Tuesday, September 1, 2009
The house price guarantee
It is painful admission, but UK house prices are beginning to recover. In fact, the monthly increases look very much like those recorded during the bubble years. If present trends continue, then within about 15 months, the UK housing market will have recaptured all the losses recorded since October 2007.
The bubble might be back, but its return is due to the implicit guarantee that the Bank of England and the Treasury have put in place as a response to the financial crisis. The government has given home owners now have an implicit insurance policy that the taxpayer will make up any losses on property speculation. It was a guarantee that was easily granted, and will prove virtually impossible to remove.
With each passing price increase, confidence in this guarantee will grow, and as it does, more and more speculators will try to take advantage of it. With the Bank of England pursuing their extraordinary policies of near zero rates and cash creation, everything is primed for a renewed round of speculation.
It is tempting to think that within a few years time, that another financial crisis, similar to the recent one will take place, with its dramatic bank failures and dropping asset prices. However, I see another scenario. The UK will drift into an extended period of increased government intervention, stagnant growth, and asset inflation. The state and the financial system are welded together, the interests of finance dominating the policy stance of the government.
In reality, neither the Bank of England nor the Treasury have any clue how to disentange the financial system from the taxpayer. They have no idea how to remove the tangled web of guarantees, liquidity support and capital injections.
Since they don't have an effective exit strategy, the support will continue indefinitely. Just watch what happens next to house prices.