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If the Bank of England were really serious about helping the economy, it would be trying to tank the housing market. That is not quite how the economists at Fathom Consulting would put it, but it's a key implication of their latest report on UK monetary policy. The Monetary Policy Committee are unlikely to follow their advice - or not directly, anyway. But the policy paper will make for sobering reading as they prepare for the start of their November meeting on Wednesday.
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Good article. I particularly like the expression 'zombie households'

Very good article, until she adds her own opinion in it:

Isn't it possible that UK houses are worth that much after all? Perhaps. Certainly, we didn't have a mad housing construction boom like the US or Spain, which has left parts of those economies with a large overhang of excess supply. But you don't find many forecasters expecting a significant rise in house prices over the next few years. Indeed, many expect a fall.

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I don't understand how she/Fathom reach the conclusion that it would crash the housing market. As I said the other thread, it could be that the "Bad Bank" would be more aggressive in foreclosing on mortgages in arrears, hence increasing supply, but by taking these dodgy loans of the banks' balance sheets in the absence of proper regulation of new lending, it would surely invite a new mortgage credit bubble?

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I'm surprised this hasn't attracted more comment.

If the Bank of England were really serious about helping the economy, it would be trying to tank the housing market. That is not quite how the economists at Fathom Consulting would put it, but it's a key implication of their latest report on UK monetary policy. The Monetary Policy Committee are unlikely to follow their advice - or not directly, anyway. But the policy paper will make for sobering reading as they prepare for the start of their November meeting on Wednesday.

How, you might ask, could a sharp fall in house prices possibly help the economy? It would help because it would get it over with. Like many economists, the authors of the report, Danny Gabay and Erik Britton, believe that the British economy will not truly put the crisis behind it until it has fixed the banking system and dramatically lowered the amount of private sector debt weighing on the economy. Unlike some of their peers, they think that a correction in house prices is a crucial part of that process in Britain, and it has barely begun.

There is a lot of meat in the report. Here's what I found most interesting.

First, the authors highlight a recent study from the Bank of International Settlements [145KB PDF]. Based on data from 27 countries, this finds that financial crises tend to be followed by a long period of drawing down debt in the private sector. Nothing new there, you might say, but the numbers are interesting: on average, total private sector debt, as a share of GDP tends to fall by 38 percentage points, and the process takes 10 years.

In the US, private sector debt has fallen by about 11% of GDP in the past few years. You could say that their correction is broadly on course (even if that course is painfully slow). But in the UK, private sector debt has barely fallen at all since the Bank of England came to the economy's rescue with a bank rate of just 0.5% (see chart below).

Chart showing household debt

"Zombie companies" always feature prominently in cautionary tales about Japan. Instead of forcing companies to recognise their losses, the authorities kept them alive on a drip-feed to nearly free cash. By seeking to ease the pain of adjustment, they actually made it a lot worse.

If you buy the Fathom view, policy-makers in the US and UK are making exactly the same mistake, only we're creating zombie households instead, who can only stay afloat because the cost of servicing their mortgage has fallen through the floor. As a result, banks don't have to face the fact that their mortgage-based assets are worth much less than they were at the peak of the boom - and the country can't move on.

Isn't it possible that UK houses are worth that much after all? Perhaps. Certainly, we didn't have a mad housing construction boom like the US or Spain, which has left parts of those economies with a large overhang of excess supply. But you don't find many forecasters expecting a significant rise in house prices over the next few years. Indeed, many expect a fall.

It is all but impossible now to obtain a mortgage worth more than 75% of the current value of the house. You can call that extreme risk aversion, or you can read it as a forecast of further house price falls by the lenders themselves.

Robert Peston has written frequently about the funding needs of the banks over the next few years. The Fathom economists calculate that, if recent house price declines continue over the next couple of years, the banks will once again have a £180bn funding gap by 2012, when the Bank of England's Special Liquidity Scheme for the banks is due to end.

We like to think that by recognising bank losses early and injecting fresh capital, Britain and the US have avoided Japan's mistakes. Instead, according to Fathom, we have made the same mistakes, in a slightly different way.

Where do we go from here? Fathom says it's time for a UK version of TARP, funded, at first, by more magical money creation by the Bank of England.

Briefly, the way this would work would be that the Treasury would set up a "bad bank" to buy troubled mortgage-backed assets from banks, paid for by issuing a special bond, which could be bought by the Bank as part of QE2.

Is there any chance this would happen - and would it work? I suspect we will not find out the answer to the second question, because the answer to the first is no. At least for the foreseeable future.

But you can reject the specific policy conclusion while still paying attention to the arguments that have led them there. Like many other critics, Fathom thinks the Bank of England weakened the effect of QE by spending nearly all of the money on buying government bonds. More of the same, in their view, would be at best counter-productive and possibly downright harmful. Many around the table at the MPC's meeting this week will be harbouring similar doubts: after all, just how low can the gilt yield go?

The Fathom economists are also looking at a country where average house prices are not now much lower than they were at the peak in 2007 and the ratio of household debt to disposable income is also close to its historical peak - and concluded this is not a country, or an economy, which is ready to put the debt crisis behind it. They are not alone.

Like ToW, I can't say I agree with all of her assertions but my God she actually gets it.

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So Steph thinks unlike any other country in the world our houses are special and worth bubble prices?

Fathom want the B of E to buy up bad mortgages so banks can then lend more - which will then push prices higher.

To my mind this Fathom are in the pocket of some bankstas. What they suggest doesn't help households and their debts, it only helps banks protect the value of their bad mortgages by creating more debt.

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So Steph thinks unlike any other country in the world our houses are special and worth bubble prices?

Fathom want the B of E to buy up bad mortgages so banks can then lend more - which will then push prices higher.

To my mind this Fathom are in the pocket of some bankstas. What they suggest doesn't help households and their debts, it only helps banks protect the value of their bad mortgages by creating more debt.

agree, steph is a big VI and the bad bank is just a continual subprime suspense.

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So Steph thinks unlike any other country in the world our houses are special and worth bubble prices?

Fathom want the B of E to buy up bad mortgages so banks can then lend more - which will then push prices higher.

To my mind this Fathom are in the pocket of some bankstas. What they suggest doesn't help households and their debts, it only helps banks protect the value of their bad mortgages by creating more debt.

See thread 'Bank of England must use QE to buy 'bad mortgages', warns Fathom Consulting'.

"Guess where the Fathom Directors used to work:-

Erik Britton, Bank of England

Andrew Clare, Bank of England

Danny Gabay, Bank of England"

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See thread 'Bank of England must use QE to buy 'bad mortgages', warns Fathom Consulting'.

"Guess where the Fathom Directors used to work:-

Erik Britton, Bank of England

Andrew Clare, Bank of England

Danny Gabay, Bank of England"

Oh dear... !

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I followed the link to the BIS report from that blog, and found some v. interesting, important, and scary charts there. I started a new thread with them:

LINK: http://www.housepricecrash.co.uk/forum/index.php?showtopic=153952

It will crash. No matter what the BoE wants. Their best hope is a (partially) controlled crash-landing, but a crash will it be.

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Comment no 16

16. At 12:45pm on 02 Nov 2010, Ben wrote:

My word. A BBC journalist breaks ranks. I thought I'd never see the day.

foredeckdave:

".. I've lived in the same house for 20 years and paid-off the morgage. ...

Does that make me very clever? No, it just turned out that way by circumstance."

I've rented the same house for 3 years because although I'm in the top 10% of earners, I refuse to tie myself to a life of debt on a house that isn't even nice.

I have one kid and one on the way. I pay the top rate of tax, work really hard, and still cannot house my family in a decent home. Does that make me stupid? No, I was just born after the boomers had totally messed up our economy and sold my generation down the river!

IMHO, the contract between state and citizen will never be fulfilled for my generation ie I will get no pension, no elderly care and probably no free health-care. So why am I paying the tax for boomers who all bought houses fairly cheaply in real terms? Let's get the rates up and see who is left standing after the interlude in this panto.

Edited by GordonBrownSpentMyFuture

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I don't understand how she/Fathom reach the conclusion that it would crash the housing market. As I said the other thread, it could be that the "Bad Bank" would be more aggressive in foreclosing on mortgages in arrears, hence increasing supply, but by taking these dodgy loans of the banks' balance sheets in the absence of proper regulation of new lending, it would surely invite a new mortgage credit bubble?

Agreed. It's highly dishonest of Flanders to present it like that. All the honest VIs admit that their motivation is to get house prices rising by releasing more easy credit, coupled with a state sponsored "safety net" for borrowers in trouble and state provided compensation for banks.

Edited by ingermany

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click here for your link

f the Bank of England were really serious about helping the economy, it would be trying to tank the housing market. That is not quite how the economists at Fathom Consulting would put it, but it's a key implication of their latest report on UK monetary policy. The Monetary Policy Committee are unlikely to follow their advice - or not directly, anyway. But the policy paper will make for sobering reading as they prepare for the start of their November meeting on Wednesday.

How, you might ask, could a sharp fall in house prices possibly help the economy? It would help because it would get it over with. Like many economists, the authors of the report, Danny Gabay and Erik Britton, believe that the British economy will not truly put the crisis behind it until it has fixed the banking system and dramatically lowered the amount of private sector debt weighing on the economy. Unlike some of their peers, they think that a correction in house prices is a crucial part of that process in Britain, and it has barely begun.

There is a lot of meat in the report. Here's what I found most interesting.

First, the authors highlight a recent study from the Bank of International Settlements [145KB PDF]. Based on data from 27 countries, this finds that financial crises tend to be followed by a long period of drawing down debt in the private sector. Nothing new there, you might say, but the numbers are interesting: on average, total private sector debt, as a share of GDP tends to fall by 38 percentage points, and the process takes 10 years.

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Completely agree, by definition the recession will not end until Joe Public can afford to both service a mortgage and buy consumer goods.

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You have fallen for it.

Steph thinks that unlike any other country in the world our houses are worth bubble prices:

"Isn't it possible that UK houses are worth that much after all? Perhaps. Certainly, we didn't have a mad housing construction boom like the US or Spain, which has left parts of those economies with a large overhang of excess supply"

Fathom want the B of E to print money to buy up bad mortgages from the banks so they can lend more - to push prices up

LOL people believing the BBC were anti-HPI - you couldn't make it up!

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It makes perfect sense to bring house prices down to a very affordable level as we would then be able to send more of our currency abroad to buy tat to do our new houses up and get that retail economy going again.

picLarge20717.jpg

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Picking up on this thread. Fathom Financial Consulting have kindly provided me with the full report (attached), which I couldn't find posted anywhere.

As I read it they are property bears, they indicate that Auction price indicate a truer fair value indicator for UK house prices (22% down from current prices), and that the problem is that until the banks realise the loss on their books we will have zombie households/zombie mortgages.

It seems to me that the proposal is actually to offer the banks an opportunity to offload their non-performing debt at a 22% haircut, by doing this they will 'mark-to-market' their entire mortgage book and effectively say, "house prices now down 22%". This becomes the new benchmark when valuing property for a mortgage application. They are then able to offer mortgages at reasonable income multiples, move the LTV back to 90% and the general population would once again be able to participate in the housing market, not just the cash rich and those with lots of equity, i.e. it gets FTB back in.

I do not see too much moral hazard, the banks have to take a 22% ish hair cut, the sub-prime borrowers have to keep paying but now it is to a 'government "bad" bank' not a 'private "evil" bank'. There could be some hazard here in that the bad bank won't kick defaulters out of their home, offer discount rates etc, and as such we the tax payer subsidise the imprudent, but hey that's all ready happening, thats what the ZIRP & QE gives us. The problem with ZIRP to protect the recent imprudent means we also penalise the savers, and allow those who bought before the boom and the BTL investors to get cheap debt and 'fill their boots' with property as the only ones able to get a mortgage.

I could I may be missing something, but this seems to be saying "take the hit on HPI now, absorb the loss now, bring values down, allow the MPC to raise rates and allow a normal yield curve to develop, and move towards a normal market".

Regards

oz

TARP UK- embargoed (High).pdf

TARP UK- embargoed (High).pdf

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Picking up on this thread. Fathom Financial Consulting have kindly provided me with the full report (attached), which I couldn't find posted anywhere.

As I read it they are property bears, they indicate that Auction price indicate a truer fair value indicator for UK house prices (22% down from current prices), and that the problem is that until the banks realise the loss on their books we will have zombie households/zombie mortgages.

It seems to me that the proposal is actually to offer the banks an opportunity to offload their non-performing debt at a 22% haircut, by doing this they will 'mark-to-market' their entire mortgage book and effectively say, "house prices now down 22%". This becomes the new benchmark when valuing property for a mortgage application. They are then able to offer mortgages at reasonable income multiples, move the LTV back to 90% and the general population would once again be able to participate in the housing market, not just the cash rich and those with lots of equity, i.e. it gets FTB back in.

I do not see too much moral hazard, the banks have to take a 22% ish hair cut, the sub-prime borrowers have to keep paying but now it is to a 'government "bad" bank' not a 'private "evil" bank'. There could be some hazard here in that the bad bank won't kick defaulters out of their home, offer discount rates etc, and as such we the tax payer subsidise the imprudent, but hey that's all ready happening, thats what the ZIRP & QE gives us. The problem with ZIRP to protect the recent imprudent means we also penalise the savers, and allow those who bought before the boom and the BTL investors to get cheap debt and 'fill their boots' with property as the only ones able to get a mortgage.

I could I may be missing something, but this seems to be saying "take the hit on HPI now, absorb the loss now, bring values down, allow the MPC to raise rates and allow a normal yield curve to develop, and move towards a normal market".

Regards

oz

Excellent! Thanks for the link ozbear.

Great summary too.

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  • 259 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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