Tuesday, April 17, 2007

Wealth from increased house prices an illusion

Evanomics: Is the China effect over?

The risk has long been that we would discover that underneath our strong economy, was brewing some hidden inflationary pressure. If that emerged, it would imply that some of our recent economic success had been built on shaky foundations: it would mean that interest rates had perhaps been "too low", that the borrowing we have done on the back of low interest rates was less affordable than we thought, that the house prices we have paid on the back of easy borrowing are unsustainably high, and that any sense of consumer wealth deriving from higher house prices is a mere illusion.

Posted by pedagog @ 04:42 PM (602 views)
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13 thoughts on “Wealth from increased house prices an illusion

  • The Beeb seem to be covering their bum today, don’t they?! Worried that things are about to go down the toilet and that they may be open to criticism for not reporting this likely outcome in the past? 🙂

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  • “wealth deriving from higher house prices is a mere illusion.”

    Really, what a surprise I would never have guessed it. You mean to say the whole thing has just been a Scam Evan. I’m just lost lost for words.

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  • sold 2 rent 1 says:

    Also Chinese and Indian wages are rising 8% and 6% respectively.
    Combine this with the commodity prices and the China effect is on its last legs.

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  • Shipbuilder says:

    Evan’s a smart cookie – i’ve never read anything by him that makes a prediction or offers a solid commitment – he’s all ifs and buts – ‘the risk is’, ‘that would imply’, ‘one has been able to imagine’ – he knows it’ll all come crashing down and doesn’t want to get caught in the fallout.

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  • Well the Beeb is waking up to what I’ve been saying here for over a year now – or is it two years?

    But then I have the advantage of being an importer of Chinese goods, so have a little advance knowledge.

    Yes, the deflation caused by Chinese imports is over – export prices from China (in dollars) are now rising by between 5 and 10% p.a. The rise in the value of the pound has temporarily blunted this, but only temporarily – $2/£ is not a natural exchange rate – for spending parity it should be somewhere around the $1.35/£ mark, and there’s no strong argument to support the notion that it will stay at it’s present level for any length of time.

    So despite our Merv’s hopeful letter to Gordon, there is no good reason for inflation to trundle back towards 2% of it’s own accord, and small interest rate hikes are not likely to have a major impact. A 1% increase in interest rates by the end of the year is quite likely – for a household with a £200k mortgage paying some tax at the higher rate, that will soak up gross income of nearly £3.5k p.a. – which for most households is not small change..

    ..and will it mess up the books of the BTL ‘portfolio’ brigade? – oh yes…!!

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  • Another Evan Davies (NuLabor Muppet) quote ‘If the flow of cheap imports dries up, either because the Chinese export prices rise or because our exchange rate falls, then we have to adjust the domestic economy to slower growth and restrained consumer spending.’

    You mean to say that the UK economy is built on cheap money withdrawn from House Price Equity buying cheap chinese tat and when we can’t afford to buy more stuff the whole economy will stagnate as the retail sector goes tits-up!

    Most sane people involved in manufacturing knew this would happen years ago!

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  • What was that Evan!!??

    it would imply that some of our recent economic success had been built on shaky foundations: it would mean that interest rates had perhaps been “too low”, that the borrowing we have done on the back of low interest rates was less affordable than we thought, that the house prices we have paid on the back of easy borrowing are unsustainably high, and that any sense of consumer wealth deriving from higher house prices is a mere illusion.

    Oh – you’ve have changed a bit from what you said 6th March 2007:

    I’m willing to be persuaded that whatever the specifics of buy-to-let or private equity, the UK economy generally may not be too frothy at all.

    After all, there can be small bubbles in a calm pond. And in the economy generally, things look less worrying. We saw that after the dotcom spectacle when the UK economy pulled out despite a huge equity crash.

    Also encouraging is the fact that Britain’s debt boom seems to have peaked – at least the consumer credit side has slowed down; and so far, the banks are making large enough profits to be able to write-off a big chunk of bad debts without falling into crisis themselves.

    Unemployment is not rising and even if it begins to, there will probably be some reverse migration to dampen the impact here (as some central Europeans will inevitably choose to return home if getting a job in the UK proves tough).

    Inflation is not as high we had feared it might be a few weeks ago, so if the economy dives, there is room for the Bank of England to cut rates and stimulate the economy, an option that was not available in the late 80s, when we had a recession, but were also trying to beat down inflation.

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  • Two things astound me about this:
    1 – The media are slowly waking to what we have been banging on about on here for an age. The miracle economy is no
    such thing and the cyclical nature of the markets implies that base rate would most probably return to their long-term norm

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  • Bit trigger happy tonight:
    Two things astound me about this:
    1 – The media are slowly waking to what we have been banging on about on here for an age. The miracle economy is no
    such thing and the cyclical nature of the markets implies that base rate would most probably return to its long-term norm of around 7%-8% when the deflationary pressure from Chinese goods ran it course, which of course it always would.

    2 – The other interesting thing is that it is the ministry of truth reporting this.

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  • Actually the escape hatch of sorts could be well and truly closed if Japanese rates start to rise. That would add an interesting catylist to the mix.

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  • I also have noticed that the content in here is starting to get more popular. Today was the first time I saw a ”
    bad news” UK property article on google’s home page.

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  • The Bald Man says:

    Gordans miracle is finally being exposed in the media. There is no miracle economy without HPI and MEWing!

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  • Good point nearly30.

    I’m glad someone is pointing out that the Pied Piper is playing everyone else as well as their own flute.

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