Wednesday, 2 September 2009

The house price guarantee

It is painful admission, but UK house prices are beginning to recover. In fact, the monthly increases look very much like those recorded during the bubble years. If present trends continue, then within about 15 months, the UK housing market will have recaptured all the losses recorded since October 2007.

The bubble might be back, but its return is due to the implicit guarantee that the Bank of England and the Treasury have put in place as a response to the financial crisis. The government has given home owners now have an implicit insurance policy that the taxpayer will make up any losses on property speculation. It was a guarantee that was easily granted, and will prove virtually impossible to remove.

With each passing price increase, confidence in this guarantee will grow, and as it does, more and more speculators will try to take advantage of it. With the Bank of England pursuing their extraordinary policies of near zero rates and cash creation, everything is primed for a renewed round of speculation.

It is tempting to think that within a few years time, that another financial crisis, similar to the recent one will take place, with its dramatic bank failures and dropping asset prices. However, I see another scenario. The UK will drift into an extended period of increased government intervention, stagnant growth, and asset inflation. The state and the financial system are welded together, the interests of finance dominating the policy stance of the government.

In reality, neither the Bank of England nor the Treasury have any clue how to disentange the financial system from the taxpayer. They have no idea how to remove the tangled web of guarantees, liquidity support and capital injections.

Since they don't have an effective exit strategy, the support will continue indefinitely. Just watch what happens next to house prices.


Anonymous said...

Glad to see you are coming round to my way of thinking Alice. I also agree about the subtrend growth for the next few years, which I think will be replicated in all indebted Western economies.

You are wrong that the support will continue forever though - it is easy to withdraw in pieces. Just because *you* don't understand how to do it doesn't mean the BoE doesn't understand how to do it.

This is a logical fallacy you have made many times (because you can't understand something, nobody can understand it) which is why your predictions have generally been wrong.

Anonymous said...

you disappoint me. You have no faith in your own analysis, and you are easily convinced by the strategy of people living in la-la land. I shall no return to your blog

Anonymous said...

AC: "The bubble might be back, but its return is due to the implicit guarantee that the Bank of England and the Treasury have put in place as a response to the financial crisis."

This is a lot like 'distribution'.

carol said...

@"Anonymous 1" - You might want to look up this word, if you're not familiar with it already: hubris.

Alice - In my town in Greater Manchester, I am still seeing asking prices dropping by 5-20K at a time. And still very few sales. Rents are also falling.

The next leg down is due to start in the autumn or over the winter.

Just wait patiently. Rome didn't collapse in a day.

Anonymous said...

Unfortunately, housing is like an investment and tax tithe drawn from the population and handed over to the banks and the elite to do whatever investing with it they wish (usually overseas investing and not in the country). Investment into the country is usually done by foreignors. Britain's elite, however, pursue high profits in overseas markets and fund this through inflating house and land prices in the UK: it is a virtuous money making machine.

Marchamont Needham said...

Government policy is purely to create a short term bubble to prop up the economy in time for the election. That's what we're seeing now.

But after the election God help us all. If the Tories win we'll get swingeing cuts and a deeper recession. If Labour win we'll get a gilts strike. Either way interest rates will have to rise and the Brown Bubble will pop.

Electro-Kevin said...

Ha ha @ Carol.

What happens to toxic debt when assets rise in value again ? Mortgage defaulters have been kept in place rather than have their houses repossessed - so is this a case of simply starting where we left off when house prices regain their value ?

I feel it in my fingers ... I feel it in my toes ...

Not because of any romantic inclination, but simply because with QE it's as though we've been eating our limbs to stop ourselves from starving.

Britain is f***** in every way. In almost every measure of what makes a country great, beautiful and wealthy Nu Lab have operated a policy of utter debasement.

"Just because you don't understand how to do it it doesn't mean that the BofE doesn't" Funny. And there was I thinking the BofE were acting on a wing and a prayer.

Actually, when it comes to esotericism I get suspicious of people. It normally means they're bluffing or lying. And - as with the expensively equipped Met Office - if I really want to know what the weather is doing I look out of the window.

Anonymous said...

As long as the Bank of England keeps inflation in check by putting interest rates up to sensible levles when necessary, all will be well... except for for those who cannot avoid excessive taxation.

B. in C.

fajensen said...

Here in Denmark rumours are that the banks have begun to move defaulted property into a holding company - at present valuation - and attempt to rent it out. That way prices does not have to fall as they would in open trade and the bank therefore does not have to take the loss on its balance sheet. The holding company will, eventually, but eventually may be a long time off. Possibly when the people responsible for the mess are safely retired.

Anyway, per citizen the UK is clearly less screwed than Denmark (or perhaps we were lending to you).

I wonder:

What ever the Hell did "they" do?? Gear 800:1 instead of the conservative 80:1 that has served us so well till now? Fund the entire Icelandic lending spree?? Buy stock in Pakistan on margin?

Following is a table of European government’s commitments. All figures are in billions of euros and include capital injections, guarantees granted, effective asset relief and liquidity interventions.

United Kingdom 781.2
Denmark 593.9 <--- Ouch!
Germany 554.2
Ireland 384.5
France 350.1
Belgium 264.5
Netherlands 246.1
Austria 165
Sweden 142
Spain 130

Anonymous said...

I've quite got used to living in fantasy land economics where the gov't allows people to avoid the nagative consequences of their own misguided decision making. I may even vote Labour come GE time.

Sod it, in for a penny, in for a £bn.


Anonymous said...

I think they saw a similar uptick in America, before it headed down for the next leg. I don't trust these figures, it doesn't seem right, unless the cash rich are moving into property as a means of protecting their wealth from the coming inflation.
It seems as if the cash poor can't borrow to buy. Like any Ponzi scheme, housing requires punters coming in at the bottom, with unemployment heading up, especially from the state sector next year, this can't be sustainable.

manfromthefuture said...

Its true that prices have been rising this summer here in London. However, I agree that this cannot continue. One way or another nation will be forced to sort out its debt. None of the fundamental problems have gone away.

My biggest fear is inflation. If we get runaway inflation, house prices will go up, but that is not to say that they have increased in real value. So it’s important to distinguish between price and value. Inflation right now is running a lot higher that official figures admit. Everything I see is going up. Recent figures in the news claiming deflation are (apparently) due to oil prices dropping. That I see as a temporary fluctuation.

Most banks are quoting a lending variable rate under 4% how can they make against inflation at this rate? HSBC today announced loans at under 2%. Their lowest ever rate! I can only conclude it works because depositors are getting an even worse deal. These low rates cant continue either.

I have a horrible feeling that the spending power of cash is about to crash, and if that happens house prices will go up a lot, but this is not to say that they have actually appreciated.

Anonymous said...

Alice dear, stick to your guns. This is fundamental. The price of property on any measure is too high. We have an economy which no longer produces anything tangible. We are as EK says, fu##ed.

There is a long way to go before houses are affordable, before rental returns are adequate, and before the price of property reflects the cost of building it.

Lots of people are repaying their mortgages. They are scared. They can see the lack of work - I know lots of people on short time. They fully know that this mega printrun of money the B of E is churning out is going to have to be repaid, and its us who will be paying it. There are precious few people who can safely afford to speculate on houses just now.

TheBinMan said...

Sucker Rally.

bill said...

I can't believe i'm about to tell you this for the 10th time, but here goes. If the UK is refused credit at rates they can afford via lower bond prices (and hence higher yields), then any guarantees will not be worth the paper they are printed on. This scenario will happen eventually.

Remember early last year when the housing market turned down in an instant? Then fell like a stone? Why do you think it couldn't turn round again just as quickly a second time? It could and will at some point. Remember all the debt! It is still there!

Finally, remember a lot of the people holding cash have just committed to the housing market, propping it up. First time down is always the biggest bounce. Who will prop it up second time down?

Gono said...

bill - totally agree. How about 3rd time? 4th?

manfromthefuture - re inflation causing house prices to rise. WRONG. inflation will cause interest rates to rise and debt heavy assets to be liquidated. It will take years and a flush out of the debt before inflation filters into house prices. Look at the seventies. When inflation hit 10% and rates rose to suit, prices fell for FOUR YEARS, before eventually bottoming. Check long term charts and see for your self.

mike said...

Consumers are now paying off more debt than they are borrowing. It's only a matter of time before that feeds through into house price falls.

Markbaldy said...

Pure hype leading up to the general election - the return of Gordon's miracle economy !
When reality sets in and we start to live within our means, then the REAL price drops will occur.
The bailouts and printing money will end soon - until then, the UK will be fantasy island !

Anonymous said...
This comment has been removed by a blog administrator.
TheBinMan said...

We're only days away from the point of realisation that we are in a deflationary depression/ economic collapse.(no G20 meetings this time Gordon))

We are truly living in historic times.

The coming stockmarket collapse will be breathtakingly beautiful, in it's own way it will be a masterpiece, the absolute fear and bewilderment it will create should keep peoples wallets shut for a very long time.

Sadly,this summers rally has just been the denial stage,the last blast as life as we knew it. It's going to start getting real ugly from here on in.

Days away.

TheBinMan said...

btw the Dec 09 futures contract on house prices at £163,000 (163) is an excellent short,fantastic short.

I love suckers,they keep me well off.

Anonymous said...

I look forward to the UK economy and its people getting the enema of a generation. People's behaviour over the last 12 years has been appalling: the boozing, violence, deceit. It is hard to feel sympathy for all of it hitting the rails.

I recommend leaving for a better country.

PL said...

Hold your flippin' nerve Alice, this dead cat ain't bouncing very high. Surprised at you.

Nationalist said...

I feel inflation is coming, but what I don't know is if the government will fight it with higer interest rates or let it rip on the grounds it destroys debt (while robbing savers.)

Just to be on the safe side I've moved half my savings to CHF.

Anonymous said...

The graphs of total number of sales from the land registry suggest flattening, not an uptick, especially when seasonally adjusted.

Overall, the drop on house sales remains astonishing - from what must be an average of over 100,000 annually from 2003 through to 2007, with the bottom flattening out at around 35,000 this year. That surely has to translate into a 60% real price drop over time - half of that being due to inflation, say, from 2007 to around 2013/2018.

B. in C.

Anonymous said...

P.S. Sorry about the "annually" in mine above - it should be monthly of course.

B. in C.

Anonymous said...

People's behaviour over the last 12 years has been appalling: the boozing, violence, deceit.

the serfs imitating their masters!