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Every Single Recession Issue Is Property Related


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I'm sure seasoned and hardened HPC members will know this, but it concerns me how much denial there still is out there about what is causing and worsening this recession.

We hear a lot of media stories about car industry woes, retail busts and many other small business problems, and they are often reported as being a result of "The Recession". Often, links to property speculation and house price inflation are never mentioned and the implication is that these difficult times are as a result of banking problems, losses, reduced demand etc, etc. But in my view the root cause of all these things, without a SINGLE exception, can easily be traced to housing inflation and its associated debt levels.

This might appear obvious to many here, but outside this website I am unconvinced that the message is getting across, otherwise why would relentless media coverage be constantly referring to the desire for the housing market to "get going again"? This phrase doesn't actually mean to make housing affordable, plentiful and easy to access. It really means to start the whole property inflation game going again.

This would be a total disaster. But people think only in two ways: selfishly and short term.

The fact is that every single banking meltdown, almost every company bankruptcy, and most sad individual stories can be traced without any problem to the house price speculation which preceded these problems. It cannot pass un-noticed that so many news stories fail to link the roots of all these stories to one thing, and one thing alone: every one of them can be traced to an almost religious faith in property inflation as a free entry to wealth, but that wealth NEVER existed.

The average person still has absolutely no idea why this meltdown is happening. They are constantly fed half truths: We are told that it all started with the American Sub Prime market, yet the WHOLE of the UK housing market was in a sense sub prime, which can happily be defined by the notion that nearly all housing loans were excessive and based not on the SUSTAINED ability to pay back the loan, but on wildly optimistic estimates that property values would go on increasing above already ridiculous levels. There were very few approved mortgages in the last decade that were not based on this fallacy. Therefore nearly all UK property lending WAS, by default, sub prime.

While it is true that particularly car manufacturers have been myopic in failing to see that gas guzzling vehicles had no long term future, much of the car industry implosion is based on one simple thing.....the previous boom in sales was entirely predicated on wealth that never existed.

The vast majority of people still do not understand the concept of gaining wealth from housing inflation: it is NOT real wealth....it is literally a transfer of wealth from those at the bottom of the pile to those at the top. When those at the bottom do not wish to play the game any longer, the pyramid collapses. This collapse is the sole reason why all those banks have gone under. No other single economic factor is responsible.

VP

Edited by VacantPossession
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Very good post, and I'm replying to bump.... I do want to say, though, that I think the root cause is not house prices, it's greed.

indded. It just so happens that greed and leverage go hand in hand, and what is the only asset class that has a mature market designed to offer leverage to Joe Punter?

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Very good post, and I'm replying to bump.... I do want to say, though, that I think the root cause is not house prices, it's greed.

I agree with the OP, though would put the longer term context on it as well in a similar way to Fred Harrison.

A basic shortage of land due to tight planning rules tends to drive speculation by developers who hold land banks

As people see prices rising, more people start to buy into the idea that property only ever goes up.

More people join the frenzy, and borrow more to buy existing houses and property for renovations etc. Of course very little productive use is made of much of this property, its just a speculative vehicle which puts pressure on those that need it for productive purposes.

Rents get push up a as landlords need to pay their bigger mortgages, this again put pressure on productive users.

People borrow more and more, and eventually the interest payments start to exceed what can be serviced by the productive economy. Thus the bust comes

Property inflation is the root cause of all recessions and that it why we need a land tax.

Edited by mikelivingstone
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I'm sure seasoned and hardened HPC members will know this, but it concerns me how much denial there still is out there about what is causing and worsening this recession.

You can see how already the economy is being primed for the next boom-bust cycle.

The best way to protect yourself from this stupidity is to read economic history, and understand how over many years human nature has barely changed.

If you want an excellent place to start, read "Devil Take The Hindmost" by Edward Chancellor.

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I agree with the OP, though would put the longer term context on it as well in a similar way to Fred Harrison.

A basic shortage of land due to tight planning rules tends to drive speculation by developers who hold land banks

As people see prices rising, more people start to buy into the idea that property only ever goes up.

More people join the frenzy, and borrow more to buy existing houses and property for renovations etc. Of course very little productive use is made of much of this property, its just a speculative vehicle which puts pressure on those that need it for productive purposes.

Rents get push up a as landlords need to pay their bigger mortgages, this again put pressure on productive users.

People borrow more and more, and eventually the interest payments start to exceed what can be serviced by the productive economy. Thus the bust comes

Property inflation is the root cause of all recessions and that it why we need a land tax.

I agree with your definition of the problem but I wonder whether there are other solutions .....

Property is an illiquid asset that is prone to bubbles which have devastating consequences when they burst.

I agree that we should prevent it from being a speculative instrument. Setting limits on income multiples to mortgages and a minimum LTV could help reduce speculation. Taking away the interest deductions for speculators and setting the CGT on property speculation at 50% or higher might also reduce the rewards for speculation.

I do find the idea of a land tax intriguing bit I wonder whether it would cause speculative bubbles to get even larger if other conditions are right as speculators would try to raise prices enough to recoup any land tax losses.

The result of a land tax might be to penalise long term holders of land but to make bubbles larger when they do occur.

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I agree, the problem is simply a property bubble, the causes of which are:

  • Deregulation of credit markets allowing for high debt.
  • Corrupt bankers who lined their own pockets by throwing credit assessment to the wind.
  • The home's unique status as the last tax-free investment.
  • The government egging on the feel-good factor of the boom.
  • (Possibly) Restrictions in land for housebuilding.

The only thing is, therir hasnt been full-blown propety bubbles in France and Germany <_<

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I agree, the problem is simply a property bubble, the causes of which are:
  • Deregulation of credit markets allowing for high debt.

  • Corrupt bankers who lined their own pockets by throwing credit assessment to the wind.

  • The home's unique status as the last tax-free investment.

  • The government egging on the feel-good factor of the boom.

  • (Possibly) Restrictions in land for housebuilding.

The only thing is, therir hasnt been full-blown propety bubbles in France and Germany <_<

Parts of France have had a bit of a bubble .... The Riviera where the rich come to play, parts of Paris where enablers of the bubble lived and within a 30 minute drive of anywhere that EasyJet or Ryanair fly.

The bubbles in the EasyJet/Ryanair parts of the country have burst as (no shock here), those bubbles were inflated by equity withdrawn from British property. That game is over.

The rest will follow .....

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I'm sure seasoned and hardened HPC members will know this, but it concerns me how much denial there still is out there about what is causing and worsening this recession.

Absolutely

House prices fall and then the economy falls closely behind it, usually about 12-18months later.

In societies where economies are based on consumption rising house prices are fundamental for economic growth and 'prosperity'

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This might appear obvious to many here, but outside this website I am unconvinced that the message is getting across, otherwise why would relentless media coverage be constantly referring to the desire for the housing market to "get going again"? This phrase doesn't actually mean to make housing affordable, plentiful and easy to access. It really means to start the whole property inflation game going again.

VP

Absolutely right and without a real examination of the causes we are doomed to find the wrong solution. There is so little challenge of the current 'spend our way out of it' agenda that it amounts really to brainwashing.

The media narrative for the past decade has been uncritical of the government's economic policies and a persistant ramper of property prices. It would be like turkeys voting for Christmas for them to turn around and recognise this now.

At the forefront of the media messaage is the BBC with its £3bn a year licence fee. Based on its current coverage you would never suspect that the Conservatives have a +10 point lead over the Labour party. Because the BBC editorial leanings chime so well with the Labour Party this what we hear, without any countering views.

I can see the problem and more you listen to the output the more clear it becomes. But I haven't got an answer. Unfortunately it seems to me that we are doomed to face economic reality because the have to and not because we choose to.

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I think that is mostly true for this recession since property is the most common asset used to secure large loans, whether residential or commercial. So that's where most of the credit money has come from.

However, property isn't the only asset that can be used to secure loans. I've worked in companies that have used capital equipment, furniture, PCs and software licences as security. That would have only the most tenuous link to property prices.

VMR.

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Absolutely correct VP. I remember the first signs being my parents, who were trying to sell, being inundated with leaflets from removal companies. My parents commented that in all their years of moving (over 15 times) they had never been targeted by removal firms trying to get them to choose them just by a 'for sale' being in the garden. They had not even sold.

For quite a few years I have been shocked by the size of friends mortgages and even more surprised when told of remortgages to pay for extensions, holidays, new cars, help given to children etc. etc. Of course with many of these items paid for in such a manner then obviously it has a knock on effect throughout all business.

Many existing and start up businesses were treated in the same way with banks throwing money at them when good, old-fashioned common sense would scream at them that the chances of this business growing or suddenly making bigger profit is just not possible or realistic. One blatant indication of this was a friend who told me he had decided to give up his job as a chef (where he was paid OK and perfectly happy) to go into business with a friend, via a business loan, making four poster beds for dogs!

Thousands of people got caught up on this naive merry-go-round and, if it has not already, will impact on everybody's life.

Keep posting VP - I love the common sense and well written thoughts.

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I'm sure seasoned and hardened HPC members will know this, but it concerns me how much denial there still is out there about what is causing and worsening this recession.

VP

I got this graph off this site several years ago and I've had a hard copy kicking around on my desk ever since. I'm not sure who posted it or its validity, but it makes the property bubble/recession link very clear. Sorry, but the scan quality is a bit naff.

img029.jpg

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Great post. Just a few other observations.

The housing land bubble was a big driver behind the Private Equity bubble as well.

How many of these deals were leveraging not the perceived value of the business but just the property assets which themselves had been pumped up to values way beyond the ability of the occupying and trading companies to cover once those assets had been commuted to debt or indeed the ability of any other retail concern to cover.

The fake economic spin produced through this low rate driven leverage fest then split out into the commodities market.

In some ways it just so happens that property / land was the transmission mechanism, the real issue is the driver for this bubble which was artificially lowered interest rates and loose monetary policy. This was an entirely avoidable situation, but it was given the best part of a decade of idiot money to reach the scale it has. Other spill-over effects have been significant - in awe of banking and finance salaries the CEOs and high rankers in other businesses sectors have felt obliged to take up their entitlements and get their share of the top level loot, heck even the council execs think they deserve 1/4 mil each on the public teat. There are now hundreds of small companies hobbled by grossly overpaid board level pigs, fraud and double-dipping from the books is rife - they've learnt a lot from the banking and investment sector.

The manufacturing forced from these shores by high rent/rates/labour costs is never coming back, there is no party out there with the backbone to let the land values contract to a level that would enable this occur. This will also ensure that much of what remains of finance and financial services will go the same way.

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Anybody care to update this excellent graph? Only goes to Q4 04

I refer to the graph on the previous page. By the looks of it we have at least 3 years of recession to look forward to (just looking at it by eye).

I posted that in about 2005, after I got sick of various people saying we had to have a recession to cause the property market to break.

Busy working on an update, but I have other research which is more interesting as well.

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I have just started to see all of this in a new way, so book recommendations appreciated.

There are quite a few excellent books written on how economies go from boom to bust, but you need to be careful because there is also a lot of dross.

If you want a quick easy read, try JK Galbraith, "A Short History of Financial Euphoria", but also read "The Great Crash 1929", which is something of a classic.

Also Kindleberger is superb, "Manias, Panics and Crashes"

Slightly heavier reading, but excellent, "Popular Delusions and the Madness of Crowds", Charles Mackay, written in about 1841.

I'm not a great fan of Fred Harrison, IMHO his argument is too unsophisticated.

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I agree, the problem is simply a property bubble, the causes of which are:
  • Deregulation of credit markets allowing for high debt.

  • Corrupt bankers who lined their own pockets by throwing credit assessment to the wind.

  • The home's unique status as the last tax-free investment.

  • The government egging on the feel-good factor of the boom.

  • (Possibly) Restrictions in land for housebuilding.

The only thing is, therir hasnt been full-blown propety bubbles in France and Germany <_<

The tax free point is highly significant. To fail to tax large personal profits based on huge increases in notional values sends entirely the wrong signals to the electorate. It encourages a lack of real wealth creating energy and discourages the desire to gain wealth through productivity, or the creation of goods and services people need, and effectively diverts investment away from the real economy and into the bogus economy that housing represents. The only productivity created by housing is the building of new structures, or the substantial development of existing property (that does NOT include buying a new kitchen or conservatory!).

Moreover, by definition, it divides the nation into owners and renters, even though the majority of them are all renters (the "owners" are effectively renting from the bank until mortgage is paid off). The renters get not only no tax relief whatsoever but also tend to be marginalised and looked down upon in the perception of the "owners". The diversion of funds into property speculation instead of real wealth creation literally stunts the nation's economy. If the billions spent on housing and its subsequent inflationary costs were spent on stoking a real economy growth, I doubt this recession could ever have occured.

There is a moral issue too: The division created by tax free gains on first homes drives a social wedge between the so-called "haves" and "have-nots", yet those who chose to not play the property roulette game have been unduly penalised for doing what has now proved to be a sensible thing. But now, even when the causes are obvious, it is the profligate, re-mortgaging owners who are being molly-coddled while those who had no part in this farce are being constantly penalised, their savings reduced, and their social status now no better than it was in the eyes of the tediously conventional wisdom.

We need a sea change in attitudes to property, and I do not apologise for repeating what many of my posts have pointed out: We need to look at particularly Germany, and Holland, to witness a system where property speculation, though existing, takes second place to real economic growth, and tenants are through social attitudes and legal frameworks given absolutely equal status.

VP

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We need a sea change in attitudes to property, and I do not apologise for repeating what many of my posts have pointed out: We need to look at particularly Germany, and Holland, to witness a system where property speculation, though existing, takes second place to real economic growth, and tenants are through social attitudes and legal frameworks given absolutely equal status.

This would be a step in the wrong direction IMO. The point is a tenant and a landlord can never have equal status and no amount of government regulation or long term assured tenancies can alter the fact that one person is paying another for something that would be free if the landlord wasn't there in the first place.

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I agree with the OP, though would put the longer term context on it as well in a similar way to Fred Harrison.

A basic shortage of land due to tight planning rules tends to drive speculation by developers who hold land banks

As people see prices rising, more people start to buy into the idea that property only ever goes up.

More people join the frenzy, and borrow more to buy existing houses and property for renovations etc. Of course very little productive use is made of much of this property, its just a speculative vehicle which puts pressure on those that need it for productive purposes.

Rents get push up a as landlords need to pay their bigger mortgages, this again put pressure on productive users.

People borrow more and more, and eventually the interest payments start to exceed what can be serviced by the productive economy. Thus the bust comes

Property inflation is the root cause of all recessions and that it why we need a land tax.

Wouldn't a land tax end up being a tax on gardens?

And if it was all about a shortage of land, why did Australia have a house price bubble?

And how can you tax land? It's so many different things.

PS - I'm tipsy, and probably missing the point.

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