money supply had to be controlled at all costs. As part of this general monetary tightening local authorities were no longer allowed to borrow on capital markets and were prevented from building homes. Yet now, through the massive expansion of debt, the money supply has increased dramatically and yet people still talk about limiting public expenditure. Even the PFI initiatives (new hospital coming to a town near you) have been financed through debt instead of through old fashioned public expenditure. By the way, I am not arguing for massive public expenditure increases, just putting it into context. Bizarre! London Landlady.. Prescotts policy is toothless and does not go far enough - it just amounts to building these stupid shacks and to encouraging people to part buy and part rent. This does not get around the main problem which is that there is a housing bubble. Any responsible government would establish a policy environment to ***** it as soon as possible. And France... once again the difference is, as you say, largely cultural. They have more responsible lending regime and a more stable housing market because it seems that they have old fashioned values about economics and concentrate on productive activity (making and selling food, cars, arms and hot air). It is a gross generalisation to say that "the French dont like doing up houses" Some do, some dont. However due to aforementioned housing bubble plenty of Brits have picked up bargains and also do them up. If the situation was reversed you may find loads of French people colonising places like the Yorkshire Dales etc. In fact in 40 years time the Chinese probably will be doing that, and we will be reduced to cleaning their shoes and putting on "cultural shows" for their entertainment.

What more do I want? If I was chancellor I would say this... Folks, we have an ageing population and a pensions black hole. We have a younger generation priced out of housing. This younger generation will also have to pay more for the pensions of aforesaid ageing population. Therefore we are going to have to take some action to encourage people - many people - most people to save. The BTL phenomenon absorbs resources, creates debt that has to be serviced over many years, and it pushes property prices up to unsustainable levels. This is not an economically efficient way of meeting housing demand. Therefore we shall set a policy environment that makes BTL financially unviable and we shall set a policy environment that encourages saving. Housing need will be met by lower prices, housing associations, and..yes... the return of the council house! We shall remove the restrictions imposed on local authority construction of housing. There is a practical economic case for this. It is just unfashionable and untrendy so it will not be done. By the way - I have lived in a council house and been an owner occupier. My council flat was lovely and it is now worth more than the flat I bought when I gave the keys back to the council. Thats life

Didnt we have credit controls in the 50s and Harold Macmillan told us we never had it so good. Tight credit can be an effect of weak economic activity etc. But it doesnt have to be. This is because you can fix it any way you want. You could just tighten credit for mortgages - it used to be a lot more difficult than it is now to get a mortgage. I am not talking about credit for investment etc. In France it is almost impossible to get an overdraft. If you made it very difficult for the individual to get credit for consumption and housing, but made it easy to get credit for investment and even for housebuilding for sale and for rent, then you would have a benign housing environment. In such an environment the prices would fall quickly from their current levels to a new equilibrium. This new level would be based on the actual cost of building a house, plus premiums for location etc. Therefore in a crappy location the house would be priced at the level of the construction cost plus a profit for the builder. Around 70,000? or less??

But also restrain credit and the price of houses will drop quickly - thus freeing up more money for people to save. Restrain credit and renting becomes a long term option, allowing people to save and eventually buy (if they want to) a house with a large deposit and a small mortgage. Restrain credit and tax second homes and BTLs. Houses immediately become a different type of commodoty alltogether. God knows there are enough box like barratt homes to go round, they should be dirt cheap, and they would be if the market was fixed differently. We fix the market for Alcohol, for Tobacco, for Gambling, for selling Firearms and Guns and for countless other things. Why cant we fix the market for houses??? In my opinion part of the reason is because a large part of the current political classes are financially tied un to the housing boom. This is just a function of their age and middle classness - but we all pay the price for their inability to recognise the true nature of the British economy.

Have you noticed how the mainstream press is banging on about the pensions problem? Have you noticed how politicians are now quite worried about it - and that some scaling back of pensions in the public and private sector is probably inevitable? Have you noticed how we will all have to work longer and save more? Any yet have you noticed that NOBODY has linked this to the fact that so much of our cash that we should be saving is tied up in depreciating property? NOBODY has suggested some form of credit tightening, or dare I say it credit rationing, to force us to save. It is all palmed off as individual responsibility when, as we all know, the mind of the individual is largely made up by the spin and gloss emenating from magazines, TV, the neighbours etc. That is why we behave in herds, hunt in packs, get rich together (the 1990s) and get poor together (the 2010s?)