Happy talk

It is safe to go back in the water. The crash is over. Interest rates are coming down, and house prices are ready to take off again.

It never ceases to amaze me how much this country needs to believe in the housing market. Consider this article today from the London Evening Standard:

"House prices in London will not crash next year, according to the majority of pundits. They believe prices will freeze - although a handful of experts are more optimistic and are forecasting rises of up to six per cent. However, industry insiders agree that the number of sales is likely to be about 15 per cent lower than this year as mortgages become more difficult to arrange. London estate agent chain Kinleigh Folkard & Hayward believes the market will remain "price neutral" next year. "

Any A Level student would spot the inconsistency here. If sales are going down, then unsold inventory must be going up. Therefore, it is hard to see how prices could be going up six percent. But whatever, the need to believe is strong.

The Daily Express were also singing a happy song this morning. This time it was about the likelihood of lower interest rates:

"MILLIONS of home owners can look forward to a happy New Year with interest rates set to tumble, experts predicted last night. The Bank of England is expected to announce a quarter-point drop as early as next month. And in a further boost for borrowers, industry leaders said rates may fall to five per cent or even lower by the middle of the year. Bank bosses paved the way earlier this month by dropping the base rate from 5.75 to 5.5 per cent – the first cut since August 2005.

It is hoped another cut in interest rates will inject life into Britain’s flagging housing market. The global credit crunch, sparked by “sub-prime” borrowers in the US defaulting on their loans, has driven up the price at which banks lend money to each another. "

You have to laugh at that line beginning "it is hoped...". Personally, I "hope" nothing of the sort. I want all this housing madness to stop. I believe a further surge in house prices will do enormous damage to this country. A correction will come, and the longer it is delayed, the more painful it will be.

Suppose that the Daily Express is right and the housing market recovers due to lower interest rates. It can only happen if banks power up the credit creation machine and begin pouring out mortgages. Since incomes aren't rising, a further surge in house prices can only happen on the back of a rise in personal sector indebtedness. Britain's households are already cracking up under the weight of personal debt. It is time clean up the mess.