Meralti

http://www.moneyweek.com/investments/prope...or-a-fall-10707

 

nice bearish article from Moneyweek thats difficult to argue against

There is some interesting facts about the special liquidity scheme in an article that this one links to. You can read it here Borrowing costs will go up

In a nutshell; the withdrawal of the special liquidity scheme means borrowing cost are going to continue rising regardless of what the BoE does with base rates. I remember mentioning this a while ago.

I've quote from the article to save you having to read the whole thing.

Why? Because as Vicky Redwood and Ed Stansfield of Capital Economics point out, the help that the banking sector has been getting from the BoE since the financial crisis kicked off, is being gradually withdrawn.

 

For a start there's the Special Liquidity Scheme. Under this, the BoE gave the banks nine-month Treasury bills in exchange for mortgage-backed securities and other rubbish that they were unable to sell, or use to borrow cash against. The banks were able to use these Treasury bills as "high quality collateral to raise cash in the markets".

 

By the end of this year, the banks are going to have to repay these loans. £110bn remains outstanding. In other words, they need to swap the nice, cheap source of funds that they got from the BoE for the harsh realities of the open market. The cost of this borrowing will be higher. And this, says Capital Economics: "is likely to feed directly into higher borrowing costs and reduced credit availability" for consumers.

 

There's also the Credit Guarantee Scheme. Under this, banks issued bonds with a government guarantee, "of which at least £110bn are still outstanding". This scheme is set to end next year. A third of the initial loans can be rolled over until April 2014, but the rest mature next April. In all – if you include other outstanding debt set to mature – the BoE reckons the big banks need to refinance about £400bn to £500bn by the end of 2012.

 

They can do this by raising more money from the likes of me and you – using 'retail deposits' to close this 'funding gap.' However, as Capital Economics points out, "outstanding deposits would need to rise by some 40% from their current level of £1.2 trillion to solve the funding problem". That's not going to happen. So you might end up getting banks competing with each other for deposits – in other words, offering better rates. That's good news for savers, but it will push up costs for borrowers.

 

The other option is to raise money in the wholesale markets. An over-reliance on wholesale funding is how Northern Rock came a cropper. And those markets shut down during the credit crunch. They've reopened – but "the amount that banks need to refinance far outweighs the £130bn of term debt raised in the markets last year". So again, there's going to be a lot of competition for those funds, which means they'll be expensive.

 

All banks really do at the end of the day, is buy money from one group of people (depositors) and sell it to another (lenders). If the money costs the banks more to buy in, then they have to raise the price at which they sell it. So borrowing costs look likely to rise this year, regardless of what Mr King does with interest rates.

Yes, I could have put it better. I think over time these effects will likely take place. However, most of the time such large changes can take many many years, though sometimes with large jumps in-between stable periods.

Not sure we've has our jump yet. I think that it was postponed, and when it comes it will be quick.

We might be having (or just had) one of these jumps at present, but these thing rarely go in a straight line and can indeed sometimes reverse (Like in the Asian crisis 1997, or more recently when Russia was put on its backside when oil fell to $33). China could well have a significant crash soon as could the other Brics.

Agree with the China crash scenario. The crack-up boom is happening there not in the west.

When I was younger and Japan was growing, we were all told we’d be speaking Japanese and working for them by 2000. As it happened events didn’t go as expected.

So I like to explore the possible scenarios raised by posters here so that I (hopefully quite quickly) am able to react if facts on the ground change markedly.

Yes, I remember this. They got that wrong and they same sort of voices are wrong about China now. That said, the prosperty gap between them and the west will continue to close. Possibly by us getting poorer.

At this point in time, I still think we might have a few years yet with low rates and inflation (albeit CPI) of between 3 and 5%, eroding debt, reducing the deficit and with real house prices falling, but in nominal terms flat(ish).

 

There was a piece on the fool today stating real house prices back to 2003 levels already.

Is that the the new bull scenario?

Agree on the inflation to deflation crash. That would wrong foot many and hurt almost everyone.

Unless you're long cash (more accuately a surviving hard currency).

Nothing is inevitable, but if inflation stays high, then there will be increasing pressure for (and eventually will be) higher wages.

 

The PTB would have a hard job keeping them in check if the genie is let out.

 

 

 

Possibly, but then again, IIRC the problems in the 70's started off with commodities going sky high (mid east and far east wars -oil shock - gold at $800), and with inflation rising rapidly. At first there were no real wage rises, then the wage rises began and it all went crazy. Though not the same, there are similarities.

 

 

 

While that would appear a likely outcome, there is still very low inflation in the US and EU and Japan (at the moment). If that stays the same (or even reduces as the deflationists believe) then there might not be such a reduction of expendable income in the West. (just here )

Your last point seems to contradict all your other ones and many of your previous posts. A period of high inflation followed by a second deflationary crash is a distinct possibility. However, should this happen it will pretty much wipe out all those people who rush into property as a protection against inflation now.

Wage inflation will follow eventually. I guess it depends what you do for a living. I haven't been able to raise my rates for a good few years now - but a friend of mine who runs his own IT consultancy (mainly networking but he does all sorts - basically advises, manages, procures and installs the complete IT infrastructure for people) has got so much work on he's just jacked his rates by 50%. He told me he was hoping a few clients would tell him to get stuffed so he could have the odd day off - no-one did - so he's still working long hours, 7 days a week (and making a fortune).

 

Another guy I know runs a PR agency - he's flat out - it just depends on what you do, who your clients are etc. A neighbour runs a sandwich shop which has given him a good living for the last 20 years. He says he's barely breaking even at the moment - trade has fallen off a cliff.

 

It's like house prices - there is a huge variation in the market.

There is no inevitable rise in wages. In fact they are unlikely to match inflation. The current situation is not like the 1970s, as you stated in an earlier post. The inflation we are seeing in the UK is not about you or your mate hiking your rates or buying a butty in yer launch hour. It is about the Brics countries closing the gap in wages and prosperity between them and the west. This means that wages in the west will not increase at anything like the rate that they are doing in the Brics - therefore wages rises, such as they are, will not match inflation. This will lead to a reduction of expendable income for western workers.

There is an article in Citywire today stating that prices will fall. It has a nice graph of house prices to average earnings. The average long term price-to-earning ration is 3.7. The current ration for the UK 5.3. This means that UK wages must rise by over 50% in order for the long term price-to-earning ration to be restored at the current average house price. Anyone expecting to recieve that either works for a bank or lives in cloud cuckoo land.

Before you say it. I know that the long term average is an abstract concept and there is no law that states it must be maintained at a value of exactly 3.7. However, neither is it an infinitely elastic thing. At the moment it indicate how out of kilter prices are; and the idea that earnings place an upper limit on how far prices can rise is obvious.

If wages do not rise then prices must come down. Or a combination of both. I expect to see very small, below inflation wages rises and significant HP falls.

Replying to Chazza, Jin and Bubb,

 

Mid-sized family homes in decent parts of London are in a bull market. It's as simple as that. That may change, with higher rates etc, but it's a bull market.

 

Buyers are families with children late 30s early 40s who, for the most part, by accident of birth, were buying their 1st properties in the mid 1990s. Thus they got in at the bottom and, even though they may have increased the size of their mortgage, will all have huge amounts of equity, as they have moved up the property ladder. Career-wise they are enjoying their best years 35-45, so earnings are good. And repayment-wise they are all feeling rich as the low rates of the last three years have meant their monthly repayments have been next to nothing.

 

So they have benefitted the most from circumstance.

 

In addition, these kind of people will for the most part be well educated, have decent jobs, not over-leverage themselves (those that have will have got much richer, largely speaking, as the system has rewarded debt) , often mum and dad work which means two incomes, be lawyers, doctors, city boys and so on.

 

Plus areas like certain parts of Battersea are desirable because , south of Clapham Junction, there is the pleasant Northcote Road and very few council housing, low levels of crime (by London standards) so families are happy bringing up their kids there. Much happier than in the more conveniently located Vauxhall, say, or Lambeth ...

 

It will take a hell of a sea change to destroy all that ...

You might be living in the last bastion of the HPI madness - it also sounds, after all these years, as if you've been infected. I not saying that what you're saying is wrong just that the people you describe are living on borrowed time. In the rest of the country HPs aren't rising. Prices are either drifting down or stock isn't being sold. How long can the situation you described continue? Will it survive the cuts, unemployment, widespread reductions in subsidies and interest rate rises? To quote Ken Clark:

Middle England hasn't got a clue

The buying of debt with fiat does not increase the money supply, it just replaces credit with fiat plus the amounts are relatively small compared to the amount of debt out there. Sure this is all delaying tactics but there is now nothing that can be done to save the system. Even at current rates of swapping debt for fiat the dollar will remain the reserve currency for a long time but as the bond market will soon signal “no more printing” the dollar in my opinion will strength considerably from here as assets fall. There is no way hyperinflation is even remotely possible.

 

 

 

 

This is wrong in so many ways that it’s hard to know where to start.

If they stopped swapping debt for fiat then some debt would default – this is inevitable anyway. It will certainly not destroy the financial infrastructure and would make cash and the debt that survives worth much more. If the government gets it right, implements financial restraint and allows some strategic defaults then the dollars continued roll as the world reserve currency is assured.

 

I just cannot understand all this nonsense about hyperinflation. Your debt is an asset of the rich & powerful- why do you think they will destroy this relationship?

 

Back to the HPC (the sublect of this thread) I think it's clear that whichever of the abve is correct, the debt bubble has peaked and this spells big trouble for the property market. They may be able to delay a little more but the big slide is coming.

An excellent post Wise Bear. I'm in a similar position to the poster that prompted your response. I would follow you advice to be letter but find that I have already done so. I'm also sceptical of the hyper-inflation scenario - as you ably demonstrate it destroys much of the assets of the very people and organisations who are trying to keep this show on road. Something that is often overlooked is that the very forces and policies that are pushing up the price of PMs are same as those that were designed to supporting high house prices in the UK (and other countries). Should their effect run out of stream and start to fail in achieving their objective, which I think they are; then the reason to continue to follow that route will be gone -- rates will rise (as they alrady are on domestic loans). As you state commodities will suffer under this scenario.

That's incredible if you consider a ~66% reduction in the number of sales on top of that!

Yes, the hard numbers are: Halifax mortgage approvals where 39,905 for January - 17.4% down on the same month last year and 6.2% down on December.

I make that ~0% MOM NSA

 

Yes you really do need to dig beneath the spin

The NSA came in at -0.02% -- a tiny fall. I estimate the averaging the two indexes as Bubb does will give a fall of around 0.5%

So no change in the trend there then.

However there were less than 40,000 transactions from January -- which is a pretty small sample size compared to what it used to be, as discussed in this post

their market share of new lending has fallen from about 30% to about 6%.

Today the land registry are reporting that house prices in England and Wales fell 0.2 percent in December, leaving the YoY figure at 1.5%.

as reported on yahoo

The revisions to previous months are interesting. The fall from September to December was 1.7%. or -0.425% a month, close to crash cruise speed. This is somewhat more than previously reported.

In real terms both Landreg and Haliwide are back to the levels of May 2003, which looks significant as this level has been reached by both indices at pretty much the same time.

Considering the interest rate rises occurring in the mortgage market we should expect the steady decline to continue. Mr King of the BoE has already publicly admitted that incomes have fallen back to 2005 levels, so in real terms the house prices falls are greater than the fall in incomes.

Grant Shapps, minister for housing, stated that he wanted to see HPI at a level that is a little under that of the standand-of-living inflation - which is what we're seeing, albeit through the mechanism of falls in both.

Hometrack reports continued falls in UK prices and demand as reported on yahoo

prices slipped 0.5 percent on the month, slightly more than December's 0.4 percent decline. That took the average house price down to 153,600 pounds.

 

Hometrack said the sluggish start to 2011 was likely to continue, given the uncertainty over the economic recovery and worries about the effect of government cuts.

 

...

 

Over the last six months, Hometrack's survey has recorded a 26 percent fall in demand, with a drop of 9.5 percent in January alone, suggesting the housing market faces more fundamental problems than the usual post-Christmas slowdown.

One of the largest contributors to the -05 GDP figures released yesterday was construction at -3.3% in Q4 2010.

Some interesting facts coming to light. This also matches well with other reports on another thread.

Firstly, mortgage lending is reported as reaching a 9 low and interest rate expected to raise. As reported here by the BBC. Interesting that the BBC has reported bearishly on property recently. As the mouth piece of the UK government this is a total reversal from a few months ago.

Total UK mortgage lending fell to its lowest level for nine years in 2010, new figures show.

 

The value of mortgages advanced stood at £136.3bn, which was down 5% from £143.3bn in 2009 and the third year in a row that the figure has fallen.

 

Lending was just over a third of level seen in 2007, revealing the extent to which the UK property bubble has burst.

 

The Council of Mortgages Lenders (CML) also said it expected interest rates to rise sooner rather than later.

Also, considering recent posts regarding the media priming the UK public for rate rises we now see that mortgage lenders are unilaterally rising rates in response to rising swap rates. link

More lenders are set to withdraw competitive fixed price deals over the coming days and weeks, and replace them with higher rates.

 

Hard-pressed householders are having to pay more for their mortgages, in advance of expected base rate rises, and at a time when inflation is being stoked by higher fuel and food prices.

 

Lenders are raising rates against the backdrop of increased costs of wholesale borrowing, with five-year swap rates having shot up from 2.66% at the start of the year to nearly 3%. Two, three and ten-year swap rates have also soared, with ten-year swap rates now standing at 3.78%.

Also rents are now being reported as falling.

rents fall for first time in 11 months

In December, the average UK rent dropped by 1.2% to £684 per month - the lowest average since July 2010 according to the figures.

Boom in rental inflation 'coming to an end'

The boom in rental growth is likely to be at an end, think-tank Capital Economics has warned.

 

Property economist Paul Diggle says the boom is on its last legs and warned that if its unemployment forecasts are correct, more tenants will be struggling to pay rents.

I think people's attitudes in this country have been distorted by interest rates that were way too high for decades. Why on earth should someone get (for example) 10% risk free return on their savings?

 

Maybe people who want good returns on their savings should invest their money and take a bit of risk.

It is your view that is distorted. Base rates are too low and rising cost push inflation is now becoming a real risk in the UK. Rising rates a bit and allowing the pound to strengthen would suppress inflation. A strengthened pound (but not too much) would make imports cheaper - it is cost push inflation that we're seeing after all.

We should be looking at this question in terms of political interference in the credit/debit cycle with the aim of making electoral gains. When an administration of any hue is elected, it is in it's interest to initially adopt a policy of contraction in order to reduce inflation and gain a reputation for economic competence (or even prudence - remember that). It then adopts an expansionary policy in the lead up to a subsequent election, hoping to achieve simultaneously low inflation and unemployment by election day. This is what Brown attempted and actually had considerable success - labour rose from the low 20s to 33% of the vote. Commensurate tightening after the huge expansion Brown and the BoE unleashed is necessary - rates will rise, its only a question a when. The people are being actively primed for it. I watched John Redwood discussing the necessity of this only yesterday on Newsnight.

Copied from a post on HPC

 

QUOTE

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Banks write off debt for landlords

By Tanya Powley

 

Published: January 14 2011 18:26 | Last updated: January 14 2011 18:26

 

Several of the UK and Irish banks that received government bail-outs are offering to write off up to 25 per cent of a mortgage debt for professional landlords and developers – just to encourage them to move to new lenders.

 

Anglo Irish Bank – the institution at the centre of Ireland’s property meltdown and the recipient of €30bn of government money – is one of a number of lenders willing to let certain property owners off a proportion of their debt if they refinance elsewhere.

 

Brokers report that Bank of Scotland, part of Lloyds Banking Group, and Royal Bank of Scotland have arranged similar deals – often known as “golden goodbyes” – although Bank of Scotland says it is not “policy” to incentivise a remortgage with another bank.

Has anyone thought about what this really means? What sort of loans does this apply to? Sounds like BTL and developer loans secured against property (what else). I would speculate that these are non-performing loans from which the bank in question has accepted it can never make money over the long term. For a BTL loan this would imply that the achievable rents cannot cover the mortgage costs. These are very likely to be interest only loans which will no longer be able to serviced by rental payments alone should interest rates rise (even 1/4 or 1/2 a percent). Should the bank repo then the value of the loan will not be recoverable through sale of the property at current market valuations. Also, I would suspect something similar for developer loans -- the sale repo property won't cover the loan value. The banks mentioned are therefore prepared to take a (limited) write-down in order to get these loans of their books. It also implies that no other lender will touch these loans (for remortgage purposes) at there stated value. In order words no one believes that the collateral is worth the loan value.

This simply means that those banks involved are implicitly accepting a 25% fall in the value of the collateral (property) from the time the loan was made.

Which looks very bearish to me.

I think we'll have close to zero base rate for years to come. One of the factors in play these days, as opposed to previous recessions / crises - is that all the developed economies are in the same boat.

 

Which is my point - there is simply too much money lent into the housing market now (the boom is 10 years old in my area) for a collapse to be thinkable. Base rates are going to be low for years.

Unfortunately for you and your argument the base rate does not necessarily determine mortgage rates. And it is these that determine the cost of the credit that flows into the UK property market. Swap rates are rising regardless of an ultra low base rate, and this is having a knock effect on mortgage rates for new lending.

You may remender that the correlation between swap rates and the base rate was also broken after the Lehman crisis, although I can't recall exactly when.

See the following article

Since November 2010, two-year swap rates have increased from 1.31% to 1.72% and five-year swaps have gone from 2.18% to 2.82% in the same period.

 

David Hollingworth, director of communications at London & Country, says: “Swap rates have fluctuated over the last two years, but of late they have been on an upward trend.

 

“We have already seen evidence of lenders increasing their fixed rate mortgages because of swap rates and the sharper fixed deals are under threat.”

 

Industry consultant Mehrdad Yousefi says high inflation is worrying the money markets and pushing up swap rates.

 

Halifax raised the rates on its two-year fixes by 0.2% today and blamed the increased cost of funding and swap markets.

So. you see that the cost new lending, which is what will ultimately drive the market, is under considerable upward pressure. When new lending is squeezed then this must put downward pressure on prices. Although you don't state it, I think what you mean is that existing mortgage holders on tracker mortgages must, and will be protected at all costs. I disagree. ZIRP served to prevent mass defaults when the financial crisis hit. Continuing it depends on what proportion of the banks total loan book consists of these kind of mortgages. When this proportion falls to a low enough percentage and the bank have enough capital to withstand the commensurate losses, it will be safe to raise rates and let some debtors sink underwater. People should be preparing for this event. Anyway, the rates on new loans is rising.

Link to their main site

 

http://www.fathom-consulting.com/research/.../latest-update/

 

Looks a bit grim, and I quote

This is also reported on This is Money.

the discount between homes under the hammer and the wider market was 26% last month, widening sharply from 20% in November.

 

....

 

The sample size in December was unusually large, giving us a high degree of confidence in this new reading,' said Andrew Brigden, senior economist at Fathom Financial Consulting. 'We have not seen such a large discount, in a month where there was a good number of auction sales, since late 2008-early 2009, in the aftermath of the collapse of Lehmans.

 

'We expect to see bigger falls in house prices, as measured by the lenders' indices, as we move into the New Year. If the reading on the Fathom/Zoopla API remains close to its current level, then a double-digit fall in house prices through 2011 is on the cards.' Yesterday, an index published by Halifax, the UK's largest mortgage lender, revealed house prices fell 1.3% in December and were down 3.4% over the whole of 2010.

As I see it the losers will be everybody. You seem to think the 10 year old UK property bubble will 'burst' and that the only people who will 'lose' are those who took on too much risk.

 

Well, there's all sorts of scenarios. On the one hand people who took on too much risk - as long as they keep paying their mortgages - will be unaffected - apart from being unable to move house. On the other the major UK housebuilders go bust - who will be around to hoover up the land at lower prices and build. Where will the money come from to build with?

 

On the other hand, a property bubble 'bursting' along with mass repossessions etc. - will cause a banking system collapse and - not to put too fine a point on it - chaos.

 

I think the global inflation scenario is a hundred times more likely than the 10 year old property bubble bursting scenario. Where I live we've had stagnant house prices for about 7 years now. Which, set against inflation, means we have already had nominal falls. Give it another 20 years and property will become affordable again.

 

Or will it? As long as people pay daft rents, there will always come a point where someone will plunge in and buy to let out. Part of the structural shift in property ownership that is going on now.

The extremely complacent scenario you describe along with the social shift to neo feudalism (property haves verses have-nots) you mentioned in earlier posts requires IRs to stay where they are for at least 5 years (and that is not just base rates but domestic mortgage rates too). Also required is a sustained economic recovery that allows wage inflation to match core inflation and the creation of a significant number of non public sector jobs.

However, five years of weak, sub-trend growth, rising employment and high energy and commodity price inflation along with a banking sector that remains crippled in terms of funding itself at non-punitive rates simply will not deliver this. High inflation without commensurate wage inflation will not enable further debt creation, in fact it will result in the exact opposite.

There is an almost complete mismatch between what governments and central banks want the cost of credit to be (this is what you seem to believe it really is, btw) and what banks have to pay to raise the funds to grant new loans.

Debtors have a big shock in store. Either that or, as I've previously mentioned, they must be subsidised, at steadily increasing levels -- for ever -- and at the cost of the productive economy.

I think the troubles will spread to the UK, and take the form of restricted credit, and probably rising rates

Further credit tightening look inevitable as the requirement imposed on banks during the bailout to lend at 'affordable' rates fall away.

See telegraph article

These targets were imposed to ensure that ordinary people could still borrow money during the recession, and have helped stimulate the property market over the past two years.

 

But these lending targets are due to be withdrawn at the end of February 2011, when the state-owned banks Lloyds Banking Group and Royal Bank of Scotland will be free to set their own lending levels.

 

Lloyds Banking Group includes the Halifax and C&G brands, two of the country's biggest lenders.

 

Although it is now known how individual lenders will reacts to the changes, the total amount banks lend for mortgages is expected to fall significantly due to the lack of competition in the market.

 

...

 

Analysts warned that with no new Government targets in place, lenders will withdraw their deals for the riskiest borrowers amid fears that they will default on their loans.

These requirements were really set up to support prices. Letting them lapse is an example of a passive policy shift: where nothing is actively done, but non-the-less will result in a significant change in the mortgage market. This an example of what I was talking about here.

This means that the rates charged for domestic mortgages are likely to rise regardless of the BoE base rate.

More bearish data has been released, this time from Rics; as reported by the Press association

Property prices fell again last month as interest from buyers plunged for the sixth month in a row, research indicates.

 

New buyer inquiries slumped again in November and dropped at a faster rate than in October, according to the latest report from the Royal Institution of Chartered Surveyors (RICS).

 

It showed 44% more chartered surveyors reported prices falling rather than rising in November, while the reading for transactions per surveyor slumped to its lowest level since June 2009 at 14.8 last month.

 

...

 

A lack of buyers in the market is continuing to weigh on property prices, with mortgage finance remaining a stumbling block for many, particularly first time buyers.

 

RICS also said the surge in properties coming on to the market was now fading as would-be sellers decide to hold off until the new year.

Perhaps we should expect fall to increase if would be sellers decide to put the their properties on the market next year.

There are some interesting CROSS-currents in the market now

Interesting indeed. Rightmove, usually one of the most bullish indices, has recorded a record 6.2% fall in asking prices over the last 2 months.

3.2% fall in November

3.0 fall in December.

YoY is still 0.5% though. So still positive, but only just.

See report here.

A heads-up, or a false indicator? Taken together with the rise in the Homebuilder shares, it could be a heads-up.

 

Meantime, the average of the H&NIndex shows we are clearly in a Crash Cruise speed phase, with prices down -0.9% in November

Given the recent downward move in asking prices I'd say it was a false indicator. The Acadametrics index is based on the Land Registry data so lagging around 4.5 months so the shift downwards probably isn't showing up in data yet.

Just read a new article in Money Week.

In the US, Russell Napier of CLSA is talking about inflation climbing to the 4% region while ten-year Treasury yields hit 6%. It's hard to disagree. Over the last 50 years the average yield on these bonds has been just above that level.

This raises the question: will rising bond yields cause base rates to rise as well? This will be very bearish for property prices.

Bearish data has just been released by the council of mortgage lenders.

An expected decline in mortgage lending towards the end of the year has now become apparent, data released by the Council of Mortgage lenders shows. Lending for both house purchase and remortgaging were affected by a lull in activity in October. There were 46,000 loans for house purchase (worth £6.7 billion), down 4% in number and 6% by value from September. The total was 16% lower (12% by value) than in October 2009, but lending numbers in the final quarter of 2009 were boosted as buyers brought forward transactions to take advantage of the stamp duty holiday.

Some interesting highlights:

• FTB Volume down 19% YoY
• FTB Value down 17% YoY
• The average loan-to-value for house movers 69% an increase from 67% in September
• The average income multiple was 2.84, down from 2.89 in September."

Not much can be done.... that makes political sense for those in power now.

 

When Labour was still in power, and hoping to be re-elected, it made sense to do reckless things that propped up prices like:

+ Encouraging banks to lend beyond sensible LTV's

+ Discouraging foreclosures

+ Pushing up housing benefits

Since all these things made many voters happy, and the damage that they caused was really only visible (to most) in hindsight/

 

Now the "political equation" is much different. I believe the Coalition knows that house prices need s bigger correction, and for them, it is better to get it started sooner, rather than later, so they can assign the blame for the bubble and a possible crash where in belongs: on Brown and BofE loose money. If they delay it another year or two, then Labour might escape blame.

 

So the Coalition must think it is best to "take those pins out" now and aim them at the housing bubble (and also at their Gordon Brown voodoo dolls- he's a pathetic and "abysmal" creature, well-designed for blame that he richly deserves.)

 

-- etc --.

I agree with most of the above, but I think that you have excluded a third option for the government. That is to, as you say, pull the pins out; only slowly and maybe not all of them, thereby controlling the both the rate and amount of falls. This could possibly avoid an outright crash. Electorially the collation do have something to loose from an uncontrolled fall in prices. The real test is whether or not they are prepared to raise rates, as you said earlier low rates are the biggest "pin" supporting prices. Even a small rise will be enough to push prices down quite a lot; but they won't do it unless they are sure that the banks are sufficiently capitalised to be able to withstand the losses.

On one level it makes sense for them to raise rates a little bit early on, while they are still in control of the process, rather than waiting for the bond markets to force it on them. Do they have the balls for this? If rates do not rise I think prices will continue to fall by a few percent a year but not spectacularly. It just doesn't make sense for an owner to sell for a loss when the cost of servicing a mortgage are so low. but this will all change very quickly if a rate rise is forced. The question remains, will the government continue the initiative they started of gradually removing (changes to housing benefit) the props? If so, how far will they go down this road?

I reckon that despite falling demand, PRICES have been propped up by ultra-low rates.

Sellers are unwilling to drop their prices, and buyers "overpay" because low rates make prices look affordable

That is pretty much it. Vendors simply do not have to sell, therefore buyers who can do and feel forced into it, stump up the money. This can only continue as long as interest rates remain this low for existing property owners. I don't see this continuing all that much longer. Sovereign states are increasingly competing for funds; with each other, with banks who need to roll over debt and corporations. The bond market must surely respond with demands for higher yields. The only thing that can slow this is more QE, the effectiveness of which will continue to diminish. QE must eventually lead to higher long-term interest rates anyway. IMO higher interest rates will happen sooner rather than later. When this finally occurs the banks will not suffer that much because they have already been given the last two year to reduced their exposure, and have been doing just that. The larger UK banks are becoming well capitalised again and they will be able to withstand significant falls in house prices.

We have already transitioned from the phase that occurred in late 2007/early 2008 where all actions we aimed at saving the financial system. The banks have survived and many prospered. Looking ahead I believe it is necessary to prepare for an environment with significantly higher interest rates. If unemployment also increases then large HP falls are in store. I now firmly believe that we are on the cusp of a serious second leg down. The government could act, as Brown and Darling did, and throw everything at it a second time. Over the next few months, as house prices continue to drift down we should be asking ourselves the following questions:

1. What can the government do to prevent the second down leg?

2. What are they doing now, or have already done to prevent it?

Unless the answers to these two questions are broadly the same then the government is not genuinely acting to support prices and the falls will increase.

A great chart from Money Week showing UK house prices and net mortgage lending. Source.

HP and Net Lending Chart

In a nutshell, this collapse in NML suggests UK house prices are standing at the cliff face. If they were to follow net lending trends, residential property values could be about to halve.

Net mortgage lending is as analogous to the rate at which air is being pumped into a vastly overinflated balloon. If the air is flowing out at a greater rate than it is being pumped in then it deflates.

Another chart from Money Week show HPI almost touching zero.

HPI Chart