Thursday, February 7, 2013

HPC was naive to think there would be a proper crash

How house prices have risen 43-fold since 1971

Some number crunching that illustrates why property is a bit different from manufactured goods or services: "A carton of milk would set a family back by £10 and a roast chicken would have a £51 price tag if food costs had risen in line with house price increases over the last 40 years, research by Shelter has found. The charity said that the typical value of a house had increased by just over 43 times since 1971, from £5,632 to £245,319." Unsurprisingly, there is no clue in the piece about the role of bank credit or our tax system that favours property speculation but we should be used to that by now.

Posted by quiet guy @ 08:52 AM (1839 views)
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11 thoughts on “HPC was naive to think there would be a proper crash

  • Folks, property is only different because government legalized the fraudulent use of mortgage backed derivatives as assets, creating a ponzi schemes. A derivative is a futures contract. For mortgages, it is a contract to receive future mortgage repayments. These are properly treated as liabilities because the income has not yet been receive and there is counter-party risk.

    Treated as a liability, there is a limit to how many a bank can hold on its balance sheet, simply allowing them to use it for hedging. This is a good market mechanism.

    Treated as an asset, there is no limit to how many a bank can use and they have incentive now to gather as many as they can, regardless of sub-prime status, since it can now be used as collateral for other items.

    If government allowed derivatives like that for milk, it would also be in a bubble.

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  • HPC was naive to think there would be a proper crash

    I disagree; after the 1990s crash it was logical to assume that something similar would happen. If you look back throughout history, bubbles habitually burst.

    This time, NO ONE could have known that the governments and central banks would behave in quite the irresponsible way that they have, and the way they continue to do so. The depression of the next few years will, I think be a testament to that. No growth, and lots and lots of inflation. which is what he have had over the the past 5 years.

    Now Osborne has said that they will QE until there is growth – regardless of inflation. Zimbabwe here we come.

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  • hpw said “Now Osborne has said that they will QE until there is growth – regardless of inflation.” or “regardless of the fact that there’s no evidence of its stimulating any economy – other than central bankers’ mantra that ‘things would be even worse without it'”

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  • I am not sure how they believe that printing more units of exchange is going to boost productivity, thus real wages, but there you go.

    It was logical to assume the UK bubble would burst, the Irish, US and Spanish bubbles did.

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  • Constantly squeezing the next generation has caused the economic crises we now face. Workers have had to spend more and more of their income on housing, so is it any surprise that they have little left to spend on the high street?

    The system is broken and they can’t fix it, but I get the feeling we are about to be used in a massive economic experiment. The fan has started to spin…..

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  • Well duh, divide that 43 by the increase in the price level (10?) and you get a rather less dramatic but still obscene 4-fold increase in real terms.
    N

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  • @4 – I think they think that supporting asset prices by low IRs avoids ‘wealth destruction’ and thereby keeps people spending. The property market and bond funds would collapse if IRs went up – and it would make it very difficult to pay off government debt. They’ve painted themselves into a corner and have to choose between asset prices and a healthy real economy.

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  • mark wadsworth says:

    Obviously, all mortgages are a game of two halves. For the borrower has a financial liability and the lender has a financial asset. If somebody pays you with an IOU, then that IOU is an asset from your point of view as hopefully you will get money for it (from the issuer).

    That said, one of my favourite Killer Arguments against LVT is “You can’t tax land, it’s the only asset which has beaten inflation”.

    It’s the only asset which has consistently beaten inflation precisely because it is heavily subsidised and lightly taxed. If the Home-Owner-Ist logic is correct, then assets which have performed badly against inflation (cash, shares, cars, whatever) should be taxed more heavily.

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  • mark wadsworth says:

    Icarus: ” if IRs went up – and it would make it very difficult to pay off government debt.”

    Not necessarily.

    If UK has issued longer term debt at a fixed interest rate (say 5%) and interest rates go up to 10%, then the market value of the bond goes down. So a £1 billion nominal value twenty year bond is now only worth £500 million. So the government can directly or indirectly refinance it back for £500 million in today’s money. For sure, the interest rate on the new £500 million gilt will be 10%, but 10% on £500 million is the same as 5% on £1 billion 🙂

    Unfortunately this does not apply to the very short term debt which the BoE/UK government issued under QE program 🙁

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  • MW – I was thinking of the IRs on the new debt needed to finance the budget deficit.

    We both know that assets=liabilities but that a lot can happen while things are re-adjusting and markets are clearing (e.g. another bank crash when higher IRs wipe out a lot of the assets on their balance sheets).

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  • mark wadsworth says:

    Icarus, yes I was simplifying and if interest rates go up, then by and large the UK government will end up paying more.

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