How personal debt grew to £1.4 trillion.

HAMISH_MCTAVISH

joguest wrote: »

85% of personal debt is mortgage debt. This might explain the rise (in house prices and debt)

Or it might just as easily show that a genuine supply and demand imbalance caused prices to rise, and the issuance of mortgage debt was able to keep up.

An increase in lending can certainly cause prices to rise, even where there is no shortage. Ireland and the USA prove that point, with housing vacancy rates of 17% and 11% respectively.

Where the bears get confused is assuming ALL increases in prices are caused SOLELY by the expansion of debt. Which of course is simply not the case. If it was, then the UK with it's 3% vacancy rate would have seen the same 45% falls as Ireland with it's 17% vacancy rate when the credit taps were turned off. And of course, it didn't. Despite other factors, ZIRP, bank bailouts, etc, being broadly the same.

The reason central bankers don't target house prices with interest rate rises, is because telling the difference between a speculative bubble without any foundation and a genuine supply/demand imbalance is fiendishly difficult.

The only way to be sure which is which, or how much credit expansion played a factor, is with the benefit of hindsight....

After the credit taps were turned off..... Zirp and homeowner support were introduced, and the banks were bailed out, this is what happened.....

Ireland: 17% vacancy rate. Now 45% below peak.

USA: 11% vacancy rate. Now 38% below peak

UK: 3% vacancy rate. Now 10% below peak.

Australia: 2% vacancy rate. Now above previous peak.

Pretty obvious what the situation is there.....

Thrugelmir

HAMISH_MCTAVISH wrote: »

Or it might just as easily show that a genuine supply and demand imbalance caused prices to rise, and the issuance of mortgage debt was able to keep up.

Mortgage debt in broad terms doubled between 2003 and 2007, by £600 billion. This fuelled the spike in prices.

Without the UK Treasury and BOE support prop to provide funding to the banks. There would now be a major funding shortgage.

So the current game appears to be that of encouraging borrowers to repay debt, whilst standing still in asset value terms and preventing a collapse in the property market.

Banks will shortly be required to hold 6-8 times more capital to fund a 90% mortgage than a 60% one. We have without doubt left one era behind and are now entering another. The outcome is far from clear.

HAMISH_MCTAVISH

Thrugelmir wrote: »

This fuelled the spike in prices.
.

No, it enabled the market to function as it should, with credit supporting the expansion of homeownership and price being used to ration the supply of houses.

Had the credit crunch never happened and artificially crashed the market, the outlook for UK house prices would have been much the same as what happened to Australian prices. Continued growth to the point of discovery around affordability constraints, followed by a plateau which is allowing incomes to catch up.

But cutting off mortgage funding due to the freezing up of global credit markets (nothing to do with UK lending standards, BTW) cut that process off prematurely, and is now worsening the housing shortage, increasing rents, and only building up a bigger boom for the future.

It's a bit like trying to reduce road traffic deaths by rationing petrol...

Utterly self defeating, and creates more problems than it solves.

the_flying_pig

HAMISH_MCTAVISH wrote: »

...Ireland: 17% vacancy rate. Now 45% below peak.

USA: 11% vacancy rate. Now 38% below peak

UK: 3% vacancy rate. Now 10% below peak.

Australia: 2% vacancy rate. Now above previous peak.

Pretty obvious what the situation is there.....

Hamish

I shouldn't nit-pick - this is vastly, vastly stronger than your average [sub-estate agent] standard of post, it has a hypothesis, evidence, even a 'control' of sorts, and a conclusion, it's altogether really quite sensible indeed. But I do have a couple of comments [it's refreshing and rare to be able to be replying to a post of yours that's sensbile enough to actually be worthy of proper comments rather than the standard abuse & ridicule]:

(1) Y'know what - there's probably something in this [it doesn't, of course, follow that UK prices are about to 'soar' or whatever other nonsense you might choose to infer but, yes, there is probably a strong core of truth in your comparison] ; but
(2) Your comparison is probably a bit misleading from at least a couple of important perspectives:

(2i) - interest rates - it's fairly widely recognised that Ireland's pwoperdee prices falls were heavily influenced by membership of the Euro - the increases were 'too big' due to relatively low Eurozone rates whilst Ireland was overheating, similarly the falls were possbily 'too big' due to relatively high Eurozone rates whilst Ireland was nose-diving. The UK [and, to be fair, the US] was extremely aggressive in pursuing ZIRP as quickly as it could, for as long as it could, even whilst inflation was well above target.

(2ii) - your measure of prices - falls from peak are not quite meaningless but are potentially highly misleading because a basic rule of bubbles is that the bigger they are, the harder they fall. and, for starters, the irish bubble was far bigger than ours. so a much more sensible question to ask would be whether there was a correlation between rental yields and/or house price to income ratios and vacancy rates. so, for example, this report seems to suggest [see page 5 - although their rebasing everything to country averages is weird and confusing] that Irish houses are in fact currently more overpriced than UK ones on a rental yield basis albeit probably less overpriced than the UK on a price-to-income basis.

http://www.dbresearch.com/PROD/DBR_INTERNET_EN-PROD/PROD0000000000254693.pdf

HAMISH_MCTAVISH wrote: »

No, it enabled the market to function as it should, with credit supporting the expansion of homeownership and price being used to ration the supply of houses.
...

that, on the other hand, was a reversion to type - the very worst, most meaningless, strain of bullsh1t.