Housing crisis not caused by undersupply, but by interest rates [article]

[Riedquat]

5 minutes ago, iamnumerate said:

There are places where prices are cheaper than 2007 - despite interest rates dropping since then, e.g. Hartlepool.

https://www.telegraph.co.uk/property/house-prices/parts-uk-have-suffered-lost-decade-house-prices/

Urgh, what a ghastly article!

However look at the graphs and you can still see the same turning points.

[BorrowToLeech]

2 hours ago, iamnumerate said:

True but I know places where prices have doubled since 97 others 6 times more.  If it were just interest rates - nothing to do with people moving to the country shouldn't they all have risen by the same amount?

No, you wouldn’t necessarily expect that, but in any case this is a straw man. Of course there are other factors, and regional variation will occur regardless of the overall, national-level changes.

Even if you believe those other factors are significant, falling mortgage rates will push up house prices dramatically, and any other contributory factor is additional to that, rather than an alternative to it.

[iamnumerate]

2 hours ago, BorrowToLeech said:

No, you wouldn’t necessarily expect that, but in any case this is a straw man. Of course there are other factors, and regional variation will occur regardless of the overall, national-level changes.

Even if you believe those other factors are significant, falling mortgage rates will push up house prices dramatically, and any other contributory factor is additional to that, rather than an alternative to it.

But house prices have not risen throughout the country despite mortgage rates falling everywhere.

Saying they probably would have fallen more at normal mortgage rates.  I do think interest rates are a factor as immigration.

For example. Fergus Wilson has loads of tenants from other countries if mortgages were to rise or those tenants were to leave the UK he would be in trouble. (I saw the programme about him).

[nothernsoul]

Fergus wilson admitted he was saved by ultra low rates. Without them he faced repossession and all those properties flooding the market. Local estate agents were bricking it. With base rates at an historical average it is not possible for buyers to meet prices currently asked. A lot of existing owners would not be able to service their mortgage debt either leading to repos on the market, crash. In this case,  all other factors, including demand, become secondary. 

 

[iamnumerate]

31 minutes ago, nothernsoul said:

Fergus wilson admitted he was saved by ultra low rates. Without them he faced repossession and all those properties flooding the market. Local estate agents were bricking it. With base rates at an historical average it is not possible for buyers to meet prices currently asked. A lot of existing owners would not be able to service their mortgage debt either leading to repos on the market, crash. In this case,  all other factors, including demand, become secondary. 

 

True but I think lots of immigrants leaving the UK would harm him as well.

[scepticus]

I think the chain of causality goes:

1. Exogenous factors push down on market interest rates.
2. Lower market interest rates require CBs to follow suite with lower bank rates (otherwise a yield curve inversion would occur).
3. All asset prices rise as a result including bonds, stocks and real estate.

However this only lasts until rates hit zero. At that point, asset price rises can only be induced to keep rising by fiscal policy that spews enough additional safe assets (govt. bonds) into the economy. 

Negative interest rates set by the CB also cannot perpetuate asset price rises over the long run because the NIRP regime is inherently deflationary.

What are the exogenous factors then? A few ideas:

• Demographics (ageing societies will tend to result in lower rates)
• A fiat monetary system is only stable at 0% nominal rates. Hence will tend to 0% from any starting point.
• Rate of genuine technological progress that leads to growth is slowing.

I think the majority of HPI can probably be laid at the door of one or all of these 3. Rates are just the canary.

 

[BorrowToLeech]

14 hours ago, iamnumerate said:

But house prices have not risen throughout the country despite mortgage rates falling everywhere.

Saying they probably would have fallen more at normal mortgage rates.  I do think interest rates are a factor as immigration.

For example. Fergus Wilson has loads of tenants from other countries if mortgages were to rise or those tenants were to leave the UK he would be in trouble. (I saw the programme about him).

Prices have risen throughout the world, never mind throughout the country. This does not mean they have risen absolutely everywhere.  

Shut down the local factory, and everyone will move away, regardless of what interest rates are doing, so there will always be some places that aren’t following the general trend. 

[winkie]

1 hour ago, BorrowToLeech said:

Prices have risen throughout the world, never mind throughout the country. This does not mean they have risen absolutely everywhere.  

Shut down the local factory, and everyone will move away, regardless of what interest rates are doing, so there will always be some places that aren’t following the general trend. 

Prices have risen throughout the world if purchasing in pounds.....some places where there are jobs prices are falling, some places where there is a shortage of work prices are high.......in the future how expensive a place or an area is will have little to do with the work available in that area because many more will be living in one place and earning a living from another place.....many will not even be working at all, their income will not come from any work they do.?

[Captain Kirk]

On 28/08/2019 at 17:21, scepticus said:

I think the chain of causality goes:

1. Exogenous factors push down on market interest rates.
2. Lower market interest rates require CBs to follow suite with lower bank rates (otherwise a yield curve inversion would occur).
3. All asset prices rise as a result including bonds, stocks and real estate.

However this only lasts until rates hit zero. At that point, asset price rises can only be induced to keep rising by fiscal policy that spews enough additional safe assets (govt. bonds) into the economy. 

Negative interest rates set by the CB also cannot perpetuate asset price rises over the long run because the NIRP regime is inherently deflationary.

What are the exogenous factors then? A few ideas:

• Demographics (ageing societies will tend to result in lower rates)
• A fiat monetary system is only stable at 0% nominal rates. Hence will tend to 0% from any starting point.
• Rate of genuine technological progress that leads to growth is slowing.

I think the majority of HPI can probably be laid at the door of one or all of these 3. Rates are just the canary.

 

If low rates were due to exogenous factors then there would be no need for QE. Just keeping the base rate / short term rate in check would prevent yield inversion.

[scepticus]

On 29/08/2019 at 18:04, Captain Kirk said:

If low rates were due to exogenous factors then there would be no need for QE. Just keeping the base rate / short term rate in check would prevent yield inversion.

Don't understand your point. Expand?

[Captain Kirk]

11 hours ago, scepticus said:

Don't understand your point. Expand?

Well, ZIRP reduces short term borrowing costs, whilst QE reduces long term borrowing costs. Assuming a CB is trying to keep the yield curve in check (+ve gradient everywhere), it would have to reduce the base rate due to the effects of QE, which is to pull down on the yield curve, if it hadn't already.

The exogenous factors you point out probably are relevant now, but they probably wouldn't be so important had the banking system not been bailed out and been allowed to adjust itself and settle naturally. The CBs did ZIRP and QE to reflate the bubble. The only way a bubble economy can keep going is for borrowing costs to be at zero. But this causes all kinds of other problems.

[zugzwang]

1 hour ago, Captain Kirk said:

Well, ZIRP reduces short term borrowing costs, whilst QE reduces long term borrowing costs. Assuming a CB is trying to keep the yield curve in check (+ve gradient everywhere), it would have to reduce the base rate due to the effects of QE, which is to pull down on the yield curve, if it hadn't already.

The exogenous factors you point out probably are relevant now, but they probably wouldn't be so important had the banking system not been bailed out and been allowed to adjust itself and settle naturally. The CBs did ZIRP and QE to reflate the bubble. The only way a bubble economy can keep going is for borrowing costs to be at zero. But this causes all kinds of other problems.

Flaring nonsense. The international primary dealing system would have failed outright without State intervention (which continues to this day).

Industrial civilisation would have effectively ended the day Lehman Brothers closed its doors.

[Peter Hun]

 

https://www.bbc.co.uk/news/extra/pjfxZM72Gj/house-buyer-time-machine

Quote

Inside the paper, there were dozens of homes for sale - and the idea that “new was good” was very evident. 

A two bedroom flat in a new 10-storey block of flats on Worthing seafront was priced at £5,150.

The same money would have bought a new three bedroom semi about 10 miles from Brighton - on Wimpey Homes’ Roman Way Estate in Burgess Hill. The newspaper advert lists the benefits of buying brand-new. New homes featured an immersion heater, veneered internal doors and plastic rainwater pipes and gutters.

£5,150 in today’s money is just over £65,000. 

The price tag may sound cheap, but wages were much lower compared with today’s earnings.

 

Millions of Britons – somewhere between two-thirds and three-quarters – did not have a bank current account in 1968.

To get a mortgage, a couple like Tacita and Charlie would have probably opened a savings account at a local building society – to build up a deposit – and then applied for a home loan at that branch.

“And even then, some people would have to wait for months,” says personal finance expert Prof Sharon Collard from the University of Bristol. “Building societies generally only lent money they actually had. Financial services hadn’t yet opened up to the international money markets.”

In 1968, our couple would have a combined gross income of £1,500 a year.

 

Quote

 

The sums for October 1968:

·          Tacita and Charlie have a 2019 gross income of £43,500, which is slightly above average for couples in their mid-20s

·          In 1968, a couple in a similar position would have an estimated gross income of £1,500 – that’s £19,000 in today’s money

·          After saving a rough 20% deposit, they could borrow about £2,750 at an interest rate of 7.6%

·          In 1968, they could buy a property costing about £3,400 – that’s just over £43,000 in today’s money

 

 

[Captain Kirk]

1 hour ago, zugzwang said:

Flaring nonsense. The international primary dealing system would have failed outright without State intervention (which continues to this day).

Industrial civilisation would have effectively ended the day Lehman Brothers closed its doors.

So you keep saying, but I don't agree with you.

Plus, I don't see how you can say I'm wrong when you only have to look at the yield curve over the last 8 years and listen to CBs or read their websites. It's no secret they are reflating bubbles that they helped create and that keep popping.

Edited August 31, 2019 by Captain Kirk

[doomed]

1 hour ago, zugzwang said:

 

Industrial civilisation would have effectively ended the day Lehman Brothers closed its doors.

Hyperbole

[scepticus]

6 hours ago, Captain Kirk said:

Well, ZIRP reduces short term borrowing costs, whilst QE reduces long term borrowing costs. Assuming a CB is trying to keep the yield curve in check (+ve gradient everywhere), it would have to reduce the base rate due to the effects of QE, which is to pull down on the yield curve, if it hadn't already.

The exogenous factors you point out probably are relevant now, but they probably wouldn't be so important had the banking system not been bailed out and been allowed to adjust itself and settle naturally. The CBs did ZIRP and QE to reflate the bubble. The only way a bubble economy can keep going is for borrowing costs to be at zero. But this causes all kinds of other problems.

I see, thanks. The banking system had to be bailed out because most deposits were insured, and had those banks gone down the taxpayer would have had to make good on all those deposits.

So I would counter that the purpose of QE was primarily designed to keep banks afloat to avoid taxpayers being on the hook for paying trillions in deposit insurance.

The need for a bailout at some point in future was kind of guaranteed at the point where deposits became insured. Turns out that that point was the point at which the banking system had created as much credit as it was capable of doing. Which in hindsight, was the point at which rates fell near 0 due to exogenous factors.

Its true that more sensible macro management from the late 90s to mid noughties may have put the data by which this occurred back a bit, but it still would have arrived.

 

[zugzwang]

5 hours ago, Captain Kirk said:

So you keep saying, but I don't agree with you.

Plus, I don't see how you can say I'm wrong when you only have to look at the yield curve over the last 8 years and listen to CBs or read their websites. It's no secret they are reflating bubbles that they helped create and that keep popping.

Liabilities in the shadow banking system and the banking system proper were 30x global GDP after the Crash. Typically, the task of repairing or writing down those non-performing loans took 3-4 years, though the likes of  Deutsche still carry significant amounts of legacy debt even now. A decision was taken circa 2011 to re-inflate the UK economy using a combination of domestic housing subsidies and Chinese flight capital. The rest of the world adopted a broadly equivalent approach, inspired no doubt by economists from the World Bank and the IMF.

[cnick]

35 minutes ago, scepticus said:

I see, thanks. The banking system had to be bailed out because most deposits were insured, and had those banks gone down the taxpayer would have had to make good on all those deposits.

So I would counter that the purpose of QE was primarily designed to keep banks afloat to avoid taxpayers being on the hook for paying trillions in deposit insurance.

The need for a bailout at some point in future was kind of guaranteed at the point where deposits became insured. Turns out that that point was the point at which the banking system had created as much credit as it was capable of doing. Which in hindsight, was the point at which rates fell near 0 due to exogenous factors.

Its true that more sensible macro management from the late 90s to mid noughties may have put the data by which this occurred back a bit, but it still would have arrived.

 

 

What if the banking directors were not (had not been) protected by limited liability?

http://www.edmundconway.com/2012/10/limited-liability-is-the-real-issue-with-banks/

??

[scepticus]

43 minutes ago, cnick said:

What if the banking directors were not (had not been) protected by limited liability?

http://www.edmundconway.com/2012/10/limited-liability-is-the-real-issue-with-banks/

??

Well no matter how rich the directors might be, they wouldn't have enough assets to cover trillions of customer deposits would they?

Personally I do think that savers should either get a choice - 0% interest with deposit insurance OR an interest paying account which is NOT insured by the taxpayer. Getting paid interest for taking no risk is a free lunch and should never have been offered.

This is the rotten apple at the heart of our monetary system on which the various parasites in the system have been gorging.

[Democorruptcy]

A Tony Blair institute chap has really written:

Quote

If not a shortage of housing, what lies behind the explosion in UK house prices from around 4.5 times median household income in 1996 to a multiple of around 8 today?

The first thing that Tony did when elected was the 1998 Bank Act to make the Bank of England independent.

3x Main + 1x Second income has become a BoE "no more than 15% of mortgages greater than 4.5x household income".

The switch from single income to Joint Income Mortgage Just About Managing (JIMJAMs) has led to triple the mortgage lending.

House prices would drop 50% if we went back to 3x Main + 1x Second income

1998, 3x £18k plus 1x £6k = £60k house

2019 4.5x £25k + £15k = £180k+ house

2019 could be 3x £25k plus 1x £15k = £90k 

[Captain Kirk]

3 hours ago, scepticus said:

The banking system had to be bailed out because most deposits were insured, and had those banks gone down the taxpayer would have had to make good on all those deposits.

I'm not sure most deposits were insured. In the UK it was 100% of the first £2,000 and 90% of the next £33,000. The bigger values came after the GFC. Personally, I don't think the government should be in the business of insuring deposits.

[scepticus]

1 hour ago, Captain Kirk said:

I'm not sure most deposits were insured. In the UK it was 100% of the first £2,000 and 90% of the next £33,000. The bigger values came after the GFC. Personally, I don't think the government should be in the business of insuring deposits.

Right but that was at a single institution and of course 95% of people at the time presumably had a lot less than 35K savings in any case. The political reality is everyone (including old ladies, the disabled, struggling single mums, local small firms etc etc)  felt safe as houses thanks to these guarantees, so the political and social costs implied as well as financial meant that a bailout was a shoe-in.

There is now an opportunity to fix this of course, but with rates at 0 anyway, and maybe NIRP on the way, and banks (esp investment banks) struggling to turn a profit, perhaps this is no longer the big problem it was.  

In fact this is related to one of my exogenous factors - rates have come to 0% because that is the average return one should expect for taking no risk. And note that the CB rate is a risk-free rate, because it is the interest it pays on risk free deposits of bank reserves at the CB.

Another way of putting this is that in a widely financialised economy where everyone has a bank account that is generally pretty low risk, the average rates uninsured depositors should be getting must be close to 0 for the system to find a stable point. Various people have pointed to 5% rates being the norm for 300 years, but of course wind back that far and you find depositors lose their money all the time, and further, only a tiny portion of the population has a bank account or engages in borrowing or lending. Everyone else had what few pennies they had in a tin hidden away somewhere in their hovel.

The fact that asset prices have risen due to low rates is neither here nor there - the only long run situation that can obtain is that zero risk investments get 0 returns - at best. So my view is that all else equal, risk free rates should be 0 and asset prices should be whatever they need to be to fit in with that. Having said that though obviously other factors like governments running perpetual deficits will still cause inflation and push nominal prices of assets up. Correct policy is therefore:

• ZIRP CB rate, and assets priced on the expectation that continues forever. Some minor shoter term (months to years) adjustments above and below 0% allowed subject to natural growth and contraction of economy.
• Balanced government budget. Expenditures based on taxation.
• Where the government borrows long term, those bonds should be tied to specific projects and offer both a return vs the risk free rate and potential for losses.
• No deposit insured savings aside from a small allowance for each private individual and an option to take a larger allowance at a negative rate.
• NO more bailouts for private financial institutions.

That would be a stable, transparent and robust system.

[Captain Kirk]

11 minutes ago, scepticus said:

In fact this is related to one of my exogenous factors - rates have come to 0% because that is the average return one should expect for taking no risk. And note that the CB rate is a risk-free rate, because it is the interest it pays on risk free deposits of bank reserves at the CB.

I agree you should get 0% return for taking no risk, but there is still risk in non-deposit banking activities and rates should reflect that risk. I agree, if governments are to guarantee deposits then they should return 0% or at most an inflation rate of return.

Don't forget risk has now been been socialised because banks have colluded with governments to ensure they should never be allowed to fail. So now moral hazard has moved the risk on to all of us. Lending people money to buy houses or anything else is just as risky today as it has always been.

[Arpeggio]

1 hour ago, Captain Kirk said:

I agree, if governments are to guarantee deposits then they should return 0% or at most an inflation rate of return.

Might this just mean the deposits that are safe and therefore more attractive for the banks to use casIno style, now don’t have obligations for banks to pay interest on either.......or are we talking nationalisation?

Edited August 31, 2019 by Arpeggio

[zugzwang]

2 hours ago, Captain Kirk said:

Don't forget risk has now been been socialised because banks have colluded with governments to ensure they should never be allowed to fail. So now moral hazard has moved the risk on to all of us. Lending people money to buy houses or anything else is just as risky today as it has always been.

The collusion you allude to is actually known as the Primary Dealing network. It's been in continuous operation since 1960, or thereabouts.

The next crisis is going to develop in the shadow banking system - just as the last one did - beyond the reach of any regulator or central bank.

At least half of US mortgages are now originated by financial entities that aren't banks.