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Flat Bear

It Was A Credit Bubble Not A House Price Bubble

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Sorry to all those who have been on this site a long time and understand the difference.

There are many recent posters, bears as well as bulls, who do not seem to understand this.

I think it had became a consensus that the primary reason for the rise in asset value and in particular houses over the past decade was cheap and plentiful credit.

This cheap and easy credit needed a home and found it in the "equity" of houses. This credit created a boom in houses which fuelled speculators and financiers to self perpetuate prices. Price levels become totally out of kilt with reality to the degree where I had friends of mine tell me "thats not bad" when they saw a 2 bedroomed terraced in Reading on offer at £230,000!

These unrealistic prices could not continue, it was obvious, but they seemed to go well beyond what seemed to be possible (I thought we would see a crash in 2005/6) Peoples lives were being blighted by the cost of housing to the point where young couples were putting themselves in financial slavery so they could get a foot on the ladder.

The end was never going to be pretty and although to date it hasn't been too bad for many it will be getting worse.

The reason the distinction in a credit as apposed to housing is that although prices must come down on overleveraged assets it does not neccessarily mean there is not a housing shortage in the UK.

There is pent up demand for housing, some of which can be afforded by many STRs and FTBers alike but the overwhelming majority of this demand is for housing at a much lower cost.

Demand does not equal need alone.

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I think it had became a consensus that the primary reason for the rise in asset value and in particular houses over the past decade was cheap and plentiful credit.

Spot on, as prices rose dramatically so cheap and easy credit followed.

The first downward trend in HPs started late 04 into 05, but then the BOE in August 05 reduced interest rates ( which Mervyn later admitted was a mistake ) and the pundits in their wise predictions stated IRs had peaked and were now on the way down.

The great Guru Pundit of all the great wise and worshipped one Roger Bootle predicted IRs would fall to 3.5% by Q4 2006 and off the country went on a further credit binge now having learnt the standard rule of Economics. :D

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The first downward trend in HPs started late 04 into 05, but then the BOE in August 05 reduced interest rates ( which Mervyn later admitted was a mistake ) and the pundits in their wise predictions stated IRs had peaked and were now on the way down.

Yes, it's interesting to reflect on how everybody thought that one of Labours greatest policies was to make the Bank of England responsible for setting interest rates. The only problem was that they were set based on the remit of maintaining a 2% rate of inflation. The inflation rate does not include house prices, so this was never a factor. Imagine how many letters Mervyn would have had to write to Brown if that was included! There is no doubt that the current slump would have been nowhere near as bad if the brakes were applied to the economy in 2003. I'm still a little mystified why that never happened as I can't imagine how anybody with a degree of common sense could not see that by allowing personal debt to spiral out of control we could only have one conclusion .... where we're at now!

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They knew the boom was unsustainable all along

This article appeared in The Independent.

Ex-Governor George says Bank deliberately fuelled consumer boom

By Jane Padgham

Wednesday, 21 March 2007

The Bank of England deliberately stoked the consumer boom that has led to record house prices and personal debt in order to avert a recession, the former Bank Governor Eddie George admitted yesterday.

Lord George said he and his colleagues on the Monetary Policy Committee "did not have much of a choice" as they battled to prevent the UK being dragged into a worldwide economic slump by slashing interest rates. And he said his legacy to the current MPC was to "sort out" the problems he had caused.

Lord George, who headed the Bank for a decade from 1993, revealed to MPs on the Treasury Select Committee that he knew the approach was not sustainable. "In the environment of global economic weakness at the beginning of this decade... external demand was declining and related to that, business investment was declining," he said. "We only had two alternative ways of sustaining demand and keeping the economy moving forward - one was public spending and the other was consumption.

"We knew that we were having to stimulate consumer spending. We knew we had pushed it up to levels which couldn't possibly be sustained into the medium and long term. But for the time being, if we had not done that, the UK economy would have gone into recession just as the United States did."

He said he was "very conscious" that stimulating consumer demand could give rise to problems in the future. "My legacy to the MPC, if you like, has been 'sort that out'," he said. Under Lord George's governorship, rates were slashed from 6 per cent in 2001 to 3.5 per cent in 2003, pushing house price inflation above 25 per cent and high street spending growth to its highest since the late-Eighties boom.

In a wide-ranging discussion on the first 10 years of the MPC, Lord George also rejected suggestions that the MPC should target specific concerns such as soaring house prices, arguing that it was vital to take the broader picture of the economy.

Meanwhile, Kate Barker, a current MPC member, said in a speech last night that interest rate changes might become more frequent as the committee tackles volatile energy prices, rising inflation expectations and increasing pricing power. "This is a different kind of uncertainty from worries about demand which have been more usual during my time on the MPC, and I suggest that this may prompt a change in observed behaviour towards more frequent interest rate changes," she told the CBI North East dinner.

Interesting, eh?

Edited by juvenal

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Yes, it's interesting to reflect on how everybody thought that one of Labours greatest policies was to make the Bank of England responsible for setting interest rates. The only problem was that they were set based on the remit of maintaining a 2% rate of inflation. The inflation rate does not include house prices, so this was never a factor. Imagine how many letters Mervyn would have had to write to Brown if that was included! There is no doubt that the current slump would have been nowhere near as bad if the brakes were applied to the economy in 2003. I'm still a little mystified why that never happened as I can't imagine how anybody with a degree of common sense could not see that by allowing personal debt to spiral out of control we could only have one conclusion .... where we're at now!

+1

The other side of course to this is all that capital malinvested.Thats why now we see the huge deficits.

Every scrap of credit going on consumption.The amount of people in the UK who rely on the state was unsustainable before GDP started contracting.We really need a gilt strike asap to finish this government off.

This thing has a long long way to go yet.Unless we slash government spending soon we will move from starters to the main course.

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They knew the boom was unsustainable all along

This article appeared in The Independent.

Ex-Governor George says Bank deliberately fuelled consumer boom

By Jane Padgham

Wednesday, 21 March 2007

Ah, thanks for that.

I was looking for the Independent's version of this story (which also appeared on Sky's news site) to go on my video,

which mentions the same thing:

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I think it had became a consensus that the primary reason for the rise in asset value and in particular houses over the past decade was cheap and plentiful credit.

This cheap and easy credit needed a home and found it in the "equity" of houses. This credit created a boom in houses which fuelled speculators and financiers to self perpetuate prices.

The primary cause is the inbalance between debtor and creditor counties. The financial industry supplied the path from savers to credit hungry consumers, and politicians eased the way with lax regulation. This path was called MBS.

Two things are correcting this:

1. Trade inbalance is correcting due to demand collapse (long way to go)

2. Savers noticed they weren't going to get their money back

So the credit source was really leveraged foreign savings.

VMR.

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