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Shocking advice for the MPC

Stephanie Flanders | 10:40 UK time, Tuesday, 2 November 2010

If the Bank of England were really serious about helping the economy, it would be trying to tank the housing market. That is not quite how the economists at Fathom Consulting would put it, but it's a key implication of their latest report on UK monetary policy. The Monetary Policy Committee are unlikely to follow their advice - or not directly, anyway. But the policy paper will make for sobering reading as they prepare for the start of their November meeting on Wednesday.

How, you might ask, could a sharp fall in house prices possibly help the economy? It would help because it would get it over with. Like many economists, the authors of the report, Danny Gabay and Erik Britton, believe that the British economy will not truly put the crisis behind it until it has fixed the banking system and dramatically lowered the amount of private sector debt weighing on the economy. Unlike some of their peers, they think that a correction in house prices is a crucial part of that process in Britain, and it has barely begun.

There is a lot of meat in the report. Here's what I found most interesting.

First, the authors highlight a recent study from the Bank of International Settlements [145KB PDF]. Based on data from 27 countries, this finds that financial crises tend to be followed by a long period of drawing down debt in the private sector. Nothing new there, you might say, but the numbers are interesting: on average, total private sector debt, as a share of GDP tends to fall by 38 percentage points, and the process takes 10 years.

In the US, private sector debt has fallen by about 11% of GDP in the past few years. You could say that their correction is broadly on course (even if that course is painfully slow). But in the UK, private sector debt has barely fallen at all since the Bank of England came to the economy's rescue with a bank rate of just 0.5% (see chart below).

Chart showing household debt

"Zombie companies" always feature prominently in cautionary tales about Japan. Instead of forcing companies to recognise their losses, the authorities kept them alive on a drip-feed to nearly free cash. By seeking to ease the pain of adjustment, they actually made it a lot worse.

If you buy the Fathom view, policy-makers in the US and UK are making exactly the same mistake, only we're creating zombie households instead, who can only stay afloat because the cost of servicing their mortgage has fallen through the floor. As a result, banks don't have to face the fact that their mortgage-based assets are worth much less than they were at the peak of the boom - and the country can't move on.

Isn't it possible that UK houses are worth that much after all? Perhaps. Certainly, we didn't have a mad housing construction boom like the US or Spain, which has left parts of those economies with a large overhang of excess supply. But you don't find many forecasters expecting a significant rise in house prices over the next few years. Indeed, many expect a fall.

It is all but impossible now to obtain a mortgage worth more than 75% of the current value of the house. You can call that extreme risk aversion, or you can read it as a forecast of further house price falls by the lenders themselves.

Robert Peston has written frequently about the funding needs of the banks over the next few years. The Fathom economists calculate that, if recent house price declines continue over the next couple of years, the banks will once again have a £180bn funding gap by 2012, when the Bank of England's Special Liquidity Scheme for the banks is due to end.

We like to think that by recognising bank losses early and injecting fresh capital, Britain and the US have avoided Japan's mistakes. Instead, according to Fathom, we have made the same mistakes, in a slightly different way.

Where do we go from here? Fathom says it's time for a UK version of TARP, funded, at first, by more magical money creation by the Bank of England.

Briefly, the way this would work would be that the Treasury would set up a "bad bank" to buy troubled mortgage-backed assets from banks, paid for by issuing a special bond, which could be bought by the Bank as part of QE2.

Is there any chance this would happen - and would it work? I suspect we will not find out the answer to the second question, because the answer to the first is no. At least for the foreseeable future.

But you can reject the specific policy conclusion while still paying attention to the arguments that have led them there. Like many other critics, Fathom thinks the Bank of England weakened the effect of QE by spending nearly all of the money on buying government bonds. More of the same, in their view, would be at best counter-productive and possibly downright harmful. Many around the table at the MPC's meeting this week will be harbouring similar doubts: after all, just how low can the gilt yield go?

The Fathom economists are also looking at a country where average house prices are not now much lower than they were at the peak in 2007 and the ratio of household debt to disposable income is also close to its historical peak - and concluded this is not a country, or an economy, which is ready to put the debt crisis behind it. They are not alone.

PS. Here is Danny Gabay talking to Evan Davis on the Today programme earlier.

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  • Comment number 1.

    When it comes to house prices, I'm staying out of this argument. I've lived in the same house for 20 years and paid-off the morgage. I've no children at home and the price that the house would fetch on the open market is irrelevant as I've no wish to move.

    Does that make me very clever? No, it just turned out that way by circumstance.

    So, whilst I do have an opinion regarding house prices, I do not feel that it is fair to impose my views when I am not facing severe negative equity ( a consequence of the above).

    However, JFH will have a field-day when he reads this thread :)

  • Comment number 2.

    Surely this is what QE was really all about, propping up banks so avoiding for now the spiral of repossessions and therefore depressed house (and commercial property) prices leading to collapse of lenders.

  • Comment number 3.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 4.

    Tank the housing market? What on earth do you mean?

    Please use proper English instead of trying to look cool and using language that is obscure and anoying. Good grief!

  • Comment number 5.


    I love reading this blog, but you regularly use terminology that, as an amateur economics enthusiast, I don't understand.

    Would it be possible for you to have a glossary of terms at the end of the blog?

    (In this blog for example: TARP)

  • Comment number 6.

    'Fathom says it's time for a UK version of TARP, funded, at first, by more magical money creation by the Bank of England'

    Which will presumably lead to higher inflation (RPI currently 4.64%).
    And with wages rising at 1.5%, that will make houses even less affordable than they are now.

    I reckon Mr King will have read Chapter 2 (The Descent), I wonder if he's prepared to risk it? He's got away with it once, maybe he'll get away with it twice, or thrice perhaps.

    But he must realise he can't get away with it forever.

    Sooner or later any foreign or private ‘investors’ having had their fingers well and truly burnt clean off, will want out.

    Decimate the purchasing power of the currency, and you risk a breakdown of society.

    Upon an interesting tightrope our Mr King has to walk, and all down to avoiding pre-packaged bankruptcy for insolvent financial institutions.

  • Comment number 7.

    So what will the MPC contribute this Thursday - more QE (see Paul Mason's blog for the answer!) While a reduction in the price of houses is in order the rate at which this occurs is critical particularly in relation to any recovery which according to the CIPD the government seem hell bent on fouling up. The answer does lie in reliance on Micawber moneynomics and the free market in banking.

  • Comment number 8.

    Monetarily everything that is happening now and everything that will happen in the future revolves around the creation of money as debt.

    And with 97% of all money being created as debt bearing interest, and more debt being needed to satisfy repayment of existing debt + interest, either there has to be more debt or deflation and debt default must occur.

    The system is inflationary and requires an increasing level of debt to survive in its present form. However the nation’s indebtedness is (according to ‘experts’) already too high. It is therefore reasonable to conclude that one of the following must ultimately occur:

    1) Nationally we can increase debt levels to create enough money to service existing debt, which in turn is likely to lead to a compound debt trap.

    2) Nationally we can reduce ‘debt levels’ causing deflation, unemployment, a lowered standard of living, and increasing default on debt.

    3) The government can print more money to enable the payment of debt, which results in inflation and a possible loss of confidence in the currency (a currency crisis).

    Up to press the government’s presumption is:
    Households will increase debt
    Government will reduce debt
    And all will be well.

    The Office of Budgetary Responsibility predicts a 25% increase in household debt over the next 5 years. However households are increasing debt by only 1% per annum, which is nowhere near the levels necessary to make the figures ‘fit’, which is not unusual, given the circumstances, namely:

    The hopelessly indebted will borrow till the cows come home, but can’t pay it back.
    The modestly indebted could borrow, but are nervous of their economic future.
    The prudent won’t borrow per-se because they see it as the road to ruin.

    Given all of the above it is likely that tax receipts will continue to fall if the government carries on cutting, and the amount of government debt will continue to rise.

    At some point in the future the government will realise that plan is, and conversely isn’t working. It will be seen to be working in that it is cutting its spending, it will be seen to be failing because it isn’t cutting its debt.

    All manner of political rhetoric will be put forward to explain the problem and what to do about it, none of which is likely to be relevant. In event once all the politicians have been given an opportunity to blow their respective trumpets, the Bank of England will print more money.

    And this will carry on until the ‘expert’s advice’ to off-load sterling is heeded by those holding it, and the value of sterling will gradually dissolve.

    And when sterling has lost sufficient value, and assuming society hasn’t disintegrated with it, the UK will be competitive for manufacturing again, on the negative side our standard of living will have fallen by a similar amount as sterling.

    And if the ‘positive money group’ time it right, they’ll get their opportunity of changing the system.

  • Comment number 9.

    At last mainstream media commentators are starting to recognise the huge issue of over inflated house prices and contemplate the severe but necessary pain required to correct them. I don't see why evefry citizen in the UK should have to suffer though by the debasement of the currency via QE2 to pay for the bad assets on bank's balance sheets?

    A house price correction of between 30 and 50% is probably required and this will be very painful in terms of credit restrictions for recent buyers in the next decade. However, consumer borrowing is not what we need borrowing for, we have far too much of that already. We need borrowing by businesses and government for investment in the urgent non fossil fuel energy infra-structure and leading edge communications we are desperately behind on.

    Negative equity will cause tremendous hardship for many but it is preferable to complete investment impotence which is the alternative from the situation we are in.

    Hopefully we will learn for ever that a house is a place to live and as such that is the extent of it's value as an investment. There is no reason why house prices should ever be ahead of average inflation over the medium term.

  • Comment number 10.

    The present state of affairs is a result of the decision to bail out the banks. It would have been better to let them go into administration so that many of the debts would have been wiped out. Small personal deposits were protected and the retail banking businesses could have been bought from the administrators and restarted within a few days. The only losers would have been large depositors who should have had advisers to tell them that investing in institutions with such low reserve ratios was risky.

    The only way out now is probably a period of, hopefully steady, inflation with negative real interest rates for debts, bringing other prices up into line with house prices. This seems to be the MPC's policy, since they are keeping the bank rate at 0.5%, well below any inflation index.

    Unfortunately this also means low real interest rates for savers. Small savers, who do not have the benefit of advisers, who will help them keep their money relatively safe, will lose most.

    So once again big business will win at the expense of middle income families, who will see the value of their houses and savings for retirement drop, while their income does not keep up with inflation. No help can be expected from the coalition government, who are likely to be even more on the side of big business than New Labour.

  • Comment number 11.

    Do you mean 'paying down' debt rather than 'drawing down'?

  • Comment number 12.

    If I am not part of the 'economy' then why would, say a 50% tank in my house price, be just what I need to get going? If a 50% reduction means that the CBI, IOD the pound and the city all can help themselves, then I would rather stick with my over valued home as it is...

  • Comment number 13.

    Vastly lower house prices of course mean that a smaller proportion of income will be spent on housing - where is the remainder expected to go - some could be saved pushing bond yields down further and hopefully triggering investment - the remainder must go on some other form of consumption and is thus likely to drive further imports - but there is already a balance of payments deficit and this would only exacerbate this.

    also with many households in negative equity it would become impossible for many to move thus making the labour market even more sticky - is this really the solution?

  • Comment number 14.


    This isn't that shocking, this was suggested on these boards at the start of the crisis. House prices are the ball and chain around this country's neck.

    And if we do have QE2 - we have two outcomes - we end up like Japan, or we end up like Weimar 1922.

    Why bother?

    #5 Troubled Asset Relief Program

    -buying non performing loans and mortgages - some of which should never have been made in the first place but lead to a nice bonus pot for someone.

  • Comment number 15.

    I think watriler meant to say "The answer does NOT lie in reliance on Micawber moneynomics and the free market in banking." Is he getting past it!

  • Comment number 16.

    My word. A BBC journalist breaks ranks. I thought I'd never see the day.


    ".. I've lived in the same house for 20 years and paid-off the morgage. ...

    Does that make me very clever? No, it just turned out that way by circumstance."

    I've rented the same house for 3 years because although I'm in the top 10% of earners, I refuse to tie myself to a life of debt on a house that isn't even nice.

    I have one kid and one on the way. I pay the top rate of tax, work really hard, and still cannot house my family in a decent home. Does that make me stupid? No, I was just born after the boomers had totally messed up our economy and sold my generation down the river!

    IMHO, the contract between state and citizen will never be fulfilled for my generation ie I will get no pension, no elderly care and probably no free health-care. So why am I paying the tax for boomers who all bought houses fairly cheaply in real terms? Let's get the rates up and see who is left standing after the interlude in this panto.

  • Comment number 17.

    #1 foredeckdave - your comments are valid whatever your situation or views. In any case due to the myriad of interactions within our economy you probably would be impacted by a housing market 'tank' in some way or another.

    #4 and 5 - totally agree - less jargon more plain english to help everyone to be able to make reasoned responses.

    #9 Sage... - I know you are commenting from a theoretical point of view and I don't disagree with the thrust of a lot of your points. However, the house for life argument just doesn't wash these days, especially with high unemployment and palmost certainly more to come. If you are stuck with negative equity and no job you may not be able to afford to move to find other work. Add to that housing benefit cuts and its Hobsons choice gone mad.

    Theory is all very well, but if we have a housing crash then the real world for many people, and not just those who may have overextended themselves with little thought, will become an exceptionally difficult place.

  • Comment number 18.

    If house prices fall it leaves lenders with a black hole on the balance sheet. If interest rates rise so will defaults on mortgages. So perhaps keeping rates low but not lending on property is aimed to keep prices relatively stable and allows debt levels to decrease over time as people pay off their mortgages, which suits the banks and the govt. The downside is it takes time.

  • Comment number 19.

    Houses are simply too expencive in relation to wages.

    When I bought my first house it was 10% deposit as a minimum and a mortgage of 3.5 income. How times have changed!

    Prices need to go down to get first time buyers in a position to become first time buyers. This should naturally realign the more up the ladder property prices.
    Sure, it will be tough on some people re negative equity but I wonder how many would be in this 'tough' position if prices dropped, say, 25%.

    The other benefit of course is smaller mortgages eat up less income so people will have more disposable income to spend on other things.

    Just as an aside, if property values dropped 50% and wages were reduced by 50% how many people would be worse off, and how much more competetive would UK produced goods be on the international market?

  • Comment number 20.

    So if we have a house price crash, how many people will be bankrupted and have their lives ruined? And if tis so good to force such a crash because it gets it over with, surely the same logic applies to the whole economy? No low interest rates and no QE, just wreck the economy and start again.

    It may be valid but it also smacks of right-wing extreme capitalist ideology divorced from the real politics of this nation. i.e. the British people would not accept it especially if an alternative is offered.

  • Comment number 21.

    Nice article Stephanie

    I guess you must be one of the few BBC people that doesn't have a large buy to let portfolio, as currently the main focus of the BBC seems to be a desperate attempt to ramp the property market.

  • Comment number 22.

    QE was really I hope designed to not trash otherwise viable businesses in short term cash flow crises.

    Propping up zombies on the basis that it saves paying unemployment benefit, may be a less defensible policy.

    Propping up house prices on the basis that it saves the mortgage lenders undue embarrassment is a moot point.

    I would personally favour crashing the market a bit to let some final market value related stability in. But that may be a politically unacceptable risk.

    All of the current political decisions are a balance between what is right to sort the mess out, and what may result in riots, mass civil disobedience and another labour government in 5 years time. Like Japan, I suspect we will muddle into long term stagnation. Unless things get so bad that we cant, in which case a fascistic government will take over, and impose a solution.

    Been there, done that, got the jackboots.

  • Comment number 23.

    Walking around the banking corruption that caused it all makes the wording difficult. The banks would want this correction because all the bad loans were assumed by the governments (taxpayers), so the loss based on this correction would be for the taxpayer not the banks.
    Ruined the national economies, stold retirement accounts and investments, bailed-out by governments, charging interest to loan back monies provided by governments, would like to devalue individual assets...not the people I would look too for solutions...but as majority owners of governments will probably happen.

  • Comment number 24.

    Interesting read, even if some of it went completely over my head. I Can't imagine anyone actually subscribing to a sudden drop in house prices, too many people have too much money tied up in mortgages that they can barely afford already. The damage has already been done. There was a time when a person would buy a house for themselves, and "Professional landlords" would let properties for a reasonable amount. Nowadays with the market flooded with "Buy to let" properties, people are letting their homes in order to pay off the mortgage, which most of the time is considerably more then the same place would have been let by a proper landlord, and so the cost of renting a place has skyrocketted, meaning that people like myself whom had planned to rent until i had enough money to put a deposit down on my own house, now can't actually afford to save any money at all, because I am effectively already paying someone elses mortgage.

  • Comment number 25.

    #16 Ben wrote:

    possibly the most revolutionary statement I've yet seen on these blogs

    'IMHO, the contract between state and citizen will never be fulfilled for my generation'

    It is this sentiment which should be of the greatest concern of the government.

  • Comment number 26.

    The OECD and several other respected analysts have been saying that UK house prices are overvalued by 40% for several years - the Irish housing market has fallen by about that much - ditto falls in Spain etc - why are we surprised Fathom are now saying it too?

    Our obsession with home ownership in the UK makes us different from other economies - following the stock market falls that have damaged pension values and savings, people started to look at housing as an investment option - many did buy-to-lets too.

    I therefore think we are going to see a heavy fall in house prices and this will have a pronounced effect on the UK economy because it will destroy the investment value of houses as savings vehicles, so cutting peoples' net worth quite hard. It will also deflate the housing construction industry, causing a lot of unemployment and may well precipitate another banking crisis, as banks will have to write down the value of non performing mortgages.

    I think a steep fall in house prices just as the spending cuts begin to bite next year will see a sharp contraction tipping us into the "double dip" recession, as well as a rapid depreciation in Sterling that will drive the cost of fuel and food up sharply too, magnifying the impact and further depressing the economy.

    The trumpeted AAA rating for Sterling will again be under threat and just as the cost of unemployment been to rise and the tax take falls, the government will find the UK's cost of borrowing will rise sharply again.

    We can see the first phase of the ConDem Coalition coming to an end about spring 2011, as the "phony war" on debt comes to an end and the real confrontation with the underlying problems of UK PLC emerge.

    As Dempster has said above it's worth noting that the OBR is predicting a 25% increase in the level of personal debt - once house prices have fallen and the personal equity underpinning this debt has evaporated the implications point towards a tide of mortgage defaults, personal bankruptcies and rising government borrowing, potentially even the need for an Irish-style second bank bailout round that may well not be feasible in the UK given the size of the banking sector.

    Cameron could find himself locked into a spiral of economic decline and being forced into nationalising the entire banking sector - assuming the coalition holds together that long.

    Dempster is right about printing money devaluing its real worth - the only question is which major currency will topple first? My money is on the dollar being dumped as the neocons take control of the House of Representatives and Obama's stimulus is chocked off in the name of "small government."

  • Comment number 27.

    8. At 12:11pm on 02 Nov 2010, Dempster wrote:
    The system is inflationary

    Explain how, with two and a half million unemployed.
    Actually nevermind that. Give me any examples of demand pull inflation as opposed to cost-push inflation over the last 40 years. Yes I'm including the seventies.

    Dempster, I know it is intuitively logical but it's not reality merely justifcation for destruction of the welfare state.

  • Comment number 28.

    From my understanding of QE, it proved bit more effective in US than the UK as in the US Fed directly bought mortgage backed securities, thus helping banks balance sheets, and even stimulating some lending ! In US They bought treasuries too, which brought down borrowing costs for the government and many corporations. (cf with lamentable UK QE1 as explained by economist here Dont think yet more standard QE in UK (or US) will help much as yields are so low, banks still want to consolidate, and households don’t want to borrow. While Fathom’s proposal may have merit, for a lot of ordinary people it will just look like yet more bailing out of banks whether its dressed up as QE or not.

  • Comment number 29.

    "Briefly, the way this would work would be that the Treasury would set up a "bad bank" to buy troubled mortgage-backed assets from banks, paid for by issuing a special bond, which could be bought by the Bank as part of QE2."

    Heres' my advice.
    Combine the functions of the treasury and the central bank.
    Take the National Budget Constraint and stick it where the sun don't shine.
    Operate a fiscal expansionary policy to employ everyone who wants to work on projects that benefit the citizens of this country.
    Oh and set the overnight support rate to 0%

  • Comment number 30.

    27. At 1:50pm on 02 Nov 2010, MetalGasket wrote:
    8. At 12:11pm on 02 Nov 2010, Dempster wrote: The system is inflationary

    Give me any examples of demand pull inflation as opposed to cost-push inflation over the last 40 years. Yes I'm including the seventies.
    Example No.1 Demand pull = Gold over the last two years
    Example No.2 Demand pull = Personalised number plates over the last twenty years
    Example No.3 Demand pull = Vintage motorcycles (me & my mates)
    Example No.4 Demand pull = ‘Take That’ concert tickets (my wife & her mates)

    ‘Dempster, I know it is intuitively logical but it's not reality merely justification for destruction of the welfare state’.

    I don’t pretend to understand politics, but having said that I don’t agree with dismantling the welfare state.

    There have been many quoting the phrase ‘Too big to fail’ usually referring to banks.
    My conclusion is that nothing's too big to fail.
    I think the question should be¸ what do you not want to fail?
    And if you gave most people a choice between a ‘Bank/s’ and the NHS, I suspect they’d pick the NHS.

  • Comment number 31.

    Bobrocket - well to me it's obvious. I doubt the government will get their knickers' in a twist though as most people in the UK can't be bothered to revolt. Certainly not in an organised way that would cause a systemic threat. Look at the last protests. Outwitted by the MET and kettled. How hard is it to keep one step ahead of the MET for goodness sakes? Kettled then back to the playstations.

    "Give me any examples of demand pull inflation as opposed to cost-push inflation over the last 40 years." - err, housing? Is this a trick question!?

  • Comment number 32.

    To 27. At 1:50pm on 02 Nov 2010, MetalGasket wrote:

    Whilst I acknowledge demand based inflation, ultimately anything that is in demand has to be affected by debt based inflation, because all money is created as debt.

  • Comment number 33.

    The comparisons with the property markets in the US and Spain are in no way useful, we live in an overcrowded island with a population that is set to grow up to 70m in decades to come.
    Rent yields are rising significantly due to a number of factors including the lack of new starts since the down turn. It is simply a supply and demand scenario the same as any other market, as bank rates stay low and investors see rental yields grow to between 5-9% more will move funds into property which will support prices.
    As in the early 1990s we will see stagnation for the next 2-3 years but as in the 1990s probably get a 40% increase as soon as there is any kind of free up in mortgage funds.

  • Comment number 34.

    Wrong,wrong ,wrong.

    The housing market has already tanked.
    And look what that has done.
    Making it even worse by causing a massive wave of repossessions,defaults and negative equity crises no way to ensure that new houses get built and lenders regain confidence.
    This suicide-economics trend , encouraged by The Coalition's barmy response to an economic crisis .....smashing confidence and dismantling infrastructure the British neocon approach causing the same impact on the economy as the Cultural Revolution did ,which nearly destroyed China in the sixties and early seventies.
    They returned to a more realistic and normative approach to commerce and boomed.
    As for the UK , creating massive toxic banks will also decrease values and confidence .....and this amounts to massive asset theft by those lucky enough to vulture swoop and pick up casualty assets for next-to-nothing.
    Look at Ireland and be very afraid.
    What is needed is are turn to conventional and economic sense.Those 15 years of boom are a lot more sustainable than the 3 years of crunch we have had.
    Rising asset values generate confidence, which allows people to move forward in their lives by expanding, downsizing,extending, Good-lifing, whatever ......everything.
    Keep these loony theories in the undergraduate refectory at LSE.
    House prices now are cheap,cheap, cheap.
    Comparison of house prices now with those times when interest rates were massive , is disingenuous.I remember paying £600 a month on my "friendly society mortgage" of £38,000 in 1990.And that was under the Tories and it was Hell.Surely not again?
    How come the rest of the world is lending again and we are not?
    What on earth is so unsustainable about a return to reasonable property price worked for 90% of the 20th century!

  • Comment number 35.

    31. At 2:20pm on 02 Nov 2010, Ben wrote:
    "Give me any examples of demand pull inflation as opposed to cost-push inflation over the last 40 years." - err, housing? Is this a trick question!?

    Housing is a very good example of debt based inflation.
    Think of how many flats are currently unoccupied and how many apartment schemes were mothballed after the credit crunch.

    Price level = (Amount of money x speed of transaction) / (Supply of all real values)

  • Comment number 36.

    A large correction in house prices should have happened at the same time as the recession but the prices were underpinned by a government who were about to fight an election and couldn't risk banks being further weakened by having to write down property assets.

    Who knows the amount it has cost the country overall but the only ones who seem to have benefitted from the low interest rates are mortgage holders at the expense of savers.

    Looking at my own situation if someone tells me my home is worth such and such I just laugh for whatever the equity is I cannot spend it and certainly wouldn't borrow against it so for me I treat it like the monopoly money it really is.

    So if the price dropped 50% tomorrow it wouldn't affect me or hundreds of thousands like me. It is a home and not just an investment.

    However while others try to hold on to their monopoly investments it is driving hundreds od thousands of potential first time buyers into the hands of the unscrupulous buy to let investors who I blame so much for the overhyped prices.

    Prices will have to correct and because they were never included in inflation figures in the first place there will be a nil effect through their deflation.

    Preferably when they are back in line with wages then we will see a proper botton to this recession and have a starting point for a real recovery.

  • Comment number 37.

    Is it not a bit simplistic to look at house prices as though houses were basic commodities like tins of beans and like is like?
    Is a Hackney flat from 20 years ago the same flat that was renovated and had its street prettified and all the delis and trattorias opened up?.
    Is a Georgian terrace in Newcastle or Edinburgh the same thing it was is the sixties?
    Is a penthouse in Chelsea not a tad more internationally desirable now than it was in the seveties?
    Is the parochial London in its grimy early eighties riot-torn days the same as the booming metropolis of the 20teens?
    Look at what happened to Britain ....its whole physical fabric improved under Labour.It had pzazz.
    It lost the down at heel Tory ghost town look it had developed under Maggie and Major.
    Are we going back to the seedy fading Tory tattiness we all got fed up with?
    From pzazz to pzzoff!

  • Comment number 38.

    All this user's posts have been removed.Why?

  • Comment number 39.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 40.

    31. At 2:20pm on 02 Nov 2010, Ben wrote:
    - err, housing? Is this a trick question!?

    You can't attribute price rises in one asset class caused by a desire by individuals to own there own home to general inflation caused by too much money floating around especially when we are not building any new ones.

  • Comment number 41.

    If the Bank of England were really serious about helping the economy, it would be trying to tank the housing market.
    How about establishing Fair Market Value?
    I agree that the British economy will not truly “recover” until
    1. it has fixed the banking system and
    2. lowered the amount of private sector debt weighing on the economy.
    In fact, Fair Market Value is a way back to normalcy and stability.
    Policy-makers in the US & UK are making EXACTLY the same mistake as Japan. Mortgage rates have not been set at a fair market value. They are being artifically held low – much too low. If you don’t have forecasters expecting a significant rise in house prices over the next few years, it is likely because there are too many artificial, injected, Governmental interferences to be able to forecast with any accuracy.
    “We like to think that by recognising bank losses early and injecting fresh capital, Britain and the US have avoided Japan's mistakes.”
    Nope, you've repeated them and possibly even out-done them.
    The investment banks too big to fail, should’ve have been allowed to fail. Bail-outs were a total waste of time and only made the problem(s) more severe by injectine a huge artificial component to the banking sector.
    Time for UK version of TARP? Oh God no! Let’s make the problem even worse by injecting more magical money created by the Bank of England.
    Treasury would set up a "bad bank". The “bad bank” would buy troubled mortgage-backed assets from banks, paid for by issuing a special bond, which could be bought by the Bank as part of QE2. No, no, no, these articial measures will not work any better in the UK than they have in the United States. What makes you think so?
    You know the old cliché: Honesty is the best policy. Stop with the injection of artificialuty! Let the markets find their own values, and for goodness’ sake, let banks that can’t manage, FAIL. It’s called supply and demand, not "artificial" supply and demand.

  • Comment number 42.

    It's all a bit puzzling, isnt it? I remember the FSA / BoE/ Treasury conducting stress test scenarios on banks in September/October 08 in order to judge a) how much tier one capital they needed to protect them against house price collapses b) confirm elegibility for government insurance on their balance sheets and further capital injections by taxpayers. Now, we are being told there could be another "funding gap" of £180bn by 2012 ( Fathom). Where does this leave the original exercise and how does a bad bank work alongside government insurances on "bad" assets? AS the Irish have found out to their cost, a bad bank isnt a final cure in itself - it could just be another way of transferring credit risk to the taxpayers - again!

  • Comment number 43.

    I totally agree about the zombie house-holds.

    The way Capitalism works is that companies grow, flourish and dominate the market. Those who become weak, over-extend themselves or who lose touch with their customer base go to the wall - but with Capitalism that means that other new companies step forward and take their place.

    It is the same with the housing market.

    We have hundreds of thousands of people who simply cannot afford a home now due to the ludicrous asking prices - ludicrous asking prices as the result of 10 years of lax credit lending that bankrupted our banks.

    The greedy and feckless, many who took out liar loans, now sit in houses they really can't afford simply because the BOE has reduced their mortgage rates to virtually nothing.

    But that is not how it should be. That is not right. That is not how Capitalism works.

    The greedy, the feckless, those who ramped UK house prices into the biggest housing bubble in history, those who took our liar loans and those who over-extended themselves thinking they were buy-to-let empire builders should now be allowed to go bust.

    They should be forced to go bust. They took a chance, they gambled and they got it wrong.

    But what is happening is that these greedy people are being protected by the hundreds of thousands of hard-working VOTING tax-payers who can't afford to buy a house because house prices are still are ludicrous asking price levels - and they are only at these ludicrous asking prices still because all the greedy speculators are being propped up by tax-payers' money.

    No, drive up interest rates, fore-close on these houses, make them drop the asking prices considerably by 20% or even 30% and let them then pay off the debt they now have. In the meantime, it will allow hundreds of thousands of people to be able to afford a house and the knock-on affect will be loads of work for estate agents, surveyors, solicitors, carpet and kitchen fitters, decorators, etc, etc, etc.

    By propping up the biggest housing bubble in history what the BOE has stupidly done is bring a huge part of our economy to a grinding full stop! It would be hilarious if it was not so damaging to the economy.

    House prices have fallen 50 percent in the States and every economist says they will continue to fall. The same is true of house prices crashing by more than 50 percent in Eire and the same in Spain, etc, etc.

    I will ask the question again - why is the BOE propping up the ludicrous asking prices of property alone anywhere in the World right now - can the BOE not see that the result is that a vast area of economic activity in the country has simply stopped working?

    Why don't politicians ask this question?

    The bottom line is simple - unless house prices drop considerably then the housing market, and all its knock-on affects in people buying things for their new homes and hiring people, will stay economically dead.

    All this so that a greedy minority who ramped up house prices to the biggest bubble in our history can pay mortgages which are often lower than the rent of most hard-working tax-paying voters.

    Raise interest rates on mortgages. Burst this damaging housing bubble.

  • Comment number 44.

    35. At 2:47pm on 02 Nov 2010, Dempster wrote:
    Price level = (Amount of money x speed of transaction) / (Supply of all real values

    The quantity theory of money is surely discredited by now.
    WOTW confirmed it when he described his measurement of the velocity of money in a previous blog with the help of Mrs W.
    At worst the 'velocity' is meaningless. It can't be measured and will vary for different asset classes. At best it's an 'after the fact' accounting identity.
    And the supply of all goods and services is assumed to be at 'full employment'. Do me a favour.

  • Comment number 45.

    The national average earnings index was 98.3 in September 2000. By September 2007 it had reached 128.7. This shows an increase of 31% over the seven year period.

    By comparison the Land Registry house price index in September 2000 was 135.9 and by September 2007 it had reached 292.5, an increase of 115% over the same seven years.

    Also during the same period the amount outstanding on consumer credit and mortgages had more than doubled. Source: National Average Earnings Indices, the Land Registry Property Price Information Service and the Bank of England.

    The growth in domestic property prices had therefore far exceeded the growth in earnings, and had been fuelled by a significant increase in the money supply by way of extensive credit.

    And unless there are sufficient people willing to take on more debt, ultimately house prices have to fall because national average earnings are currently increasing around 1.5% per annum and the RPI (excluding houses) is around 4.5%.

    House price increases are just inflation, nothing else, and wages didn't keep up, only extensive credit made it possible.

  • Comment number 46.

    44. At 4:31pm on 02 Nov 2010, MetalGasket wrote:
    35. At 2:47pm on 02 Nov 2010, Dempster wrote:
    Price level = (Amount of money x speed of transaction) / (Supply of all real values)

    ‘The quantity theory of money is surely discredited by now’
    ‘At worst the 'velocity' is meaningless’

    Admittedly velocity does not vary significantly, unless you’re trying to buy ‘Take That’ tickets as my wife’s mates were a couple of nights back, ask them about transaction speed, they didn’t like the effects of it.

    In any event, ignore velocity if you like:
    Price level = (Amount of money) / (Supply of all real values)

    I reckon the quantity of money is likely to become a very real issue for UK based assets, unless the BOE steps in with QE2.

  • Comment number 47.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 48.

    MetalGasket #44

    a scientific looking graph always beats common sense. Drink to kool-aide.

  • Comment number 49.

    Anyone with a brain and a pocket calculator knew that when house prices went beyond the average wage times three then house prices were far too high. Then as more people piled into what was deemed an appreciating asset class the banks piled on the multiples thus ensuring that prices continued to rise.

    Some lunatics seemed to think this was A Good Thing and people were encouraged to take out the `value' of their `investment' and spend it on trivia. It wasn't just Basil Brush who was going boom-boom!

    If anyone said this was silly they were jeered down from all sides as `we were all middle-class now'. What a load of tosh!

    Now how do we get out from under this pile of nonsense? If prices just drop as they are starting to do then the issue of negative equity raises its ugly head. For some this will be just a temporary nuisance, for others this will be a disaster. Perhaps if there is to be some more QE, an idea I dislike, this should be directed at ameliorating those disasters. There will be cries of unfair but I think being practical is more important: life is unfair anyway so adjust!

    It will be interesting to see how long before the buy-to-let market implodes as it surely will, particularly now since the housing benefit subsidy for landlords is also being withdrawn.

    As for the argument `the contract between state and citizen will never be fulfilled for my generation': more tosh! There never was a contract; just a political class bribing the public with their own money making promises that could never be fulfilled. The state is only a reflection of the ruling elite and if you hadn't noticed they are bankrupt as well.

  • Comment number 50.

    By comparison the Land Registry house price index in September 2000 was 135.9 and by September 2007 it had reached 292.5, an increase of 115% over the same seven years

    You missed the latest index September 2010 267.3. mmm wonder what that tells us.

  • Comment number 51.

    There is sadly, only one way out of this problem. Paying down household debt. This cannot be done quickly. As in the past government will use inflation to inflate away the problem. This is not a good long term solution.

    Inflation destroys value but is a fast solutiojn. Paying down debt retains value but is a slower solution.

    I prefer the latter approach since I'm keen to have value preserved. Keeping house prices high is a function of capacity. All the time capacity is restricted prices will be high.

  • Comment number 52.

    House prices will fall - either because the market collapse, leading to falling nominal values: or because of currency devaluation and inflation giving falling real values.

    Falling real values will only make houses more affordable if wages start to increase - at the moment, with wages failing to keep pace with inflation, devaluation will not be enough to stimulate a recovery.

    On a more general point, it's pretty clear that the UK has got to reduce its indebtedness - public and private: and there's only two ways that can be done. The debts must either be paid off or written off until we reach a level that is sustainable in light of our income.

    It's really remarkable how much of this debate is about increasing debts rather than trying to earn more to pay them!

  • Comment number 53.

    49. At 4:56pm on 02 Nov 2010, stanilic wrote:
    ‘It will be interesting to see how long before the buy-to-let market implodes as it surely will’.

    It already has!

    I work in the Northwest of England, and this is my experience:
    During the boom property increased dramatically in value.

    In the past investment property was valued as follows:
    Gross annual rent x Years Purchase multiplier = capital value.

    This method of valuing investment property was basically thrown out of the window during the boom. For example, buy a flat for £110,000, next year it’s worth £120,000; you didn’t need to rent it out to make money.

    The boom ended in September 2007 and we have now drifted back to the traditional method of valuing property.

    For example a flat in the Northwest of England capable of generating a gross annual rent is worth £6,000.00 x 12 = £72,000.00 as rough guideline.

    Now that same flat was likely sold for £120,000 in 2006/2007.

    The rents are not going up to any real extent, but the years purchase multipliers are still falling, and if what I’m seeing is anything to go by, for flats, particularly when encumbered with a ground rent and service charge, a years purchase multiplier of 10 is looking like where we’re heading.

  • Comment number 54.

    Giving even more money to the banks won't help economy, because problem is not that banks are unable to lend, but that borrowers are already in too much debt and not interested in borrowing more. There should be widespread debt relief to the debtors, and some sort of a credit control mechanism to prevent house prices from raising again. Then we could bring house prices back to the normal levels.

    Obviously, this would help economic recovery because debtors wouldn't have to use their income to pay down debt so much, they could go consuming instead.

  • Comment number 55.

    49 Stanalic

    Negative equity would be a nuisance for some although over time with inflation this would be wiped out.

    The main problem comes for those who need to move from one area to another for their work but because all house prices would have fallen pro rata some sort of portable negative equity loan could be established.

    After all anyone who sells at a loss would still have to pay the full amount borrowed back to the lender. There are always ways and means to mitigate such circumstances without pushing more of the burden onto the taxpayer.

  • Comment number 56.

    51. At 5:00pm on 02 Nov 2010, DibbySpot wrote:
    ‘There is sadly, only one way out of this problem. Paying down household debt’

    Unfortunately Dibby Spot, the Office of Budget Responsibility doesn’t agree with you. They predict household debt will rise from £1457bn to £1823bn over the next five years, an increase of 25%.

    And even more unfortunately, households don’t agree with them, because evidence suggests they don’t really want to see it grow much at all.

    Which is going to give the Office of Budget Responsibility a bit of headache.

  • Comment number 57.

    52. At 5:11pm on 02 Nov 2010, tFoth wrote:
    "On a more general point, it's pretty clear that the UK has got to reduce its indebtedness - public and private: and there's only two ways that can be done. The debts must either be paid off or written off until we reach a level that is sustainable in light of our income.

    It's really remarkable how much of this debate is about increasing debts rather than trying to earn more to pay them!"

    Public debt is our money supply. Under our current monetary system, all money comes to existence in a form of debt. Peoples often think everybody would be better off if debts were paid back - reality is just the opposite. Without debt there would be no money left at all!

  • Comment number 58.

    House prices hit a lull from 1990 to 1996,the dreary Major years.
    The exuberant price rises thereafter were due to:
    1 A realistic return to normal house-price inflation.
    2 Sensibly low interest rates allowing sensibly increased income multiplicability for mortgages.
    3Direct-selling of mortgages.
    4Real, healthy competition for mortgage business ....and was that really such a bad thing?
    2 A booming economy,
    3 Optimisim
    4 Local area improvements.
    5 FAiled share investments, and failed pension arrangemnets, diverting attention and investment to the property sector.
    5 Britain itself became a place where foreigners increasingly wanted to move to.
    6People had cash and there was plenty of work about.
    7So what the Heck was the problem.What was unsustainable?
    Now Northern Rock did not crash because of a mortgage default due to irrational lending.
    It crashed because of an irrational rush on its deposits, and an irrational drying up of wholesale mortgage funds.Pessimism killed it.
    RBS did not crash because of massive losses.The losses came after the crash.
    RBS crashed because of an irrational slump in its share price, admittedly precipitated by exuberant expansionism.Pessimism killed it even when it was making up to £10bln a year , year after year.
    Britain was incredibly successful, and its borrowing reflected that confidence.
    Are we all supposed to be saving up to buy our houses outright?
    Give up yopur silk pyjamas, wear a hair-shirt.
    Barmy,barmy barmy.
    Pessimism is the enemy.
    It is deadly to our economy and the pessimists are running the show at the moment.
    Let's get our earplugs on and show them Britain is not going down the tubes.
    Onward -UK!

    Time to re-appraise the Crunch as a dreary ,depressing retrograde famine ,rather than just desserts ..... and get cheery and growing and lending again!

    I think we need a bit of wage-inflation ......I am sick of being told it is time to cut my cloth ......everything else has gone up so why shouldn't I get paid more ?
    And why shouldn't my house be worth a bob or two more?

    Does that mean strikes? Does it have to , would that not be a shame if we were pushed back to that?
    We all see the industrial unrest of the seventies as a nightmare, the reason the Tories got in etc, the overly powerful unions , the weak governments etc .....maybe we need to realise how necessary all that aggro and discontent was...... people felt they were being fleeced then just like they do today .....they weren't striking because they were communists, they felt they had their nose to the wall with increasing bills and increased unemployment and pessimism everywhere.
    Yesterdays miner is today's maisonette owner.A collapse in house prices today would have a similar effect as the wholesale social changes of thirty years ago.
    A Ballardian Bonfire of the Volvos would be dreadful but might not be unlikely!

  • Comment number 59.

    57. At 5:42pm on 02 Nov 2010, zfvr
    Good point. It's interesting too if Dempster is right that household debt is going up £400 billion in the next 5 years and the public debt is due to rise by a similar amount that implies Savings or an increase in private wealth somewhere of £800 billion plus the difference between imports and exports.
    So that begs the question where is all that private sterling wealth ending up?

  • Comment number 60.

    59. At 5:54pm on 02 Nov 2010, MetalGasket wrote:
    57. At 5:42pm on 02 Nov 2010, zfvr
    'Good point. It's interesting too if Dempster is right that household debt is going up £400 billion in the next 5 years'

    The OBR just predicts it will. It has to, to make the figures fit, to make the future money supply (growth) plausible. Problem arises if households don't increase their borrowing, which at the moment they seem unwilling to do.

  • Comment number 61.

    In actual terms house prices have fallen , but in international terms they have fallen even more....consider the Aussie dollar was 2.90 to the pound a few years ago and now is 1.60.
    The typical UK pad AT £200k was A$580K BUT IS NOW £180k which is only
    A$288K ie less than half of its former value.
    For Euros the Euro was 55p in 2001 so a £200k house then = 363k Euros , now £180 k at E =£ 0.88 = 227kEuros ., wchis is nearly 40%.
    Even basket case like the US dollar, which 50p but is now 63p, has gained more than 20% on Sterling.

    So the crash has actually happened.

  • Comment number 62.

    59. At 5:54pm on 02 Nov 2010, MetalGasket
    That's a good question :)

    If we follow the money it is needed to keep companies profitable and often these are owned by small section of population, so it could be that private wealth just accrues to them, but pension funds who also get dividends often buy just government bonds, effectively neutralizing the money. Then there are secondary lenders... and then it could be just ordinary people wanting to have more wealth before consuming. Maybe when societies grow richer there is less unsatisfied consumptions needs and more demand for savings. Population aging most probably means there are extra savings needs as we prepare for retirements. Pension funds do this for us, which probably means there is extra boost to the demand once these funds are unwinded.

  • Comment number 63.

    #34. At 2:44pm on 02 Nov 2010, onward-ho wrote:
    Wrong,wrong ,wrong.

    #37. Look at what happened to Britain ....its whole physical fabric improved under Labour.It had pzazz.

    You remind me that I have long thought that the X-factor show should have a special exit door, where the extremely deluded are taken off to the men in white coats for long term help.

    Onward-ho, because you float on a cloud of delusion there seems to be little hope for you. Your postings over the last 2 years clearly identify you as needing a reality check.

    Do you not realise that a large amount of the Pzazz that you fell for was as a result of DEBT. Do you really think that every neighbour that bought a new car or replaced windows or block paved their drive was doing it out of hard earned savings?

    2 years ago we had a one off chance to make the corrections to the UK economy based on overinflated house prices. Instead we have spent the money keeping them inflated, to the benefit mainly of the baby boomers and Londoners. As a result there are now no options left that will not cause significant pain to the majority of UK residents.

  • Comment number 64.

    When I first started to get a grasp of the debt based monetary system we have, I was struck by the fact that for me to earn a wage, someone, somewhere had to go into debt to fund it.

    There appeared something inherently flawed in the concept. My gain had to be at another’s loss + interest.

    At present we have a right to earn a wage, but only by someone going into debt to fund it.
    It’s a negative system, it breeds debt, bankruptcy, destitution and misery for the unwitting.

    There are an awful lot of ‘rights’ out there, but if I had to add one, it would be:

    It is the absolute and fundamental right of every human being to earn an income without forcing another to go into debt to fund it.

  • Comment number 65.

    16. At 12:45pm on 02 Nov 2010, Ben wrote:
    I've rented the same house for 3 years because although I'm in the top 10% of earners, I refuse to tie myself to a life of debt on a house that isn't even nice.....

    IMHO, the contract between state and citizen will never be fulfilled for my generation ie I will get no pension, no elderly care and probably no free health-care. So why am I paying the tax for boomers who all bought houses fairly cheaply in real terms? Let's get the rates up and see who is left standing after the interlude in this panto.

    I agree that those who bought houses when they were cheaper and got a better deal than those who want to do it today. Fifty years ago it was not seen as an investment but as a form of security. Thirty years ago it was seen as a sure bet investment opportunity capable of providing new cars and expensive holidays through equity release.

    What puzzles me is why (people like) you want to own a house? If it were a sure bet to rise in price throughout your life it would make sense. But history is showing this is increasingly uncertain. So why not find another investment and rent a home?

  • Comment number 66.

    Harsh as it might sound I currently favour allowing (forcing?) house prices to fall, even if the fall is dramatic. If we are silly enough to buy an investment product we have it drummed into us that past performance is no guide to future performance, and that share prices can go down as well as up. Given that pension funds have suffered badly one way or another it is hardly surprising that some have regarded buying bricks and mortar as a one - way bet with absolutely no risk attached. The rash of BTL certainly falls into this category.

    Why should bricks and mortar be exempt from market variations? The sooner house prices can fluctuate the sooner the distortion caused by "guaranteeing" house price increases will go away. At the moment anyone with any reliance on interest income is having a hard time of it, not least to prevent defaults on mortgages. Why? Why are "foolish" lenders and borrowers being protected to the detriment of the "wise"? (The terms are, of course, relative.)

    Yes it would be painful, but is anyone going to be bold enough to suggest that what is happening at the moment is completely pain free? It's high time the pain was felt by those who caused it.
    But then I'm not an economist...

  • Comment number 67.

    Aproduct whose price has only fallen 2% when the main source of funding it, the mortgage market has dried up 90% in the same month has quite a lot of price resilience methinks.
    If the main problem with the property market is the supply of money and the overstringent criteria being applied to the lending of it, rather than the demand for property would be a lot easier just QEing RBS with a hundred billion quid and not recalling the guarantees already made,and watch the profits roll in as RBS increases in value and corners a bigger share of a bigger loans market.
    Think big and think successful.

  • Comment number 68.

    #16 You don't really think that houses just fell into the baby-boomers laps, do you? My first house in 1980 was a small terrace in the cheapest area of town. It needed a new roof, new windows, new doors, new floors, a new bathroom, had no central heating. I did a lot of the work myself. That's how this baby-boomer got a house, no other way was available.

    I don't care if my present house tumbles in value. I am quite happy living in it (a modest semi) and paid off the mortgage asap by saving. Although I use credit cards the balance is paid off each month come hell or high water.

    Despite what the trouble-makers say, there are plenty of other baby-boomers like me who worked and saved for what they have and didn't see housing as an easy way to riches.

  • Comment number 69.

    63 JOHNEARLE .....
    If I'm so deluded how come I predicted the economy better than anyone else on these blogs?
    And watch this space for 2011.
    Wanna hear it first?

    65 Nevergetold
    It was not easier to get on the housing ladder in days of yore.
    Most people didn't think they could aspire to this until they were established .
    They were prepared to live in accommodation that today would be condemned.
    The prices paid were at the upper limit of our then affordability.
    Interest rates on my 38k mortgage in 1990 were nearly 17% and it cost 600 quid a month.
    Only three times income was allowed and there was a hefty mortgage indemnity premium to pay.
    Legal fees were pretty much in pound prices what they are today ,ie today's legal fees are a a fraction in real terms of what they were.
    We had massive negative equity in the nineties and millions were trapped in huge mortgages and negative equity.
    Things like tellys and sofas cost the same in pounds as they do today so these were a massive commitment.
    We did not start off with everything new, a lot was handmedowns and scavenged stuff.
    Parents were poorer and we did not use credit cards,we were not allowed them ,so there was no way of dealing with extra financial pressure.
    Aye we had it hard too, me lad!

  • Comment number 70.

    Dempster if money isn't made of debt then as far as the rest of the world is concerned it isn't real money, it is monopoly money.
    No pain ,no gain.
    Would that it were otherwise, but money doesn't grow on trees, it has to be bought with a price, otherwise why don't we all just print it?
    The Wizard of Oz is a fairy tale, and the neo-Dorothys who think we can wish upon a star as much cash as we want are living in another fairy tale.

  • Comment number 71.

    There are two kinds of debt.
    There are those where the interest payments are being met, and there are those where it is not.
    Now to subdivide the first category of good payers into those whom the banks think might be able to service that debt in the event of a sale of the property at a reduced valuation and those who it thinks might not, is rather disingenuous if the ones who are placed into the latter category find they are unable to resell their asset at a decent price because the potential purchaser now knows the bank will sell their debt for tuppence. And is probably in on the nod with the banker.
    A complete con .

  • Comment number 72.

    Stallinic - "As for the argument `the contract between state and citizen will never be fulfilled for my generation': more tosh! There never was a contract; just a political class bribing the public with their own money making promises that could never be fulfilled. The state is only a reflection of the ruling elite and if you hadn't noticed they are bankrupt as well."

    Often agree with a lot of your stuff, but..

    With the debt they are bribing the current lot with the next generation's money. This is quite different and it is a situation engineered by one generation to the detriment of another who are not yet old enough to stop them.

    #68 - I didn't say it fell into anyone's lap. However, affordability now as a multiple of wages is far worse. That's totally unsustainable and whatever you or I think about who worked hardest, the current house of cards will not survive.

    In demanding an unreasonably high general standard of living, people now are spending our children's future by borrowing money they will never pay back. That might not be you #68 so please try to keep a macro view on this and don't take the comments personally.

  • Comment number 73.

    The report by Fathom is very logical and I can't argue with its outcome. It will never be implemented - why?

    Politicians have a horizon of the next election. To push rates up etc would cause a huge drop in support (its going to be tough for the coalition as it is with the cuts) for the current government.

    So what will they do? What I predict is they will continue with the low interest rate policy for at least 2-3 years until the spending cuts have been implemented and the outcomes known. In the meantime inflation will whittle away at the real cost of debt that is hanging over private households and government debt. house prices will track sideways at best but most likely fall but not nearly enough to make houses truly affordable.

    Am I bothered about this? Not really - it is probably the least worst option at the moment - if there were wide scale repossessions it would probably trigger another bailout because unfortunately nothing has yet been done about the 'too big to fail syndrome'. As for the emergency liquidity scheme due to end in 2012 - guess what - they'll just roll it over.

  • Comment number 74.

    57# zfvr

    I have heard the mantra that all money is debt before, and should perhaps have mentioned it in order to avoid your response.

    The question is that if all money is debt, then what is debt?

    From the point of view of lenders then the loans (other people's debts) are assets and this allows them to create money. But a debt is only worth the repayments -and the repayments are made out of future income.

    Debt is not money: it a bringing forwards of income. You can only bring forwards so much before the system becomes unsustainable because you will have nothing left for the future!

    So once again, I say this debate has to move on from discussing debts to discussing how we pay for them.

  • Comment number 75.

    70. At 9:54pm on 02 Nov 2010, onward-ho wrote:
    'Dempster if money isn't made of debt then as far as the rest of the world is concerned it isn't real money, it is monopoly money.
    No pain ,no gain'

    But who takes the pain and who stands to gain?

    For around five years (2002 – 2007) banks leant money to people who had little hope of ever repaying it. This forced up house prices and when bad debts mounted, those banks should have been allowed to fail, such is the nature of the system.

    In any event the more money they leant out, the faster house prices rose.

    Trouble is they ignored the fundamentals of real wage increases (which were small) and the capacity to repay money. To get over these constraints they leant money based on ever increasing multipliers of a person’s wage.

    It was a classic bubble, inflated by easy credit and unsound banking practices, and eventually it will deflate. Which for the younger generation, is a good thing, because they will be able to afford a home of their own.

  • Comment number 76.

    There needs to be paradigm shift, from equilibrium thinking and balanced budgets to managing quantity of government-issued financial assets to satisfy private sectors desire to have net savings in all circumstances. Get it too low, and there will be unemployment, get it too high, and result is inflation. There is no formula to calculate how much is needed, it has to be found by trial and error, but luckily amounts do not have to be so exact to get satisfactory outcomes.

    Government issues financial assets in two forms: bonds and money. Usually money is issued first and then converted to bonds, so that government debt is a net financial asset to the private sector. As debt levels grow there comes time, even in the worst of times, when private sector net financial assets satisfy private sector's need for net savings and debt levels stabilize, assuming there is no current account deficit draining these savings constantly. But issuing government bonds is totally unnecessary and I would say immoral, why pay transfer payments to the wealthiest segments of the population? Without government bonds, newly issued money would just accumulate to the banks as excess reserves, where it could be kept as a non-interest bearing net financial asset of private sector.

    Then we could constrain banks lending to bid up asset prices and forbid dis-stabilizing cross-border lending. Banks have way too many freedoms!

  • Comment number 77.

    A little more on the "money is debt" argument.

    If this were true, then presumably we could get ourselves out of our current predicament by all taking out higher mortgages, maxing out our credit cards and urging the Government to borrow more. Easy!

    But wasn't this how we got into the present predicament in the first place? And didn't the crunch come (as it inevitably would) when a sufficient number of people were unable to repay their debts.

    OK, this happened first in the US where a large number of loans were made to people who could never repay (on the assumption of ever increasing property prices): and OK, it was made much worse because of all the securitisation and double counting etc

    But the fact remains that the value of any debt is the repayment and the sustainable level of repayment is determined by the level of disposable income.

    Borrowing does not create money - it attaches future income. The only people who make money are the lenders.

  • Comment number 78.

    Today's Daily Mail picks up on Fathom's highlighting that 3 million people have mortgages they won't be able to afford when interest rates rise, arguing for the "Bad Bank" approach to remove non performing loans from banks' balance sheets.

    This is serious stuff - it means that as and when the BoE MPC does put up rates, they are in effect pushing the banking industry over the cliff because it will trigger a huge wave of mortgage defaults that will in turn lead to the need for an Eire style second bank bailout - but one we probably can't really afford, so the only option left will be bank nationalisation in the UK.

    How did we get to this position? Answer - ludicrous housing policy.

    Due to the high cost of housing and the low incomes of so many households, home ownership is simply not possible in the UK for a very large proportion of our families.

    Instead of taking responsibility for this, successive governments have failed to prioritise social housing to provide affordable rented housing which has led to families being driven into buying when they really couldn't afford it.

    So instead of having a good stock of social housing, the jobs that would have been created building it and a very much lower level of private debt plus a banking industry not constantly on a knife edge, we now have a mountain of private and public debt plus the potential meltdown in the housing market AND an other banking crisis on the horizon.

    Who got us into this mess?

    Blair & Brown allowed this unsustainable policy to continue, but its designers were Mrs Thatcher's government and the libertarians from the IEA and Adam Smith Institute who argued to sell off social housing and to "get the state out of housing".

    Now is the time to recognise this problem and put in place a programme to build new social housing. This would be a much better bet than throwing ANOTHER £40,000 for every man, woman & child into the banking system.

    THe BoE talks about "moral hazard"in relation to banks taking high risks because they know government will bail them out - "too big to fail."

    In my view the real moral hazard llies in politicians following their ideological, dogmatic policies which harm our futures, betray our families and seriously damage our long term economic prospects.

    The State cannot be "rolled back" - the State is the representative body of the people - it's our way to come together to protect and promote the need of our people for homes and jobs, just as it did in the past to protect us from invasion and tyranny. David Cameron's "big society" sounds benign - but it is smokescreen for a dangerous abdication of collective responsibility - people needs homes - the market cannot meet this need through home ownership without threatening ther entire financial system - therefore the market has failed.

    Libertarians can wriggle and squirm as much as they like - they are fundamentally wrong that there is any alternative to state provision and the longer they go on deluding themselves there is a free market option, the deeper they will drive the economic crisis and the bigger the risk that the UK will sink into a depression which will last a generation.

    This is the gamble being taken with the capital side of the economy right now - it mirrors the gamble being taken with the current account with the estimate of the impact of spending cuts now set at 1.6 million job loses.

  • Comment number 79.

    Without realising it this is a nod in the direction of the Marxist concept of value.

    It is fiat money that has fuelled fictitious capital & so asset price increases - shares as well as property.

    Exchange value is out of step with value.

    The correction will take place.
    The more the authorities try to postpone it the bigger the depression.

    Why do we want to like in a society where everything, including the roof over our heads, is a commodity, & money is the only measure of life?

  • Comment number 80.

    72 Ben

    Sorry to be annoying.

    `With the debt they are bribing the current lot with the next generation's money. This is quite different and it is a situation engineered by one generation to the detriment of another who are not yet old enough to stop them.'

    The implication is that this is a deliberate act is wholly erroneous. What has been going on is a stupid act conducted by those who are only thinking for today. It is intellectual failure not an immoral conspiracy.

    As for stopping otherwise clever people from acting stupid: well, I have been trying for over forty years and wish you luck. I have at last been able to stop beating myself up for failing as at least I can point to the ruin and the debt such have caused.

  • Comment number 81.

    Most of us have been saying this for years. Unfortunately we will get QE2 and more efforts to prop up a hopelessly inflated market.

  • Comment number 82.

    There seems much consensus nationally and on this post that we have made a huge mistake in the last thirty years but in particular 1997-2007 with over-inflating house prices. How about a solution that doesn't throw out the baby with the bath water?

    Here's my attempt: Let house prices fall by the government providing new land at sensible and much reduced price with planning permission for developers to build AFFORDABLE houses for first time buyers. Use QE to provide a nationalised bank with funds to provide 25 year repayment mortgages at 5% interest (£90K mortgages 10% deposit required). Monthly payment circa £600.

    With an inflow of first time buyers able to buy their own affordable houses on affordable but reasonable terms property prices up the chain would have to fall drastically. To insure that this does not cause foreclosures the government must keep interest rates low so that buyers in these houses can afford their payments and successively over the next twenty odd years mortgages will be paid off.

    At the end of the mortgage period owners will be debt free but will have lost money over the 25 years. (Investments can go down as well as up). However, crucially there will be no mass failure to keep up payments and they will have full equity at the end of the period.

    If people need to move during the time they have negative equity (probably until the last 10 years or so of their repayment period) then they will need to rent out their house and move to another rented house/ cheaper bought house where their new job is. I believe that rental prices will fall but not too much if there is a properly controlled expansion of affordable houses to buy. Therefore the rental income on the house they moved from should cover the majority if not all of the mortgage payments on it.

    We have made a mistake with house price inflation. The first step is recognising this. The second step is acting to mitigate it without cutting off one's nose to spite one's face.

    Any other pragmatic suggestions or feedback?

  • Comment number 83.

    Lest we forget who was it that oversaw a boom in house prices? Who was it who told the MPC to ignore asset price inflation? Who was it who encouraged bankers to gamble and lend money to bad risks? Who was it who furiously stoked demand for housing, thus forcing up house prices, by allowing countless East Europeans to settle here when other EU countries delayed their entry?

    Tory Blair and Gone Brown.

  • Comment number 84.

    "It is intellectual failure not an immoral conspiracy"

    Yep, didn't mean otherwise. Agreed. But now we know the mess we are in people who call for more borrowing do disgust me.

  • Comment number 85.

    Yes, I agree Stephanie, with both you and Robert and all those who were warning that the real danger was private debt becoming public debt. Forty odd years ago mortgages and therefore property values were tied to earnings, so by that reckoning house prices are still hugely over-valued. The correct ratio should be the average house would be worth about 4 times average income. So, still some way to go then. For individuals to get a grip on their debt they need to start cutting up their credit cards, particularly the second one and their store cards. The age of "I want it all, and I want it now!" is over.
    Regards, etc.

  • Comment number 86.

    I just would like to say that "practically impossible to get a mortgage above 75% loan to value" is tripe.

    Don't believe the hype. 4 or even 5 times your salary and 10% deposit is still more than easy to arrange if you handle your existing credit well and don't miss payments on secured or unsecured credit.

    You wont get the best rates but then lenders would be foolish not to charge a risk reward premium. If you struggle to get a mortgage for any reason try speaking to a mortgage broker who is whole of market rather than reading blogs or going to price comparison websites. As the lenders who have the best rates will make you jump through more hoops to get them, and sometimes it worth paying a little more to keep you hair and your head!

    End of...

  • Comment number 87.

    The broadcasting profession always seems to get quite snobby when commentating on the housing market. It is usually their opportunity to patronise the house buying public for getting into debt beyond their means whilst funding the dream. Politicians have understood that they get the UK public on board,despite the snide comments,because a strong housing market generates the feelgood factor whilst allowing us to ignore the steady collapse in manufacturing and real wealth generation.Would anyone bet on any politiician willingly calling time and waking the UK public from the dead ? The dear old BBC would just love all the blame to be laid at the nasty tory party door when all parties have been willingly complicit!

  • Comment number 88.

    79. At 08:49am on 03 Nov 2010, duvinrouge wrote:

    "The correction will take place.
    The more the authorities try to postpone it the bigger the depression.

    Why do we want to like in a society where everything, including the roof over our heads, is a commodity, & money is the only measure of life?"


    When a lot of people were blaming Tony and Gordon for not seeing the financial crisis coming it occurred to me that a good strategy might have been to restrict credit and build/provide lots of council/social housing from 1997 onwards. I doubt anybody would have got elected on such a programme, but wouldn't it have ameliorated the personal debt crisis at the very least, stalled the inexorable rise in house prices (and housing benefit) and given people somewhere affordable to live?

    In practical terms negative equity is only a problem if you can't afford the mortgage or want to move; we live with it all the time if we borrow to buy a car. Perhaps more of those who couldn't/can't really afford a mortgage should have been forced to come to terms with their circumstances in the same way that the Tories (sorry, Coalition) want housing benefit claimants to do. Plenty of "social" housing would have saved those who should never have bought inflated property in the first place from a lot of misery.

    And isn't it naive to expect landlords to reduce the rent they charge in line with the housing benefit cap in expensive areas? If you're the landlord of a buy-to-let property and the reduced housing benefit doesn't cover the mortgage, what will you do if, as is hoped, rents have come down generally and you can't find another tenant? Isn't there yet another crisis waiting to happen?

    I'm well aware that council housing is a dirty concept nowadays, and I think a much more imaginative approach than simply building massive estates like in the old days would have been required, but I believe I'm right in saying that what's left of it has to be self-financing and perhaps it's because it can actually work so many people find it ideologically offensive.

    I can't compete with people who know a lot more about economics than I do, but whether you agree with me or not (or think I'm an idiot), I really do think we need a serious re-evaluation of what kind of country we want to live in and, for all the rhetoric, whether we're even vaguely going in the right direction.

  • Comment number 89.

    Let's look at facts....
    Fact 1 :The economy has grown over 3% in the past year.
    Fact 2 :Interest rates on mortgages are actually quite low just now, though the margin over base is high.
    Fact 3 :The RPI inflation of 5% does not sound particularly like a depression,does it?
    Fact 4 :UK house prices are not particularly high anymore allowing for recent changes in the interest rate.
    Fact 5 :There has been no mad rush of homeowners being repossessed recently.
    Fact 6 :Unemployment has not ballooned upwards yet ,notwithstanding what is in the pipeline.
    Fact 7 :House prices have gone up 1.8% in the past month , ie. no-one is giving away penthouses in Chelsea for 10 bob yet.
    Fact 8 :The stock market is doing quite well, admittedly not at the dizzying heights of yesteryear but quite respectable nonetheless.

    Eight facts pointing to house price stability rather than disaster.
    Methinks the boffins in 2010 are only now predicting what happened THREE YEARS AGO .
    It did happen .......and thank heavens, it's over!

    Prozac for Fathom!


  • Comment number 90.

    Ben #16 & #72 - good post. I wish more people understand that our generation will suffer thanks to the greed of the previous one. How people could not see that borrowing 6 or 7 times earnings to buy a house clone in some non-descript housing estate in anywhere town for a quarter of a million was a stupid idea I will never know. Or not seeing an issue that a decade in to the most insane property bubble in history, house prices were rising at a far higher rate than wages.

    The answer is of course the same as ever - fear and greed ingrained in the human psyche. Egged on by cheap television people honestly thought that they were on the road to riches rather than to disaster. "If everyone is doing it then it must be right, yeah?". It is just the same as it was with stocks in the 1920s. people taking tips from bellboys and borrowing money to do it. Nothing changed. Now it was "my mate's mate who is a taxi driver did it and is making loads of money". wrong wrong wrong. WHATEVER IT IS, BE IT TULIPS, TECH STOCKS, PROPERTY OR WHATEVER ELSE - IF EVERYONE DOES THE SAME THING IT CREATES A BUBBLE AND IS DESTINED TO END IN TEARS.

    So what happened is this. In the 1970s the mentality was that you would buy a house to put a roof over your family's head if you could afford it. Pan forward to early this decade it was more like - "well i'll buy a house because that is what I deserve and i will buy another one to rent out". Without stating the obvious if everyone buys-to-let then there will come a time when there is not a big enough market to let to. The "wealth" that was created was not real. in the 70s & 80s 30 year olds were mostly driving a used hatchback. Pan forward to the greed era and it became a shiny new BMW X5 all paid for on credit to go with their 3 properties. It gets dangerous when people assume it is easy to make double-digit returns. All this greed fueled the debt bubble.

    So people got arrogant and driving around in their shiny cars looked down their noses at those not fortunate enough to be establish2ed money earners at the right time - i.e. the 90s economic boom. So I - like Ben - have had to try and build capital in tough circumstances while the fortunate ones flaunted their "wealth" they acquired by greed-led default. Yet now the house of cards comes falling down I am supposed to help these people out of the mess they made with all this pretend wealth? I am all for stimulus going to where it is needed - small businesses and entrepreneurs that create real wealth and the real jobs that will bring us out of this mess. But why should it go to those who don't want to accept that they made a mistake and have to pay the price?

    Try budgeting. A lot are complaining about negative equity and putting fuel in their exorbitant 5 litre SUVs. If you are having trouble paying your mortgage at these rates then you are just going to have to go through personal austerity. Maybe it is time to come up with the 'ultimate sacrifice'. Maybe an annual holiday in Asia and some skiing weekends at the villa in the alps and weekly trips to the spa in the SUV will have to be replaced by a holiday in Greece and weekly trips to the supermarket in the super-mini. And maybe little Quentin can do without so many violin and tennis classes at the club.

    And good point on pensions Ben. That is a disaster building for sure. I like yourself have to work under the assumption that I will not have a pension but for wealth I make from my own investments. So this is an open message to everyone 40 and under. Whatever you do make sure you invest for your retirement. And do not be so daft again and put everything in property as it is illiquid and so you cannot spend it.

  • Comment number 91.

    Remember markets love suckers.
    So hardly anyone is buying houses, except a canny few with wads of cash.
    People who really shouldn't be selling are being suckered into selling in the vain hope that prices will further fall and they can clean up and buy cheap later.
    Most people well able to buy are delaying their purchases as they think prices will drop.
    People are thinking money is rubbish and gold is everything and so the price of gold has rocketed.
    People are wary of borrowing more as they think interest rates are going to shoot up.

    OK suckers ... watch out for ....

    2011 GOLD CRASH

    You heard it here first.

  • Comment number 92.


  • Comment number 93.

    In the case of Sub Prime mortgages which have been parcelled up and sold on, in some cases many times, can someone confirm who is left holding the Titler Deeds as I understand they are still with the first granter of the mortgage and therefore they and not the purchasers of the bundles are still the legal owners of the deeds.
    This because the US lawyers and Banks thought it too expensive to transfer the Deeds and the Legal Charges every time the bundle was sold on.
    Is this a correct understanding?? If so were the right Banks bailed out??
    Can someone in authority as a Bank with a Bundle to produce the Deeds of all the properties involved. I look forward to seeing the result.

  • Comment number 94.

    At last, someone who recognizes that our problem is not public debt but private debt which holds back anything we might want to do.

    Securitization and derivatives trading got us here which cannot be laid at the governments door. that is still going on and will make everything we want to do (eg build nuclear power stations) incredibly expensive due to betting on the commodities and the industries involved.
    Estimates are that we will pay 5 times the real cost of anything (as we are doing with housing).

    Problem is that neutralising / realising by defaulting on the debt and allowing losses to happen would hit the banks again and bring the economy to a halt. Remember these people don't care about individuals going bankrupt or losing their homes.

    The Bad Bank solves this, but is paid for by the taxpayer - dont forget King ignores inflation month after month (he hurt us badly with his prior incompetence).
    The other problem is that while credit could flow again, interest rates would have to rise and there comes the housing correction.
    The only way to stop this is to continue ignoring inflation as the BofE has always done, but it won't be possible forever, we will be rumbled.

  • Comment number 95.

    Aren't the wouldn't-it-be-loverly-if-money-grew-on-trees-neo-Dorothy-end-fractional reserve-banking-brigade not a bit anti-Semitic with their anti-international-banker conspiracy theory?

    Economics based on envy .

  • Comment number 96.


  • Comment number 97.

    Tanking the housing market is the only way to get the economy back on track. House prices were deliberately inflated way beyond their true market value for one reason only, so banks can make more money.

    So YES allow house prices to fall 50% but drop the mortgages by 50% also. Let the banks swallow the negative equity and if they ask where the money is going to come from to do that, tell them they have already had it, they just squandered it in paying obscene bonuses, so take it out of the next 10 years worth of bonuses.

  • Comment number 98.

    What is to be desired in the housing market?
    How about - effective use of housing stock
    - minimise homelessness
    - maximise personal home ownership - it gives people a
    stake in society
    - and incidentally maximise employment

    To achieve this:-
    - shift the burden of taxation from commercial and social property to residential property, and increase progressive stamp duty on larger properties - this brings down house prices and encourages subdivision of larger properties
    - end tax loopholes for buy-to letters to escape capital gains tax
    - base minimum lending rate policy on 1. inflation that includes inflation in house prices, and 2. UK competitiveness in world markets based on the trade gap and capital flows.
    - statutory requirement for minimum deposits on residential property of a percentage of purchase price that reflects the ratio of property prices to average earnings. This is currently historically high, so the deposit needs to be high - e.g 30%.

    Buy-to-letters and the over-mortgaged suffer pain for the next few years as house prices fall, but first-time buyers get a benefit.
    More subdivision of larger properties, so bigger housing stock where this is needed.
    Businesses get a benefit from reduced property taxes - and thus may increase employment.

    While we're at it - let's increase employment by:-
    -reduce the minimum wage by £3/hour for businesses engaged on trade where they are competing in a world market. Instead allow unskilled workers to keep their jobseekers allowance at the rate of £3/hour of employment while working in these industries. .
    Effects:- Jobseekers can earn another £63/week
    Jobseekers move to areas where there are unskilled jobs available in manufacturing, agriculture and forestry. - equilibrating property prices across the nation
    Increase in manufacturing, agriculture, and forestry activity.
    Improved balance of payments.

  • Comment number 99.

    Poor old buy-to-letters.
    Much lower than normal risk but ripped off for arrangement fees, super-high interest rates which went up rather than down during the crash,low-loan to valuation criteria making portabilty of mortgages impossible,inheritance tax,hiked capital gains tax , non-allowance of annual losses against income tax,reduced holiday let allowances, ridiculous registration charges, massive maintenance charges, crazy green regulation, overzealous safety and fire regulations,ASBO regs,planning hurdles,accountancy and legal fees,feral tenants and horrid neighbours.
    Rents lower than ever in real terms,standards and spec are super-high due to competition,tenants endlessly pestering landlords at all hours for rubbish like lightbulb failure and boiler pressure adjustments.
    BTL landlords held on like grim death to avoid a Detroit-like crash in the housing market and what do we get in thanks from the young and envious ?
    ......Blame and distaste.

    Not fair, really, is it?

  • Comment number 100.


    The interview, which Evan Davis undertook with Danny Gabay is very interesting.

    Gabay's point is essentially that all the commercial banks should be allowed to dump all of the non-performing loans into a single entity; funded by government through more Quantitative Easing.

    This means that all the financial institutions may clear themselves of all the obligations created by the deals their managers arranged, particularly on the corporate property side. Their balance sheets would be a little poorer, but the quality of the outstanding debt on their books would improve massively.

    Is this not what Mr King would refer to as "moral hazard"; a second bank bale out?

    Surely a more appropriate way for the financial institutions to adjust their balance sheets is to review their loan portfolios, write down the value of over-priced assets and take a hit this financial year. The FSA could engineer this orderly write-down, through its regulatory role.

    Gabay's clients for Fathom hail strongly from the financial services community, so his point has some purpose, in that sense.

    A more appropriate use of QE2 would be an institution, designed to create the growth and business of the future; i.e. manufacturing etc, rather than further state subsidies to already heavily state backed financial institutions. The next round of QE needs to get to the real economy, not get tied up in the log jams of painful adjustments in the financial services community, or in artificially sustaining asset prices in stocks and property.

    I trust you are correct and that the MPC and HM Treasury will not heed Mr Gabay's advice.


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