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April 13, 2008



"...some people are “trapped” in their existing home. But this is because capitalist presenteeism forces people to live nearish to where they work. But the problem here is the repressive nature of capitalism, not the housing market."

No. Banks make you insure them against losses. This means that borrowers with negative equity don't always have a realistic option of selling at a loss and paying the bank back. The bank won't let them sell at all.

This was a major part of the early 1990s negative equity problem.


Thank you for revealing that Hutton is just talking his book, just like some oafish share-pusher.


"the problem here is the repressive nature of capitalism". can you expand upon this please chris? i'm just not sure what you mean exactly....


I agree Hutton talks a load of tosh in that column, I couldn't really make sense of it as I was reading it.

However, given the documented levels of debt and equity extraction from houses, I think there's a reasonable case to be made that house prices going down is going to affect growth and could trigger a recession. i.e. there's reasonable evidence to draw a causative inference.

Of course, I still don't believe that we should prop up house prices because I don't think we have the tools to buck the momentum of the slide without equally bad side effects later on in the housing market and immediately in some other sectors.

Bob B

Several issues are being (? intentionally) conflated in the public debate.

The deflating of the house price bubble may matter little to me (and others) personally because I'm laready a home owner with no plans to move and I have a variable-interest mortgage with no need or plans to re-mortgage. OK, I'm all right, Jack, but what of those who:

(a) have been unable to afford to buy a house because of the bubble - average house prices are currently at some 6 times average earnings compared with the trend value of 3.7 times average earnings?

(b) have come to the end of a fixed-interest mortgage and are stretched to refinance a mortgage at a time of a credit crunch when there is a looming threat of negative equity, perhaps because the original mortgage was a 100% mortgage?

Admittedly, houses were remortgaged to afford costly exotic holidays but also to pay for long-term care for those incapacitated by Alzheimer's or expensive life-saving drugs which NHS refuses to pay for.

It's all very well for GB to downplay the recently reported drop of 2.5% in average house prices in one month because prices have risen by 180% over the last 10 years. But some informed observers were warning of the consequences of the house price bubble as long as 8 years ago:

"All economists agree, however, that the current pace of activity in the housing market will weigh heavily on the MPC. Speaking at a conference last autumn, one committee member, Charles Goodhart, said house-price inflation was a better indicator of future inflation than other asset prices such as shares.

"'Across countries, changes in house prices are now a good predictor of inflation in goods and services one or two years out,' he said.

"He added: 'Monetary variables in general and house price movements in particular need to be given more weight in the assessment of inflation, particularly at a two-year horizon, than is done in some current models.'"

Professor Goodhart was one of the swing voters in favour of keeping interest rates unchanged in December [1999]. The chances must be good that the latest burst of steam emitted by the housing market will nudge the MPC's vote the other way this week. [10Jan00]

"CHARLES GOODHART, a former member of the Bank of England's monetary policy committee, warned yesterday that the Bank is failing to take sufficient account of the house price boom in setting interest rates.

"His warning comes amid growing fears among economists that house prices, fuelled by the lowest interest rates for 38 years, are getting out of control. Yesterday, new figures showed that homeowners are borrowing record amounts against the rising value of their homes. . . " [6 April 2002]

Bob B

Brown and Darling cannot in all honesty claim the deflating of house prices has come as an unwelcome surprise:

"Then there's David Miles, the respected chief UK economist at the investment bank Morgan Stanley. In November [2006], Miles warned that only half the recent growth in the housing market can be explained by genuine issues of demand and supply; the remainder was due to a speculative bubble that could be about to burst.

"The economist's warning is as close as any credible analyst has come to predicting a house price crash this year. 'A substantial fall in real house prices is likely at some point in the near future, though it could be one to two years away,' he warned."

This piece by Roger Bootle has an illuminating graph of the time series of the ratio of house prices to earnings [16Oct07]:


Britain needs to come up with a better way of managing its housing market. I don't think there's a single more boom-bust market in the developed world. This roller-coaster pricing in Britain seems to be about a decadal thing in the UK, not the once-in-75-year-event that it is in the US. And in the US we wouldn't even be in the trouble we're in now if we hadn't deregulated banking and credit in the 1990s to, well, make it look more like Britain.

Bob B

"This roller-coaster pricing in Britain seems to be about a decadal thing in the UK, not the once-in-75-year-event that it is in the US."

Speaking of market failings in America, what of this precursor of the current subprime mortgages debacle?

"The US Savings and Loan crisis of the 1980s and 1990s was the failure of several savings and loan associations in the United States. More than 1,000 savings and loan institutions (S&Ls) failed in 'the largest and costliest venture in public misfeasance, malfeasance and larceny of all time.' The ultimate cost of the crisis is estimated to have totaled around USD$160.1 billion, about $124.6 billion of which was directly paid for by the U.S. government, which contributed to the large budget deficits of the early 1990s."

The S&Ls in America were the approximate equivalent of the old mutualised building societies in Britain, some of which, like the Nationwide, still flourish.

One of our (arguably main) failings in Britain has been a tardy and flagging response of the construction industry to business opportunities created by house-price bubbles. This shows what happened to house building in England:

Remember, Gordon Brown was virtually bragging that house prices had increased by 180% under New Labour. Hooray! I suspect the calculation was that the ensuing feel-good factor would do wonders for New Labour's election prospects despite Prof Charles Goodhart's perceptive forewarnings dating back to 2000.


In the case of Spain, with a very high economic growth these last years, the increase in housing price had a very powerful effect:
1. Labour effect. Building was the n. 1 in labour rate increase.
2. Consume. Since more than 60% of the population owns a house that is fully paid (morgage free) they felt much more richer and THE BANK SAW THEM AS RICHER TOO. They had more power to expend and to get credit (there are very few rented houses in Spain, even english people looking for the sun use to buy !)
3. Building industry was one of the first factors of the GDP growth.
Of corse, that was worse for the first time buyers (again, they don't want to rent).
Now, the prices start to fall and the whole economy is feeling it. With houses cheaper, first time buyers may found themselves not being a buyer anymore.


Hutton really is a twit.

I always try to explain it to friends as follows: rising house prices are only a good thing if you are currently living in the biggest house you are ever likely to need/want. And even then only if you intend to downsize.

The same goes for rising share prices of course. High prices (high valuations) are only good if you are about to become a net seller.

And rising prices are especially *bad* if they artificially inflate consumption.

Hutton is a complete twerp.


spot on Chris

Bob B

Busting asset-price bubbles can have extensive, persisting and very unwelcome downstream consequences - remember: the stockmarket crash of 1929 was the busting of an asset-price bubble.

The better course is to discourage the bubbles from forming in the first place by applying monetary and fiscal policies that "lean against the wind."

When GB changed the Bank of England's inflation target in December 2003 from 2.5% by the RPIX to 2% by the CPI, he swapped a price index (CPI) that didn't include house prices for one that had (RPIX). Thereafter the two indices diverged:

By February this year, the annual rate of inflation according to the RPIX was running at 3.7% so interest rates - other things equal - should be much higher than they are now.


> "the problem here is the repressive nature of capitalism".

I'm OK with the rest - just I don't know how any other system can get around he issue that people (in the short term at least) need petrol to get places and if the site where their labour is most useful (in any sense) and where they want to live is far apart they have to pay the price unless we want to make oil free and create a problem for everyone.

Glenn (aka angry economist)

Well, it is not relevant but have I mentioned that I love my wife?

Mark Wadsworth

House Price Crash! Bring it on! I've sold all my flats and sold-to-rent, this is all going like clockwork!

Mark Harrison

In today's environment, being a landlord has about as much social acceptability as it did in Dickens' time, but I'm still willing to stand up and say it's what I do.

From a linguistic point of view, by the way, the word "landlord" is a clue that I've been in this business for a long time - those who started in the last ten years call themselves "buy to letters" and those who started in the last three years seem to prefer "property investors" and have a naive belief that landlording is "passive income" rather than being the service business it really is.

Because of that, I have a slightly odd view of housing economics - I don't think of house-prices in going up in value - but I do believe that, long-term, inflation depreciates the mortgage, so pretty much harness the money illusion.

The last few years have not been good - while the illusionary value of my assets has gone up, the cashflow hasn't particularly (it got better for a short while as market interest rates went down, but those costs are creeping up again.)

I've been writing about the fact that there would be a house price crash (but not particularly attempting to predict which year it would be in) since 2004.

From my point of view, the last 2 years in particular have been a speculative boom in which naive buyers have pushed up the prices of assets by following a greater fool model.

Frankly, I'd be a winner from a market correction - for the simple reason that, over the next 20 years, I intend to start buying again.


"But the problem here is the repressive nature of capitalism, not the housing market."

No, the problem is that there is not a futures market nor is there any way to to short local housing markets. This is the problem.

Bob Deed

Its worth bearing in mind the damage that the credit crunch and the housing market instability and uncertainty is doing for housebuilding targets - particularly the ability of housing associations to provide socially rented and other affordable homes.

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Last week I was looking for the house in Los Angeles. And what you think - I've didn't noticed any prices down. All they (houses) are expensive. I thought I can find good house for good price. Maybe it belongs to other regions. Anybody knows it?

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