From: M Holmes 
Newsgroups: uk.politics.misc uk.finance
Subject: Re: Pop! Britain's Bubble Economy Confounds Experts. Economic disaster one rate rise away ?
Date: Thu, 6 Apr 2006 16:53:24 +0000 (UTC)

In uk.finance Mel Rowing  wrote:

>> > The South Seas Bubble was based on precisely nothing. 

>> Actually it was based on government debt. 

> It began through and agreement by the South Seas Islands Company to
> service the British Governments's L9m debt at 6% in return for
> exclusive trading rights in South Seas Ports.  Form then on, it was
> nothing but hype and rumour. 

Not that we've seen any hyping of house prices or credit. No sireee.

>> > So long as people continue to live in houses nobody is ever able to
>> > argue that they have no intrinsic value. 

>> If they merely return to their value at the start of the credit
>> bubble, say around deregulation in 1984, then houses will still have
>> intrinsic value (the folks valuing them in 1984 will simply be more
>> accurate about their intrinsic value than those valuing them now) but
>> we'll be in a whole heap of trouble.  Tulips too still have their
>> intrinsic value, but nobody will exchange a house and a business for
>> one. 

> The intrinsic value of a houses is that it provides a roof over ones
> head with varying degrees of comfort and amenity.  That's the same now
> as it was in 1984.  It has nothing to do with house price which is a
> product of markets. 

Sure, even if prices drop 90% then folks will still have the house they
willingly paid for. I guess it must be annoying in Japan to have
neighbours moving in paying 11% of what you did and you being saddled
with debt for the rest of your life when they're not, but them's the
breaks in a speculative market.

The real hit in a credit bubble comes from the deflation. Eventually as
cash becomes more valuable then folks either have to take a cut in wages
or be sacked. That makes it harder to service the debt and even if they
keep the house, causes the two thirds of the economy dependent on
growing consumer spending to crash, with the loss of jobs that entails.
Then there's the folks who can't move to a new job because they can't
sell their house because they're in negative equity, and anyway nobody
can get credit to buy at a price at which they'll sell.

Assets can maintain intrinsic value. I daresay shares in 1932 still had
some intrinsic value, but the economy can still be blown to hell.

>> > It may well be that house prices may take a dip from time to time. 
>> > They regularly have.  There exists a ready supply of entrants into
>> > the housing market keen to take advantage of any such dip to get a
>> > foot on the property ladder. 

>> If they can't get credit, how much will they pay?

> Is there any indication of a credit squeeze?

Check out the bond markets for the last ten days. There are few now who
doubt the carry trades are beginning to unwind. Our housing bubble has
been built on credit from China and Japan (as far as I can tell I'm the
last person left in the UK who still saves up to buy things so it isn't
coming from us) and our bankers are starting to call in our loans.

> You discount entirely some important factors. 

> The current owner occupier sector of the housing stock was not
> acquired over the past week but over the past 30 years or more.

In a 70 year credit cycle, 30 years is still just recent history.

> A
> significant proportion of it is not any longer subject to mortgage. 
> With these people the question of negative equity doesn't even arise. 
> Any dip in the price of houses would place only the more recent
> purchasers in such a position. 

That won't pan out because many who have paid off their mortgages are
now depending on reversionary cash from the house in lieu of the pension
they don't have. They'll have severe problems if there's no way to raise
that cash.

As I tried to point out: housing is only *part* of the credit bubble.
Government debts and unfunded pension liabilities are a huge part too.

> Even if one found oneself in such a position, the best option would
> not be to sell.  Selling into a depressed market would result in one
> ending up with residual debt to service and still the problem of
> finding a new home.

Indeed.

> There is no indication of even a scenario under
> which significant proportions of people are about to start selling
> their homes thus rendering themsleves homeless. 

There's the BTLers to start with. When prices start coming down, the
bankers are gonna want more security in the form of cash, or they'll
call in the loans. 

Then there's the lack or remortgage cash. That means a lack of consumer
demand. Since at least half of job creation in the past decade and a
half has been overbuilding of retail floorspace, that means we're headed
towards mass redundancies. Car loans and credit card loans will
exacerbate this in a deflation. Those people then won't be able to
service their six times salaries mortgages and will be reposessed if
they don't sell.

For the folks that stay put, they're likely to see problems from empty
reposessed houses and the kinds of trouble they bring as well as what
will be the mother of all recessions.

> In order for any market to experience a fall there has to be a surfeit
> of sellers or a dearth of buyers.

Or a dearth of credit for the buyers.

> There is no indication that any
> slack in the market would not be taken uo by those anxious to upgrade
> and get their first foot on the housing ladder. 

OK, so how do you explain a 89% fall in prices in Tokyo with base rates
of zero and unemployment at 5% ? Did people merely choose not to
upgrade, or did banks in trouble decide that they couldn't risk lending
money to buy houses?

>> > Everybody needs housing. 

>> Also true in Tokyo where at one point house prices had dropped 89%
>> when the base rate was zero percent.  That people need something
>> means that a credit bubble distorting its value will cause more
>> trouble, not less. 

> Hardly a comparable case in a society where the population is static
> (growth rate .02%) and ageing compounded by a banking system sagging
> under corporate bad debt. 

As someone pointed out: if we get a recession, immigrants legal and
otherwise will want to go elsewhere, and they're essentially all of the
excess demand over what's being built. As for bad debts, our banks have
been raising provisions against those for some months now and I expect
that to continue, in Spades.

>> > Paying rent is dead money lining somebody else's pocket. 

>> Anybody paying interest is paying dead money to line my pocket.  I
>> use that interest to cover rent and beer. 

> Your landlord would not agree with you.

Nobody *ever* agrees with me. I'm still correct though.

> Tommorow your beer will be gone. 

As long as I have cash, there'll always be more beer. 

FoFP