Friday, October 26, 2007

The real impact of the credit crunch

House prices don't panic says Item club, but maybe we should

One of the most absurd pieces of logic we have seen permeate the business media of late is that the housing market is safe from a crash because repossession levels remain low. This is a ridiculous argument for the following reason.Up until recently it was actually quite difficult to get yourself into so much financial trouble that your property ended up being repossessed. Why? Well, any time you had even a hint of financial problems, all you had to do was use the combination of soaring asset prices and easy availability of credit to top-up your mortgage.But this option has been removed

Posted by michael baxter @ 11:20 AM (838 views)
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3 thoughts on “The real impact of the credit crunch

  • This is an interesting comment,
    “What will happen when the baby boomers retire, if they hope to use their home’s equity as their pension? We will see a rush of money coming on to the market which is not backed by our ability to produce. Inflation will soar, and interest rates will rise, until house prices fall to a value that means demand and potential output are in equilibrium.”
    I always thought this is what will happen in Japan, when the savings start being spent, which I believe is why the Japanese government has never forcefully reflated the economy, because they know inflation is coming ( I don’t know if this is true or not) in the end.

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  • no more ridiculous than an argument that was around for years that it didnt matter how much personal debt was outstanding because it was secured on assets valued at the same.

    Just think about that nonsensical, circular argument. So called respectable commentators and financial journalists were stating it like it was sound.

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  • stillthinking: You’re absolutely correct. If everybody saved lots for their retirement, then come retirement time there will be lots of money chasing ever-fewer workers (“our ability to produce”, as your quote says). Inflation would be the obvious result. The easiest way for governments to fix this problem is to allow massive immigration, thereby increasing the number of workers and keeping prices down for pensionners. Keeping a lid on inflation also means they don’t have to pay pensionners more (pensions are index-linked) so for the government immigration is a no-brainer. As for the effect it has on society….

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