BoldAsBrass

I don't think it's a question of learning. When people refer to 'inflation' - they mean a general increase in prices and wages. When one refers to the inflation of, for example, the 1970s - one is not referring to just price inflation or just wage inflation. At the moment, clearly, there is price inflation without wage inflation. But that cannot continue forever. When I argue that we can tolerate 'inflation' in this country because there is going to be (there is already) a period of global inflation I mean, and I would have thought this was self evident, that we are going to have a period of wage and price inflation. Sure, times are hard and wage inflation will lag price inflation. But it will come.

Does it have to be hyperinflation? Why not just a bit of old-fashined, ordinary inflation. Inflation of 5% a year will soon wipe out your debts. I used to argue that we won't get inflation in this country because of the nature of our globalized economy. But, I don't argue that any more. With inflation on the march in the contries that supply us with cheap imports, a bout of global inflaiton is inevitable.

Yes, it's an interesting situation. What are the big housebuilders doing? This is important because, one of the things that led the falls in the last bust in the late 1980s was the volume housebuilders dropping prices to unload the stock they had built. This time round things are completely different as the government has got behind the banks to do anything to save the sector. And Barratts have stated they are going to rent their unsold houses out. Which, as business models go, is a pretty good one. The cost to build of (for example) 2 bed flats in a block is probably in the order of 40k - 60k (depending on land price and location). If you can rent these even for just £600 a month, you'll get your build costs back in 10 to 15 years (allowing for interest on debt) and then be sitting on a nice revenue stream thereafter. I can see the banks being quite happy to lend to fund this type of business model. I have maintained for sometime that we are witnessing a structural change in property ownership in this country - less will own, more will rent.

I just hope one day young people will realise the extent to which they have been dumped on and default on their unasked for obligations. I do wonder when they are going to wake up and realise what is happening to them. You'd think that there would be some sort of 'golden rule' - that governments should not be allowed to borrow more than a certain percentage of, say, GDP. Oh wait ... Gordon Brown had some golden rules I think! I'd like to see some immutable and irreversible law that said no government can borrow money. Then they (i.e. we - because we're the ones on the hook for the debt they take on) would have to live within their means.

Sounds simple. Why wasn't it done?

The point I was trying to make was that no-one knows what are assets and what are not. The web of packaging up debt and using it as a security for a loan or lending to another bank accepting their MBS or CDO as security and people sticking in some bad debt with some good debt and selling it on again etc. etc. means that no-one in their right mind would take on a bank's liabilities at the moment.

And to take just one example ... death ... how many times have you heard people say ... 'we're renting the house out because it's not a good time to sell at the moment'. Maybe you've never heard it - I have. What people can't seem to get their heads around is that not everybody is up a creek without a paddle. It's been a crash in sales for two years now - still no significant price falls in my area. Death, divorce, unemployment, non-existent FTBs, high deposits ... all shrugged off. The whole edifice is underpinned by rent and interest rates. While people will pay £1200 to rent a 3 bed semi and interest rates are low (and they will be for years - collectively we're in too much debt for anything else to happen) - prices are going nowhere.

Who, exactly, would have been willing to take on the liabilities of banks in liquidation? "Here you are, roll up, here's a bank ... there's some CDOs and MBSs and a load of other things they invented that means even their directors had no idea what was actually going on ... look as far as we know they've lent 2x against assets worth x ... but, to be honest, we've no idea ... how many of the loans are risky ... no idea ... nor did they ... it's all a bit tricky .... capital wise ... you'll need the mother of all capital positions before you take it on ... otherwise you'll be bankrupt too ... form an orderly queue ... what do you mean there's no-one in it ... just a guy from the Treasury ... is that all?" Haven't noticed other more competent and better capitalized organizations taking up the slack so far.

That is absolutely spot on. After about 7 years renting I bought a few months ago (landlord was selling up and couldn't face: finding a suitable house to rent again paying about £400 a month more for a similar house finding a long term landlord finding one who would accept cats I think the UK is a nuthouse. I think house prices are ludicrously high. I really want them to fall so my kids can spend their lives without a millstone of debt around their necks ... but I find myself looking at other houses on the market and thinking 'did I get a good deal' and 'wonder what we'll get for this after we've done it up' ... and 'is it worth extending, will it add value' ... But you're absolutely right. It's like a bloody virus - some mass indoctrination that is really hard to break free from. I feel like I'm stuck in the mud again and being sucked down into a morass of house price data and property porn.

And how would the bank runs have been dealt with? And the riots when the government passed emergency legislation forbidding you from taking your money out of the bank. And the fact that, overnight, everyone would demand their wages in cash? If bank failure/run-down was a viable option, don't you think the cowardly politicians would have taken it?

In the scenario you outline, money would have no value. You're into wheel-barrow territory.

I guess you've forgotten the queues around the block as people waited to empty Northern Rock of every penny of their savings. If nothing had been done - this would have spread and, yes, Britain would have ceased to function as a nation.

Where would the government get the money from to recapitalise the whole banking system? I don't think you grasp the scale of the problem. This is not one bank that is in trouble that needs the BOE to step in as the lender of last resort. In 2008 we were half an hour away from the cash machine network being closed down. This is a crisis - not a blip. If house prices fell by 50% - the whole things going down the pan.

Okay so we end up with one giant nationalised bank that is bankrupt - that has loans of (say) £2 trillion backed by assets worth £1 trillion. Whichever way you look at it, a banking system running under the Basle rules cannot exist. Why do you think NatWest and Lloyds were bailed out? Why do you think the BOE provided a safe haven for 'troubled assets'?

And yet I read at the weekend there is 20 years worth of North Sea Oil still waiting to be retrieved. It's in deep water and it's going to cost a lot of money to get at but, of course, the vast majority of the price of oil in this country is tax. Inevitably the government is going to have to bring in some sort of balancing tool so that as the oil price goes up the tax percentage drops and vice versa - to keep tax revenues roughly the same. I can't see peak oil being the trigger. And, even it is, or some other catastrophe occurs - who will this benefit? The idea that house prices can fall 50% and all the people currently priced out can swoop in and buy at sensible prices is becoming more laughable by the day. I'd love to see it happen - to give my children a chance of a life not spent in debt to banksters or scum landlords - but it isn't going to happen. If it does - we'll all have a lot more to worry about than house prices.

This is just the logical extension of what is already going on. It seems few people are willing to face the simple fact that if the housing market crashes and there are mass repossessions - the BANKING SYSTEM WILL GO DOWN WITH IT. Set against a backdrop of having to improve their capital positions, what can banks do? Answer: exactly what they are doing now. Demanding higher deposits, being fussy who they lend to and building in (at last) some breathing space that will allow prices to correct - a little. Repossessions - unless there is a lot of equity and the bank will definitely get their money back - will be avoided like the plague. Banks becoming long term landlords - until the market eventually recovers and allows them to sell and get their money back - is completely and utterly predictable and inevitable. Why the shock horror? What would you do if you owned 10 houses with 90% mortgages and the market fell and you had to sell one of them at a loss - which would force a margin call on the other 9? Answer: you'd do whatever it took to avoid selling. Government bail outs. Restricted lending. Avoidance of repossession. Banks becoming landlords. What else did you expect? A 50% property crash and the collapse of our banking system? If you expected this, you must believe in fairies.

Surely there is a middle path? For example, between 1997 and 2007 personal debt increased at the rate of about £75 billion a year. As I understand it our financial system requires growth - and the ideal is moderate growth of 2%. This requires a 2% increase in debt - i.e. a 2% increase in the money supply. We had a situation where debt was rapidly increasing (1997 - 2007), we have recently (2008 to present) had a net pay down of debt (which reduces the amount of money in circulation) - why can't we have a situation where, in a year or two, we start increasing consumer debt by small amounts? Surely we are in an extended soft landing.

Maybe after a year or two of the pretend cuts, the public sector will realise the gravy train is intact and undamaged after the 'collision'. As I understand it, government spending is set to rise year on year for the next 5 years.

If you throw oil into the equation, surely your timescale must be 50 years, not the next year or two? What would the nature of the shock that you foresee be? I see the current situation as a cartoon snowball of debt hurtling down the hill with bankers coming up with ever more obscure and inventive ways of increasing debt. One day one bank says to another - 'we're worried about you, we're not sure what you're up to' with the sub-text of - 'if you've been up to what we've been up to, this is going to end badly'. We had a crisis - the banks stopped lending to each other. Just stopped. Some of the big banks were technically bankrupt and, to avoid systemic banking collapse, the government stepped in with pretty much a blank cheque. Whatever else happens, the banks are not going to be allowed to fail. So, given that a 30% decrease in property values would make the banks fail, how do you see this playing out? My take is that the snowball stopped - just on the edge of the cliff - and the goverment got underneath and just about pushed it back onto level ground. Now the snowball is inching away from the cliff courtesy of sane lending and low interest rates. I think we'll have low interest rates for a long time. Crises we have had before (withdrawal from ERM) occurred because it benefited somebody - George Soros in that case. Things don't just happen - which is why I say that, unless it is in someone's interest to have a bank crisis, we won't have one. What do you see happening that will precipitate a crisis?

When you talk about the 'logic of collapse' - what, exactly, is your logic? To me it is logical that things won't collapse - not because there are no reasons for collapse (there are plenty I suppose) but because, as far as I can see, it's in no-one's interest for collapse to take place. Who wants society to disintegrate so there are food shortages and riots? I think things happen when it is in someone's interest for that thing to happen. Banks made lots of money by packaging up debt and, effectively, lending the same money over and over again. People borrowed the money because it looked to them (idiots, it is true) that house prices would go up forever and they would make money. It was in the government's interest to let this happen as they milked the credit boom for all the tax and stamp duty it generated. So, you can kind of see why the boom happened. As far as I can see a bust is in no-one's interest. As far as I know there is no immutable law that there must be a bust and the property market seems to be staggering on despite the changes in fundamentals. I think about the possible outcomes of the current situation but I've had a bit of a personality transplant over the last few years. I'm optimistic about the future now.

Whilst agreeing with a lot of what you have said ... can you live your life like that? To me it seems like walking around with a board on with the message 'world ends tomorrow' - too depressing for me. And what to do? Fine if you've got the half a million (at least) you need for anything approaching a decent smallholding but, if the 'no food' scenario occurred - don't you think the city dwellers would be marauding across the countryside in gangs looking for food to steal? For as long as I can remember people have been saying the system is going to break down - it hasn't yet and if it hasn't following what happened in 2008, maybe the system is a bit more resilient than some people think. If we end up in Mad Max world - well, what the hell, you've got to die sometime.

I STRed 7 years ago - convinced that (in my area) property was massively over-valued and, just like the market in 1988, would go down by a considerable amount (i.e. to become 'affordable' again.) At the time it wasn't a bad decision. Interest on my STR fund paid the rent on a nice 4 bed detached and for a couple of holidays a year too. But, look what's happened since. Massive lending by the banks, explosion in BTL, banking collapse, quantitative easing, 0.5% base rate for 2 years etc etc. I'm not a risk taker so I was never going to put my STR fund into gold or shares. Last year, I admitted defeat and bought a house again. Overall the experience was reasonably positive. I have ended up about 50k better off. House prices in my area are the same now (give or take) as they have been for about 8 years or so. The house I bought last year was previously sold in 1988. I paid exactly, to the penny, twice what it sold for in 1988. When I STRed I had no idea the goverment would do ANYTHING, including printing money, providing a safe haven for 'troubled assets' (don't you live that expression?) and slashing base rate to 0.5%. Having seen the size of the financial hole the banks are in, it is clear to me that a house price 'collapse' (30% or more) must be accompanied by a banking collapse. There is no other way - unless they rewrite the rules on capital ratios so that a bank can have no capital reserves. Where we're headed now is a period of global inflation during which wages will lag but, in a few years when the global economy picks up again, wages will rise. So times will be tight and house prices will fall - a LITTLE. Houses in nice areas near nice schools etc will fall very little, if at all. I think you were nuts to STR given the costs of moving and the Stamp Duty you'll pay when you buy again. Renting with a family is a pain in the bottom - I know, I've just done it for 7 years and that was quite long enough. I cannot imagine why anyone would STR now - at the moment I'd rather have my money in property than in cash. If you get a 30% or more property crash - will your money in the bank be safe? The FSA compensation scheme doesn't have enough fund to bail out one bank - let alone the whole lot of them. I was much more concerned during 2008 and 2009 that I'd lose my money in the bank (despite spreading it around to be under the 50k limit) and/or that a banking crisis would close internet banking and my money would disappear. I actually like the fact now that, regardless of what happens, the house is mine and my money is no longer 0s and 1s in a computer. We're either going to get some sort of catastrophe - banking collapse, social unrest, riots etc - or, more likely, we're going to slowly inflate our way out of the mess and, in the meantime, a generation is priced out of property.

My take on the endless supply of stats is that they are essentially meaningless. There is way too much noise in monthly stats. National stats over a longer period are meaningless too - what is happening in Newcastle may well be the exact opposite of what is happening in Guildford. So, who/what to take notice of? Regional stats over a long period? But the volume of transactions is so low that regional stats are so full of variations as to make discerning a trend impossible. Microscopic example. I bought a house a few months ago. An identical house in the next street (same estate) went on the market last week for £65k more than I paid. I was in a good position and the vendor was keen to sell - maybe I got a good deal (relatively speaking) - who knows? That's my point. The only value stats seem to have is to aid the general population's view of the housing market. So, hopefully, they'll stay negative for years and start re-conditioning the way people think about property. But I think to believe that house prices are falling 1% a month and that, therefore, house prices will fall 10% in a year - and 18% in 2 years - is just wrong. Might be true in Liverpool, the opposite might be true in St. Ives.

Yes, but not the wages that count - public sector wages. They get a nice steady rise every year. It's only very recently that pay restraint is being taken seriously. House prices are already not far from 2003 levels in my area. Unfortunately, house prices were insanely high then and still are. They went down a bit from 2003 levels as interest rates rose during 2004/5 - went back up again, and a bit more, during 2006 (following the signal from the BOE in August 2005 that interest rate rises were over (they dropped 0.25% in August 2005 after a series of rises during 2004/early 2005)) - fell a bit in 2008 - crawled up a bit in 2009 and are now slowly (very slowly) falling again. Currently, various charts of sold prices show prices in my area as only a little above 2003 prices (depending on property type - flat, terrace, semi or detached. Detacheds seem to have risen the most.) This illustrates what I said above

I think you're right, the crash has happened in some parts of the country. I'm not sure if people (generally) really appreciate the differences across the country. 10 years ago I had a holiday in Budleigh Salterton (nice town on East Devon coast, rather full of middle class oldies). The town has quite a few roads filled with 2 up, 2 down Victorian terraced cottages (12' front garden, 100' back garden). The sort of cottages that were built to house labourers but which have mostly been tarted up. At that time they were selling for £60k. Now, even today, they are on the market for 300k. At about the same time I remember there was a rash of adverts in the national press - you handed someone some money and they would buy terraces in places like Newcastle, Sunderland etc for about 14k - renovate them (new kitchen, bathroom and lick of paint) - and manage the letting of the properties to DSS tenants at £395 a month. You bunged them 20k per property and they made a bit of profit on the renovation and took a slice of the rent. Those same 2 up 2 down terraces sold for 100k (and more) in 2007. I'm sure they are not that price now. So, in many parts of the country, property increased by a factor of 5 or more and, in some parts of the country, has already fallen back a considerable amount. I bought a house last year in a nice part of Surrey. Looking at the various documents that were presented to me during the sale, it seems that I paid exactly TWICE what it sold for in 1988. I'm sure that in parts of the country where there is little work and no-one (apart from the people that already live there) wants to move there - prices will (or have) tumble - maybe by the 50% widely predicted - maybe more in the places where they want up 6 fold. If my house fell by 50% (I couldn't care less, it would make life a lot easier for my kids) - it would be back to its 1988 price. I can't see that happening myself. With interest rates a fraction what they were in 1988 and the inflation of the intervening 23 years, it would be a massive and serious deflation if prices here went back to 1988 levels. This crash will be very regional and, unless you happen to want to live somewhere with low salaries and/or little work, prices will not go down by much. I wouldn't be daft enough to suggest that property around here is cheap - but it is certainly good value compared to other places - like London and the West Country.