Friday, December 5, 2014

Household debt is set to soar way above pre-crisis levels.

The Chancellor is banking on another house price bubble

"To the extent that this happens, it is expected to be caused not so much by debt-fuelled consumption, or not directly in any case, but by rising house prices." (The chart below looks curiously like Nadeem Walyat's projections).

Posted by libertas @ 01:29 AM (3876 views)
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30 thoughts on “Household debt is set to soar way above pre-crisis levels.

  • This is one of the most painful articles I’ve read for a while. It seems to suggest that the UK is on a trajectory for another messy bust.

    It seems to sound alarm bells in a number of areas. I get a bad feeling that in 2015 we will be looking back at articles like this and wondering why our politicians did very little to alert the nation and fix the problem.

    I seem to recall after the 2008 banking crisis that the Queen asked civil servants and politicians why nobody had spotted the growing threats and rung any alarm bells 🙁

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  • As we head into 2015, there appears to be little hope against a rising dollar. This will be deflationary in the USA also raising the net real value of the dollar debts to everyone who has issued dollar debt in countless currencies to save interest. The contagion will spread next year and we will see the downturn after 2015.75 will be far more confusing to these people who lack any comprehension of currency and the world economy. Interest rates up up and away – pop goes the UK housing bubble.

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  • Yes I think the queen asked Mervyn king who seemed to know what was going on and
    Warned about house prices in 2002/2003 however never did anything about it

    I wonder whether the markets will decide these are lunatic economics and start selling
    Bonds to force interest rate rises

    When commentators say interest rate rises would crush the economy and rates are near zero
    You know there is a major problem

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  • I’ve now read the OBR December 2014 Economic and Fiscal outlook statement. The journalist who wrote this article must have read a different statement. If you don’t want to be blown about by silly journalism, I suggest you all do the same

    Contrary to the implications of this article, they do not forecast or imply a massive house price spike in the next electoral term. Please understand that this article is designed to titivate their mostly home owning readership by implying that house prices will rocket. I assume that libertas has been well and truly titivated in the desired way. He read this late entrant for poorest article of 2014 and saw what they wanted him to see. Understand this: most of their readership already have a house with no (or a small) mortgage so what hey are supposed to take from this article is that their house price will rocket with no increase in their own personal debt. How exciting, this Telegraph is a great paper. For good measure you will notice that the article is also sprinkled with a liberal dose of ‘if anything goes wrong it’ll be Europe’s fault’ which is also 100% audience targeted.

    Here’s what the OBR actually forecast for five years time:

    Employment increased by another million people
    Output gap closed to zero ( essentially economy at full potential)
    Current account defecit reduced to zero in four years and a small surplus in five years

    Most people who read the Telegraph ought to be more excited by the above than a supposed house price surge but most of them are fairly basic people who don’t understand much of the above. What they do understand however is the value of their gaff, hence the journalists attempt to isolate, pervert and strangle an out of context aspect of the OBR statement.

    As far as house prices go, look closer at the article and you will see that it talks about house prices 8.8% higher than 2007 in real terms. We’re not that far off peak now so the Telegraph is actually claiming that house prices will be something like 12 or 13% higher than they are now in 5 years time. Obviously we want them to be reduced but roughly 12% in five years is not exactly headline news. As we have seen this year, the link between mortgage approvals and house prices is broken (for now), so there is no guarantee that personal mortgage debt will rise at all with this supposed 12% increase in house prices ( because of the restricted house/mortgage supply, btl’ers, corporates and the cash rich have been encouraged to buy with little or no mortgage).

    Getting away from the article, I find it hard to believe that house prices will rise by much more than inflation over the next few years and there is a small chance that they will actually fall. The next raft of stringent mortgage rules are due in soon (courtesy of European standardisation) and we are being promised quite a few new houses. If we get the promised new houses then prices might even fall a bit because Interest rates will rise once we get closer to a zero output gap and there will be proportionately more owner occupier buying. If we don’t get the promised new houses then people will bend over backwards to get a house regardless of interest rates (standard shortage induced behaviour) and btl’ers, corporates and the cash rich will continue to leverage the restricted supply without having to borrow much.

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  • One thing’s for sure, the stamp duty change is designed to ensure a big lift leading up to the election, just as the market looked like it might turn.

    An unprecedentedly shrewd move.

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  • Just read Gemma Tetlow’s analysis. The IFS do a thorough job. Recounted by the Telegraph this morning.

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  • Buying at the top of the market is always stupid, no matter how sound the logic seems.

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  • “an unprecedentedly shrewd move”

    If it works and they get in they’ll probably also benefit from the fruition of the OBRs forecast of effective full employment and a budgetary surplus by the end of their second term. It goes without saying that it would have happened regardless of who was in power and what policies they pretend to enact but whoever is in charge next term will probably therefore also get to stay on until 2020.

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  • All this talk of house values being just above 2007 prices. Oxford seems to be on a different planet! We have houses 50% over 2007 prices selling within a week or so, its utterly depressing ;-(

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  • “Buying at the top of the market is always stupid, no matter how sound the logic seems.”

    That’s well and good, providing you know what the top is.

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  • Flashman, only issue with your projections there are, whilst I don’t doubt 1m more jobs, at current rate we have 1.1m new residents from the EU within four years, and so the capacity rises faster than production so long as Europe is relatively weaker than the UK. This all changes and goes in reverse if structural problems in the Eurozone resolve.

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  • libertas, I didn’t make any projections.The OBRs made the projections and you do not need to worry that they might have forgotten to put simple things into their calculator.

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  • “Getting away from the article, I find it hard to believe that house prices will rise by much more than inflation over the next few years”

    Actually, on average, house prices SHOULD rise 3.5x the rate of economic growth, because mortgages provide that much leverage to it. Oscillations that deviate from this path make that appear to not be the case, but the overall trajectory is clear, but if the economy is growing by 3%, house prices should rise 10.5% per year on average on that measure, and so the recent house price rise IS sustainable. London wen’t double that, but frankly, it is getting most of the immigration and growth in the Capital is well above the UK average.

    You will all completely miss the entire bull market, and then like in 2008 miss the bottom when houses correct next, likely in the early 2020’s. Meanwhile, rather than paying off capital on a mortgage, building more equity, you will help fund buy to let landlords.

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  • You will all completely miss the entire bull market,

    You wish. Sounds like Nadeem talking.

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  • Just compared several decades of GDP vs house prices for four separate markets. The relationship suggested by libertas does not exist.

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  • mountain goat says:

    @2 Anned well said. I wonder what parts of the UK economy have borrowed in $? I think UK gov debt is all UK£ denominated?

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  • reticent wrote:

    “One thing’s for sure, the stamp duty change is designed to ensure a big lift leading up to the election, just as the market looked like it might turn.

    An unprecedentedly shrewd move.”

    Or this:

    http://www.telegraph.co.uk/finance/autumn-statement/11274700/House-prices-in-high-end-London-slashed-after-stamp-duty-shift.html

    Unintended consequence or design feature?

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  • mountain goat, as you know it’s generally only the smaller countries that issue debt in a currency other than their own, so I don’t think we have to worry about the contagion described @2. The Dollar rising or falling ( despite the certainty implied @2, we don’t actually know) can hardly be considered as some sort of harbinger of doom. It’s gone up and down like a yoyo for decades, so where is the logic in hinting that this time it’ll be a disaster. There is a tendency in the blog world to treat everything like its the first time it’s has happened.

    Anned, I have some vague recollection of you predicting utter collapse in 2014 quoting someone called Armstrong.

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  • The Independent reports that the OBR forecast for the increase in non-mortgage, unsecured debt (overdrafts, credit cards) over the next five years is £360bn – £41bn more than its forecast of last March.

    If economic growth forecasts depend on this amount of borrowing to consume then there’s trouble. Not only will the ratio of unsecured debt to household income be much higher than it was pre-crisis but there is also a big question over people’s willingness/ability to take on so much debt, especially since they’ve been reducing the above ratio in recent years (ratio is 37%, was 44% pre-crisis and the current OBR projection takes it to 55% in 5 yrs).

    Total household debt (mortgage plus unsecured) is projected to rise by almost £1 trillion, from £1.7 trill to £2.6 trill. over the period. Given OBR’s household income projections this would bring total household debt to income up from 169% to 184% – another record.

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  • I’m sure people will be quaking in their boots in five years time when they’ve got almost guaranteed employment and one of the best asset to debt ratios in the world. I’m beginning to think all this misery oriented economic voyeurism in some way precludes people from seeing anything at all.

    What eventually happens to people with loads of debt and even more assets? That’s right, they eventually end up with bugger all debt and loads of assets. What’s the worst thing that can happen to them? They end up no worse off than the people who sat on the sidelines clucking and tutting. How often does the worst thing happen? Hardly ever. Don’t blame me, it’s just how the world spins.

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  • They’re valid questions. To what extent do OBR economic growth forecasts depend on the OBR forecast rise in unsecured debt to fuel the required consumption? Will people be willing and able to take on that amount of debt?

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  • libertas @13 – I think that your comment that house prices should rise by 3.5x economic growth because of mortgage leverage is falling into an old arithmetic trap – the absolute increase in house prices is 3.5x the increase in wages, but as a percentage of the house price, it is 1.0x economic growth, assuming that the mortgage and therefore the house price increases linearly with wages. (Wages W, allow you to borrow 3.5W, so that a house price would be P=3.5W, increase by growth G to WG, so you can now borrow 3.5WG, so house price increase is 3.5WG / 3.5W = G)

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  • I’d directly answer your question if it wasn’t so ‘closed’. The a minus b nature of it demonstrates that you have no comprehension of the dynamic trail of a borrowed unit of money. A unit of debt isn’t just created, paid back then snuffed out. It lives on, in one form or another, indefinitely and while economic voyeurs sniffily refer to consumption, they are actually just failing to comprehend the economic and emotional value of pleasure and reward. They are also failing to understand how the unit of borrowing spent on so called ‘consumption’ eventually ends up being spent on infrastructure, public services, assets and being invested in the production of exported goods and services. Whilst you’ve been pinch-facedly clucking about debt on an almost daily basis, almost ten million UK citizens somehow ended up grafting for businesses that sell their products and services overseas. I own a business like that and I probably wouldn’t have had the opportunity to create it, in a country dominated by pinch-faced debt cluckers. In five years time when (according to the OBS) we’ve got higher levels of personal debt, we’ll also have almost full employment, no budgetary defecit and one of the best asset debt ratios in the world. But far more importantly, our so called expansive borrowing and enjoyment of life will have started to wind its way towards another wave of new companies, investment and infrastructure. Poorer countries dont get to behave like us so,they remain trapped and stunted. Their only way out is to discover something underground or to exploit their population. ‘Debt cluckers’ behave like they live in one of the many ‘trapped in a state of poverty’ countries, so thank heavens there aren’t many of them.

    I have no intention of engaging with any silly blog boys who are now foaming at the mouth because debt was mentioned in non satanic terms, so don’t bother. The number of posts have drastically increased from new posters and returning old ones and it’s good to see that this site can be kicked back to life. However I’ve said what I’ve come to say and it’s time to leave. I might come back in six months or so but perhaps that’s it for good. The battle to persuade people of the need to build more houses has been well and truly won with absolute buy in from every major political party and council. New projects and starts are now finally ramping up to the extent that we’re actually going to build enough houses (for our yearly needs) in 2016 and 2017. We’ve (I’m going to indulge myself even though I’m a Johnny come lately who’s only be volunteering for 16 months) even helped to influence three conservative MPs who are currently lobbying their local Labour led councils to build more council houses. I couldn’t have imagined anything like that even a year ago.

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  • The issue is unsecured borrowing. A large proportion of those borrowers are people who don’t have the corresponding assets, so the issue is the distribution of ownership of assets and of debtors, rather than of the ratio of a country’s total assets to total borrowing. Even for those who have the assets to cover their unsecured debt the big question is whether they are willing to borrow at the levels projected by OBR. For the large proportion of putative borrowers who don’t have the assets the question is whether the are willing to do the required borrowing and spending – and will the lenders lend at the projected levels. The signs are that the projected huge increase (from £430bn to £8oobn) in unsecured debt won’t happen, and if it doesn’t happen what then for economic growth forecasts which depend on this borrowing?

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  • @Debtserf

    It was completely intentional to charge people with expensive houses more because the Tories have been using Stamp Duty as their mansion tax since they introduced those higher bands in the first place.

    What’s funny about this article is that I’ve been wanting to see a graph like this for aeons and, if anything, I’ve found it rather heartening. For most of the crisis, I’ve been reading about the extent of household deleveraging but I’ve yet to see it spelled out like this. I don’t know what a safe level of debt is, but if we’re not expected to get back to 2005 levels until 2016, I’d say this boom has a lot more legs than I thought.

    Both mortgage rates and consumer credit IRs are much lower than they were in 2007, so the debt levels could easily peak higher this time, but we’re 3 years away from that peak.

    Given how long it took the recovery to get going, the question has always been “what does this mean for the business cycle”? The credit crunch began 7 years ago, so we’re due another crisis in the next year or two, but the economy has only really just started to rebound significantly, suggesting the next peak is years away. Maybe we are due another volatile decade like the successive recessions of the late 80s/early 90s after the protracted boom of the early 80s/noughties. Maybe one crisis will lead to another as QE and reduced rates prove only to be salves on an economy addicted to debt that’s always one black swan away from being plunged back into crisis. Then again, maybe this is the new normal, rates can remain low until well beyond 2020 and there will be a lot of prosperity before the next crisis hits.

    This graph makes me veer further towards the latter conclusion. There’s obviously a lot of uncertainty with Russia and ISIS being more serious than swine flu or any of the other recent scares. But the idea that we’re swimming in debt and the recovery is built on sand is obviously overblown. A lot of deleveraging has taken place.

    I have also said that the recovery might carry on whilst the housing market undergoes a sudden adjustment leading up to the election and/or beyond it. This stamp duty manoeuvre has changed that.

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  • Reticent. Agreed, probably a couple years away from the next slow down, but it will be like gold’s bull run, with corrections within a secular bull market. I would say that the next crash is farm more than 3yrs away. 2008 tends to happen every 15 to 20yrs. At which point my mortgage will have been paid off 5yrs prior, because we are over-paying by 50% bringing the term below 15yrs, so I shan’t even notice the house price crash when it occurs.

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  • icarus, I’m afraid you just don’t get it. Understanding economics is as much about imagination as it is about formulas. Nearly all of the worlds systems are dynamic and kinetic. One thing never simply depends on another. There are lots and lots of ‘things’ and none of them act sequentially so you actually need to be asking a better question. If you think this answer is too cryptic, it’s because you don’t get it. Sorry.

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  • @23, I’ll miss you Flashman. However even you haven’t answered the question I posted on two threads here (to kick some life back into the site) After all, it can’t ALL be about house prices (can it?)

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  • OK, seeing as it’s you clockslinger ( I’d better first reprint your question):

    “Well, in MY copy of todays Guardian I saw that Jeremy Hunt tweeted that it is acceptable to breast feed ostentatiously in public (I dispute that Claridges is public because they wouldn’t serve me after I got my Aldi vodka out to top up my coke) but anyway…
    I don’t want to trouble the Minister when he’s busy tweeting about tits (in my tax paying time) so PLEASE can anyone on this site just tell me: is alright to undo my jeans to adjust my dress from right to left in our local Cote (south coast county town)?
    I had a massive row with my partner after I stood up and did this. She thinks it completely infra dig. Jeremy’s tweet suggests she’s alone in her her neurotic sensibilities approach and in fact I couldn’t have been faulted even if I’d dropped my boxers. In fact she’s worse than that Nigel Farage. Well? What IS the right answer? (BTW, I take back anything bad I have ever said about the Conservative party. I was clearly wrong. They like so TOTALLY have their finger on the social zeitgeist”

    For the sake of clubability, I’ll overlook your use of infradig and my partner. What’s wrong with cool and my bird? Before moving onto your actual question, I’m going to have to address a more serious issue. If you’ve been told by a tailor that he cuts your suit depending on which way you dress, I would suggest that you’ve been conned and touched up. If the tailor’s worth a few quid, you need to accuse him of something hideous in 30 years time. By then compound interest will have improved the compo you’re entitled to and he’ll be too old to remember if he did or didn’t do it.

    Finally moving on to your question: I’ve looked it up in Debrett’s for you ( it helps to have superior access to data) and it turns out that it very much depends on how cute the partner is and on how infradig her crackers are. By the way, I think you’re being a bit churlish complaining about how your MP uses his time. I’ll apologise for this criticism, if you can find me a single instance of a Tory MP doing something more useful.

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  • Flash, now can I guess; you are really Rod Liddle (you picked me up on the gender neutral vernacular there)?
    I’m afraid I (really) don’t know what my shorty’s “crackers” are but I so get the advice on my tailor! Sadly it was jeans I was wearing at the time and I tend to do prey a porter and adjust, so nothing bespoke.

    Don’t leave though or I’ll have to increase my medication. You DO have your actual finger on the actual zeitgeist innit,and are a bit of a wit.

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