Home-Owner-Ism unravelling before your very eyes.

Just to recap:

1. At the start of a house price/credit bubble, a house is worth (say) £80,000. Mr B, the owner, has financed this with a mortgage from the bank for £80,000. Mr A, who sold it to him, has £80,000 in the bank. So the bank is due to receive £80,000 from Mr B (an asset) and has to repay Mr A £80,000 as and when he needs it (a liability). The bank is charging Mr B slightly more interest than it is paying Mr A, so the bank makes a small profit of (say) 2% x £80,000.

Mr B then sells it to Mr C for £100,000, repays the mortgage and puts the balance of £20,000 on deposit with the bank. So the bank now has an asset of £100,000 and liabilities of £100,000 (it owes Mr A £80,000 and owes Mr B £20,000).

Several iterations later, Mr G buys the house for £200,000. It's the same house and the same people in the same economy and the same bank with the same initial capital, but now the bank is making a 2% x £200,000 net interest margin.

2. This is all a slightly negative sum game, of course, so to keep the wheels oiled, the bank doesn't just have to trick Mr G into paying double what the house is really worth, it also has to convince Messrs A to F that Mr G can afford to repay them all. It helps if there are some countries like China who are exploiting their slave labour to sell Messrs A to G flat screen televisions and so on, so China has surplus money that it (rather naively) lends back to UK banks to then lend to Mr G (just in case Messrs A to F want to withdraw some of their money to buy things like flat screen televisions).

3. In absolute terms, UK household debt doubled from £700 billion to £1,400 billion over the last ten or fifteen years, and about half that came from abroad (China, petro-states etc). The very important bit is that as houses are largely bought with mortgages, they are only worth as much as people can borrow and as much people are prepared to lend. And sooner or later the bubble bursts, the music stops and the whole house of cards collapses (plus any other random metaphors).

4. As Robert Peston explained (I haven't checked his figures, but they look roughly right - even if he is out by a factor of two the outcome is the same):

UK banks face a deadline of the end of 2012 to repay £165bn of high-quality liquid assets supplied to them by the Bank of England under the Special Liquidity Scheme. And over the same timescale, British banks will have to find £120bn to pay back debt that has been guaranteed by the Treasury under the Credit Guarantee Scheme (there is an option to roll over a third of these government guarantees to 2014).

Now as bad luck would have it, this schedule for repaying the Bank of England and the Treasury coincides with a spike in repayments on other substantial debts of British banks, in the form of bonds and residential mortgage-backed securities. What this means, according to the Bank of England, is that banks need to refinance or replace up to £800bn of term funding and liquid assets over the coming 30 months.

The Bank of England estimates that simply to replace this finance, British banks need to sell about £25bn of new bonds and asset-backed securities every month. Here's the troubling news: what's required is 66% more debt issuance per month on average by banks than actually took place during the boom years of 2001-7. And banks are currently issuing (selling) less than half the debt that's needed.

So it's a fair assumption that house prices will fall as a result of this. How much and over what timescale, we can't begin to guess, as government intervention is difficult to predict. And to be fair to the last Labour government, they managed to stave off the inevitable for two and a half years (heck knows what the long run cost to our economy or even our social fabric will be).

5. That most Home-Owner-Ist of newspapers, The Daily Mail (via Miken at HPC), also appears to have cottoned on:

Britain could be on the brink of another mortgage drought, the Bank of England warned yesterday. Lenders expect the number of loans to plunge over the next three months, research published by the Bank showed, as fears of a second credit crunch grow.

So far so good. The Daily Mail sees all this as A Bad Thing rather than the laws of commonsense and economics reasserting themselves, which is A Good Thing, but hey.

6. My favourite bits from their article are:

a) "But any mortgage squeeze is likely to enrage taxpayers, whose money was used to rescue banks including Halifax, one of Britain's biggest lender of home loans, and Royal Bank of Scotland. "

Well duh. This was not a one-off 'rescue', this was just the first few instalments in the massive transfers of wealth from the taxpayer to the banking system to try and patch up the holes and prop up house prices.

Maybe Mr G lost his job or something and couldn't keep up his repayments. So the government collects a bit of extra tax from Mr A to Mr F to bail out the bank to help it insure or repay their deposits. Home-Owner-Ism only works by bribing people with their own money. But imposing higher taxes doesn't help Mr G find a job, so we're into a downward spiral already.

China would like its money back, but luckily the money they lent was denominated in sterling, so one swift devaluation later, they've been conned out of a quarter of the money they originally lent and they are not so keen to lend on such favourable terms in future and/or want to be repaid.

b) "There would be a knock-on effect for anyone who needs to sell their home if potential buyers back out because they cannot get the financing. The CML predicts that there will be just £15billion of net mortgage lending this year, compared to nearly £110billion in 2007."

Well duh. If Mr G wants to sell the same old house to a first time buyer, Mr H, all he has to do is to drop the price to something that Mr H can afford to repay, like about £80,000, simples.

Had Mr A kept the property all those years, this wouldn't be so bad, but this is one example of the Home-Owner-Ist ratchet at work: Mr G doesn't want to end up in negative equity; Messrs A to F want to be repaid in full, or have their deposits insured by the government, which can only do this by slapping extra taxes on them, and so on. In the meantime,

Chinese workers have woken up to the scam and are going on strike, but the Chinese government is too embarrassed to admit that they've lost a quarter of all those lovely profits and simultaneously damaged the very economies they relied on as export markets.

8. Seriously, who really wins out from all this? Answers on a postcard. And don't tell me there's nothing we can do about it because of The Hallowed Green Belt and Poor Widows In Mansions.