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HovelinHove

The Long Haul

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Having read the article in the Telegraph this morning about how the BOE are trying to avoid a Japan style lost decade...which probably means we're guaranteed to have one, I looked at this article, and in particular the first graph on the right:

http://www.globalpropertyguide.com/Asia/Japan/Price-History

Their HPC never reached the near -20% annual falls that we reached last year, however, what is notable is the fact that although annual decreases became smaller, they never went positive YOY and after a period of small yearly decreases the falls started to accelerate again. (it would be interesting to see the MOM data to see if they have periods like we are having now with 3-6 months of growth)

Japan has never been able to escape its debt. Every time it starts to build up a head of steam through loosening monetary policy, it is held back by the crippling mill stone of debt round its neck. We are in that position now. People who borrowed at pre-peak prices, and indeed any who borrow in the next few years will be borrowing to buy an asset of continually decreasing value. This is the story that the banks and government etc are desperately trying to avoid becoming established at the moment, they are trying to shake the falling house price story out of the national psyche so that it doesn't become ingrained and a self-fulfilling phenomenon, the problem they have though is debt, just like the Japanese. People quite simply can't borrow anymore (lower equity, lower salaries, lower employment...leading to more of the same), and no matter what is said publicly, the banks will not lend at the levels needed to produce a 'sustainable' boom (QE is going into the stock and commodity markets I reckon). Any lending less than mid noughties levels will lead to overall price reductions, and as these reductions resurface in the National indices, so the banks will become even more cautious.

This is going to be a slow war of attrition. HPC made a massive, unprecedented appearance last year, the current rebound is unsustainable and as the cycle of mini rebounds followed by periods of further slump occur over the next few years, eventually people will realise that all rebounds are false dawns and the market will track what has happened in Japan...a very long period of YOY falls of 3-5% will occur. What Brown and the BOE have done is bonkers for the long term (of course they don't care about that), after the election tax and IRs will start to rise very quickly making this so much worse, maybe even worse than the Japanese, and just as our first phase of the crash is so much more aggressive and severe than the Japanese crash, so our later stages may be deeper and more damaging due to the amount of debt we have to pay back nationally and individually that will drag on the economy for at least one if not two decades.

The BRICs economies and their commodity suppliers will be hard hit in the short term as demand from the US, UK and Europe dry up, so they cannot rescue us. In the long term we may see early recoveries in these new economies creating a new paradigm, but if anyone thinks they're going to buy our overpriced crap, they're having a laugh.

We have a long period of decline that may become terminal.

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Japan has never been able to escape its debt. Every time it starts to build up a head of steam through loosening monetary policy, it is held back by the crippling mill stone of debt round its neck. We are in that position now. People who borrowed at pre-peak prices, and indeed any who borrow in the next few years will be borrowing to buy an asset of continually decreasing value. This is the story that the banks and government etc are desperately trying to avoid becoming established ............../

Good summary of what is to come.

If the BOE had included house prices in the inflation figures - [WHY were house prices NOT included??? :wacko::wacko::wacko::wacko: ]... and interest rates had NOT been lowered in 2005 - just think - we wouldn't be where we are now....

And - here on HPC - we warned of all this..... :rolleyes:

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Good summary of what is to come.

If the BOE had included house prices in the inflation figures - [WHY were house prices NOT included??? :wacko::wacko::wacko::wacko: ]... and interest rates had NOT been lowered in 2005 - just think - we wouldn't be where we are now....

And - here on HPC - we warned of all this..... :rolleyes:

It's precisely because of 2005 that we are having a long bounce...people still believe the government CAN (not will, as they will always try) to rescue us.

IMO the banks have been holding off on repossessions, and will continue to do so while the belief that we may be through the worst of it prevails, but this delayed rush for equity will start once prices start falling again as they will fight each other for what's left.

Edited by HovelinHove

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It's precisely because of 2005 that we are having a long bounce...people still believe the government CAN (not will, as they will always try) to rescue us.

IMO the banks have been holding off on repossessions, and will continue to do so while the belief that we may be through the worst of it prevails, but this delayed rush for equity will start once prices start falling again as they will fight each other for what's left.

The problem is so systemic I think a deal has been struck between government and banks. The banks are basically insolvent and if there were mass repossessions and foreclosures the housing market would collapse and with it the British economy. So the deal for recapitalization is stave of for as long as you can mass foreclosures, continue to make loans and try to rebuild/resore your balance sheet through cash flow and earnings of the next few years. This is how they saved the american banks in the Latin American crisis... this is how Japan has managed to avert a collapse in GDP... I wonder if Britain can pull it off. There is a greater problem facing Britain in that all developed economies are caught up in this systemic problem. A Japanese-style lost decade has to be the optimistic outcome.

Edited by roman holiday

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Good summary of what is to come.

If the BOE had included house prices in the inflation figures - [WHY were house prices NOT included??? :wacko::wacko::wacko::wacko: ]... and interest rates had NOT been lowered in 2005 - just think - we wouldn't be where we are now....

And - here on HPC - we warned of all this..... :rolleyes:

Eric - although I agree with you 100% that something should have been done in 2003-2007 to stop house prices rising out of control I am not sure that including house prices in the inflation target would have been correct as this would have damaged other sections of the economy - my personal view is that tighter regulation would have been the answer - eg limits on what individuals could borrow as % of salary, banks needing to taking provisions were less than 25% deposits and clamp down on banks offering liar/jumbo sized loans. Interestingly my friend who works in civil service came round over the weekend - on commenting on the loan shark stories I said that I thought there should be a limit on the amounts people could borrow and she said no thats too patriarchal, the gov would never allow that as would impinge on individuals freedoms!

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The problem is so systemic I think a deal has been struck between government and banks. The banks are basically insolvent and if there were mass repossessions and foreclosures the housing market would collapse and with it the British economy. So the deal for recapitalization is stave of for as long as you can mass foreclosures, continue to make loans and try to rebuild/resore your balance sheet through cash flow and earnings of the next few years. This is how they saved the american banks in the Latin American crisis... this is how Japan has managed to avert a collapse in GDP... I wonder if Britain can pull it off. There is a greater problem facing Britain in that all developed economies are caught up in this systemic problem. A Japanese-style lost decade has to be the optimistic outcome.

Spot on, exactly as I see it.

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The problem is so systemic I think a deal has been struck between government and banks. The banks are basically insolvent and if there were mass repossessions and foreclosures the housing market would collapse and with it the British economy. So the deal for recapitalization is stave of for as long as you can mass foreclosures, continue to make loans and try to rebuild/resore your balance sheet through cash flow and earnings of the next few years. This is how they saved the american banks in the Latin American crisis... this is how Japan has managed to avert a collapse in GDP... I wonder if Britain can pull it off. There is a greater problem facing Britain in that all developed economies are caught up in this systemic problem. A Japanese-style lost decade has to be the optimistic outcome.

I agree to a point, however this deal will only work while the pretence of price stablisation is achieved, once the market starts to drop again it will be the first to blink, then gloves off as a fight for equity begins, especially as our government are on the way out. The Yanks have bitten the bullet early and gone down the foreclosure route, especially with their sub-prime, we have tried to avoid this, but it won't work. I forsee a huge rise in repossessions in 2010 as the unemployed lose their JSAs etc and the banks realise there's no hope of getting a bean out of these people unless they repossess. Have the banks kept their part of the deal about pumping money into the markets and returning lending to 2007 levels.

The Fu(k they have!

Edited by HovelinHove

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The problem is so systemic I think a deal has been struck between government and banks. The banks are basically insolvent and if there were mass repossessions and foreclosures the housing market would collapse and with it the British economy. So the deal for recapitalization is stave of for as long as you can mass foreclosures, continue to make loans and try to rebuild/resore your balance sheet through cash flow and earnings of the next few years. This is how they saved the american banks in the Latin American crisis... this is how Japan has managed to avert a collapse in GDP... I wonder if Britain can pull it off. There is a greater problem facing Britain in that all developed economies are caught up in this systemic problem. A Japanese-style lost decade has to be the optimistic outcome.

Exactly right.

A couple of other tools to help along the way are a very steep yield curve and the sanctioning of a huge retail bid/offer between deposit and loan rates (although the UK might be messing this one up).

Time is the key to survival for many sectors of the economy and not just banks.

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Eric - although I agree with you 100% that something should have been done in 2003-2007 to stop house prices rising out of control I am not sure that including house prices in the inflation target would have been correct as this would have damaged other sections of the economy - my personal view is that tighter regulation would have been the answer - eg limits on what individuals could borrow as % of salary, banks needing to taking provisions were less than 25% deposits and clamp down on banks offering liar/jumbo sized loans. Interestingly my friend who works in civil service came round over the weekend - on commenting on the loan shark stories I said that I thought there should be a limit on the amounts people could borrow and she said no thats too patriarchal, the gov would never allow that as would impinge on individuals freedoms!

I agree with your friend. But I wonder what she thinks of propping up the banks now those excessive loans have gone bad.

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Eric - although I agree with you 100% that something should have been done in 2003-2007 to stop house prices rising out of control I am not sure that including house prices in the inflation target would have been correct as this would have damaged other sections of the economy - my personal view is that tighter regulation would have been the answer - eg limits on what individuals could borrow as % of salary, banks needing to taking provisions were less than 25% deposits and clamp down on banks offering liar/jumbo sized loans. Interestingly my friend who works in civil service came round over the weekend - on commenting on the loan shark stories I said that I thought there should be a limit on the amounts people could borrow and she said no thats too patriarchal, the gov would never allow that as would impinge on individuals freedoms!

A system has to be adopted where individuals are held responsible for their actions the hard way, i.e. by not allowing moral hazard in the first place. Not more, but less regulation and intervention is the proper answer. In this specific case, remove the central bank and the job is done. No bank will lend any more than they can reasonably afford to lend at rate that reflects the true demand/supply for debt capital. All your problems will be solved with the added bonus of more liberty and meritocracy around.

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Eric - although I agree with you 100% that something should have been done in 2003-2007 to stop house prices rising out of control I am not sure that including house prices in the inflation target would have been correct as this would have damaged other sections of the economy - my personal view is that tighter regulation would have been the answer - eg limits on what individuals could borrow as % of salary, banks needing to taking provisions were less than 25% deposits and clamp down on banks offering liar/jumbo sized loans. Interestingly my friend who works in civil service came round over the weekend - on commenting on the loan shark stories I said that I thought there should be a limit on the amounts people could borrow and she said no thats too patriarchal, the gov would never allow that as would impinge on individuals freedoms!

Regulation does not work. Everybody has a Swiss mortgage in Poland as the Polish banks require 20% deposits ...

We should indeed put up the rates in 2003-2005. The whole economy was over heated by the cheap money from housing and investors after the Internet bubble collapse ...

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basic game theory,isn't it.remember how the irish guaranteed all bank deposits when they'd all agreed not to.then all of a sudden everyone's gurateeing deposits.

That is exactly it, or the inverse. If you were a medium sized building society and you had a load of your mortgage holders being made unemployed, and you see the prices start to slip, you'd move quickly to recover whatever equity you could as you can't afford to subsidise the unemployed (which is why so many small banks are going bust in the states). This pushes prices down quickly again, then a large bank who has a greater proportion of lower quality mortgages than a rival (eg RBS vs HSBC), starts thinking along the same lines, only on a huge scale, and begins chasing its customers in areers, and BTLers who aren't meeting their margin calls. Then the bigger bank has to do the same...Kabooom! Meanwhile the government is in total dissarray as the polls are showing that they are 20% behind and infighting and blaming becomes more important than the economy. This is the winter that lies ahead along with public sector strikes, a new increase in redundancies in the private sector and a run on the pound.

Edited by HovelinHove

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