Saturday, 7 July 2007

UK housing market looking into the abyss

This week was the turning point. The Bank of England, faced with incontrovertible evidence of rising inflationary pressure, finally pulled the plug on the housing bubble and raised interest rates.

Moreover, everyone understands that rates won't be sticking at 5.75 percent for long. Homeowners can expect at least one more rate increase by the end of the year. Even 6 percent may not be the end of it; inflation is a stubborn beast; it is difficult to kill quickly. It would be foolish to rule out further increases; perhaps later this year or maybe early next year.

The rate increase brought out the usual and predictable screams of anguish from homeowners and businesses. Mortgage payments are spiralling upwards; and a wave of home repossessions will follow. Likewise, businesses will find their financing costs higher; investment will decline, bankruptcies will increase, and unemployment will rise.

However, should we feel sorry for anyone facing repossession? After all, did anyone force homebyers to sign up for bloated mortgages? Many people understood the dangers that come with speculative bubbles. They preferred to stay renting and faced a barrage of contemptuous commentary about being shut out from owning a home forever.

Homeowners facing repossession certainly brought some of their woes upon themselves. Nevertheless, there are other, more guilty, bubble-villians more deserving of contempt. Starting from the top; the Bank of England and its irresponsible recent monetary policy decisions, created a period of ridiculously low interest rates that lured unsuspecting and financially naive borrowers into the housing market.

Estate agents also bear a heavy responsibility. They talked up the market; misled people with their ignorant claims that housing is an investment, and that in the long run, it is impossible to lose money. They were ably assisted by a plethora of cheap and nasty property shows that broadcasted the lie that the housing market was a bottomless pit of untapped wealth.

Finally, there are the banks and building societies. Rather than turning away desperate homebuyers, lending institutions entrapped them with deceptive teaser rates and fixed charges. Lending standards deteriorated. Lending volumes mattered more than lending quality. For the last five years, the banks and building societies were setting themselves up for a wave of defaults and deteriorating balance sheets. Don't be surprised to hear about failing banks and bankrupt bulding societies.

As my dear old Grandma always said; stupidity always has a cost; stupidity is always punished. Now, the housing market moves from hubris to retribution. The agony of higher interest rates will be protracted. There will be a falling off and what a falling off it will be.


amiguser said...

A fallng housing market, is politically toxic to the government (witness what happened to the tories after 91). Tell us why the government will not try to prevent a housing implosion.
What is to stop the government printing as much money as necessary?

thks for the blog, not many UK housing bloggs.

Anonymous said...

>What is to stop the government printing as much money as necessary?

is it the gov that decides for that or is it the BoE?

BoE is raising interest rates just to fight inflation, printing more money will make that useless.

if labour (or tories or whatever) did take some care about housing market, they should have prevented the bubble from creating (raising property taxes for sample)

they simply cannot help avoiding it from bursting.

regards from italy


Do you really think the BOE is independeant, when its members are appointed by Alistair Darling?

Which Inflatiion rate are u refering too - the RPI, CPI or maybe we will have our own version of the Core rate, with everything that goes up in price taken out.

The housing bubble is the modern version of opium for the middle class, since without it, we would have anti war demos every week.

laplace77 said...

hi amigauser,

don't know much about BoE but the fact it has a fixed "amximum allowable" rate for inflaction.

I know italian CB (BdI) lost much of its indipendance since we (hopefully) joined the Euro; now we just have to follow Germany, which is growing by exports and technology (not by bubbles)

I know CPI is an index which does not include energy and foods, since they are "too volatile" and so can "alter" periodical reports.

however, both oil and food are supposed to raise and at a pretty constant rate:
- oil because it's gonna be less than needed (see china and india growing their consumptions)
- food for some reason detailed by Nestle's officer (see here

so, given that oil and food prices will influence other prices and they will raise (even with volatility) CPI will remain high