Tuesday, June 2, 2009
Some reassurance for the bears
House Price Gains Can’t Reboot the U.K. Economy
There are signs that the British housing market may be touching bottom, with prices and mortgage approvals rising in the last month. Both suggest that the worst of the slump is over. But it would be a big mistake to read too much into those figures -- and it certainly isn’t a signal that the U.K. economy is pulling out of the steepest recession in the last 20 years. While house prices may steady, they still have further to fall. Though property inflation may have led the last boom, it won’t lead the next one. The U.K. economy still has plenty of pain ahead. In a market that is falling, there will always be one or two months when prices edge up. It’s called a blip.
Posted by little professor @ 08:01 AM (1156 views)
5 thoughts on “Some reassurance for the bears”
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alan says:
“The U.K. still needs to go through a painful period of adjustment, during which it creates new global industries. An economy built on ever-increasing debt, rising house prices, huge trade deficits and rising government spending isn’t going to be much of a recipe for surviving the post credit-crunch world. The U.K. has hardly even begun the process of re-constructing its economy”.
Just about sums it up!
stillthinking says:
At the moment, any house price recover is impossible, and the ongoing crash will be truly dramatic.
However,
it occurs to me that the UK governments plan to sell gilts directly to the public is a rather cunning plan in some ways. They will presumably offer returns slightly above banks without the risk of banks so I can see the issues being a success. At the moment one of the reasons that banks cannot lend is due to insufficient capital and one of the reasons for that is because people have moved their savings to accessible money, ie not term deposits where you cannot withdraw for some length of time.
So this money is moved to gilts, the money the government gains is spent on a) maintaining state spending a la New Deal and b) moving that money -back- to the banks in the form of capital.
Which does rather neatly solve state funding problems and also, people who don’t want to put capital into busted banks end up doing exactly that, putting capital into busted banks using the government as a proxy guarantor.
Meaning essentially that the banks are recapitalised by the taxpayer.
The downside to all this is the liabilites taken on by the taxpayer, because suddenly all risks are carried by government, and also price-discovery for capital is broken. Further, although I don’t personally see inflation taking off soon, these funds are tied up.
The risk for the population buying bonds is the same as usual, a collapse in price or government debt becomes eventually untenable.
This is I think why the government have chosen intermediate financial companies, simply to do this fast, as faster is the better, and rolling out public sales, which would typically you imagine be done by government itself, is just too slow.
The remaining issue is that the government is obviously still wedded to the idea of high property costs being good for the economy, when they are not, and also that the credit risks of today, bad as they certainly are, get pushed into the future and worsened at the same time. Also, it is not such a big step for a saver who considers the unusual step of buying government debt, to open their eyes and consider foreign bank accounts, foreign debt as well. Maybe that bit won’t happen.
will says:
Nationwide talking sense at last – a round of applause please.
mander says:
Next Goverment needs to act to save the country. Right now we are doing nothing and refuse to accept the real economics. Maybe FSA knows of a plan the ordinary people don’t. We are talking 50% house price drop that brings the houses in line with incomes which is the ideal market to have for generations. We will not go bankrupt because the houses bought in the last 10 years are only a small part of the UK economy. It is all down to some people to accept that are not that rich but still well off and they still can enjoy 10 years of equity if not spent already.
voiceofreason says:
“…touching bottom…”
Touching cloth more like.
And that is my intellectual input for the evening.