Tuesday, Dec 15, 2009

Don't Blame Greenspan

Forbes: The housing bubble was driven by a weak dollar, not low rates.

Article also uses UK data, makes the case that a weak currency NOT low IR drives up house prices. Can explain a few things. Consider that today the US dollar is exactly where it was 2 years ago, they have had a 30% hpc because of the credit crunch. Whereas during the same credit crunch UK's GBP has fallen 20% but we have had only a 15% hpc. So perhaps because of the weak pound we still have sustained interest in home ownership.

Posted by mountain goat @ 12:48 PM (1695 views)
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16 Comments

1. mark wadsworth said...

It's always nice to try new theories, but according to FT data, the house price bubble since 200 was much the same in most European countries (except Germany and Switzerland) and includes those in the Euro and those outside (Ireland had the biggest bubble - because it JOINED the Euro-zone). And the house price bubble was the same in ANZ and USA (thought not quite so silly in Canada). Seeing as over the last nine or ten years all major currencies have all gone up and down (mostly within a range of average plus minus fifteen or twenty per cent), I think we can rule out currency weakness as an explanation.

Tuesday, December 15, 2009 12:56PM Report Comment
 

2. mark wadsworth said...

"the house price bubble since 2000" not "since 200" obviously.

Tuesday, December 15, 2009 12:57PM Report Comment
 

3. ontheotherhand said...

The author suggests it is nothing to do with interest rates because there were house price increases in the 70s. I think there are many factors needed to get house prices rising. Some of them by themselves are necessary, but not sufficient factors. Surely over the long term since the 70s we see greater public access to mortgages for ever increasing terms for increasing multiples and so the conditions today are just not the same as the 70s. The single greatest statistical factor that emerges from regression analysis is not population growth, GDP, house building rates etc. but rather 'what did house prices do last year'. The 'r squared' for 'what did house prices do the previous year' is high, meaning it is highly correlated. i.e. booms need something to get them going, but then it's just momentum of the crowd.

Tuesday, December 15, 2009 01:17PM Report Comment
 

4. Neil B said...

Has everyone got amnesia? House prices rose because the credit was freely available, allowing more people who usually wouldnt have been able to afford an expensive property to buy one. Its a simple law of trade: If there is a huge availability of buyers at price X and X+1, then keep inflating X to make as much profit as possible.

Tuesday, December 15, 2009 02:29PM Report Comment
 

5. stillthinking said...

But sterling wasn't weak up to 2007.
Surely this is talking about interest rates but should be talking about inflation, how could we have such sustained house price increases without inflation in the general economy, or, * in what way were the gains of house price increases disconnected from consumption *.

1) I think that the disconnect was due to the money staying in the housing market primarily (unrealised paper gains), equity release is additional debt not profit, this is very complicated but generally I think so.
2) But, certainly there would have been wage inflation due to the flat building boom, but at around precisely this time the UK labour market is opened to europe and the "polish builder". That kept construction wages down, the market got flooded with additional cheap foreign labour, very clearly so I think. Labour have generally pursued immigration policies to suppress wages whether skilled or unskilled.
3)Also, lest we forget, we have also been flooded with very cheap replacement Chinese/Asian goods (manufactured goods didn't disappear, we stopped making them, so replacement). Look at domestic pricing, rail tickets etc, very different.
4)Finally, we were selling sterling denominated debt to a (then) large global group of savers, this is a successful export while it lasts, people need to buy sterling(maintain the price) to buy sterling debt.

These four things prevented inflation, and by doing so maintained low interest rates. I do not agree that low interest rates are a cause for the housing bubble because interest rates are driven by price stability requirements which are driven by measured inflation.

Tuesday, December 15, 2009 02:30PM Report Comment
 

6. stillthinking said...

One fifth thing,
Labour, rightly or wrongly, have pursued a population growth strategy for the UK, I don't mean just the immigration aspect, I think they have increased child care payments. In perspective, the population of the UK was ~55 million in the 70s, now we are at a questionable ~61 million (if not more) and the increase has principally been working age people. Over 35 years, this is an enormous increase. This also suppresses inflation (I do realise this is similar to the polish builder ..).

Tuesday, December 15, 2009 02:42PM Report Comment
 

7. growler said...

Neil B is on the money 100%

People are in the market at a price level they would normally not have been in.

The result can also been seen as simple supply and demand. You've redefined the demand curve because at every point along it, people are willing (AND ABLE THROUGH INCREASED UNSUSTAINABLE FUNDING) to pay the higher price. That paid higher price enables the next person in the chain to receive more and borrow more - and so it goes on. A (1 + i) approach to the power on "n".

Change those conditions of demand - down across the entire curve as at present - then the only way that can increase prices is reduced supply. As we've seen.

With interest rates their lowest possible, unemployment on an upward trend, industrial over-capacity and governments all colluding to save money and cut - it doesn't take a scholarship from Harvard to work this one out.

Tuesday, December 15, 2009 03:41PM Report Comment
 

8. honest valuer said...

FACT: all booms whether property, stocks, tulips, classic cars etc are caused by easy credit.

Tuesday, December 15, 2009 07:41PM Report Comment
 

9. Martin said...

Everybody I knew and their dog could get mortgage approval 2 years ago. This is the reason for the house price bubble was due to a saturated market. Bring back strict credit checks and plausible mortgage affordability evaluations in order to rewind to a period of genuine financial control.

Tuesday, December 15, 2009 07:49PM Report Comment
 

10. tenyearstogetmymoneyback said...

Agree with Neil B and Growler completely.

To add more detail the cause of the excess credit was the fact that the country borrowed £700 Billion
with few very people realising. Knowing the figure google verified this immediately

http://www.tandf.co.uk/journals/routledge_interviews/rglo_Global-Financial-Crisis-Primer_transcript.pdf

Contrast this with the good old days of affordable housing. On one TV program I saw a retired building society
manager who said that when he was working they got enough funding to do four mortgages a week,
so he would literally spend a day deciding who to give each one.

Tuesday, December 15, 2009 09:58PM Report Comment
 

11. crunchy said...

Don't Blame Greenspan? Dot Com, 911, (Greenspan) onto (Bernanke) onto (World Bank) onto (Climate Change) onto (Slavery)

The denial in everything continues, no wonder some are getting shafted left, right and centre.

http://www.youtube.com/watch?v=pVmxQsvj6lo&feature=related

Tuesday, December 15, 2009 10:57PM Report Comment
 

12. crunchy said...

http://www.youtube.com/watch?v=Ydo2Mwnwpac

LOL. LOL. LMAO. GO TIM, THEY DON'T LIKE IT UP EM.

Tuesday, December 15, 2009 11:30PM Report Comment
 

13. crunchy said...

http://www.youtube.com/watch?v=dY3eaymWSQg

GET A PROPER EDUCATION. : )

Tuesday, December 15, 2009 11:50PM Report Comment
 

14. crunchy said...

http://www.youtube.com/watch?v=q_cy7v4-9v8 Someone asked me about the connection with (Enron) the other day..

Exclusive info that the media will not cover. I should not be having to do this. Do more research on this and GREENSPAN.

Wednesday, December 16, 2009 09:00AM Report Comment
 

15. charlie brooker said...

Now that's what I call passing the buck!

Wednesday, December 16, 2009 11:06AM Report Comment
 

16. mountain goat said...

Well at least some you guys considered the arguement.

I don't believe it is simply the availability of cheap money that makes people buy a house. There might a minority who are so financially naive but most people understand that it is buyer beware out there. There has to be confidence that your job is secure, and that the house will keep its value or rise in price. I maintain that people who bought a house this year would have been influenced by the idea that their savings were being trashed by the gov bailouts. I think I remember correctly that Flashman felt this way. This balances the fear that the hpc might not be over yet. If you are an American you might likewise feel your currency is being trashed, but the facts contradict this since the dollar strengthened during crisis. So for Americans thinking of buying a house now the decision is less straight forward, they would feel its safer to hold onto cash and let the recession play itself out.

Wednesday, December 16, 2009 11:40AM Report Comment
 

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