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

Why can't you people see the wood for the trees? Britain imports more and more and produces less and less goods and services. If you are going to have a standard of living goods and service equivalent to imports must be exported. You cannot go on paying for an ever increasing bureaucracy which contributes nothing in goods and services and indeed actually inhibits the production of goods and services. All you are doing is taking in your own washing. It is unsustainable. It will collapse. The question only is when. When it does Enoch Powell's prediction will be fulfilled.

R

A need to get into perspecive.

In fact the UK GDP grew by 1.8% in 2005

2 The deficit on the balance of payments amounted to 2.5% of GDP

4 Thus we "got poorer" by around 0.7 percentage points except that GDP figures do not include earnings from foreign sources.

So the money went round in a circle 1.8% faster than the year before? Hooray!

Producing what? Just paying PC bozos to go round picking on old biddies with china pigs in their windows.

If only the GDP actually had some meaning.

R

Neither you nor I know this. What we do know is that in previous credit bubbles, such drops in prices are far from atypical.

Goverments in the past have tried various schemes, most of which amount to printing money. These attempts almost always led to some degree of repudiation of the currency and sometimes outright destruction of the currency. The conclusion form history is pretty much that it'sbetter to weather the deflation than to meddle with it.

Japan tried a kind of half-hearted version of this. The jury is still out but the story is shaping up to be that they turned a four year sharp debt-deflation into a 15 year blunt debt-deflation with an 89% hit on property prices and an 80% hit on stock prices with emergency interest rates of zero percent.

Whether if we had the vote we'd choose that option rather than a more painful four years is an open question. Personally I'd opt for the quick drop to get it all over with.

The less liquid the asset, the harder it is for peiople to get out with some of their wealth intact. As I've said before though, this isn't a housing bubble. The crash will come in something like derivatives (say mortgage-backs or CDO's) which are supposed to be very liquid. Global housing markets will simply suffer collateral damage as credit dries up. No mortgages means no crazy prices. Essentially housing will have to be priced at whatever the cash deposit is now.

The equity markets are secondary to the bond markets. If the bond markets go, then equity markets will follow, just as in 1987. Besides, the US and UK stockmarkets are in secular bear markets currently,. albeit towards the end of cyclical bull markets. That's not a good position from which to weather storms in the real money markets.

Which will make them short of cash and therefore unable to make further loans. *That's* what causes the grief for assets which depend on credit to maintain prices.

You seem to know your South Seas Bubble history. Do you think the high prices could have been reached without mass availability of credit?

The long-wave cycle.

Yup. Limits, financial or social, are typical in the early parts of a credit cycle. Often these are put in place after the bust of the previous cycle because "this must never happen again". The third generation is always the problem because even their parents can't remember the debt-deflation and so the third generation don't have a gut fear of getting into debt. That's why the run amok and get hit again.

Good inflation is typical in the early cycle, bad inflation in mid cycle, and the kind of disinflation that cuts interest rates and drives up asset prices in the late cycle. The end cycle typically brings the debt-deflation and clears the financial system for a renewal of good inflation.

I just read that 45% of folks have no pension savings. What would it take to make you think this is a problem?

Well, if the markets crash then their worries on that score will be eased. There's always a silver lining eh?

That's debt on the books. There's also PFI debt and the vast reservoir of unfunded pension and welfare promises.

They're socialists. They're *incapable* of learning this or they wouldn't be socialists.

Some banks are essentially already loaning BTLers the interest on their loans - though in disguised ways such as remortgages for 130% LTV. When they realise that this problem isn't temporary and is going to get wore, they'll shut them down and reposess or call in loans. All they have to do to precipitate the situation they need is to quit loaning the interest.

I read that two thirds of GDP is dependent on consumer sales. Also something like a third of jobs growth in the past five years has been in trades related to domestic housing.

Hard to say. More relevantly: what proportion of the population do you think could pay their mortgage if out of work? I just read that the majority of workers do not have the recommended savings of six months of salary to tide them over hard times. Back when I started work the recommended amount was a year of salary and I spent my first four years of work making sure I saved that amount before I bought anything more expensive than a boom-box. That attitude to financial safety is gone in the UK and sadly we'll all end up paying for it.

That's not what I'm talking about. I'm talking about situations like Japan five years ago or the US in the 1930's. You ask for a loan. They say they have no money and even if they did, they couldn't risk loaning it on assets which are falling in price. Japanese banks put any money they could get into bonds paying a fraction of a percent rather than loan it into domestic property markets. Sure, some people could still get loans, if they already had other assets on which to secure it, but even in Japan there weren't sufficient of those to provide any demand.

OK, what changed in the last six months to make prices rise again? Have all the women doubled production of kids? Can one year olds get mortages now? Your explanation does not fit the facts.

Indeed, but it's not the absolute level of prices which matter, but what happens to them relative to the debt outstanding against assets.

Util they acquire the wealth to buy. Anyway, even cheap rented accomodation provides demand at the bottom of housing markets and that's what supports the rest.

FoFP

I find it incredible that there are still people who do not understand that:

Interest is the rental payment on money borrowed. Interest is rent and if rent is "dead money" then it follows that interest is also dead money.

This is pretty clear with an endowment mortgage. The endowment part is essentially a piggy bank for the homeowner to save and pay off the debt (or that was the plan. most of them don't manage that nowadays which wasn't a surprise to some of us). The interest part, which for any new buyer is much larger, is purely a rental paynment on the debt and is money lost to the homeowner. In a typical 25 year mortgage, even if the endowment pays off the house, the total interest paid will amount to three and a half times the price paid for the house.

In a repayment mortgage, the same applies except that instead of saving to pay the debt, the debtor pays down a little of the debt each month. Again most of the payment is interest and all the interest is money lost to the debtor. Only the small fraction of repayment is money in their own bank account in the end. Of course this is complicated by the payments being averaged out over the loan, so that almost all the payment is interest at the start and almost all the payment is repayment in the end. In total though about 3.5 times as much is paid in interest (lost money) than is accumulated to the debtor.

The idea of "dead money" is of course an economic nonsense though. Any money spent getting someone what they want is money used for the only useful purpose to which in can be put. Thus rent, interest and payment for a beer is all good money if that's what the person paying it wants. The real "dead money" most people see in their lives is taxation, wher money gets taken from people and spent on shit they wouldn't want between now and the cold death of the universe.

FoFP

In article , Tumbleweed writes

There you go. I was looking at the central zones card, which is all I have even needed. But I can't see how it can be looked at as a fearsome indicator of soaring costs. Every visitor I meet says they can't believe how cheap it is to have unlimited all-day travel in London.

No they are not! If you start with a 100% IO mortgage on a house costing 100K, and that house increases in value to (say) 430K over 25 years (that's just 6%pa), and you've paid interest at an average of (say) 6%pa over that period (100K x 6% x 25 = 150K), then you now own 430K - 100K = 230K of equity and you've only paid 150K for it!

"M Holmes" wrote

Actually, I find it incredible that there are still people who do not understand that:

Over the long term, the rate of interest paid on mortgages is very close to the overall rate of house price inflation over the period.

"M Holmes" wrote

And the house value might end up at five times the price paid, leaving the homeowner having paid only 4.5 x price for an asset now worth 5 x price!!

This is very true.

However, you need to pay rent anyway. A rental agreement in no way gives a facility ever to own the property in question.

Taking the conventional re-payment mortgage as an example the interest burden reduces over time. Conventional rent doesn't.

There is a reasonable expectation over time that the value of a property will appreciate at least in line with inflation. Mortgage rates tend to fluctuate, generally speaking, rising and falling with inflation rates. Rents generally rise in line with inflation.

Endownment mortgages, of course were only fashionable in the days that mortgage interest qualified for tax relief and 40% of premiums paid into endownment mortgages qualified for tax relief. Thus a 10% mortgage interest rate translated to around 7.5% net. A £100 endownment premium translated to £90 net. You further saved on life insurance since the endownment automatically became paid up upon your death.

These savings plus compounded profits on the policy led to a reasonable expectation that your net outgoings would be exceeded by the net returns on your policy and indeed there would be a useful some left over to pay to you in tax free cash.

Alas, for everyone it was not to be. Chancellors don't like taxpayers having access to one way bets. Endowment tax relief was abolished. Sometimes afterwards MIRAS was abolished also. Insurance companies for a time still maintained that they could maintain the endownment mortgage as a worthwhile investment instrument. Then came the stock exchange crash.

I have in my desk at this moment an endownment policy (non qualifying) , part of such an arrangment, bought from my son at a price I wouldn't have paid anybody else. He really had a one way bet. When it matures I intend to split the proceeds between him and his other brother!

Your gain is all from speculation on housing. The interest is still money lost to you and will be subtracted from any gain to determine your profit.

The same would pertain if I borrowed money to buy shares. The shares could rise in value but any interest I paid in the meantime would be lost to me.

Interest is *rent* on money borrowed and is no different to any other form of monetary rent.

If you're still having trouble dealing with the concept then imagine borrowing money to bet on a horse. The interest is lost entirely independently of whether the horse wins or not. Replacing the horse with a bet on a house changes nothing.

FoFP

Indeed. Owning a property, should that be what is required, involves saving money to buy that property. One way is to rent property and save income until able to buy. Another way is to rent money, mortgage a property, and aim to buy it by paying off the mortgage. This often involves saving through the bank which loaned the money and supplied the mortgage on the property. The bank essentially "owns" the property until the mortgage is settled. Note that both of these involve paying rent until the property is bought: one renting property and one renting money.

In a conventional mortgage, payments are evened out over time and so the payee doesn't see the benefit of reducing interest because they are then required to pay more capital.

Rents have been falling here while mortgage payments have been rising with both interest rates and with house prices. Seems to me that I'm on the better end of that deal. We're now in a bigger place than we were at the same rent.

Or deflation.

That link seems to have broken lately.

[The number of things that very predictably went wrong with endowment mortgages elided....]

FoFP