The Faster House Prices Fall, The Better Off We’ll All Be

[interestrateripoff]

http://www.telegraph.co.uk/money/main.jhtm.../04/ccom104.xml

Something must be done! This is something. Therefore it must be done. Following such logic, governments have blundered into all sorts of interventions which they have subsequently lived to regret.

By contrast, last week's interim report from Sir James Crosby on the mortgage market came up with virtually no proposals for action. But was this a mark of failure or of success?

The essential motive for action is the belief that something has gone wrong with the technicalities of the mortgage market which, if only it could be sorted out, could return the market to something like normality. The technicality in question is the drying-up of securitised mortgages - the bundling-up of mortgages for sale to investors unconnected with the original loan.

This is important because until the credit crunch began last August, it was the growth of this market which allowed lenders to offer such huge volumes of mortgage funds on such attractive terms.

So you can see a potentially attractive course of action. Fix the securitised mortgage market: that would mean a resurgence of mortgage supply; that would stop the downward pressure on house prices; that would alleviate pressure on banks and on consumers - and that would stop the recession.

But there are three substantive obstacles to successful action. The first lies in the diagnosis. What has gone wrong in the housing market is not the result of a technicality - it is the natural consequence of the bursting of a bubble which was inflated by the excessive flows of funds into mortgages, including through the securitised route.

It may well have been the collapse of the securitised debt market which prompted the current weakness of mortgage lending but, as Crosby acknowledges, things have now moved on.

Because it is now widely believed that house prices are likely to fall, even if you bombarded lenders with funds they would not rush to lend. The combination of falling prices, a worsening economic climate and shortage of capital would make them reluctant. Accordingly, money would only be available on much worse terms than it was before.

Moreover, for similar reasons, mortgage borrowers are now much more reluctant to borrow.

..........

How can this be squared with the objective of not letting the crisis bring down the whole system and plunge us into a depression? If a general economic downturn is in prospect, then relief can be provided by reductions in interest rates and/or fiscal stimulus through lower taxes or increased spending. If there is a case for propping up individual banks, that can be undertaken in the way it eventually was with Northern Rock.

But don't prop up house prices. They have got wildly out of line with the economic fundamentals. They can only get back into line by falling or by the fundamentals adjusting to those prices. The latter would mean higher wages and salaries and that would entail much higher inflation for several years. That is a route we should want to avoid at almost all costs. Accordingly, it is house prices that have to do the adjusting. The faster that they fall, the sooner that they can get back to a reasonable level and normal conditions can resume.

The Government has banged on ad nauseam about the need for "affordable housing" and has introduced various ill-conceived measures to promote it. In fact, the best way to make houses more affordable is for prices to carry on falling. Like it or not, that is what is going to happen.

Continues at the link.

And normal is??

If only someone had hindsight we might know how this will all end, has there been any economic modelling what unemployment etc... will be or aren't the economists clever enough to guess this one?

[symo]

The best way to create affordable housing is to raise interest rates to 10%. Do it Merv, do it!

[Realistbear]

There are umpteen ways of bailing out the housing market -

provided the Government is prepared to spend enough money

. But whatever the Government spends on this initiative will not be available elsewhere

.

Gordon's HPI-MEW-BTL driven economy is over and I cannot see how or why the taxpayers should attempt to prop it up through even more taxation. The crash will take its course and the market will find its own level in a few year's time. The best government can do is to learn from its mistakes and never repeat what Brown did again (credit-driven bubble exacerbated by unrestricted and unregulated lending practices, a.k.a. "miracle economics").

[eastleighfan]

The Government has banged on ad nauseam about the need for "affordable housing" and has introduced various ill-conceived measures to promote it. In fact, the best way to make houses more affordable is for prices to carry on falling. Like it or not, that is what is going to happen.

Says it all really . If house prices fell down to a reasonable level , they would become more affordable affordable .

[ken_ichikawa]

The best way to create affordable housing is to raise interest rates to 10%. Do it Merv, do it!

thats way too conservative, should be 35%.

[Once in a lifetime]

I just get the impression the spin doctors will try to 'claim credit' for cheaper housing in a few years time.

[dances with sheeple]

I just think the extent of the collapse is going to shock even hardened HPCers and stun journalists and politicians into a numb silence as they rock back and forth drooling and wondering what to do. Oh and a lot of sheeple are going to get their fluffy little arses melted wakening them up forever to the fact that they are not posh and becks. However, I`ve been saying this for a while, when do we start to see real meltdown evidence that can`t be ignored by the bbc?

[macfarlan]

Normality in this case is the 'house prices only ever go up' type of normality that some like to believe, after all it has been the norm for the last 10 - 12 years.

This is the kind of normality being sought by the people who repeated this mantra ad nauseum.

But it was merely an opinion, not some inherent truth.

As they are discovering now, saying it loud doesn't make it true.

The Government has banged on ad nauseam about the need for "affordable housing" and has introduced various ill-conceived measures to promote it. In fact, the best way to make houses more affordable is for prices to carry on falling. Like it or not, that is what is going to happen.

Says it all really . If house prices fell down to a reasonable level , they would become more affordable affordable .

Spot on.

[Bloo Loo]

politicians of both main parties keep harping on about "getting the economy back on track"

My view, is the economy IS getting back on track.

[interestrateripoff]

I just get the impression the spin doctors will try to 'claim credit' for cheaper housing in a few years time.

I think that's just being cynical, they'd never do anything like that.....