Tuesday, July 10, 2007

A 3-pronged approach (3 prongs where?)

Darling in pledge on new housing

The press is red-hot about the first government step into the housing market... are they posed to destabilize it? The Guardian stresses the "more houses" side of the announcement. I honestly think the government will not mess with the mortgages.. but let s see.

Posted by confused76 @ 10:14 AM (488 views)
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22 thoughts on “A 3-pronged approach (3 prongs where?)

  • “Mr Darling said more fixed-rate home loans of up to 25 years were needed ”

    Interesting idea. But what bank would be willing to stick their neck out to offer such a product – especially now when we have gone from a period of complacency about low interest rates to a period of worry about rising interest rates. And furthermore, what hedge fund or pension fund, who current mortgage bond holdings are causing them sleepless nights, would be willing to buy that risk from the banks. As I see it, this idea would require 2 things to make it work: – 1) a very high rate of return (i.e. a very high fixed interest rate -way above 6%pa) and 2) that banks keep a lot more capital on their own books. The public won’t want the former and the banks won’t want the latter.

    On reflection, this is a political publicity stunt. It makes the government look as though they are trying very hard to do something. Their proposal is laudable and on the side of the consumer/voter. But anybody who takes a long hard look at this will see it is impossible.

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  • “He told the newspaper there ‘simply aren’t enough houses’ ”

    ……………if people are going to use house as pension investment, as well as primary residences!!!!!!!!!!!!

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  • Shanty towns R us ?

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  • sold 2 rent 1 says:

    A 25yr mortgage may not pay off.

    There are only 2 ways out of this mess – hyperinflation or deflationary depression.
    With a depression IRs will crash to the floor so a 25 yr deal looks poor

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  • If they really want to do something about this mess, they should nationalise all banks, write off all debt, withdraw credit cards as a public hazard, and start again!

    ……..Too radical?

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  • Yes, Royston, too radical, as well as illegal and unconstitutional.

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  • george monsoon says:

    I think its common sense Royston…

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  • Yeah, there arn’t enough houses. Which is why Bovis homes shares dropped 11% yesterday after poor sales of new homes…

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  • tipping point says:

    And just how will the supply of 25 year mortgages be increase? If the answer is for the government to underwrite the loans then the banks will be very happy since it will allow them to offload all their subprime debt before a crash happens. Win win for the banks, loose loose for the tax payer.

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  • Good point, TP,

    I hadn’t considered the underwriting option – it is effectively what the Americans do with Fannie May and Freddie Mac. If they do try this, however, it will flood the market with a new wave of mortgage credit and force house prices even higher – making the eventual disaster even worse. However, if New Labour can keep the bubble afloat until they eventually lose power, they probably think that’s OK.

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  • stillthinking says:

    I am very interested in sold 2 rent’s hyper-inflation or deflationary depression. The government are just mouthing. Where do they get the time to implement reforms? What the reforms are is irrelevant. I know a Japanese girl who works in a Japanese club for businessman. They are all bankers over from Tokyo. Apparently a quite popular topic is how the UK is identical to Tokyo just before the crash, which they have already seen first hand. So they must think we go into a deflationary depression. Also, recently the Japanese government already reneaging on their, admittedly very generous, pensions. So they are still in the poop 17 years later! Hopefully our public sector people won’t get theirs either. I have no wish to be mean to others, but they do nothing apart from pay consultants whenever they want something done. Guess my job.
    A labour government and just something about the UK denizens makes me think it will be inflation though. Labour won’t be able to push 2% rises on the massive glut of lazy public workers. They will have strikes and then give in, after all, they are paying their own voters.
    I really wish all this would happen a bit faster. I can’t handle the tension of not knowing. Inflation or deflation. Wow! And nobody knows which. I predict inflation. Other views?
    For some reason deflation seems more exciting though.

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  • still thinking. As I am in cash now my ideal scenario would be .

    Inflation 1%, interest rates 6.5- 7%, house price crashes by 50%. time frame 12 months.

    How would deflation affect cash?

    Buy gold then?

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  • ST,

    We are already on the inflationary path. Whether it is by design or not, CPI does a very poor job of measuring inflation. The cost of living, as perceived by the consumer, is going up. Rents / housing costs has risen a lot. Wage agreements are well above CPI growth. I expect 2 things in the next few years. First, at some point the government will concede that CPI does a poor job of capturing inflation as experienced by UK consumers. Second, the government will no longer be able to keep the focus on relative annual growth rates (i.e. CPI growth V wage growth V RPI growth) because people will demand that levels will be compared instead – e.g. what % of my salary goes on rent/mortgage/food/transport compared with 10 years ago?. The latter would be a far more revealing measure of true inflation than comparing 2 inaccurate gauges.

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  • Stoatgobbler says:

    Buy Gold. Nice ETFs available now. Also, a big stack of Premium Bonds makes a lot of sense.

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  • sold 2 rent 1 says:

    The inflation v deflation debate is interesting.
    Having thought hard about this topic for 8 months I come down on the side of deflation.

    Inflation is in our system but there is no evidence of a wage-price spiral that is required for hyper-infaltion.
    Today’s rule is that once a wage gets too expensive then that job gets offshored (eventually).
    There are still loads of jobs that can and will get offshored, especially from the professional sector that hasn’t really got started yet.

    Japan’s IRs hit 8% before crashing to the floor so we can easily follow the deflationary path.

    Governments cannot be seen to be ignoring inflation, hence the MPCs 5 rate rises. There is “world” inflation in the pipeline and sterling has yet to devalue.
    The west will fight inflation all the way into a deflationary depression.

    In the 1970’s the consumer didn’t have much debt. Any recession could be fought by taking on more debt. That increase in debt fuelled the inflation.

    In 2007 debt levels are at breaking point and there can be no debt lead recovery this time.
    The debt has to be destroyed by bankrupcy and reposession.

    As the “long wave analyst” puts it
    http://www.thelongwaveanalyst.ca/downloads/Kondratieff_Inflation_Deflation_Cycle.doc
    IR in a k-winter: Rates fall, then rise in the credit crunch, then fall much lower.

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  • talking rot says:

    S2R1

    I was not interested in matters financial when Japan ploughed into the swamp. Wow! Interest rates hit 8% before everything went pear-shaped? How is it possible that interest rates go high just when an economy is falling into deflation? Was the deflation caused by too high interest rates then?

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  • sold 2 rent 1 says:

    TR,

    Interest rates go that high to halt a runaway economy.
    Assets and debts are so high that consumers hibernate.
    Consumption falls off a cliff and then stays in the gorge.
    Assets fall and debts default.
    IR rates drop right down to stimulate the collapsing economy.
    But it’s too late. The consumer is not coming out to play again, even for virtually free money.
    Prices of goods fall. The consumer fears unemployment and knows he can buy the same product next month for a slightly cheaper price.
    This is why deflation is the most feared of all situations.

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  • S2R1,

    And how do you think gold will do well in a deflationary situation ?

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  • stillthinking says:

    So the problem is that it is impossible to keep the balance between the two, like balancing a pin? There is no magic interest level which would slow the runaway economy and also allow the consumer to keep borrowing, but a healthy borrowing.
    In the UK situation, won’t the borrowing stop by itself because most people are maxed out? They can’t take any more debt on anyway. And also, given the emergence of a social divide why would I as pauper necessary notice huge funds floating around above my head. Or to put it another way, the South Sea bubble was an asset bubble, but I don’t think that the price of basic food staples of the population would have been affected. As potatoes are grown to meet demand and a suddenly richer person wouldn’t consume more.
    So inflation could just push up assets and not have an affect, or an extremely slow trickle down effect on 95% of people. The only resource we have capacious appetites for is land.
    Is this wrong?

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  • sold 2 rent 1 says:

    ST,

    In a normal recession IRs are dropped to allow a debt lead recovery.
    Once debt levels reach a maximum and assets start falling, no level of IR can entice more borrowing.

    See US debt graph
    http://www.thelongwaveanalyst.ca/downloads/US_Dept.doc

    WS,

    The good thing about gold is that it does well in both deflationary and inflationary environments
    See Homestake Mining company graph
    http://www.thelongwaveanalyst.ca/downloads/US_Economy_1910-1940.pdf
    Look closely and you will see it lost 20% of its value after the 1929 crash. After that it recovered nicely.
    This is why I am holding off buying gold until after the stocks crash this autumn.

    thelongwaveanalyst has a graph for every occasion

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