Sceptical Fox

Economics is infinite desires constrained by finite resources. Of course all graduates desire, probably expect, to live in lovely homes in attractive locations. But perhaps this is what is feeding the problem of indebtedness which is causing absurd HPI. For me the key question is the extent to which the UK and its citizens can cope with the level of debt. I'm in a similar situation to Family Man and simply can't decide which way things are going to go over the next few years. In 2005 the economy seemed to be slowing and house prices were flat (at best) so I was not expecting to see headlines this year declaring that houses are rising at their swiftest pace for 6 years and that the economy is due to expand by some 2.5%. I think Family Man has made the right decision to stay put. Our situation is that I changed jobs in 2004 and the new job came with great free accommodation. As we were advised that our flat would be difficult to rent (poky bedrooms/no parking) and Mervyn had just advised against anyone buying a house we decided to sell. This has seemed like the right decision, we were saving good money each month and house prices were static (East Sussex) but the recent headlines have got me all twitchy. We will buy again in summer 2007 unless the signs of a correction start coming through loud and clear.

Yes I've heard the fear that Japan could actually suffer hyperinflation in the (relatively near) future. God knows what that would mean for the price of a semi-detached house in Preston. This is getting heavy and we haven't even started throwing figures around yet - anyone fancy a game of golf and some Pimms?

Thanks i_godzuki Will this put an end to the so called 'carry trade'? Will it edge up interest rates around the whole globe? What's stopping the BoE, or someone else, from resorting to a 0% interest rate in the future? I suppose what I want to learn is whether or not the cheap/free money will definitely dry up at some point. If it doesn't then given our appetite for debt HPI will continue to soar for years ahead.

IWS - I've been for a jog this morning and I'm utterly knackered. 2006 is the year to sort out the body and the finances. Neither are behaving at the moment so I thought I'd slip in here and hope to be persuaded that economic armageddon will soon be upon us.

We crashed out of the ERM in '92 and houses did not begin to recover until at least '96. In fact they only reached the 1989 level (adjusted for inflation) in 2002. Of course the world has moved on and things are different this time (I mean that without sarcasm) but the essential problem is still the same. Too many people have borrowed too much leaving them very vulnerable to any change in circumstances - job loss, rise interest rates etc. When you have literally millions of people in that situation then economies get very twitchy and can behave in the strangest of ways. Economics attempts to impose rational theories onto humanity - humanity has always been bonkers and driven by emotion more than anything else. We've had the collective greed and over enthusiasm, let's see how the masses react to collective fear and anxiety. Question for Realistbear: You made a lot of waves on this site talking about the forthcoming tsunami as Japan began to raise interesst rates. I confess to getting quite excited myself (though I disliked your imagery). However the change in Japan does not seem to have brought about the immediate and devastating consequences you were predicting/hoping. Are you still convinced that a) Japan will continue to raise rates over the next two years and that the impact will be felt keenly on these shores.

Anatole - uberbull- Kalotsky is predicting trouble across the pond. Stagflation is being muttered in the corridors of power both here and the states and Brown is not in a position to cut taxes to stimulate the economy (he's plunged further into the red according to today's press). There is a feeling (probably influenced by hope in this little bear's heart) that the UK economy could spiral out of control in a matter of weeks, or it could chug along like this for years. We're all waiting for a trigger - a hike in rates (it wouldn't take much) - a surge in unemployment, the collapse of a hedge fund, oil to rocket in price due to the mid-east crisis. With the government and the consumer maxed out on credit we couldn't absorb any of the above could we?

Realistbear - I'm afraid Gordon's oil revenues are not declining. He's about to reap the biggest glut of cash from taxed oil ever. Even though supplies from North Sea are dropping the increased price has left Gordon rubbing his hands with glee (especially as he increased his taxed % last year). He's going to get something in the region of £12 billion (plus what he gets for selling off a chunk of Energy). It's going to be a good while yet before the flashman is exposed.

Flats in Eastbourne are down a whopping 10.5% in the last quarter. That's huge - we're talking mega crash language. Detached properties have edged up by 2% in the last year. It suggests to me that the bottom of the market is weakening though desperate muppets are still rushing in to catch the falling knife. A 0.25% yank on the old Interest Rates would make things very interesting on the South Coast. The property post is getting fatter by the week and we're up to 20 'Reduced Price' banners. There were none this time last year. TIMBER!!!

Which is why it is unlikely to happen. I cannot see the BoE sitting on their hands when House Prices are falling through the floor. I'd love a crash, love it but I think the best we can hope for is stagnation/small drops punctuated by BoE inspired mini-booms (like what we're in now).

The scenario depicted seems highly plausible to me. Unswervin Mervyn has been saying for years that he hopes exports will take up the inevitable burden of powering the economy once the consumers finally collapse under the burden of debt. A lower pound will obviously help boost exports and keep things ticking along for a while. Do eceonomists really look much further ahead than 3-4 years? What's the best way to guard against the inflation that will surely follow? Cash seems a nnn-starter, shares are always risky, commodoties are at an all time high, property is seriously risky, where on earth does one turn?

Not for me, though I admit my circumstances are unusual. I sold in November 2004 as I was offered accommodation at work rent free (Boarding School). Since then prices have been flat while I've saved £25,000. I'm mainly in cash but my small shares portfolio is doing well. I currently save £1,500 per month. That said I am nervous that prices are reported to be back on the rise. 10% on a £300,000 house counts as a lot of money to be saved. As ever I am in doubt. I'd feel happier if Interest Rates nudged up a touch but I fear economic weakness will send them the other way.

I have little doubt that immigration has indeed kept wages and interest rates lower. But this immigration juggernaught can behave very strangely once the gear stick is thrown into reverse. The high pound and booming miracle eceonomy has meant the UK has been a very attractive destination. We also have a reputation for loose women and partying which no doubt pulls over a few more. But, if the pound plunges and the jobs dry up then skilled immigrants will look for richer prizes elswhere.

I think you're probably right Megaflop. What your scenario misses out is the gradual but inevitable rise in unemployment that will occur as people cut back on discretionary spending. The High Street will not be as buoyant. This has already been happening for the last year. Add to this the fact that Public Spending has to be reigned in then there is little job creation in the economy, quite the opposite in fact. This will encourage further cuts in Interest Rates and the whole sorry cycle is maintained for another 12 months. I fear it could limp on like this for years. The big hope is that global tightening and those pesty speculators force the BoE's hand. Although Japan survived with Interest Rates at 0% for years I doubt we could do the same as we don't really make anything anymore in this country. Who in their right minds would invest in a nation that makes no goods and offers 0% on any savings. If the UK's Interest Rates are not higher than the other major economies (as they have been for the last 6+ years) then the money will certainly go elswhere. How much of a differential there needs to be I don't know. The Yanks have tipped above us already, if the Europeans and the Japs get close then surely we'll have to nudge up. I think 5.25% would bring a tasty crash in House Prices (20% at a guess) and leave it very flat for some time thereafter. But, to return to the main theme, I fear this is 2-3 years away. We'd all love some spectacular action but Gordon's at the helm. It's going to be very dull indeed

Apologies from the Fox for earlier error just finding my way around the system. The Fox wants a nice big crash but is becoming sceptical. If worldwide growth is over 4% and London is the centre for the super rich then that is, potentially, a heck of a lot of money flooding into our property system. Yes it's money that could disappear quite quickly and go somewhere else but at the moment it's pouring in.