BOE's prority must be preventing another housing boom.

Graham_Devon

For the past four decades, cheap credit has been the catalyst for property booms. That was the case in the early 1970s, when Threadneedle Street abandoned direct controls on lending and then watched helplessly as prices rose by 50% in 1973. A second bubble followed 15 years later as a result of a toxic mix of financial deregulation, cuts in interest rates and the pre-announced abolition of double mortgage relief. In the years leading up to the financial crisis of 2007, borrowers could secure loans at high multiples of their income with few questions asked.

There is no real evidence that the Bank's quantitative easing programme is leading to mortgages becoming more freely available, and potential first-time buyers are struggling to raise the deposits demanded by lenders before they will grant a loan. Prices need to come down to make residential property more affordable but that only tends to happen during periods of sharply rising unemployment, negative equity and aggressive foreclosure. That was the case in Britain during the early 1990s, and has been the reason for the big falls in house prices seen in the United States since 2007, but does not apply to the current UK property market.

On the contrary, banks and building societies have adopted a lenient approach to those unfortunate borrowers in arrears with their mortgage payments and, as a result, repossessions are low. There are few forced sellers, so little pressure to cut prices to levels that would make them more affordable to first-time buyers.

Anybody thinking of buying a home can take their time, because prices will, at best, move sideways this year and there is currently not the remotest chance of the Bank's monetary policy committee raising interest rates. All of which means this is the perfect time to take stock and to suggest reforms, should they be deemed necessary.

Make no mistake, these would be powerful weapons and even the threat that they might be deployed would have an impact. It would probably only require Sir Mervyn King to make a speech in which he said that the Bank was mulling the possibility of imposing a loan to value ratio of, say, 80% on all new mortgages for the market to be killed stone dead. Activity would dry up and prices would fall.

http://www.guardian.co.uk/business/2012/apr/08/housing-market-bubble-bank-of-england?newsfeed=true

Large article. The article suggests that theres an opportunity to wean the UK off it's addiction to high house prices, and it should not be squandered.

But squandered it will be. Good to see another article suggesting prices need to be lower however, and suggesting people should sit tight for the moment.

shortchanged_2

The sad thing about this is that the powers that be never seem to learn from past mistakes.

I wonder if anything will be different this time around? I doubt it when there are so many VI's in high places.

nearlynew

As long as the general poulation are stupid enough to think high house prices are a good thing, rather than economically and socially damaging, nothing will change.

wotsthat

Most of the conditions are already in place for the next boom, although the fact that property is still expensive and lenders are still hunkered down means it may not happen for some while.

The difference in the next boom will be that it'll be led by people buying houses purely for investment purposes rather than owner occupiers.

Graham_Devon

wotsthat wrote: »

The difference in the next boom will be that it'll be led by people buying houses purely for investment purposes rather than owner occupiers.

I'm confused. What's different?

Wookster

Sounds like an excellent idea in principle but I defy anyone to tell me what a fair price for a property is in the absence of a properly functioning market where there is reasonable access to credit and those in arrears are actually repossessed rather than given the 'extend & pretend' treatment.

shortchanged_2

Graham_Devon wrote: »

I'm confused. What's different?

Come on Graham. Don't you realise that property is very undervalued in the UK.

The average price is a good £100K under what it should be and that's with interest rates at 6%.

wotsthat

Graham_Devon wrote: »

I'm confused. What's different?

We've had a few decades of increasing levels of owner occupiers. i.e. people buying houses to live in.

The trend is reversing and the next boom will be led by people buying houses for other people to live in.

shortchanged_2

wotsthat wrote: »

We've had a few decades of increasing levels of owner occupiers. i.e. people buying houses to live in.

The trend is reversing and the next boom will be led by people buying houses for other people to live in.

The thing with this train of thought is that I believe that rental yields are already pretty much maxed out.

Basically we are now in a situation where there are already very high house prices with very low interest rates.

So unless house prices drop significantly then there ain't much room for yield margins in the future particularly as interest rates rise.

Graham_Devon

wotsthat wrote: »

We've had a few decades of increasing levels of owner occupiers. i.e. people buying houses to live in.

The trend is reversing and the next boom will be led by people buying houses for other people to live in.

Oh I see.

A bit like the dotcom boom? Where investors piled into a good thing where you could never loose?

wotsthat

shortchanged wrote: »

So unless house prices drop significantly then there ain't much room for yield margins in the future particularly as interest rates rise.

There will be more people per house to help pay the rent and, like it or not, people will have to get used to an increasing proportion of income being spent on accomodation and therefore less on other things.