Pop! Britain's Bubble Economy Confounds Experts. Economic disaster one rate rise away ?

It is true that changes in property prices are not included in RPI nor should they be.

RPI intends to estimate day to day living costs.

To the few of us that buy houses outright the cost is a one off purchase and not a day to day living cost. Most of us, of course, buy property through a mortgage facility. The cost of this is a day to day living cost.

Mortgage costs are not included in one version of RPI either.

However, rent relates directly to both property values and mortgage costs. These are included.

Transport and fuel costs are included.

Details of the RPI basket can be ownloaded from here

select RPI methodology and articles

"Roger Dewhurst" wrote

Sounds nasty, but if it's going to happen, bring it on.

The problem we're facing is how to avoid a debt-deflation, which would make cash more valuable, cut wages, and make the pile of debt harder to pay off.

There are two drivers of debt-deflation:

1) Debt paid off - people try to pay their debt down as fast as possible lest it become even harder to pay later as deflation ratchets up. Paying down debt decreases the money supply because that amount of credit is then no longer in circulation. This in itself makes all remaining money more valuable and all remaining debt with it.

2) Debt reneged upon or otherwise cancelled - effectively the creditor loses the money, and the money is gone from the money supply. Same result.

Obviously cancellind the debt amounts to (2) and would simply bring on the crisis imeediately and all at once. The economy would collapse.

There's a third way, which is what happens in a slow debt-deflation. As cash becomes more valuable and asset prices held up by debt collapse (the usual in debt-deflations is 67% to 90%) those who are still in employment find that their wages do now cover the basics of life. Effectively their costs come down as asset prices collapse and ordinary shop proces drop due to deflation.

It has in past credit bubbles been the saving of many economies (if it goes badly then currencies collapse and are repudiated, destroying an economy almost totally) leading to low inflation and low but steady growth after the deflationary period ends. The interim of course can be uncomfortable for some and can in some cases be protracted. The previous largest credit bubble in British history was the South Seas Bubble in

1720 and it led to a six decade deflation. It could have been worse though as it came within a whisker of destroying the Bank of England, both houses of Parliament (around half of each house had taken bribes to ramp the shares and the Bank had played games to destroy the South Seas Company it saw as a competitor, as well as trying to destroy the Conservative government) and the Royalty (most of the royal family and the Court turned out to also have taken bribes from the company to hype shares).

I doubt that anyone who understands credit bubbles would be prepared to argue that in terms of participation, or in gross debt outstanding in ratio to GDP, that this bubble is smaller than the South Seas Bubble.

FoFP

Whether that be true or not there is a world of difference.

The South Seas Bubble was based on precisely nothing.

The general consensus is that today's credit boom is based on property values.

So long as people continue to live in houses nobody is ever able to argue that they have no intrinsic value. It may well be that house prices may take a dip from time to time. They regularly have. There exists a ready supply of entrants into the housing market keen to take advantage of any such dip to get a foot on the property ladder.

Everybody needs housing. Paying rent is dead money lining somebody else's pocket.

Actually it was based on government debt.

A substantial part of it is.

If they merely return to their value at the start of the credit bubble, say around deregulation in 1984, then houses will still have intrinsic value (the folks valuing them in 1984 will simply be more accurate about their intrinsic value than those valuing them now) but we'll be in a whole heap of trouble. Tulips too still have their intrinsic value, but nobody will exchange a house and a business for one.

If they can't get credit, how much will they pay?

Also true in Tokyo where at one point house prices had dropped 89% when the base rate was zero percent. That people need something means that a credit bubble distorting its value will cause more trouble, not less.

Anybody paying interest is paying dead money to line my pocket. I use that interest to cover rent and beer.

FoFP

You can buy terraces 5 miles from Manchester Town center for around 3-6 grand. Those houses are not even worth the price of the bricks to build them. The only reason they sell at all is that speculators hope they will be compulsory purchased by the council for demolition.

If the economy goes bad the millions of people who currently want to come and work in the UK will go elsewhere easing demand for property.

Sounds like France !

Nevertheless, it is still a bubble. Houses can only really be said to cost as much as they cost to buy the land on which they stand and the cost of building them; any more over and above this is value not based on anything solid.

This being the case, the credit boom today is based _mostly_ on nothing, and will only come to an end when the lenders get scared of lending money to people in case they wriggle out of it.

The obvious ploy is to increment interest rates a little and see what happens, along with selectively building more two and three-bedroom houses only. These will scare the more extreme borrowers, and help to deflate the housing market a little (care should be taken here; deflating the housing market needs doing slowly, carefully and painstakingly to avoid a catastrophic feedback loop).

Doh! That is the case for _anything_, all you are stating is that cost price=raw materials plus labour. So what? Since when has sales price had a fixed relationship to cost price?

Not that we've seen any hyping of house prices or credit. No sireee.

Sure, even if prices drop 90% then folks will still have the house they willingly paid for. I guess it must be annoying in Japan to have neighbours moving in paying 11% of what you did and you being saddled with debt for the rest of your life when they're not, but them's the breaks in a speculative market.

The real hit in a credit bubble comes from the deflation. Eventually as cash becomes more valuable then folks either have to take a cut in wages or be sacked. That makes it harder to service the debt and even if they keep the house, causes the two thirds of the economy dependent on growing consumer spending to crash, with the loss of jobs that entails. Then there's the folks who can't move to a new job because they can't sell their house because they're in negative equity, and anyway nobody can get credit to buy at a price at which they'll sell.

Assets can maintain intrinsic value. I daresay shares in 1932 still had some intrinsic value, but the economy can still be blown to hell.

Check out the bond markets for the last ten days. There are few now who doubt the carry trades are beginning to unwind. Our housing bubble has been built on credit from China and Japan (as far as I can tell I'm the last person left in the UK who still saves up to buy things so it isn't coming from us) and our bankers are starting to call in our loans.

In a 70 year credit cycle, 30 years is still just recent history.

That won't pan out because many who have paid off their mortgages are now depending on reversionary cash from the house in lieu of the pension they don't have. They'll have severe problems if there's no way to raise that cash.

As I tried to point out: housing is only *part* of the credit bubble. Government debts and unfunded pension liabilities are a huge part too.

Indeed.

There's the BTLers to start with. When prices start coming down, the bankers are gonna want more security in the form of cash, or they'll call in the loans.

Then there's the lack or remortgage cash. That means a lack of consumer demand. Since at least half of job creation in the past decade and a half has been overbuilding of retail floorspace, that means we're headed towards mass redundancies. Car loans and credit card loans will exacerbate this in a deflation. Those people then won't be able to service their six times salaries mortgages and will be reposessed if they don't sell.

For the folks that stay put, they're likely to see problems from empty reposessed houses and the kinds of trouble they bring as well as what will be the mother of all recessions.

Or a dearth of credit for the buyers.

OK, so how do you explain a 89% fall in prices in Tokyo with base rates of zero and unemployment at 5% ? Did people merely choose not to upgrade, or did banks in trouble decide that they couldn't risk lending money to buy houses?

As someone pointed out: if we get a recession, immigrants legal and otherwise will want to go elsewhere, and they're essentially all of the excess demand over what's being built. As for bad debts, our banks have been raising provisions against those for some months now and I expect that to continue, in Spades.

Nobody *ever* agrees with me. I'm still correct though.

As long as I have cash, there'll always be more beer.

FoFP

Actually land prices here have quite a habit of falling by 90% during deflations. Even land prices don't always go up.

Lesson to be learned once every seventy years: credit looks like money. Credit is not money.

This could have been done back when Labour was originally elected in

1997. It's way too late now,.

A healthy economy needs house prices down by at least four fifths so that people won't spend a lifetime of debt service just to get a roof over their heads and so that they have enough disposable income to spend and to save for retirement. The only way to get from here to there is for prices to come down by about that amount and I cannot see a way for that to happen without there being a debt-deflation.

Every great debt bubble in history has led to one of two outcomes. The first, and least unpleasant is a debt-deflation. The second is a hyperinflation, currency repudiation, collapse of economy, and return to gold and barter. It'd really be best we try to run with the first of those.

FoFP

Same as it must annoying to have to live with your parents since you cant afford a house as they are so expensive, but them's the breaks in a speculative market.

Well maybe they wont come down then, and people _will_ spend a lifetime of debt service just to get a roof over their heads and they wont have enough disposable income to spend and to save for retirement. People being well off in retirement might even be regarded as an aberration historically, there is certainly nothing to say that is a natural state of affairs or is gnerally attainable. Perhaps people prefer to trade off a good time now for a worse time later, who'se to say they are wrong?

You might think things are bad now but they were worse at pretty much any other time you care to mention. In fact, I'm not sure there ever was such a great time except for a tiny fraction of the population, and the rest certainly couldnt afford _even_ "to spend a lifetime of debt service just to get a roof over their heads". They worked all their lives, lived in a shit hole hovel and died early and poor. You seem to be yearning for some economic shangri-la that never existed.

In article , Crowley writes

Wrong. So why should I trust the rest?

says its 6.30 for 2006 (all zones).

Of course we have. We live in a purported free market economy. Everyone hypes their wares. The 'hype' industry is quite a major one.

But prices are not going to drop 90% or anything near it.

And what does a government do about deflation assuming it comes to that?

In any case, shares are far more of a liquid asset than houses.

And the equity market has been strong. I assure you that you are not the last person left who saves. bankers cannot all in loans so long as agreed repayment shedules are met.

What cycle? 40 years ago when I first started looking after my own money there were credit controls. All hire purchase agreements required a statutory deposit likewise house purchase mortgage agreements which were in effect rationed by the lenders.

The demon word in those days was inflation which raged on regardless.

Some are of course but in the vast main this is not the case. Many people of my age are instead genwerating great anxieties over fears that the taxman will hive off a significant proportion of their major asset before their loved ones inherit it or that the council will nab it should they have to go into residential care.

Public debt stands at 42.2% od GDP which is modest when set alongside our European competitors and thus presumably sustainable. Pensions do present grounds for future anxiety. It is in this field that your fears regarding personal savings are justified. One day some government will learn that people will only provide for their futures if they are not penalised for so doing.

Let's hope that that realisation is not too long in coming but that's not waht we are discussing here.

They can't!

IIRC retailing accounts for around 20% of the economy and a significant proportion of that is food.

that means we're headed

And what proportion of the work force has a 6x salary mortgage do you think?

It happened back in the 60's mortgage rationing statutory deposits. Folk like me were buying their houses just the same. Builders couldn't get them up fast enough.I had to put £50 (more than a months salary then) deposit on mine before it was built to ensure I would be allowed to buy it at the offer price when it was completed. The builder could afford to be tardy, If you got fed up and asked for your money back he'd happily give you it and put up the price to the next buyer. If you were tardy in completing the sale once it was built he'd give you your money back and still put the price up.

I already have! Static aging population growth birth rate (9.37/1000) barely keeping pace with death rate (9.16/1000) fertility rate 1.4 births per woman (not even reproductive rate) Does this not tell you all you want to know about potential housing demand in Japan?

Even so a two bedroom flat in Tokyo will still cost you more than the same in London.

Simply not true. Immigrants tend to feature at the lower end of the socio economic scale which is why they are here. They don't compete for new housing. They tend to live intensively in cheap rented accomodation coming to the end of its useful life.