Free money

Why didn’t someone think of it before? It is so obvious. The logic is so simple. If the housing market is collapsing from a lack of credit, then why doesn’t the government step in and offer free loans to first time buyers. Problem solved. As soon as the money comes on line, house prices will stabilize. First time buyers will come flooding back into the housing market, waving their free loans at risk-averse banks.

How did Brown and Darling justify this extraordinary generosity? In announcing their housing rescue package today, three themes kept cropping up; the first two were explicit while the third was implicit.

Give me the confidence

Confidence was the first theme of the day. With the onset of the credit crunch, Brown claimed that people had lost confidence in the housing market. Banks, buyers and sellers were all trapped in a crisis of self-doubt and uncertainty. Banks wouldn’t offer credit; buyers without credit could not make viable offers, while sellers had not reconciled themselves to lower valuations. The government’s housing package will put a floor on prices, this would buttress confidence, and gradually things would return to “normal”.

Help the home buyer

First time buyers were the second prominent phrase of the day. The government package intended to clear the path for those starting out on the long road to property ownership. Hazel Blears was on the TV this morning, talking like an estate agent. She told viewers that the new measures would allow young people to get a footing on the property ladder.

Housing inflation equals economic growth

The third big idea was rather more implicit. No one said it directly, but hinted that the economic growth depended on a thriving housing market. Kirstie Allsop came closest to pointing out the connection on Radio Four Today, when she offered support for the government’s plan. She pointed out that without housing transactions, people stop buying white goods; furniture gathers dust in the storerooms, while plumbers and builders remain unemployed. Therefore, the revival of the housing market is essential if the UK economy is to keep on growing. This theme can be expressed in starker terms; we all benefit from housing inflation, even those who are priced out of the market, because housing bubbles hold up economic growth.

Ineffective, costly and possibly both

None of these themes can withstand thirty seconds of serious scrutiny. Take, for example, the confidence and the government’s capacity to hold up prices with free credit.

In order to stabilize the housing market, the government would have to offer massive amounts of free money. A few simple numbers will prove the point. Between March and July this year, the total outstanding amount of mortgages outstanding owed to Banks fell from ₤559 billion to ₤546 billion – shortfall of ₤13 billion. Assuming a five percent interest rate, the government would need to supply ₤650 million in order to make up the shortfall in just four months. Simply put, the free loan scheme will either be ineffective or astronomically expensive. It might also be both. However, it will not put a floor on house prices because the government does not have the resources to supplant bank credit.

Will it help first time buyers? It might help a few, but the vast majority will be left worse off. Suppose the government offered ₤30,000 interest free loans to 20,000 home owners, the government would need to supply ₤600 million worth of credit. The number 20,000 represents one month’s shortfall of mortgage approvals this year relative to 2007.

To put it mildly, 20,000 doesn’t really begin to cover the number of bitter people who have been shut out of home ownership due to the bubble. Besides, first time buyers were receiving huge assistance from falling prices. It is hard to see how stabilizing prices at the current inflated levels helps anyone trying to buy their first house.

Turning to the third, implicit theme; does the UK economy need the housing market so badly that the government should try to subsidize grotesque house prices with free credit? Are we really that dependent on inflated property values? These are the wrong questions to ask. A better one would be how should the government act to unwind the UK’s extraordinary vulnerability to its property market? It is a difficult question, and it is hard to see an answer that does not include some kind of significant slowdown in economic activity. Since this question only offers difficult answers, the government prefers to hide behind a seemingly simpler task of holding up property prices.

Get prices right and everything will be alright (eventually)

The first crucial step towards solving any economic problem is to get prices right. Once effective demand equals supply, incentives are properly aligned, and markets will perform reasonably well. If any government interferes and sets up a policy based on sustaining misaligned prices, then it is only adding more difficulties upon the existing pile of problems. House prices are misaligned from long run fundamentals. In order to purchase a house today, home buyers need huge loans that place an unbearable burden on long term personal finances. Banks are no longer willing to supply credit because they have finally come to realize that default risk has risen to unacceptable levels.

Delaying the inevitiable

New Labour is unwilling to recognize this reality. Instead, it offers another misaligned price; zero interest loans in order to sustain overpriced property prices. Brown and Darling can harp on all day about confidence, help for first time buyers and the weakening economy. This package will only delay the inevitable.

Estate agent tortures boss

Why does this story not surprise me:

"An estate agent who hatched a brutal revenge plot against her boss after being sacked has been jailed for 10 years. Ambreen Gul, 23, lured Waqas Malik to her flat where he was tortured and ordered to raise a £200,000 ransom or be killed with his son. She had recruited another sacked colleague and two other thugs to make him pay for her dismissal.

Mr Malik, 48, was kicked, punched and pistol whipped repeatedly. Judge Deborah Taylor told Gul she had been motivated by "revenge and greed".

This particular estate agent got bored with tormenting first time buyers and turned on her boss.

It is time to break this relationship

This chart is more than just a colourful pattern bouncing across your computer screen. It tracks house prices and household spending; the pivotal relationship that dominates the UK economy.

As the chart above amply illustrates, it is extraordinary how closely these variables move together. These indicators are the economic equivalent of synchronised swimming. When real house prices increase, spending follows. When house prices fall, spending dives down with it. Consumption spending accounts for about 70 percent of GDP, which in turn determines employment and income growth. Therefore, it's not hard to see why policymakers are obsessed with maintaining high and growing house prices.

It is, however, an unhealthy relationship. The recent period of sustained housing inflation enticed people into thinking that they were becoming wealthier. When they should have been saving, they began spending and borrowing. Through home equity loans or credit cards, the housing market was a great facilitator, which encouraged people to the sticky swamp of personal indebtedness.

Like a lot of nasty, compulsive relationships, it is difficult to see a way out. Nevertheless, there are a couple of steps that will allow our consumption spending patterns to break loose of our obsession with housing. We need to liberalise planning regulations, introduced a tax on land, and regulate the real estate and financial sectors industry more effectively.

The Bank of England should also explicitly target house price inflation. Like regular inflation, rising house prices occur when central banks reduce interest rates and commercial banks extend too much credit.

All these measures are perfectly reasonable and feasible, which will significantly reduce the probability of future housing bubbles. All that is needed is the political will to carry them out.

Squeezing out the cash

The bubble is about to eat its own children. As house prices crash and sales volumes collapse, around a third of estate agents - some 4,000 businesses - are likely to close.

That is quite a crash. It might also explain why estate agents are so detested. Perhaps, they understood all along that the housing bubble could not last. Therefore, the optimal strategy was to squeeze as much cash out of hapless home sellers; the quicker the better, and by any means necessary.

Now, it is all over and it is time to move on.

Jordan prices

These days, it is hard to escape Katie Price aka Jordan. Even the Times cannot keep away from her. Yesterday, it did a feature entitled “Katie Price is right”. Apparently, she is a role model who is “self-supporting, hard-working, uncomplaining, cheerful, courageous, a humble girl made good who sticks by her man”.

Personally, I think it is more than a little sad that the Times consider her as a role model for women today. She is someone who got her start in life by taking her clothes off. However, that rant is best preserved for another time. This is a housing bubble blog, after all.

I did, however, learn two interesting things from the Times article. First, her recent book outsold all the authors on last year’s Booker prize short list, which is a shocking indictment of the UK’s reading habits. On the strength of that statistic, I have decided to bin my novel about an angst-ridden renter in North London. Instead, I will focus on a new project - my autobiography - which will come with lots of pink framed photos of me with the six-pack Adonis that lives with me.

Second, Katie has just downsized and she intends to sell her implants for £1 million on ebay. When confronted by this seemingly preposterous sale she said, “Someone will buy them, there’s always someone.”

Some of this Jordan “it will sell” attitude has also gripped the housing market. Earlier this week, rightmove.co.uk announced that asking prices are on the rise. In February, house prices surged 3.2 percent, bringing a “huge relief to homeowners who have been concerned about falling prices in a faltering property market.” Sellers have taken comfort from the Bank of England’s recent easing of interest rates. Sellers are hoping that yet another round of easy credit will fire off one more surge in house prices.

The optimism underlying this rise in asking prices is extraordinary. House sellers have faded out the cacophony of recent bad news, which if sellers had any sense, would have prompted them to slash their prices and run for the hills.

For reasons that I can not understand, sellers are unimpressed with the recent data from Halifax, which indicates that prices have been falling since July last year. Likewise, collapse of Mortgage approvals has left them unmoved. The buy-to-let investors must be looking elsewhere for financing after Paragon has shut up shop. They seem unfazed by Bradford and Bingley’s year-end results with its deeply depressing account of higher loss provisioning; financing difficulties; and reduced interest margins. They have ignored the gloom-laden warnings from Bank of England Governor – Mervyn King –of a slowing economy, rising inflation and real declines in living standards. As for Northern Rock, that was last year’s problem.

Sadly, for sellers, asking prices are not sales prices. Sellers may ask, but they will not receive. Already, there are clear signs of accumulating housing inventory.

Rightmove did not trumpet the inventory data with the same zeal that they did with asking prices. Nevertheless, it did report that estate agents now have the highest ever level of unsold homes recorded for this time of year. It also reported that homes are also taking an average of 93 days to sell, up from 78 days just 12 months previously.

Sellers may find that their “someone will buy them, there’s always someone” optimism is misplaced and that Jordan prices do not clear the market.

Banks turn off the tap

Easy credit is the lifeblood of any bubble. No credit, then no bubble; it is as simple as that.

Today, the Bank of England published its quarterly survey of credit conditions. Every three months, the BoE goes around and asks the commercial banks how they feel about lending out money. In the most recent survey the banks told the Bank of England they plan to make far fewer loans to consumers and companies in the first quarter of 2008.

The message from the survey is all too clear - commercial banks have had enough. They've taken a long hard look at the UK consumer and they see far too much risk. UK households have taken on too much debt and default risk has skyrocketed. The housing market can go only one way - down. Handing out mortgages on overvalued property is just plain dumb.

The recent interest rate cut hasn't done much for commercial bank sentiment. The Bank of England will need to keep cutting, but this threatens to weaken sterling, which will, in turn, generate import-related inflation.

So the Bank of England is faced with a dilemma - cut rates and generate more inflation, or leave rates alone and see the economy tank.

Estate agents - the great shakeout begins

The crash is definitely on for estate agents. The recent decline in UK property prices might be modest, but the collapse in house sales is dramatic. With mortgage approvals down over 43 percent compared to last year, the prospects for estate agents is rather bleak.

Today, LSL Property Services, the owner of the estate agencies Your Move and Reeds Rains, began the long awaited cull. It has shut 12 branches and eliminated 315 jobs.

Are you having a laugh?

The front page of today's Daily Express was hysterically funny. It seems that "home owners are breathing a sigh of relief after new figures revealed house prices are rising again in many areas. A predicted slump in the housing market has not arisen, despite the credit crunch."

The source of this unfounded optimism was the Nationwide who had published data showing that property prices nationally "were up 4.8 per cent year on year." As an aside, when 2007 property prices are adjusted for RPI inflation (which is currently at 4.3 percent), the real rate of house price growth is pretty close to zero.

Without any hint of irony the article then states that "average house prices across the country dropped 0.5 per cent in December compared with last month." So despite the reassuring headline, the data shows that the crash is well underway.

To add to the foolishness of the headline, the Nationwide data referred to November prices not December. When I looked at my calender this morning, we still had a day or two of December left. In the sloppy world of Daily Express jounalism such things are mere details.

The article then quotes housing expert Peter Bolton King from the National Association of Estate Agents, who reassured us with the following gem of wisdom; "Despite the considerable doom and gloom lately, the figures show that there is no need for pessimism."

Well, Peter, have you looked at recent mortgage approvals data? According to the the Council of Mortgage Lenders, new approvals are down 43 percent. I wonder who optimistic you will remain when house sales fall by a similar forty percent. That would put a dent in real estate commissions.

Personally, I am not a bit pessimistic about the property market. I confidently predict a great year in 2008. As a "UK housing expert" I confidently predict a 5 percent fall in prices next year, with a futher 5 percent in 2009.

Losing faith

People have lost faith with the UK property market. According to a recent survey, three quarters of people predict house price falls in 2008, with just one in five believing the average home will rise in value. More than half of people polled by This is Money said house prices would fall by 11 percent or more next year.

First time buyers have disappeared

The UK housing market has become a speculative merry-go-round. There are virtually no first time buyers in the market.

What accounts for the vast majority of home sales these days? People who own property are selling their overpriced properties to other people owning property. The market is now driven by speculators trying to squeeze out capital gains from each other, with transactions being financed by banks.

The statistics on disappearance of first time buyers are shocking:

Average house prices are unaffordable for first time buyers in 466 out of 483 towns

In 2007, the average first time buyer in 8 out of 12 UK regions paid stamp duty.

The number of first time buyers is at its lowest since 1980.

An estimated 300,000 first time buyers entered the market in 2007 - 44% less than in 2002 (532,000).

First time buyers cannot afford to purchase a terraced property - traditionally the least expensive property type - in 71% of towns across the UK. Back in 2002, the typical first time buyer could not afford to purchase a terrace in only 11% of towns across the UK (51 towns).

However, the merry-go-round is about to spin off its axle. The crash is here.

Prices are still going up

We haven't quite reached the turning point yet. House prices in the UK are still going up. According to Land Registry data, prices rose by 0.7% in May, giving an average house price of £180,594. However, the annual change dipped below double digits and came in at 8.9 per cent. As anticipated, the region with the highest annual price change was London with an increase of 15.3 per cent.

Nevertheless, the tide is turning. Those interest rate hikes will spike this bubble. The optimism that has fueled this speculative madness with change. Sentiment will turn, fear will rear its ugly head, then panic will set in. Frantic activity will precede desperation. Then comes comprehension, followed by despair, leading on to the resignation.

The time to sell has passed. If you own a home that you can't afford, you are trapped. That overbearing mortgage will drag you down to the dark depths of bankruptcy.

You are doomed, doomed I say, dooooomed, doooooooommmmmmeeeeddddd.

Moving is stressful

Here's a story from the motley fool that explains all the agony and anguish of a house move and how wonderful the new HIPs will be. Apparently, buying a home is extremely stressful. Furthermore, it is costing the UK economy millions of quid.

Well, it's just as well that house prices are rising. All that additional stress is compensated by the knowledge that your new home is a moneymaking machine. Once you have moved in, just sit back, relax, and just feel all that wealth accumulate around you.

Thankfully, we now have a home information packs to relieve some of that stress. For around 600 quid, sellers must tell buyers all the wonderful things encapsulated in the prospective home wealth producing machine. However,the government must take it cut from the stress reducing HIP initiative. It is going to charge VAT on every HIP pack.

The negative impact of the stress caused by home-moving on the UK economy runs into millions of pounds, it has been alleged. According to a recent study by estate agents Your Move, 40 per cent of Britons say the stress of moving impinged on their productivity at work.

Extrapolating further, Mike Ockenden, director general of the Association of Home Information Pack Providers (AHIPP), has suggested that if the stress affecting this group resulted in the efficiency of each member being reduced by ten per cent, the cost to the British economy would be £500 million.

"The high levels of transaction failure and the extended period of uncertainty between offer and exchange of contracts in the current home buying and selling process is one of the most stressful times that consumers will endure in their lifetime," Mr Ockenden confirmed.

"Several studies have shown that the stress of moving home ranks only behind ill health, relationship breakdown and bereavement yet, incredibly we have simply learnt to accept this in the UK - unlike in most European and Western countries, where this is far from the norm."

Mr Ockenden expects that the introduction of home information packs (Hips) will alleviate some of the stress of moving by reducing the amount of time it takes to exchange contract - thereby saving the British economy money.

Estate agents get desperate

The UK house bubble has entered its final spasm of speculation. Estate agents are turning to old trick to generate panic buying - the open house. Rather than the old individual viewing, estate agents are arranging mass showings. The hope is that when other buyers see the numbers rival buyers, prices will be pushed higher.

The tactic was highlighted in the Guardian newspaper. One unfortunate buyer complained 'We only discovered this was the situation when we found our estate agent waiting at the door to tick us off on a long list of other names. We walked into this tiny flat and found 10 other couples already there. We were all tripping over each other. We had to queue to get into the bedroom. There was gridlock in the corridors"

However, the open house sales technique can have some unintended consequences. In the US, many of the so-called potential buyers often turn out to be local neighbours who are often just curious about what the other houses on the street look like inside.

Open houses can also work against sellers. Once the market slows, people stop visiting open houses. This sends a powerful signal to other buyers that the market has shifted. In the US, lower attendances at open houses was the first sign that the market was in trouble.

So, this weekend, estate agents will be encouraging the speculative frenzy with this seemingly high pressure sales technique. No doubt, some people will be stupid enough to be taken in by this misleading, and frankly nasty way of selling houses. However, things turn. The open house sales technique is a double edged sword.