I am not sure what you are saying here? Landlords have no more right to expect inflation proof rent than house owners to index link their property value. Of course they may charge whatever rent they wish but if that isn't in line with market rents then the tenant will walk.
If the obtained rent leads to a loss and there is little sign of asset growth they are likely to liquidate.
The Economist recently remarked that their favoured measure was a rent-to-house-price ratio, but they did not extend that argument to take a view on whether average rent was also over valued - which in my opinion it is, and by quite a margin.
He's got previous though: stocks crash 1987; LTCM crash; Eastern currency crisis; Russian bonds crash; suspected 2000 bug. In each of these crieses, as well as the 2000 stocks bubble bursting, Greenspan's response was a flood of liquidity rather than let bad investors take their licks and the economy heal itself. At each point he was guaranteeing bad investors a "Heads you win, tails taxpayers lose" bet at bigger and bigger pots. The end of that run can't possibly be pretty.
His job is to protect the currency first and then the economy. When he identified the stocks bubble in 1997 his job was to puncture it. He's too scared of deflation to do the job and I suspect that he will get the blame if what I expect comes to pass.
I concur with your argument that others should share in it too, but history tends towards the simple explanation.
I've been thinking about blame though, particularly in reference to the book on the South Seas Bubble that I've just finished. The fault there was clearly of some venal folks at the Company and the two thirds of Parliamen; half the Lords and much of the Royal Family that they bribed to get the bubble underway. However, in the end, Walpole manipulated his rise to power by rigging evidence (he sold out British foreign policy to ensure that the key evidence went abroad and stayed there) and ensured the exoneration of many of the politicians and Royals whose support he needed, while making scapegoats of those he didn't.
Obviously this isn't untypical behaviour for a politician and this made me wonder what the upshot of a house price crash in Britain would be and who'd get jail time.
Richard is absolutely correct about the effect on the economy of either a simple house price crash, or more so if the credit bubble bursts. The economy will be in deep recession at best and many debtors, and not a few creditors will be bankrupt. Probably so many that the bankruptcy rules will be rigged to ensure that at least some debt must be paid however long that takes. Clearly when people go bankrupt and are driven form what they pretended were their homes, there'll be much anger and a demand that someone be blamed and punished. Clearly also the politicians will manipulate evidence in such a way that they're not the ones jailed. So who will it be?
It's getting on enough so that it's becoming clear who's being blamed after the US stocks crash in 2000. Basically every company and their mother was manipulating earnings statements to ensure that they made the mark each time and prevented a drop in the stock price and a cut in executive bonuses. Clearly also most professional pundits were also touting stocks they knew to be at ridiculous prices. This was so endemic on Wall Street that in late 1999 one famous man was sacked for saying out loud that a particular stock was risky at the price. The company did a lot of business with his merchant bank and said "He goes or we pull the account". There were serious professional consequences if you weren't willing to lie to the punters and tell them what they wanted to hear (that stock prices will always rise even further and you should buy on the dips).
Now a selected few of those have come to the public eye, and where such behaviour was provable, they've been saddled with the blame and jail time. The Enron debacle has reached the point of bars and bending over for the guards, while the Fannie and Freddie scandals are just starting on that journey.
Is it fair? Well yes, in that these people did what they're accused of. No in that not everyone who did this is going to jail.
So who in Britain has been pursuing similar behaviour and will make good scapegoats for the politicians? I think we have some candidates.
The TV documentaries last year indicated that there are estate agents, banks, and solicitors who will happily conspire with punters to pretend that someone's salary is higher than actual reality would indicate, in order to help them buy a house and land their fees. This has been largely yawned at in a rising market as just something that people have to do "to get on the ladder". Perhaps everyone in the industry just gives a nod and a wink rather than try to apply professional standards or, god forbid, prevent financial fraud.
Inasmuch as this can be proved, and let's face it, comparing tax returns and mortgage applications would be an easy start to proceedings, these folks are easy meat as scapegoats. Expect some estate agents and bankers to be bending over to much cheering from the public. These folks will be blameed for conducting fraud in a way that exacerbated property prices and caused people to overpay and go bankrupt later. Compensation will undoubtedly be demanded as with the endowments scandal. Rule One says that punters neever blame themselves for their stupidity and if they're poor, they must have been conned.
I'm given to understanding from some in the business that property assessors are also wont to overvalue properties in order to justify a sufficient mortgage to make a large "Offers over" bid. Obviously this too can be seen as fraud which exacerbates the bubble. Since these people are professionals, and should clearly have known better than the punters that these houses were overvalued. Expect them to be in line for the pillory too.
My greatest worry about all this is that free trade, rather than people's greed, will be blamed for the debacle. The logic that if bubbles can happen in free markets then these markets neeed to be controlled will have a seductive appeal to punters who don't want to think too hard, and politicians who always want more power. In that vein, I suspect the BoE might cops some blame too and we'll see politicians back in charge of interest rates (assuming of course that the currency survives - if the politicians go the printing route, it might not). There's precedent here too: stockjobbing was banned for half a century after the South Seas Bubble.
The US overtook Britain as a world power following the last cycle since they were creditors and we debtors. After this one, I suspect that China will emerge from a bad depression to overtake thee US. That they're holding quite such a large stake in US bonds does make me wonder if they've already thought this through. In spending beyond its means, the US is voluntarily cutting its own throat.
MMM! In some way it would need to be linked to costs, including interest payments. Surely if interest rates rise, costs and prices rise, so inflation rises.
In your scenario, dont interest rates fall to a point where they could become negative?
I wouldnt mind being linked to inflation, up or down. It should be the same in real terms.
That is a view but as I said, should there be a change in the rent acts to bring the UK into line with Europe and many other countries then letting will become less favourable to the landlords. Neither can tenants simply be charged a percentage of a property value as they are not investing, they are primarily limited by ability to pay thus putting a firm cap on the rent level - and that is before the state decides to impose limits to protect the enlarged sector.
Agreed, but ISTM that this is what many are being 'fooled' into doing.
and so is them cashing out and flooding the market with houses for sale. Many of these sellers will reduce the price to the level that they need to sell it depressing the overall market (and to some extent bring the rental yields back to an acceptable level for those that remain landlords.
I can see that where a landlord is forced to keep his property market forces will reduce the rent. I don't accept that all (or even most) will be prepared to remain being landlords in such a market.
I meant to add that the reason I predict that amendments will be made to the rent acts is that the government will try to direct rent review panels to control (downwards) the rent levels of those on welfare and now more commonly, in retirement. It has a vested interest to cap rents since it has over the years seen a huge and unnecessary explosion in this expenditure.
If you want to make a distinction between free markets and greed, can you explain how greed can be prevented from having such consequences under a free market system? Seems to me you can't have one without the other...
Why? It's the owner who took on the lending, not the renter.
Depends how they rig the inflation index. Seems to me that rents and mortgages ought to be in there.
I think it's quite hard to run a negative interest rate regime (*). Basically uyou'd be asking people to pay banks to hold their money. That could work only to a very small extent I suspect.
I'm suggesting though that if things go at least as badly as in Japan, then we, like them, will have an effectively zero interest rate. It should fascinate the commentators who say that house prices can't fall with low interest rates that they fell 90% with a zero rate.
I don't think it can. However, I tend to agree with Schumpeter's argument in favour of bubbles and crashes: the bubbles let you test out various theories on a new technology and the crash wipes out the ones that aren't economical. Thus is progress made.
Of course having a bubble in assets that just merely sit there, is obviously not quite so useful.
In short I think you can't prevent credit and you can't escape greed. You can change the rules of course, but all that's ever achieved is to ensure that the asset the third generation go mad on next time will be a different one. Line up now for the AI's Bubble of 2070.
I nearly added, (and dont know why I didnt), that market forces will obviously prevail and, if the rent is out of line with the market, the tenants will move elsewhere unless it is brought into line.
This is kind of what I meant. They are being fooled into believing that they are easily rentable for a 7% yield. In some cases they are promised a 7% yield as part of the sales agreement (the builder pays them the difference for the first 2 years but that is instead of the 'normal' offers available on new builds). I know they are doing this as, as a know local potential 'investor', I have had the sales pitch. I declined. To get this yield you have to pitch your rent right at the top of the range for the area (1200 pm instead of 750 for my older property).
I bet none of the buyers who have signed up have actually looked at the local rental market and asked "what demand could there possibly be for top end rental properties". The first of these new blocks was finished some years ago and did command premimum rents at that level, so this is what they see when they look in the agency windows. But that block was just a small percentage of the total available stock, when all these new blocks are finished 50% of the available 2 bed stock will be looking for premium rentals and IMHO tenants just aren't going to be there, BICBW!
OK. If landlords buy properties in a place where they are unlikely to find tenants, they arent very professional. The fact is that if you cant rent somewhere, the rent is probably too high and you have to drop it to the point when it lets, (or you wait), or you increase the specification, or whatever, or you keep it empty, or you sell. The market will find it's level, no matter how many new flats are built. At some level, people will move from places where rents are higher, and commute, (I dont know where you live, so this is just an example of market forces).
Voids are not unusual, and landlords need to build an allowance for it. I use 25% and, if I get better occupancy, it's a bonus. This is the market adjusting - a professional landlord will take account of it and react appropriately.
They will be able to get tenants at some price - maybe not at a level they would like, or even enough to pay the loan, but they will be able to find tenants.
The level will be somewhere between Free, ( which actually means that the landlord doesnt have to pay water rates, council tax, electric and gas, so it does have a value, albeit nominal), and the current rent levels.
I have owned properties where the rent didnt cover the loan, (still do!!), so I have to fund the shortfall from other income. I have owned properties where I have avoided evicting non paying tenants until it suits me, thus avoiding the above mentioned costs.
They either get with the market, or lose money, (not forgetting to blame the people who lent them the money and the people who convinced them to buy - as appropriate )
I note the inverted comments, and could suggest that they actually fool themselves into buying these things. I have, probably sold around 3000 properties for/to people over the years, and there are so many checks and balances, and so much time between offering and exchanging, and so many things in the process that can discourage people from buying that, in general, they can only have themselves to blame if they think they got it wrong after the event.
I guess there are professional landlords, and those who think it is easy to make a fast buck. The former will have some kind of strategy, (even if it is only a back of the cigarette packet one), and will weigh the options of selling against retaining. If selling is the right thing to do, they will do it.
The "amateurs" soon find out that it is not so easy, and that it takes time to make it work - usually time that they either cannot afford, or will not afford.
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