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Why Does The Boe Not Want House Prices To Find Their Correct Level?


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With QE and trashing sterling the B of E have helped bank balance sheets but more importantly have created a window of opportunity for those in the worst financial position to sell their house. Mortgage rates have not fallen as much as savings rates and higher deposits are required. This is so that the people buying the houses do not overcommit themselves as much as those selling did, when interest rates rise. The B of E want those people with cash, foreigners and those in employment who can afford a deposit, to bail out the most endebted people by buying their house and realising their equity.

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Thanks for that RandomBear - that's very enlightening.

I'm still astonished that there is no mention of the sustainability of current thinking - regarding growth predictions, housing and employment levels.

No forward planning, no long term vision. It would explain a lot.

In many ways the Bank of England's rate cut in August 2005 was kicking the problem of the asset boom further down the road. When it then came back and bit them hard in 2008, they didn't really know what to do, so they started printing money.

Surely what is drastically needed therefore is someone in the Bank of England in charge of economic sustainability. They would quickly put a stop to the housing market intervention the BoE is currently engaged in.

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Housing is currently backing the currency.

Rentenmark 2.0

Correct (of course!), and as the $GB reaches historic lows, so the relative value of the housing also decreases so the entire economy shrinks to relatively horrid levels, and serious money runs away from the British economy to pump up the Australian economy even further (as if we need it, given the effect on exports), and it all gets very cyclic without anyone doing a thing or any changes in the productivity of the activity based economy... and then the activity based economy responds to those conditions by shrinking... and... Nasty stuff. They shouldn't have pumped it up in the first place.

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Thanks for that RandomBear - that's very enlightening.

+1

In many ways the Bank of England's rate cut in August 2005 was kicking the problem of the asset boom further down the road. When it then came back and bit them hard in 2008, they didn't really know what to do, so they started printing money.

Did Danny describe the 2005 rate cut as a mistake? (I believe he wasn't on the MPC then),

Peter.

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I thought about it long and hard now, and I just can't quite fathom what motivates the Bank of England.

I have just finished watching 'The Love Of Money' and seen Mervyn King apparently earnestly talking to camera, explaining that it was irrational greed and speculation on overinflated property assets that led to Lehman Brothers' downfall.

Rationally, there should be every reason why the Bank of England should want UK house prices to find their true market value. This would give consumers more disposable income over the medium term and would dampen unsustainable credit bubbles and subsequent catastrophic busts. But while we have Mervyn King publically acknowledging that the credit bubble was insane, he and his Bank still pursue policies that seem hellbent on maintaining the insane property asset prices created by the credit boom.

Does it strike anyone else as odd that someone can say "Well clearly we were insane to value property at those levels, but let's keep those valuations in tact going forward"? Does that not strike anyone else as really, really odd?

I mean we can talk about political pressure from Brown in preparation for a general election, but Mervyn King has never much been bothered or apparently influenced by that and I can't see that being the case now. Of course, publically Mervyn King has told Gordon Brown and Alistair Darling not to try to prevent the housing market crash. The other rational argument is that we have just experienced the worst financial crisis since the second world war and re-stoking a speculative boom based on inflated property assets is like returning to a hornet's nest you've just felled.

It is well documented that leading up to the credit crunch, the Bank of England quite aggresively chased high house prices with interest rate cuts - in fact it can be shown by the raw data that whenever house price inflation dropped below 9%, the Bank of England whipped up the property boom again and again, regardless of what was happening to inflation. That's in the past now, and we're all supposed to know better in these post Lehman Brothers world, right?

So while Mervyn King publically condemns 'irrational exuberance' and 'speculation based on overpricing of property assets' and warns the UK government not to prevent the long-needed correction in the UK housing market why does the Bank of England pursue policies to do the exact opposite and re-stoke the housing market?

Are they just slow learners? Do they have very short memories? Do they have sizeable property portfolios themselves?

I just don't get it.

By the way, if it's not too much trouble to ask, I'd really appreciate it if Bank of England conspiracy theorists sat this one out - I just don't buy that crap. There has to be a more pedestrian and rational explanation - thanks.

heres my take.

currency needs to be backed by something. bankers today say it is just confidence...but for confidence, there needs to be a tangible, as reality.

so in the absence of a promise to pay an ounce of this or that, they get in people minds that 200,000 notes will buy an nice average asset.

banks actually beleived this as they poured into MBS and CDOs. Investors beleived it too.

as defaulters caused Houses to fall, so the 200,000 became 160,000.

Bankers CANT even face the true value of these assets....so they lie....well, mark to model is the official title.

so while the truth remains hidden, then all they can do is A, prop up the failed system with numbers generated from thin air (QE) and B, hope that the assets will regain their value.

hence, they need people to buy houses @ 200K again, not only here, but anywhere where the bankers Assets are based on the property market. Property is the new GOLD...except, Prices were boosted by finance on prices boosted by finance...a ponzi.

a house is a house is a house...just as an ounce of gold is an ounce of gold. trouble with houses, is that its finance that gives the current value so its a moving target. saying £1 is .25 ounces of gold is a fix.

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Yes, he did.

Perhaps he should be re-evaluated then (from the HPC inner ring of hell status which he seems to hold)? since perhaps if he had been a member in 2005, things might have turned out a bit differently (or would the shedload of money flooding in to buy sterling MBSs have nullified it anyway?),

Peter.

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Perhaps he should be re-evaluated then (from the HPC inner ring of hell status which he seems to hold)? since perhaps if he had been a member in 2005, things might have turned out a bit differently (or would the shedload of money flooding in to buy sterling MBSs have nullified it anyway?),

Peter.

Probably the shadow banking system was putting in enough credit to keep prices going up anyway but who knows. The issue really is that he couldn't do anything about that. Northern Rock, securitisation etc is all the business of the FSA not the BoE.

I liked him and thought he was pretty head screwed on, if a little big-headed about his role over the last 2 years.

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I think it boils down to this.

Randombear pointed out that Blanchflower bemoaned the lack of realism in the Bank's own models. No-one is in charge of the long term interests of the economy, including the Governor himself. No-one asks about sustainability or what happens tomorrow if we do such-and-such today.

As a consequence, the Bank is always kicking problems into the long grass, further down the road - it is of no concern that further down the road there is a minefield of issues from decisions they took in the past.

It explains why the Bank is constantly putting out fires of its own making. It is also this attitude that created the credit boom and bust. Like the banks it supports, it is the Bank of England refusing to face up to the reality of the policies it pursues.

To summarize, the Bank of England's refusal to forecast the effects of its policies betrays its inability to accept responsibility for them.

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BoE has a remit...from Brown himself....inflation (CPI) @ 2%

house prices mean nothing to the bank...in these terms.

Bloo, we've already accepted that this narrow remit is not the whole picture.

To my mind, the Bank of England is negligently irresponsible by refusing to forecast the effects of its policies. Unfortunately policy sustainability is not factored into their forecasts or planning, so the UK economy will constantly be damaged long term by their decisions.

As other economists have pointed out the Bank of England will forever be blowing bubbles and allowing them to break over the economy, because they live only in the present, where the future is always rosy.

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Bloo, we've already accepted that this narrow remit is not the whole picture.

To my mind, the Bank of England is negligently irresponsible by refusing to forecast the effects of its policies. Unfortunately policy sustainability is not factored into their forecasts or planning, so the UK economy will constantly be damaged long term by their decisions.

As other economists have pointed out the Bank of England will forever be blowing bubbles and allowing them to break over the economy, because they live only in the present, where the future is always rosy.

this is true, while the bank is forced to use the interest rate tool to hit its target. sadly, that tool broke about 2 years ago.

they are now really persuing a policy, which is in their constitution, to provide stability in the private banking system, which was the raison d'etre for central banks in the first place.

as the private system is staffed by pirates that need to be stopped once their schemes are unmasked, the BoE is ALWAYS too late to stop bubble....as the pirates concoct cleverer ways each time a scheme to enrich themselves is blocked.

The BoEs worst crime IMHO, is to beleive the bulldroppings that any particular bank is too big to fail.

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So we have a set of co-conspirators in holding up asset prices:

- Politicians

- Bankers

- Central Bankers

- Estate agents

- Developers

- Local government

- House sellers

- Sibley and McTurd

Looks like first time buyers and STR'er are on their own. Does not look like banks will be in a position anytime soon to be able to survive without free money so cannot see how QE and ZIRP will be reversed for... say the next 10 years.

Maybe it is a good time buy afterall.

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So we have a set of co-conspirators in holding up asset prices:

- Politicians

- Bankers

- Central Bankers

- Estate agents

- Developers

- Local government

- House sellers

- Sibley and McTurd

Looks like first time buyers and STR'er are on their own. Does not look like banks will be in a position anytime soon to be able to survive without free money so cannot see how QE and ZIRP will be reversed for... say the next 10 years.

Maybe it is a good time buy afterall.

or is there a possability that even with all these VIs combined they will not beat the market?

I would suggest they may be able to slow it down, for example by pumping massive amounts that are so big they are difficult to count into the system at the same time as dropping interest rates to zero or there abouts

I would also suggest they could distort the market for example by carrying on the above policies too long and supporting "home ownership" by tax and positive finance whilst making renting a poor option which would create inflation at the same time as changing temporary wealth perceptions.

But they still can not beat the market longer term.

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Financial Stability is stated prime objective, alongside the inflation remit.

They ignored it. The previous incumbent in charge of it (Andrew Large) left his post early.

Sensible chap, must have seen what was coming with the rest of the committee stuffed with chancers and politically orientated decoration.

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Hello.

I had a 2 hour meeting with Danny Blanchflower yesterday and I believe I can tell you the answer to this question.

The BoE wants some asset price and specifically house price inflation because if house prices fall 30% that traps some 3mio households in negative equity. If you have extensive negative equity that destroys mobility and traps people in .

So I guess that the MPC don't care that HPI traps another group of people into terminally renting. I guess their economic decisions also have nothing to do with the fact they've all got real estate assets either.

The BofE are unelected, is there any way of knowing their VI's, i.e BTLer etc?

Edited by chefdave
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or is there a possability that even with all these VIs combined they will not beat the market?

I would suggest they may be able to slow it down, for example by pumping massive amounts that are so big they are difficult to count into the system at the same time as dropping interest rates to zero or there abouts

I would also suggest they could distort the market for example by carrying on the above policies too long and supporting "home ownership" by tax and positive finance whilst making renting a poor option which would create inflation at the same time as changing temporary wealth perceptions.

But they still can not beat the market longer term.

In the long term we'll all be dead (the rate this is going).

You talk about a market - there is no market. There are only state sanctioned transactions - they say what you can make money on and also what is off limits. Its not a market anymore - its just a new trough.

Edited by IMHAL
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Thanks to RandomBear from great insight into the MPC thinking.

The Bank of England does not want to see the 3 million-odd people who bought in recent years see the value of their properties fall, because according to Blanchflower, negative equity creates labour immobility. I should point out though, that this immobility is through their own choice - they are immobile because they are unwilling to accept the current market price for their asset.

If you are in negative equity you CANNOT sell at the current price - it is not a choice. You'd love that job elsewhere but you CANNOT sell as you CANNOT pay off the mortgage.

So I guess that the MPC don't care that HPI traps another group of people into terminally renting. I guess their economic decisions also have nothing to do with the fact they've all got real estate assets either.

But terminally renting, whilst a trap to the individual, does not affect people's mobility of labour - in fact it arguably helps it. So it is not a problem to the BoE.

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Financial Stability is stated prime objective, alongside the inflation remit.

They ignored it. The previous incumbent in charge of it (Andrew Large) left his post early.

Sensible chap, must have seen what was coming with the rest of the committee stuffed with chancers and politically orientated decoration.

How you and I could enjoy a great discussion over a pint, but sadly I have given up and am trying to at last enjoy my retirement. My battle at the moment concerns HMRC who sadly can`t understand the science or art of computing by positive real numbers, specif. by adding, subtracting, multiplying, and dividing.

Hope you had a great summer down in old Somerset, truly an old VIP poster. ;)

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  • 440 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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