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Biriani

Mervyn King On House Prices

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In his appearance before the Treasury select committee this morning, Mervyn made a few comments on house prices.

He said that the Bank now considers there to be "broad stability" in the housing market, with a pickup in transactions and small but positive price increases. Arrears have picked up, he admitted, but only slightly and from a historically low level. LTV ratios, while they have risen, remain far below the levels preceding the previous crash.

He said that the fears of collapse present earlier in the year had subsided, and there was now more confidence. He doesn't see significant house price rises as likely to return soon, however.

He also confirmed what the Bank said in an earlier inflation report about the link between house prices and consumer spending now being weakened. There is little wealth effect from house prices, he claimed, since those who benefit (trading down) are more or less offset by those entering the market or trading up.

The collateral effect is likely to be more important, since higher house prices allow people to borrow more easily. However, this only happens if i) collateral is already a limiting factor in borrowing - if equity is already high this is unlikely; and ii) if people actually wish, in aggregate, to increase their borrowing - this depends on their expectations of future propsects.

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My views:

Strong arguments, and difficult to refute with evidence. But I would raise a couple of issues:

The housing market may have stabilised, but it remains vulnerable to an external shock, and he admitted that there are several possible shocks out there.

Looking at transactions, approvals and LTV ratios can give a misleading impression of the market at the moment, since the composition of people is historically unusual (ie no FTBs).

I would dispute that there are no wealth effects from house prices. People do not always behave in an economically rational way, and the appearance of £200k more equity can do funny things to a person's spending habits. Also, there may not be a symmetric consumer response to rising and falling house prices.

The apparent breakdown of the historical relationship between house prices and consumer spending could have been caused by the global economic downturn in 2001-2002. People who would have normally cut back their spending or who faced income constraints were able to draw on their housing equity to smooth their spending.

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FTB's on their **** at 9%, down to the speculators now at the bottom rung and that is almost it.

King is just covering up for past failure to tackle the real problem.

Debt is growing way out of control and they have no answers other than to pump more money into the system. The housing ladder is rotting from the bottom rung upwards.

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Whilst broad stability has been reached so far in the market, its far to early to say there wont be a crash.

King knows this, but by talking the stability talk he hopes it will become a self fulfilling prophecy. He know's that there isn't room for another cut, if the market looks like it needs a boost.

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But you see the people who have bought up the bundles of FTB housing do not want "stability".

They want rampant and rapid HPI, especially when they are subsidising the tennants on a month on month basis.

As the economy worsens and HPI falls down to 0 and negative, many of the band wagon BTL muppets will bail in search of the next free lunch.

Then we will see how the "stability" holds up when people are piling for the exits. :lol:

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The collateral effect is likely to be more important, since higher house prices allow people to borrow more easily. However, this only happens if i) collateral is already a limiting factor in borrowing - if equity is already high this is unlikely; and ii) if people actually wish, in aggregate, to increase their borrowing - this depends on their expectations of future propsects.""

This is a classic example of textbook economics not corresponding to real world behaviour. In fact the Rational Economic Man doesnt really exist - fortunes have been made and lost on that insight.

Instead human economic behaviour is strongly motivated by peer group pressure and the desire not to stand out from the crowd. If everybody else is doing it - then you do it.

Even people who think they are standing out from the crowd just club together and find a new peer group (like HPC?) so that they can feel safe and secure again - within the crowd (though a smaller one)

Therefore King is wrong, people DO increase their borrowing on the basis of their homes, but NOT because they have thought about it carefully and concluded that they want to "in aggregate, increase their borrowing".

Instead they do it to feel good, to look good, and to keep up. We have all done it. I know I have - I lost fortune on stupidly expensive holidays and cars in the past. Yet when I was a student I had more fun travelling with other students and spending nothing.

It is all about peer pressure. Just look at the adverts for loans on TV. How do they square up with Mervyn's arguments.

King is either scared or irresponsible, reading between the lines I think he is the former. It is the likes of Ed Balls and G Brown that I am worried about.

From an ex "Old Labour" hack

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To me it looks like a sentiment war, to try and keep this permanantly high platue going, its a balancing act....

When house prices were falling, the VIs BOE and everyone else was saying there wasnt a problem, however they very suddenly changed to saying we were in deep trouble about two mounths ago, just as the market picked up, was this an attempt to slow things down. Just as things are starting to get gloomy again, everyone seems to be saying there isnt a problem, things have started booming again.

Everyone seems to be saying the exact opposite to what is actually happening on the graphs, and peoples sentiment (and i include the popularity of this website and hence the popularity of 'house price crash' on google!) Are the vi doing this in an attempt to dampen falls or rises, both of which would be disasterous?

If things are falling, say everything is fine, or spin it so it appears fine...

If things are rising, say everything is screwed to try and put people off...

How long will everyone be fooled for?

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  • 301 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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