Interest Rates - BoE should cut them or the governer should go!

Turnbull2000

tonyE1 wrote: »

I think any drop in house prices will be short and sharp but will recover quickly except in specific areas such as new builds outside of london. The reason being that those people that sell at a large discount will do so because they have to, otherwise they will wait. Once the fire sales are out of the system things will recover from a short hard drop.

Recover to what? "Recover" implies that prices at the Oct 2007 peak were normal, and any other price level is abnormal.

Do you really believe that the mortgage-backed market (which proved unsustainable and catastrophically failed) will return anytime soon, cos without it prices will plunge heavily to reflect a return to normal credit conditions e.g. 10-25% deposits, 3.5x salary. Or will hopeful buyers magic money out of air instead of banks?

SuperV

Turnbull2000 wrote: »

Recover to what? "Recover" implies that prices at the Oct 2007 peak were normal, and any other price level is abnormal.

Do you really believe that the mortgage-backed market (which proved unsustainable and catastrophically failed) will return anytime soon, cos without it prices will plunge heavily to reflect a return to normal credit conditions e.g. 10-25% deposits, 3.5x salary. Or will hopeful buyers magic money out of air instead of banks?

And that is a right question to ask, who was/is guilty and who should pay for inflated house bubble?

SuperV

UK economy 'worse than thought'

(http://news.bbc.co.uk/1/hi/business/7552336.stm)

And so on... for those that still believe they will benefit when other suffer.

wisbech_lad

And how, pray, would the BoE cutting interest rates help? There is a market rate of money. HSBC or Lloyds can just as easily decide to lend to a Taiwanese manufacturer of iPods, as to Mr & Mrs Patel wanting to buy 15 Laurel Drive.

As for who should pay for the inflated house bubble - meh, probably same as last time. A mix of those who purchased near or at the top, and then need to move, and the shareholders of the banks that lent them the money (in case of write offs by the banks)

Interestingly HSBC has doubled its mortgage lending in UK - it is still possible to get a mortgage. True that their average LTV is 58%, but that is sensible.

SuperV

More bosses 'planning job cuts'

http://news.bbc.co.uk/1/hi/business/7552614.stm

And so on...

jamesd

SuperV wrote: »

And that is a right question to ask, who was/is guilty and who should pay for inflated house bubble?

Who should pay is easy. Those who invest during a bubble are the ones who end up paying, whether it's property or shares.

Best protection is to rapidly get back to prices around the turn of the century so that the larger number of pending buyers won't be buying at inflated prices. Even just the 50% drop to get back to 2002 prices would reduce the pain a lot.

Those who have been enjoying large paper gains won't appreciate seeing much of that vanish, of course. And it will hurt those who purchased during the bubble unless they were long term buyers (who may need help moving as well).

Those who gained are mostly bank owners, here and in the US (about 40% of UK mortgage securities were sold to US buyers). They are already paying in the reduced share prices for the banks. There may be more pain for them, since about 40 billion of residential mortgage backed securities expire each year for the next three years and have to be refinanced somehow by banks.

SuperV

jamesd wrote: »

Best protection is to rapidly get back to prices around the turn of the century so that the larger number of pending buyers won't be buying at inflated prices. Even just the 50% drop to get back to 2002 prices would reduce the pain a lot..

No, it won't. They will not have their jobs. UK economy is not uncorrelated so that it is possible to say that housing market crash will not affect the rest of economy.

jamesd wrote: »

And it will hurt those who purchased during the bubble unless they were long term buyers (who may need help moving as well)..

There isn't anything like long-term buyer. That is only an expression to "help" them accept their losses. Don't forget that they will pay inflated mortgages only to keep their credit rating...

SuperV

wisbech_lad wrote: »

And how, pray, would the BoE cutting interest rates help? There is a market rate of money. HSBC or Lloyds can just as easily decide to lend to a Taiwanese manufacturer of iPods, as to Mr & Mrs Patel wanting to buy 15 Laurel Drive.

Rate cut will affect due to huge amount of money pumped by BoE in the system.

jamesd wrote: »

As for who should pay for the inflated house bubble - meh, probably same as last time. A mix of those who purchased near or at the top, and then need to move, and the shareholders of the banks that lent them the money (in case of write offs by the banks)

Again mistake. Everybody will pay it more or less. As the UK economy is dependant on housing market, it will go down. Negative equity owners will pay inflated mortgages (can't get deals).

jamesd wrote: »

Interestingly HSBC has doubled its mortgage lending in UK - it is still possible to get a mortgage. True that their average LTV is 58%, but that is sensible.

That is sensible. But it is also sensible to try to avert crises. Small Joe will not benefit from it.

wisbech_lad

SuperV. In an open economy, like what UK is, the huge amount of money pumped into the system by BoE that you advocate can (and probably will) get transferred abroad, to lend to Taiwanese iPod manufacturers. Arguably then exchange rate drops, inflation goes up, whoops, we are all poorer.

The classic response to a slowdown like this is fiscal, not monetary, because fiscal spending can be better directed domestically (i.e. unemployment benefits, retraining grants, build a olympic stadium etc).

Yes, the economy will go down with the housing market, so be it. The govt should then run a larger (fiscal) deficit to mitigate the downturn. However, slight problem that the UK govt is entering this recession with an already very weak budget balance, so their room to do this is not as big as one would like. E.g. in the good days, they spent too much money, rather than running a fiscal surplus to "lean against the wind"

Muppets.

SuperV

wisbech_lad wrote: »

SuperV. In an open economy, like what UK is, the huge amount of money pumped into the system by BoE that you advocate can (and probably will) get transferred abroad, to lend to Taiwanese iPod manufacturers. Arguably then exchange rate drops, inflation goes up, whoops, we are all poorer.

Yes, that can happen, but again loans can be conditional. In the same way you suggest, but with a market flavour instead of social.

Exchange rate will go down in a recession anyway. Even worse for the UK, it will very probably affect its technological base as people in IT will move away (and if you check any technological company in the UK, there will be a significant number of foreigners). That will be a long term blow for economy.