Thursday, 13 November 2008

Where did my home equity go?

This chart is the UK economy's dirty little secret. Years of strong economic growth were bankrolled by housing equity withdrawal.

The formula was breathtakingly simple:

  • Banks provided huge amounts of credit at low interest rates to the housing market.

  • This cheap credit created double digit house price inflation, which in turn generated huge increases in housing equity.

  • Homeowners used these gains in housing equity to take out home equity loans.

  • These home equity loans fueled a consumption boom, which maintained impressive GDP growth rates.

    The underlying health of the economy remained, at best, ropey. Real income growth was distinctly unimpressive, while productivity growth was weak.

    Her Majesty's government also played its part. During the boom years, Brown borrowed to pay for a surge in public expenditure, running up some impressive fiscal deficits along the way. The excesses all ended up in the external deficit. Both the consumption boom and the government spendfest pulled in imports.

    House prices are now falling, and everything goes into reverse. Home equity is declining and therefore banks can not issue any new home equity loans. Consumption is now contracting, tax revenues are declining and the economy is in recession.

    Brown still thinks he can spend his way out of trouble. In reality, he will have a hard time covering existing expenditure plans as the tax base shrinks and unemployment rises.

    If only the house prices could again start to rise, then everything would be alright. If only.......

    John Pickworth said...

    Even if the economy were to be magically okay in the morning... the banks are never go to loan again like they did in the golden days. Not for a long long while at least.

    Mitch said...

    Did he deliberately set out to do this or was it already happening and he made it worse?

    Anonymous said...

    Think about it: an economy where tarts rolled around drunk on binge-drinking sessions for ten years was never really a world-beating, super-efficient thing. It was just a bunch of low-grade people enjoying an orgy of borrowed money. Service in the UK still sucked if it was delivered by a real Brit, real Brits still remained barely educated and civilised for the word of work: it was all mirage cooked up by New Labour: worked brilliantly until it stopped working.

    Mark Wadsworth said...

    As my learned chum DBC Reed's recent letter in The Graun said:

    Alistair Darling's "Clueless in Lewis" interview is more alarming for the fact that the Conservative opposition has even less idea and that this lack of basic economic understanding has been around for decades.

    You cannot lower interest rates to stimulate demand without cheap credit being diverted into house-price rises and then bubbles. The answer is to block the credit going into housing with a tax. As the inflationary element in the price of a house is the land underneath, that is what you tax. It really is as simple as that.

    DBC Reed, Northampton

    As to whether Nulab created the debt/house price bubble deliberately, of course they did, absolutely cold hearted calculation. If there had ever been a right time to replace Council Tax, IHT, SDLT, Business Rates etc with a Land Value Tax it would have been in 1997.

    powerman said...

    Brown didn't deliberately set out to do this, he just really doesn't understand economics at its core, no socialist does.

    Anonymous said...

    I think so too. I don't think he considered economic or fiscal policy until recently.
    He has got the same brain as his voters.

    Mark Wadsworth said...

    Powerman, Labour LVT campaigners tell me he was warned about house price bubbles, i.e. he knew exactly what he was doing.

    electro-kevin said...

    Uncontrolled immigration was used to drive up the economy - not just through cheap and willing labour, but through demand for accommodation.

    Markbaldy said...

    Yes - all mirage no miracle.
    I have said for years that the boom was just not real... I am surprised it lasted as long as it did to be honest !
    No wonder Brown is desperate to boost the housing market... it was just wealth created from within and not wealth from exports.
    I am not sure he did it deliberately or he just landed on his feet for 10 years... I think he is too dumb to have planned it... he probably got carried along with the current... as did those that thought property was a fast track to riches without actually working.
    He will fail in his "binge to recover" plan - it is irresponsible, desperate, immoral and will leave the UK bankrupt - people have lost their appetite for more debt and the downward spiral is gathering momentum.
    RIP the UK.

    sobers said...

    I think Nulabour are economically illiterate and didn't have a clue what was happening - they just loved the tax revenue, and spent it as fast as they could. They didn't realise the bubble was inflating, or understand that the only reason why the UK hadn't hit the inflation buffers as in previous booms was the China Effect of cheap imports.

    However with regards to the immigration issue, I'm convinced that was a conscious decision to allow unrestrained immigration, both from Eastern Europe and the old Empire countries, and also not to work hard to prevent mass illegal immigration, or waves of so called 'refugees'. The addition of the Human Rights Act also prevented many illegals/failed asylum seekers from being deported.