Saturday, May 21, 2005

Desperate Move In UK To Preserve The Bubble

As the housing bubble bursts, governments can be expected to attempt desperation moves like the one proposed today in England. "Struggling first-time home buyers could gain cheap mortgages funded by public money under plans revealed by Chancellor Gordon Brown."

Of course, this is a thinly veiled effort to stop a property collapse, and it is doomed to fail. "The plans reflect government concerns, not only over the frustrations of first-time buyers but over the effects on existing homeowners."

"If new buyers cannot enter the market, sales of properties will eventually grind to a halt, leading to a meltdown in property prices and the return of the negative equity nightmare last experienced during the early 1990s."

The wisdom of allowing this bubble to form is certainly under scrutiny now, as the governments are caught between millions of people struggling with home price inflation, and millions more trapped in an over-priced mortgage. This turn of events is especially laughable as any country could bring prices in line with incomes just by reinstating traditional lending standards.

31 Comments:

At 5:17 PM, Anonymous Anonymous said...

Things seem to be so bad there that Blair has just thrown out a trial balloon that workers with a college degree will have to work five years longer than those without, in order to be eligible for their pension. Chip

http://www.timesonline.co.uk/article/0,,2087-1622625,00.html

 
At 5:21 PM, Anonymous Anonymous said...

Others have already said it but it bears repeating.

There is a significant risk that the government will step in and socialize the losses and penalize the prudent.

Hopefully, this will happen in the US in such a manner as to let the enough of the natural consequences to fall through to the "no-brainer" RE investors.

 
At 5:41 PM, Anonymous Anonymous said...

Anonymous 5:17 PM said...
Things seem to be so bad there that Blair has just thrown out a trial balloon that workers with a college degree will have to work five years longer than those without, in order to be eligible for their pension. Chip

http://www.timesonline.co.uk/article/0,,2087-1622625,00.html

Isn't this similar to some of the social security reform plans being touted here to reduce benefits for higher income workers:

http://money.cnn.com/2005/04/29/retirement/progressive_numbers/index.htm

 
At 5:46 PM, Anonymous Anonymous said...

Anonymous 5:21 PM said...
Others have already said it but it bears repeating.

There is a significant risk that the government will step in and socialize the losses and penalize the prudent.

Hopefully, this will happen in the US in such a manner as to let the enough of the natural consequences to fall through to the "no-brainer" RE investors.


The equitable way to handle the financing of the bailout would be to fund it through additional taxation on realtors, appraisers, mortgage debt and property ownership in general e.g. abolishing CGT exemption on residential RE sales, eliminating mortgage interest deducation and introducing a federal property tax. Of course, thiw will make things worse for homeowners but they have enjoyed windfall profits for the last 5-7 years from government policy - and now it's time for payback.

Of course, the real solution will not be equitable however.

 
At 5:46 PM, Anonymous Anonymous said...

5:41 anon -- tried going to your link but it didn't work. Probably because I use Netscape.

From Ben's feature article, at BBC, there is a very interesting sidebar article by the BBC Economic Editor, titled "Why I'd Like a Housing Price Crash."
Chip

http://money.cnn.com/2005/04/29/retirement/progressive_numbers/index.

 
At 5:50 PM, Anonymous Anonymous said...

The situation really has become desperate in UK.

Expect a 3-5 year mega-recession (mini-depression) there with a devaluation of the pound, mass unemployment, and wave after wave of corporate and personal bankruptcies.

Also, expect Gordon Brown to be imprisoned in the Tower of London and executed for treason before it's all over.

 
At 6:12 PM, Anonymous Anonymous said...

I do not want government bailing speculators and bozos who overextand themselves with gigantic mortgages on overpriced houses!!!
I hope they do not do it in England and I'd be outraged if it happens here. Even though there are some signs of this communist methods in California (downpayment and mortgage grants and programs are available in Bay Area). Makes you want to join the party, max out credit lines, cards ... and just walk away, happy go lucky grrrrr!

 
At 7:21 PM, Blogger ajh said...

Ben,

I couldn't agree more. Even when government measures like this are adopted for other reasons, they finish up distorting the market.

Australia has a grant system for first home buyers, originally intended to reward SAVERS as the amount you could get was based on your bank balances over the previous 2 years or so. Basic concept is to give FHB's some money for furnishings.

Political pressure to 'help the strugglers' led to the removal of the banking requirements, and when the tax system was changed here a few years back the amount was temporarily doubled to help with transition issues (and to get the government re-elected). I will admit the amount HAS been reduced back.

The result was all sorts of creative financing deals to take the grant into account (E.g. Using it as a deposit even though it isn't paid until a year or so after settlement). This allowed FHB's to pay a bit more so, lo and behold, starter homes promptly went up in price.

 
At 7:38 PM, Blogger Ben Jones said...

ajh,
I didn't know about that policy, and it's effects. Thanks!

 
At 10:48 PM, Blogger John Law said...

europe is working off the same script:

Buyers camp out for new homes
http://news.bbc.co.uk/1/hi/wales/south_east/3549178.stm

Property prices soar in Wales
http://news.bbc.co.uk/1/hi/wales/3546850.stm

House prices 'show steady rise'
http://news.bbc.co.uk/1/hi/business/3542152.stm

Wages outstripped in housing hotspot
http://news.bbc.co.uk/1/hi/wales/2590007.stm

and then, BAM!

Sharp drop in level of home sales
http://news.bbc.co.uk/1/hi/business/4529957.stm

House prices 'flat since January'
http://news.bbc.co.uk/1/hi/business/4517499.stm

How to beat a falling housing market
http://news.bbc.co.uk/1/hi/business/4065697.stm

and of course, the obligatory:

House prices 'rebound in April'
http://news.bbc.co.uk/1/hi/business/4492375.stm

UK housing market 'bottoming out'
http://news.bbc.co.uk/1/hi/business/4389637.stm

it's all right here on one page:

http://news.bbc.co.uk/1/hi/in_depth/business/mortgages/default.stm

 
At 10:49 PM, Blogger John Law said...

I stopped too soon!

Houses 'too expensive for nurses'
http://news.bbc.co.uk/1/hi/scotland/4567323.stm

 
At 12:28 AM, Anonymous Anonymous said...

"Also, expect Gordon Brown to be imprisoned in the Tower of London and executed for treason before it's all over."

It is time to bring back the good old "hanged, drawn, and quartered" punishment.

BTW, cheap financing is useful as a boost only in an up market. Once people realize that their mortgage can be upside-down, they are not going to take the bait. I don't think UK is non-recourse, right?

 
At 12:41 AM, Anonymous JJ said...

If the US govt bails out these real estate speculators, I'm leaving the country for good. As I am actually a productive, educated, responsible, debt-free person who generates lots of tax revenue for the US, I hope it's not overly proud to say that it would be a loss to the country. I'm not going to work hard and do without, trying to get financially solidified and stay that way for my childrens sake, so that some idiot lawmaker can raid my coffers when their ill-conceived policies fail. If only others would take the same tough approach and just leave if they mess with your life, we can really get some changes made in this country.

The only question is this - is there really anywhere on earth to hide from this madness?

 
At 1:56 AM, Anonymous WOJ said...

Hey jj, I'm with you. I used to think I was becoming dangerously eccentric by living debt-free and investing in wealth-generating assests (not just inflating ones). Now I know I am. I've been dumbfounded at the willingness of people all over the world to commit themselves gladly to debt slavery - encouraged of course by their government's policies. It doesn't seem to matter if it's left-wing, right-wing, or wing-nut. Governments are the great enablers of this addiction to easy credit and highly-leveraged home ownership.
The newly announced plan in the UK to help first-time buyers confirms my fears that governments will feel compelled to keep this binge going, and to bail out those who can't keep up with it.
We already have government-backed zero down mortgages - other measures are not far off.
The sad reality is that those who believe as we do seem trapped by history, with no exit door.
At a minimum, people like us need a viable strategy to protect ourselves from our governments in a post-bubble world, and I've yet to see any serious discussion about that. Almost a bigger worry is what happens in world in which markets are artficially propped up for another decade or so.

 
At 2:55 AM, Anonymous JJ said...

I have deep worries about the world as well, woj - no almost about it. At an extreme (and please note, this is an extreme, not the way I really expect or hope things will work out) you can posit the nightmare scenario that world prosperity and population has been in its own "bubble" for the past few centuries, perhaps since the Renaissance or thereabouts. That was when great minds put into place the foundations of the industrial revolution, which has clearly led to unprecedented prosperity on a global level. Maybe things are beginning to correct. Perhaps it's not just peak oil, as some people discuss on this blog, but peak everything. As a single, simple example, our food is essentially "soylent" - the only reason we have 6.5 billion people on the planet is because of the industrial agriculture machine. This kind of thing cannot persist, and as resources become more and more scarce, war is likely to result (e.g. scarce oil = invade Iraq, at least that's how I read it).

I see China beginning to appear on this blog quite a lot. Does anyone here trust China? Are they propping us up out of the goodness of their hearts, or trying to subvert us? What happens when we resist? Largest standing army in the world vs. an overextended, skeleton crew of a U.S. military. Just food for thought - again, this is just one branch of the nightmare scenario.

Here in the U.S. we feel invincible, having never fought a modern war on our own soil (with isolated exceptions, which I in no way mean to disparage). However, I personally find so many of my "fellow citizens" to be utterly useless and lazy. Those of us who work responsibly and strive to understand the world literally subsidize their lives with our labor. I have my own family to look after, and somebody is always in my pocket. I try to encourage others to be responsible and leave their country and even their families (!) better off during the course of their lives. Mostly, I am met with confustion that given my finances I don't drive a mercedes or own a big home (I rent a modest apt and drive a used volvo). I don't think I'm nuts for behaving this way, but sometimes I admit, I do wonder...

Well, if anything like a nightmare scenario were to come to pass, I would hope that after the smoke clears that I find myself standing amidst the rubble with people like you and I, and other like-minded individuals, many of whom I see on this blog. I speak by extension - anyone outraged by the irresponsibility and hubris behind the real estate bubble must see beyond this fringe issue to the larger problem.

Forgive the long post, but it's only my 3rd on the blog, and I need to get some of my thoughts out there.

 
At 3:27 AM, Anonymous Anonymous said...

For perspective, some notes about the situation in the Netherlands (the country of the tulip mania).

The Netherlands had a housing crash in the early eighties, with home prices dropping about 40% in just over a year. For many years prices went nowhere, but in the nineties prices started to rise strongly. By the end of the decade the boom had spread to the rural areas of the country.

In my area (coastal area with relatively low-income), prices of individual homes have increased by 400-1000% in the last 10-15 years. Personal incomes increased maybe 30% and household income about 65% (more households with two incomes) over this period. Official inflation was 2-3%/year.

The official average home price increase for the country was much lower (probably around +350%) because of many statistical flaws.
Prices were pushed up by fully tax deductable mortgages and other tax incentives, historically low mortgage rates, creative financing, a shortage of new housing and of course, pure speculation (although less important than in the US).

In the last two years the boom has slowed and seems to be topping(depending very much on what part of the market / country you are looking at).
Like in other countries, the amount of properties for sale has doubled in one year and is now at an all-time high; the total sales volume has NOT increased.

With the economy in really bad shape it's surprising that prices are still holding up so well. Real estate brokers and some of the banks are expecting further price increases in the future.

If this bubble goes back to the long-term trendline, like all bubbles do - prices would have to decline by at least 75% (or stay flat for many, many years to have inflation catch up).

 
At 4:18 AM, Anonymous Anonymous said...

"Brown Cried for me Charvavita"

http://www.parkerchris.pwp.blueyonder.co.uk/vidforhousepricecrash.html

posted by classixuk on http://www.housepricecrash.co.uk/forum/index.php?showtopic=9495&st=0&p=114114&#entry114114

 
At 4:55 AM, Blogger DrBubb said...

Brown's idea, as I understand it, is to have the government buy half of the property, and lease it to the FTBer at only 3%. This is a poor idea for the country, because at this stage of the cycle, that investment is likely to yield a loss, which will be borne by the taxpayer. Overall result: a subsidy from the govt. (and taxpayers!) to FTBers. Of course, this will help prop up Builders and the property market to some degree.

The chatboards in the UK are BUZZING about this today. if you want a look, you can find them here:
http://www.goldstock.co.uk/talkhouses.htm

(I have added a link to this site, at the bottom of the page)

 
At 6:06 AM, Anonymous Anonymous said...

Dr. Bubb -- nifty site! Thanks. I think that what is happening in the UK is a very good indicator for us and that our own market turn will look almost exactly the same, just later. So using your referenced site, to follow what's happening in the UK, might be a very decent crystal ball for us in the US.
Chip

 
At 6:47 AM, Blogger DrBubb said...

Maybe, Chip.

We in the UK are watching developments in Australia, which is even further ahead

 
At 6:52 AM, Anonymous Anonymous said...

JJ and WOJ, dont leave the country. This country will need you very soon as an example of how to behave to prosper. And I mean it. I am strong believer in Kondratiev Wave theory. If spend some time reading about it you will understand what is going on. It will also ease your frustration if you take a look on generational explanation of theory. You leave your life the way prospering people leave in the begining of the cycle. And we are in end fazes of old cycle, but when new cycle start, people like you will be on top. Very soon you will be richer then 99% of US population and that just by leaving within your means. However before new cycle starts we have very difficult time ahead of us.
Beside, where you going to go?
Mike C., Chicago.

 
At 7:00 AM, Anonymous Anonymous said...

"If the US govt bails out these real estate speculators, I'm leaving the country for good."

I don't think the government is going to be bailing people out this time. At least I hope not. In the last couple of months, we have tough new bankruptcy laws, Bush talking about personal accountability and Greenspan trying to reign in Fannie Mae. They see it coming.

 
At 8:39 AM, Blogger DrBubb said...

Future conversation between Estate Agent and FTBer:

"...and so are you interested to buy?"

"er ah, maybe. Last week, I thought it was too pricey. It is more than my budget. But I read the article about Gordon Brown's new scheme."

EA (apprehensively): "Yes?"

"He said that the government would pay for half the property. Do you have that financing available."

"Ah, no... Not just yet."

"Well, if you did, I would buy. When do you think you can off that."

"I think it starts next year sometime. But it's only 25% in 2006."

"I see. Well maybe I will just wait then. I read somewhere that prices were falling."

"Are you sure? We can offer you a discount to buy now."

"Oh. How much."

"5% we can do..." and after a pause, "Maybe 8-10%, I will see if I can get that. Maybe it's worth a try. But I'd need a firm price from you."

"No thanks. I think I will wait now."

 
At 9:25 AM, Anonymous historybugg said...

(The newly announced plan in the UK to help first-time buyers confirms my fears that governments will feel compelled to keep this binge going, and to bail out those who can't keep up with it.)

Clearly the UK govt is concerned that newbies can't get on the property ladder. Without newbies, this pyramid scheme (like all pyramid schemes) runs out of fuel.

Of course, there are two ways to help first-timers afford homes. One, stabilize or bring prices down by making the market less attractive for speculators. Two, fan the flames by making it easier to get cheaper and cheaper credit.

We know what govt's always decide. They always go with fanning the flames.

Why? Because higher prices mean higher taxation and greater "wealth effect".

That's how bubbles build. But this "pump it up"-style of thinking always ends badly, usually in crashes, prolonged slumps, recessions, and in rare cases, depressions.

The US has been "pumping it up" since 1913. The US dollar has lost 97% of its purchasing power since 1913. So this is a long-term phenomenon. But even long-term trends get ahead of themselves. And that's were we are today.

 
At 9:42 AM, Blogger goleta said...

"Does anyone here trust China? Are they propping us up out of the goodness of their hearts, or trying to subvert us? ...

However, I personally find so many of my "fellow citizens" to be utterly useless and lazy. Those of us who work responsibly and strive to understand the world literally subsidize their lives with our labor."


That's where the entertainment industry comes in to rescue. We need more "sex and the city" to corrupt the mind of Chinese, Iraqis, and other potential enemies. The US has achieved that goal in Taiwan :


Taiwan
The credit card market in Taiwan has expanded rapidly during the past five years, with the total number of credit cards in circulation as of December 2003 increasing to almost 40 million, or five credit cards per household.10 Directly related to the increase in credit card circulation has been escalating consumer debt. As of December 2003, total Visa credit card outstanding balances alone stood at NT$376.7 billion, 28 percent over 2002 levels and 41 percent over 2001 levels, even when adjusted for inflation.11 NT$376.7 billion in total outstanding balances translates into an average balance of NT$17,900 per credit card.12 Furthermore, according to the Taiwanese Financial Supervisory Commission, the island's population of 48 million residents has approximately US$13.2 billion dollars in cumulative credit card debt.


Another news I read says 77% of credit card holders in Taiwan are seeing their CC debts snowballing with no hope of paying the issuers back.

 
At 9:53 AM, Anonymous JJ said...

goleta, you really have a good point there. I was actually in Shanghai in March, and you're absolutely right - they're buying up dvds (US$1 each) and various consumer crap like mad. So, maybe things will equilibrate (though I'd actually prefer the other direction, since I'd rather have a degreee of intelligence with my humanity). Not that you can't enjoy this stuff and be a smart person, but movies and associated junk run the lives of SO many people here, it's no wonder our national IQ is something like 9... Anyway, in Shanghai I still found a pervasive sense of competition, so even if the Chinese blow 30% of their time on this nonsense, they'll still have the upper hand to a great degree.

JJ

 
At 10:29 AM, Anonymous koreatown said...

(The credit card market in Taiwan has expanded rapidly during the past five years, with the total number of credit cards in circulation as of December 2003 increasing to almost 40 million, or five credit cards per household.)

This happened in Korea too. During their recession over the past few years, the govt opened up the credit spigots and credit cards rained down. The govt wanted consumer spending to increase because Koreans like to save. It worked. Spending went up but folks went into debt. They weren't used to handling so much debt so bankruptcies skyrocketed and many cc companies were on the brink. So the govt had to bail out the banks and now there is talk of "debt forgiveness" for consumers because there are so many people in deep financial straits.

 
At 5:16 PM, Anonymous Anonymous said...

7:00 AM:
"I don't think the government is going to be bailing people out this time."

Hmmm, don't under-estimate the old saying:
"If you rob Peter to pay Paul, you
can always count on Paul's vote"

BTW, somebody wrote about US's skeleton military. Do you know whose military has been modernized by US's debt? ... China. Do a google search on China's military modernization.

We may be funding our own demise sometime off in the future.

 
At 5:49 PM, Anonymous Anonymous said...

5:16 anon,
There is also: if you rob peter to pay paul, you end up with a sore peter.

 
At 10:03 PM, Anonymous WOJ said...

Great discussion JJ and others - thanks for the encouragement Mike C. from Chicago. It's clear this is a global phenomenon. Without the pockets of sanity that I find on the Internet at places like here and HousePriceCrash.co.uk, it would truly be a lonely world here on the debt-free side of the planet. I count myself very fortunate to have a wife who shares my convictions about debt and the current credit bubble. I really do hope we are vindicated in the end - but for now it's somewhat agonizing listening to the gloating of those who think the real estate market can do no wrong. Just yesterday an acquaintance told me that the local market would continue to rise for many years regardless of what happens elsewhere. My response was: "Maybe, but what makes me suspicious is that you and others are telling me this now, not five years ago, not three years ago, and not two years ago -- so what has fundamentally changed since then that makes you believe this." I think he got the point because he just went silent.

 
At 2:52 AM, Anonymous Anonymous said...

Welcome to 'The Matrix' where your housing wealth is an illusion:

http://news.independent.co.uk/business/analysis_and_features/story.jsp?story=640688

 

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