"LONDON (Reuters) - High-flying house prices are 30 percent too high and could crash as they did in the early 1990s although moderate price declines look more likely, a respected economic forecasting group has warned. The National Institute for Economic and Social Research urged the Bank of England to raise interest rates by an aggressive half a percentage point next week to cool the housing market, warning that a price crash would dent economic growth in future years."
Looks to me like the Bank of England Monetary Committee are going to "make" house prices stop rising and, if their interest rate rises dont make it happen quickly, they will continue panicking to the point where prices will crash.
IIRC, when the Bank took over interest rates, it said that small adjustments in the early days had an effect on inflation around 18 months later, (presumably a similar thing happens with house price inflation).
It may therefore be that the recent rate rise may have had the desired effect already, but we wont know for some months.
The rises have certainly stopped me buying property and borrowing more money so, whilst I am a poll of one, there must be others who feel the same.
I wonder what other people here are thinking at present?
Well if we're at the peak now, then I'm laughing as I've just sold the flat I bought in 1993. The equity was more than enough to pay off the mortgage on the BTL flat I bought 3 years ago, but am keeping for now.
I know most people despise government intervention in markets but I can't disagree if it is their policy to prevent house prices spiralling out of control. Quite a few people will get burned with prices at this level, but the effects could be a lot worse. Japan springs to mind and their asset inflation, not that we know what will happen. Obviously if house prices did crash not all people would be losers, but you can't help but have sympathy with the current first time buyers and the mortgage and risk they are taking on just to live the dream of living as a family, owning their home.
Any of you who detest government intervention in markets disagree with other than selfish reasons.
I can't think of a government interention in any credit bubble that's made them popular or even look good, afterwards. Messing about with interest rates has been tried before: it brought them the blame for the
30's depression in the US for example.
The best way to fix a credit bubble is not to get into one in the first place. By the time you finally have to stop it, it's already too late.
OTOH just as many people will be better off. For someone to pay over the odds, someone has to make excess profit. A bubble in that respect is just a means to redistribute wealth. Some who have paper wealth will lose it to people who get a bargain when it's all over. but that's just redistribution too.
The real problem is those who didn't sell their houses, but concluded from the price of the sale down the road that they could borrow against the higher value of their own home. When the credit bubble, and the credit, has gone, they're left with the debt, but not the price rise. Enough of those folks in an economy means trouble for everyone.
The thing is that if they choose to try to live a dream they can't afford, on credit, then they've deliberately made themselves part of the problem. It's hard to have sympathy with that.
Sure. If you think things are bad for people in a debt deflation, then look to government to make it worse. Would you rather be struggling in a debt deflation or scouring rubbish heaps for food as some of the middle classes have been doing in Argentina?
Trust me: the first thing the government will think of in a debt deflation isn't to reinsitute sound money and take a hard look at the banking system which spawned all the credit, it'll be to inflate and borrow. It's in their blood. Argentina lies at the end of that particular road.
Personally, I'm in the process of selling my home, and intend to stay in rented accomodation for a while.
I expect residential property prices, relative to incomes, to fall over the next (say) 2-3 years. If I'm wrong, and they continue to increase, I'll be a) very much poorer and b) much more likely to emigrate.
I do agree that the UK economy is heading for rougher ground, but unlike (say) Mr Holmes, I think there are real factors which are likely to hold up prices. IMHO the political system is not able to tackle these, and barring an economic disaster these pressures are likely to remain.
Dont get me wrong - I have felt that the market was peaking each year since 2001 when I made some quite serious financial changes to cope with it
However, the government and the BoE seem to have the bit between their teeth now, and are doing things to cool it down. This wasnt the case before this year.
The BoE don't have any mandate to target house prices per se, and if they were trying do do that rates would have started rising a year earlier than they did. Rates are rising now because the economy is growing rapidly and inflation is creeping upward, which may be partly an indirect consequence of house price increases but is not directly related to them.
Yes, typically 1-2 years, so it will be next year at least before we really know the effects of the rises this year. If anything house price changes probably lag even further than the general economy because people moving house generally decide to move rather a long time in advance.
Much the same as I've thought for the last year or two, I don't see that regular owner-occupiers will be in much trouble unless rates rise a lot further than they seem likely to. Buy-to-let could well be different, by next year many of the more highly-geared owners will have negative cashflow, but the effect will depend on how many of them panic and try to sell.
Well the BoE's sole remit is to control inflation and quite reasonably has come to realise that continually soaring house prices will make that very difficult indeed (can't imagine why it's taken so long!). OTOH the government are decidedly ambivalent about this. I heard in a radio prog the other day that, privately, many labour MPs have tacitly acknowledged that 'most' people are delighted by property-price inflation and they (the gov) see it as a vote winner. Against that of course is the prospect of the whole pack of cards collapsing, but I suspect they would like things to remain in limbo at least until the next parliament when they can wreak as much havoc as they like.
Then again, in so far as the it gave independence to the BoE when it first took the reigns, the government really has no say in it. I've read also that this has sparked some acrimony between Mervyn King and G Brown.
Some pundits now seem to be claiming that the widespread tendency to cut rates because of the post dot-com crash and, probably more significantly, September 11 was overdone but I don't know if such cautionary wisdom was being voiced at the time.
I suspect that the PM et al knew that there was no chance of joining the euro that soon in which case the time-scale involved would have obviated the need to chase parity so early.
I heard on the news yesterday that BP had said they could give away petrol in England, and it would still cost us around 70p per litre, (taxes).
So, if their portion of petrol is say 12p, and it increases by say, 25%, this would increases petrol prices by 3p - not really recession provoking.
Thus, in real terms, it is government policy which could be recession provoking.
I am not aware of the relative calculations for other sectors which use oil, but would presume that oil is not a mega component of many products. I could be wrong and I am sure someone will correct me.
Er... cheap energy (i.e oil, for the most part) is an essential part of most manufacturing and service industries. If oil increases in price, then energy costs rise, and almost /everything/ becomes more expensive; transport (both passenger and freight, land, sea and air), electricity, manufacturing, refrigeration... I gather a possible response to the inflationary pressure would be for the BoE to increase interest rates (over and above what they're currently doing to try to bring the credit bubble under control).
Given the rapid industrialisation of China and India (with the consequent increases in demand for energy there), the continuing political instability in oil-rich regions, and the lack of new discoveries of oil reserves, I don't see the underlying trend of increasing oil prices reversing any time soon.
On the face of it that does seem bizarre but I gather the new CPI which has supposedly replaced the RPI is an attempt at European harmonisation of indices. Also housing cost indices in the UK appear to be notoriously unreliable/volatile (I've posted a query here about Nationwide's index because I find it perplexing) so maybe that's another good reason for their exclusion? And if inflation in our economy is determined to any significant extent by house prices (it surely is?) then the CPI is already reflecting this.....(in a sense??)
This is not quite answering the question. We are where we are and all that, does the present government in the opinion of a 'government intervention disaprover' get involved now by use of restricting credit and increasing interest rates?
Pretty harsh. My sympathy is obviously with the people who have to make the decision whether to take on huge debts or live at home longer before buying. Most people can't afford to buy young and often not on their own and at the moment their current savings are not keeping pace with house prices. Maybe you would have a different view had you not made so much money from property (persuming) and you were young and trying to buy a house with your partner. People have got to live their lives at the stage they are at. I have sympathy that they happen to be at their stage in the housing cycle when prices are forever increasing.
So you have examples of governments getting it wrong, and none of them intervening and getting it right. I get the impression our government will be damned by you no matter what they try to do.
So to recap, if the government has privately asked the BoE to try to restrain the housing bubble by increasing interest rates you think that is a bad thing and would rather see the housing bubble go out of control similar to what happened in Japan, because the government should not try to direct markets?
Yes, Beranke and Greenspan at the US Federal Reserve were concered about deflation in the post-crash period and engineered agreement amongst central bankers to offset it by inflation created by lower than neutral interest rates. At that point Bernanke was even talking of "helicopter drops" of cash and other "unothordox measures" if lowering rates hadn't worked.
I'm libertarian by politics and Austrian by economics. Consistent with both, I'd say the best way forward, given the sitation, would be to reinstitute sound, not fiat, money and to leave the interest rate to the markets. Undoubtedly there'd be a debt deflation, but I think that's a done dea anyway, and is the cure, not the problem.
It's just life.
It's not an either or. They could move and rent. Plenty of rental accomodation available these days.
Which is one reason why an asset deflation would be a good thing.
Presuming wrongly.
I'm not so young and will be buying a house with my partner.
Certainly, but owning prperty to do so is not compulsory.
Nothing increases in price forever.
It's hard to say, since we can never really know what would have happened if things had been done differently. What can be clearly drawn from history is that asset bubbles driven by credit end badly to varying degrees.
More broadly, I suspect that our government will be damned by damn near everybody, whatever they do. History is also consistent on the folks in charge when credit bubbles burst are thrown out.
They haven't. In fact a little bird tells me that they've been down to the bank to tell them to STFU about house prices and have hinted rather strongly that they'd rather interest rates didn't go up any more than absolutely necessary before the election.
The Bank may want to puncture the housing bubble. In fact I believe that King realises that it's a credit bubble and that the later it bursts, the worse the bust will be. However, Gordon Brown knows he won't be Prime Minister if there's a housing bust on is watch and so wants to prevent the Bank from bursting the bubble, by either talk or raising rates, prior to the election.
Yep. I don't trust governments to get things right.
That's rather unfair. If anyone here has a strong record of warning against that, it's Yours Truly.
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