Housing market 'unlikely to recover', says Bank of England expert

Wookster

Quite surprised this hasn't been posted yet:

http://www.telegraph.co.uk/finance/economics/houseprices/8908432/Housing-market-unlikely-to-recover-says-Bank-of-England-expert.html

Of particular interest is the line:

His remarks raise the possibility that house prices will not return to pre-recession levels as house buyers will be unable to take out the necessary home loans to trigger another boom.

Some would have us believe that the increase in prices is entirely down to shortage of supply however this only seems to be part of the picture.

Furthermore another outstanding article in Alphaville yesterday about Central Bank's role in the crisis:

http://ftalphaville.ft.com/blog/2011/11/22/758211/central-bankers-pursued-by-a-bear/

Again, of interest:

Our US economists make the very interesting point (similar to Marc Faber) that peaks of income skewness – 1929 and 2007 – tell us there is something fundamentally unsustainable about excessively uneven income distribution.

Rising asset prices, especially in the housing market, created a sense of increasing wealth regardless of income. Remortgaging homes over the long period of declining interest rates provided a convenient source of funds via equity withdrawal to finance increased consumption.

And in an ominous sign of things to come goes on to state:

Going forward, in the absence of a sustained housing boom, labour will fight back to take its proper (normal) share of the national cake, squeezing profits on a secular basis.

Graham_Devon

No comprende.

Impossible. House prices always go up.

Kennyboy66

And in an ominous sign of things to come goes on to state:

Quote: Going forward, in the absence of a sustained housing boom, labour will fight back to take its proper (normal) share of the national cake, squeezing profits on a secular basis.




A real gem of an article - perhaps a backlash against continued high immigration will be the pre-cursor to wage inflation.

the_flying_pig

When lending gets back to normal [probably in a year or two's time], prices are going to skyrocket, it'll be the mother of all booms. It must be true because Hamish tells us all the time. This David whathisname fella can't possibly understand the market half as well as McTavish does.

shortchanged_2

BUY, BUY, BUY. There never has and never will be a better time to buy.

Don't worry buyers about taking on a massive debt while your personal wealth is shrinking. Interest rates are rock bottom and will stay like that for the next 30 years.

michaels

This has long been my theory as to the root cause of the credit crunch - I thought it was a great original theory but it turned out some nobel prize winning economist had had it first.

INEQUALITY AND FINANCIAL INSTABILITY

1) Globalisation leads to the commodification of un/low skilled labour.

2) Reduced labour costs increase relative returns to capital and highly skilled labour as unskilled labour costs fall as a share of output.

3) The resulting income inequality leads to EXCESS SAVINGS - yes you did read it right, excess savings are a key part of the cause of the crash. Those on low incomes generally save little of their income and look for savings products giving a small but safe return. Those on high incomes are unable to spend all their income, have sufficient 'safe' savings and so look for high yielding more risky returns.

4) The extra savings drive up asset prices and drive down yields, especially for more risky assets as those with the extra savings are less risk averse than the average as being rich they can afford to lose some of their savings.

5) The savings are not invested in production because the returns on producing consumer goods are low because demand is weak BECAUSE of the uneven income distribution as already mentioned above.

6) Instead the savings are lent to those on low incomes to fund CONSUMPTION for two reasons (1) rates are low because of the excess savings available seeking high yield despite increased risk levels; (2) The income equality at the root of the problem results in the 'have-nots' seeing and aspiring to the lifestyle of the 'haves' and being willing to borrow to fund consumption at the prevailing low interest rates.

7) For a while this model works, wealth continues to flow unequally to the skilled and holders of capital whilst the unskilled continue to support their purchases and, increasingly, interest costs through borrowing.

8) It breaks down when the indebted become so leveraged that the become less credit worthy. At this point the risk premium increases on all their borrowing and very quickly they are unable to borrow more resulting in an immediate drop in consumption.

9) This fall in demand leads to reduced employment and difficulties in servicing debt, resulting in further increases in borrowing risk premia and a potentially very rapid vicious circle leading to insolvency for borrowers and also for lenders as the majority of the lending has supported either consumption that can not be reclaimed or spent on assets that will also depreciate in value as the number of would be purchasers and their credit worthiness reduce.

So that is what happened and where we are now. What happens next?!

Wookster

michaels wrote: »

3) The resulting income inequality leads to EXCESS SAVINGS - yes you did read it right, excess savings are a key part of the cause of the crash. Those on low incomes generally save little of their income and look for savings products giving a small but safe return. Those on high incomes are unable to spend all their income, have sufficient 'safe' savings and so look for high yielding more risky returns.

This is spot on, and part of the problem is that the bailouts have prevented the "redistribution" of wealth by foisting billions on taxpayers around the world.

The natural order of creative destruction has been tampered with.