"Mortgage rules eased as Bank of England scraps affordability test stokes the flames in the run up to the next big crash in 2025-26"

From The Independent:

Mortgage borrowing rules have been eased by the Bank of England making it easier for thousands of potential homebuyers to get on the property ladder.

It will not make it easier (i.e. cheaper) for first time buyers, it will just force them to borrow larger sums to pay higher prices for what they would have bought anyway.

The affordability “stress” test forced lenders to assess whether people applying for a mortgage would be able to cope if interest rates rose to 3 percent.

The Bank of England said that the change should not be seen as a “relaxation of the rules”, adding that a number of other measures still in place “ought to deliver the appropriate level of resilence to the UK financial system, but in a simpler, more predictable and more proportionate way.” The test was introduced in 2014 following the 2008 financial crash and was designed to stop reckless lending to people who could not afford it.

But hey, let's allow reckless lending again, now that what happened fourteen years ago is fading from memory. It's like banning guns, seeing gun crime fall and then legalising them again on the basis that gun crime is low.

Another rule, which is still in place, limits most new mortgages to a maximum of 4.5 times a borrower’s income. The Bank of England’s financial policy committee said in 2021, after a review of the rules, that this other limit “is likely to play a stronger role than the affordability test in guarding against an increase in aggregate household indebtedness and the number of highly indebted households in a scenario of rapidly rising house prices.”

FFS. How is borrowing 4.5 times your income, especially if it 4.5 x joint income of a couple, not reckless? Back in the sensible days of Georgism Lite, that limit was about 2.5 x main earner's income.

Added to a decent deposit, that's enough to pay for the bricks and mortar value or the cost of building a new one (with a sane profit margin for the builder), which depresses the price paid for the land/location value, hooray. We know this is true because they were building plenty of new homes for FTB's during Georgism Lite (landlords were frozen out by rent controls, tenant protection and high taxation of unearned income), and the insurance value of housing was pretty close to how much they cost to buy.

The other side of the UK house price/credit bubble

The papers are full of articles suggesting that the house price bubble might be about to burst soon. Experience tells us that they are jumping the gun and the next bust is due in 2025 or 2026.

What nobody is talking about yet, but will be from 2025 or 2026 onwards is the next financial crisis. I've found a chart here showing that UK banks' balance sheets have expanded by one-third over the past six years (I tried clicking 25 years, but it won't go further back than 2010). That is about 2.5 times GDP, about £65,000 per capita for every UK resident, entirely unrelated to economic growth and highly correlated with house price increases. You can't say which causes which, they are two sides of the same coin:

Rising to the bait.

Our regular troll posted his usual holier-than-thou gibberish re the 18-year boom-bust cycle:

... it's not clear, but must be a combo of many things, and maybe even things the rational and logical thinking weakling Christian finds hard to accept. For example, in ancient times the business cycle was governed by the Saros, an actual harmonic cycle of solar and lunar eclipses of about 18.6 years.

Now, here's the bit many struggle to even accept as a possibility, notwithstanding the many other possibilities they accept easily yet are no more certain: after many thousands of years of following the sun to determine the great resets, we no longer believe we do that right? But who's to say we still do, yet unconsciously, because otherwise it looks like mumbo jumbo to the enlightenment man?

I propose recessions are directly governed by natural forces fundamentally. We just find that hard to consider because like crazy fools we started to believe we are masters of the universe a few centuries ago as the loyal Christians, we still are.

I offer no explanation for why it is so close to 18 years, it *might* well be something to do with solar and lunar eclipses or some other "mumbo jumbo", so what? The point is that it is a) probably beyond our control but b) predictable. In the same way. most parts of the world have regular winter-summer cycles, we can't control those either but we can predict them and deal with them as best we can.

We deal with the winter-summer cycle by planting crops at the right time; having air-conditioning and central heating; having winter and summer clothing; changing the clocks to maximise daylight hours; stockpiling salt and grit during summer and autumn; etc.

It's the same with the 18-year cycle, we probably can't suppress it. But we can minimise the damage to the economy caused when land price/credit bubbles burst by suppressing them, ideally by taxing land values (and not taxing work and production) and if not, then at least by going back to Georgism Lite. There will still be recessions, but they will be shorter and milder, as they were under Georgism Lite.

That does not make us "masters of the universe", it just makes us masters of ourselves instead of being slaves to bankers and large landowners. It's just a sensible, practical measure, like not sowing spring wheat shortly before winter kicks in.

Set the controls for the heart of the next crash!

Spotted by Lola at Money Age:

The ‘Bank of Mum and Dad’ (BoMaD) will be a driving force behind the recovery of the UK’s housing market in the wake of the COVID-19 crisis, according to new research from Legal & General and CEBR.

L&G revealed that almost one in four housing transactions (23%) will be backed by the BoMaD in 2020, with 24% of borrowers now more reliant on financial support from family and friends.

From The Telegraph, via MSN:

Average house prices rose by a little over £3,000 in August as the property market reversed losses made during the pandemic and hit a new all-time high.

The cost of a home in the UK hit £224,123 in August, a 2pc increase from the month before, according to the Nationwide building society. It also marks a rise of 3.7pc compared to August last year.

It would appear that some at the Bank of England aren't that stupid...

Subsequent to my recent post, Surely, the Bank of England is not that stupid? (the BoE said banks should increase mortgage-to-income multiples if house prices rose), comes this in The Telegraph (also emailed in by Lola):

Ultra-low borrowing costs have fuelled a huge property boom that pushed house prices beyond the reach of young buyers, the Bank of England has warned.

A five-fold surge in house prices over the past 50 years can be “more than accounted for by the substantial decline” in the cost of borrowing, according to research by the Bank.

Its economists warned that even a housebuilding spree would not have stopped a huge rise in prices caused by the long-term plunge in rates - undermining claims that Britain's property bubble has been caused by a lack of new homes.

I assume that they are referring to this Staff Research Paper, which goes into a lot of detail, but can be summarised as follows (exactly as we explain it):

a) Rent as proportion of average gross earnings is very stable, bobbing around at 35% - 40% for the past three decades (Figure 10). So it can't be 'lack of supply' otherwise rents would have increased faster.

b) Rent (a constant) divided by required monthly repayment rate (interest + principal) = mortgage.

c) Mortgage + deposit = house price.

The paper does not seem to make recommendations, although you'd have thought those are obvious...

Surely the Bank of England is not that stupid?

Emailed in by Lola from FT Adviser, subject line 'FFS'.

The Bank of England would expect to loosen its mortgage affordability rules if the UK experienced strong house price growth, it has said.

In a working paper titled Modelling the Distribution of Mortgage Debt, out this week (July 3), the central bank tested the regulation of affordability in two different scenarios — a ‘business as usual’ one and one it named the ‘upside scenario’.

So they not think about what they have just written?

You could just as well turn that first part round and state:

If the Bank of England loosens its mortgage affordability rules, the UK will experience strong house price growth.

To all intents and purposes, credit availability and house prices (aka 'The Housing Crisis') are the same thing.

The thin end of the wedge

From the BBC:

Some 140,000 homeowners are trapped on high interest-rate home loans with unregulated or inactive firms, and are unable to switch to a cheaper deal. The Financial Conduct Authority (FCA) has now said it is considering a change to its affordability checks.

This could allow these people to switch to deals that are easier to pay. At present, they are stuck on high default rates, owing to an FCA requirement - introduced in 2014 - for mortgage holders to meet strict affordability criteria when they apply for a new fixed deal.

OK, so Annie and Bert, took out a six-times income, 100% LTV mortgage under the old reckless lending rules but banks can only lend a 'sensible' multiple like four-times-income. They'll make an exception for Annie and Bert.

What about Claire and David next door, who took out a four-times-income and have done equity release to 'tap into house price growth' and now owe six-times-income?

What about Ellie and Fred across the road who took out personal loans to pay a deposit and a four-times-income mortgage who also owe six-times-income?

If that's OK for Ellie and Fred, what about Georgina and Harry, first time buyers who want to borrow six-time-income but can't? Can they reverse engineer Ellie and Fred's position by taking out two-times-income personal loans and using that as a deposit for a four-times-income-mortgage?

Where's a loophole, there's a way.

"At long last, economists appreciate that private debt was the catalyst for the crisis"

Paul Ormerod in City AM:

A particularly interesting paper in the journal is by Atif Mian of Princeton and Amir Sufi of Chicago. Their focus is considerably wider than the crisis of the late 2000s in the United States. They quote empirical studies across some 50 countries with data going back to the 1960s. They found that a rise in household debt relative to the size of the economy is a good predictor of whether GDP growth will slow down.

Rickard Nyman, a computer scientist at UCL, and I applied machine learning algorithms to data on both public and private (households and commercial companies) sector debt in both the UK and America. We find that the recession of 2008 could have been predicted in the middle of 2007.

This is news? People have known about the 18-year credit/land price bubble cycle for over a century. Fred Harrison predicted the 2007-08 credit crunch in 1997. The Neo-Libs and Homeys like to airbrush this out of history and pretend that economic depressions are somehow random events.

Perhaps the most striking result is that public sector debt played little role in causing the crisis. The driving force was the very high levels of private sector debt.

Again, this ought to have been clear to anybody with half a brain. Labour's deficit spending was A Bad Thing, but clearly not the cause of the credit crunch. I can understand why Tory politicians claim that it was, but I am baffled why so many Labour politicians go along with the lie (a particularly twisted kind of Indian Bicycle Marketing).

A critic might say that this is simply a case of generals fighting the last war. True, we don’t know whether a completely different nasty event lies around the corner. But at long last, economists appreciate the fundamental importance of debt and finance in Western economies.

There'll be another credit crunch in 2025-26, full stop. That is the next 'war' and we haven't properly won the last one yet.

Bubblicious!

Emailed in by Lola, from The Telegraph, which devotes a lot of column inches to pushing 'equity release' schemes:

Interest-only mortgage holders with no way of paying off their loan could be handed a lifeline, as major banks look to get these troublesome customers off their books.

Virgin Money has signed a deal with one of the biggest equity release providers, insurer Legal & General. It offers customers the opportunity to switch from an existing interest-only loan to a lifetime mortgage with the insurer.

(And yes, the article contains a link to another paid for puff piece pushing this.)

Hey ho. It's a sliding scale of twattery:

1. In the good old days, you could pay off a mortgage in ten or fifteen years, most of the monthly (or weekly?) payments were principal and some of it interest. The outstanding loan was paid off quickly.

2. House prices have been pushed ever higher and nominal interest rates ever lower, so a normal first time buyer mortgage can only be paid off over twenty-five to thirty years. Most of the monthly payments are interest and some of it principal. The outstanding loan is paid off more slowly.

3. Take it one step further, we have the interest-only mortgage. All of the payments are interest on none of it principal. The outstanding loan is not paid off at all.

4. The final step is equity release; there are no regular payments and the outstanding loan increases over time until it has swallowed up the entire value of the home. The interest-rate is correspondingly higher.

So, having mucked up by allowing people to move to level 3, they think they can fix things by letting them move to level 4.

Hmm.

Fits in nicely with the Home-Owner-Ist narrative, hard working home-owners with their justly deserved unearned land price gains, for which they clearly never paid, victims of those evil banks (who pumped up their unearned land price gains) being bailed out by those generous insurers, who will ultimately claw it all back again, if not, they'll just be bailed out by the taxpayer.

And... it comes back to bite them.

From the FT:

First-time buyers who used the government’s Help to Buy scheme to get on the property ladder are finding they need help to remortgage, as many big lenders refuse to offer them finance. Under its flagship home ownership scheme launched in 2013, the government offered borrowers an equity loan of up to 20 per cent of the value of a new-build home, rising to 40 per cent in London.

These loans are interest free for the first five years. Following that period, borrowers must then pay interest of 1.75 per cent, increasing by RPI (retail price index) plus 1 per cent, on top of their normal mortgage repayments.

Only eight out of 25 lenders said they would offer remortgages to new customers who had yet to pay off their government loans, according to figures provided to the Financial Times by Homes England, the housing regulator. This could leave buyers and “second steppers” who used the Help to Buy scheme facing reduced choice and higher fees when they come to remortgage.

Well, colour me surprised. No doubt the government will launch Help To Remortgage to keep the plates spinning for another few years.
-------------------------------------------------------
Via Lola, a primo bit of squealing from FT Adviser:

Calls to scrap the Lifetime Isa (Lisa) have been branded "nonsensical" by investment providers.

Last week (26 July), the Treasury select committee (TSC) recommended abolishing the Lisa. However, industry figures such as Martin Stead, chief executive at Nutmeg, have questioned the financial and ethical implications of doing so.

He said Nutmeg has more than 11,000 Lisa customers, managing in excess of £50m, with high levels of customer interest since launch. He said the popularity of their Lisa has resulted in roughly £12.5m in government bonuses for Nutmeg's customers and he called the TSC’s report, calling for its abolition, "nonsensical".

"Resulted in £12.5 million of bonuses"?? More like "resulted in additional costs to the taxpayer of £12.5 million and higher house prices somewhere down the line".

Here we go again...

We appear to be reaching the mid-cycle dip in the eighteen year credit/land price bubble cycle and land prices seem to have flattened off (at a high level), not just in the UK but globally.

What they plan is not so much pouring fuel on the fire as spraying napalm on smouldering embers to try and get things going again:

1. Young people should get government loans to pay for first house deposit, new report suggests This is tinkering at the edges, all they'd need to do is extend the Help to Buy scheme (or 'Help to Sell', from the point of view of home builders) to 'second hand' homes and abandon the requirement that people wishing to use the scheme have to drum up at least a five per cent deposit.

2. The Halifax is offering to lend customers up to six times their income to help buy a house. Enough said.

3. And to nail things down and enable a lifetime of debt slavery (via Lola)... New mortgage offers financial help for struggling retirees.

Reinventing the wheel, although it's a good wheel to reinvent.

This IPPR report has some good stuff in it, in among the waffle (as you can see from the excerpt below). The recommendation that was given most attention (favourable and unfavourable*) is that house prices could/should be stabilised by capping loan-to-value and loan-to-income ratios:

Currently, the FPC achieves its objectives via controls on loan-to-value and debt-to-income ratios allowed by mortgage providers, and controls on the proportion of mortgages in bank portfolios. The FPC recently implemented a loan-to-income ratio of 4.5 for 15 per cent of new mortgages, even though the Bank of England recently estimated that around 11 per cent of mortgages exceeded this ratio in 2015 (Chakraborty et al 2017).

Implementing targets that bite requires giving the FPC a strong mandate to limit asset price inflation. Since house price inflation is different in parts of the country, the FPC’s guidance should be regionally specific. There is a risk that a target for house price inflation, tackled through macroprudential tools, could inadvertently increase inequality, by reducing access to credit for the  poorest borrowers**. To mitigate this risk, we recommend that the exact nature of the target, and the tools the FPC be given to achieve it, be determined jointly by the Bank of England and the Treasury, and be put out for consultation before being implemented.

House prices are also determined by other factors, not least the supply of housing, and therefore adoption of the target would need to be accompanied by a much more active housing policy. This might include public housebuilding, changes to planning policy, and curbs on overseas purchases of UK homes (Ryan-Collins et al 2017). The FPC should be able to request that the government do more with housing policy if it judges that it will be unable to meet its target through macroprudential tools alone.

It is also worth noting, however, that recent research has shown that the level of mortgage lending is the primary determinant of house prices (Ryan-Collins et al 2017).

Well duh, this is what building societies did until the 1980s. And it worked a treat, getting rid of these limits was a key part in stoking the Home-Owner-Ist bonfire. The report doesn't emphasise enough that this is all tried and tested IMHO.

* The nutters at CapX are sticking to the Faux Lib orthodoxy that it's all about supply and lax lending has nothing to do with it, despite the report going to some length to provide evidence to support their opposite and correct explanation.

** They are undermining their own case here. Credit bubbles are an arms race. By being allowed to borrow more, every borrower ends up worse off, rich and poor alike. It is quite possibly the case that higher income borrowers will see bigger absolute savings than lower income people (in fact, mathematically that must be true), but so what? Overall equality (taking earnings and housing wealth together) will increase, and higher income and lower income aren't competing to buy the same houses anyway.

Even the Homeys at CityAM must have realised how ridiculous it sounded...

From the paper version of City AM:

Between August and September, prices rose 0.8 per cent on a seasonally-adjusted basis, with first-time buyers found themselves paying an average of 4.3 per cent higher than in September last year.

It's an encouraging sign for the market, after figures over the summer suggested the chancellor's cooling measures - which included a hike to stamp duty and rules limiting how much mortgage customers can borrow - were beginning to take their toll.

They added a few extra words to the online version:

It's an encouraging sign for the market (or discouraging for buyers), after figures over the summer suggested the chancellor's cooling measures - which included a hike to stamp duty and rules limiting how much mortgage customers can borrow - were beginning to take their toll.

And how any sensible person can be opposed to limiting the amount of money banks can create when houses are bought and sold is a mystery to me.

Fun Online Polls: Politicians, credit and dead pigs.

The results to last week's Fun Online Poll were as follows:

How many politicians call for more bank lending while simultaneously wailing about the increase in debts?

Refreshingly few - 0%
Depressingly many 98%
Other, please specify - 2%

Correct.

By the way, people don't seem to have got the hang of this "Other, please specify" option; if you choose that, you have to leave a comment as well.
----------------------------------
This week, the one question on everybody's lips, or at least every dead pig's:

"Have you ever f***ed a dead pig?"

Vote here or use the widget in the sidebar.

George Osborne's economic miracle

Is just a carbon copy of Blair-Brown's isn't it?

Since I started taking a closer interest in these things, i.e. a year or two before I started 'blogging, it must have been clear that the entire 'growth' in the economy since the late 1990s was fuelled by two things:

1. A house price/credit bubble incl mortgage equity withdrawal.

2. Government deficit spending.

This is not a sustainable model, of course, so the relative shares of these two in contributing to nominal growth shifted from the fomer to the latter. Blair-Brown managed to keep it going for ten years until the wheels came off in 2007 (Northern Rock) although many consider the official end to be in 2008 (Lehmann Brothers).

Whatever we slagged the Blair-Brown government off for applies in spades to the current lot.

They realise that household borrowing to fund land speculation had reached an upper limit of about £1,200 billion (this total has hardly changed for the last five years) so they are resorting to ever more desperate measures (Help To Sell, interest rate subsidies, inflation, general mood music etc) to squeeeze out the last few drops.

Their cunning plan is only working in London and the South East, in the rest of the country, house prices have been pretty much flat for a decade, if you adjust for inflation.

So they then turn to Blair-Brown's secret weapon #2, government deficit spending. It's a good excuse to nick loads of money for themselves and their kleptocrat chums, but they are running a deficit of at least 7% of GDP and have been doing for four years (or about six years if gloss over the personnel reshuffle at the top of the UK government four years ago).

And all this is only producing nominal growth of 2% a year or something, which is probably not real growth at all. Whatever happened to the lefties' favourite weapon, the multiplier effect? If there were such a thing (there isn't) then surely that 7% deficit would be producing at least 8% growth?

Some recovery, huh?

"UK economy growing at fastest rate since the peak of the last credit and house price bubble"

From the BBC:

The UK economy grew by 1.9% in 2013, its strongest rate since the last peak of a house price and credit bubble in 2007, according to the Office for National Statistics (ONS).

But gross domestic product (GDP) growth for the fourth quarter slipped to 0.7%, down from 0.8% in the previous quarter, it said. And economic output is still 1.3% below its 2008 first quarter level,

"We've seen growth in those parts of the economy which benefit from high house prices, artificially low interest rates and lax lending," said Joe Grice, chief economist at the ONS.

"The FIRE sector, and London in particular, is lapping it up, just like they did in the years leading up to 2007."

Responding to the figures, Chancellor George Osborne said: "These numbers are a boost for the economic security of hard-working bankers and estate agents. It is more evidence that our long-term economic plan is working.

"For them, at least.

"But the job is not done, and it is clear that the biggest risk now is that the bubble pops again just before the 2015 General Election, to allow that to happen would be abandoning the plan that's delivering jobs and a brighter economic future to our party donors."

Ed Balls, Labour's shadow chancellor, said: "Today's growth figures are welcome and long overdue cut and paste job of Blair-Brown's economic policies after three damaging years of flatlining.

"But, for working people facing a cost-of-living crisis, there's always the possibility of a bit of mortgage equity withdrawal. Beats working, doesn't it? You only end up paying tax on that. Their kids can pay it all off afterwards."

Well duh: "A credit boom before each bust"

Douglas Carswell in The Spectator states the bleeding' obvious:

Here is a graph that shows the four economic downturns Britain has been through (red lines) over the past forty years.

What I find strking is that each downturn was preceded by the same thing: a surge in the growth of money (blue line). In other words, the bust followed an unsustainable credit-induced boom…

The man in the street can't see the increase in credit or the credit bubble, as it is a bit abstract, but what we can easily see is land price/house price bubbles, which are always debt fuelled.

That's where nearly all the extra credit goes - into buying and selling the same old land and buildings which have always been there, they are already built on/built and so little need for further investment above and beyond annual maintenance etc.

You can't have a credit bubble without a land price bubble and vice versa, they are the same thing, two sides of the same coin.

And we know how to dampen land price speculation (and reduce taxes on real economic activity and investment), don't we?

The supply and demand curve for "money" (2)

Continuing my post of last week, where I looked at the supply and demand curve down to about the interest rate which people are or would be prepared to borrow to spend on bricks and mortar, which is about 8%.


If we just look at this supply and demand curve, we observe that the net return to savers is pretty flat whoever the borrower is.

But there is something else dictating interest rates. There is a subtle difference between 'saving' and 'investing'. Basically, households 'save' and businesses 'invest'. (It is quite possible that household savings go into business investment, which is double plus good, but that is a overlap and not the main event).

The distinction is this: let's say a farmer normally harvest 52 units (weeks' worth) of food, exactly enough to see himself through the whole year. In a hypothetical good year he harvests an extra 20 units.

i. He can 'save' those 20 extra units by selling it to hungry people on credit, so when the harvest is not so good, he can call in the loan of food. He can also demand the payment of interest on that loan (he gets back more food than he lent out), so in future, he could, if he wished, consume an extra 2 or 3 units a year for the rest of his life, but that is only at the expense of the original borrowers, who have to make do with consuming 2 or 3 units less than otherwise.

ii. Or he can 'invest' that food by exchanging it for better implements, or by exchanging it with somebody who will improve his walls and drainage. In future, the farmer can now produce 2 or 3 extra units of food each year, but without anybody else having to consume less.

That is what drives the minimum interest rate which 'savers' will accept. If the farmer knew he could increase his future potential harvest by an extra 4 units a year by 'investing' 20 units this year, then a buyer on credit would have to offer to pay at least 4 units a year in interest before the farmer will consider 'saving' rather than 'investing', and so on.

(The problem is that savers cannot just invest in productive assets, because those are all monopolised by limited companies, so before savers can get a share of the profit from the underlying productive investment, they have to pay a ransom payment to an existing shareholder, which pushes up returns to existing shareholders at the expense of future shareholders and the economy in general, separate topic).

As we observed last week, the interest rate which people are willing to pay depends largely on how much they need to borrow, how quickly they need to spend the money, and how soon they hope to pay it back.

That all makes sense so far and the arrangement is to our overall benefit. Where it goes crazy is once interest rates drop below that rate of approx. 8%:

Broadly speaking, the descent into insanity goes in the following three stages, but the general rule is still that the further into the future the borrower's hoped for extra consumption will be, the lower the interest rate he is willing to pay:

1. If you can borrow money for less than 8%, then the lower interest rate just goes into higher land prices (rather than bricks and mortar), i.e. if you can rent a house for £6,400 (net of landlord's costs) and borrow at less than 8% to buy the building, you are happy to do so. But if you can borrow at (say) 5%, it is worthwhile paying/borrowing £128,000 (it still only costs you £6,400 a year), and that extra £48,000 just goes into the land monopoly black hole.

2. If people expect nominal land prices to continue to rise at a long term rate of 5% or more a year, then if you can borrow at less than 5%, it makes sense (on an individual level) to buy land for the sake of it (money into the LMBH), whether you need it or not, because you can realise a gain (more money into the LMBH) in future which will pay off the interest for you.

3. Because bankers seem to get paid according to the volume of loans they can make, rather than the bank's actual profit margin, bankers try to "grab market share" by lending out at very low rates (Bradford & Bingley, Northern Rock etc), the bank itself (the bankers' employers) make losses on such loans of course. It is no coincidence that the cumulative losses of all UK banks over the credit bubble decade were approx. equal to the total bankers' bonuses paid in those years.

None of these three stages are of any remote benefit to society in general or the productive economy as a whole, and are in fact incredibly damaging. They do not help people spread consumption over their lifetimes by borrowing/saving; they do not lead to any investment in productive capacity.

Bricks and mortar are of course productive capital if they are in the right place, but the land is not, and even it were, pushing up the price does not increase the amount available - and a society which believes that house price rises are A Good Thing tends to be a NIMBY society, so we end up with less productive capital (housing, factories and so on).

Why UK and other governments think it is a good idea to constantly nudge the economy towards these final three stages, and why so many people go along with this nonsense is a mystery to me.

Fair play to the Homey-In-Chief

From today's City AM:

GETTING IT RIGHT

Readers have been writing in to urge me to add names to my list of UK-based monetarists, Austrian and other economists, City analysts and politicians who foresaw the crash.

New entrants to my economic walk of fame include Lord (Howard) Flight, the Tory peer, City grandee and former front bencher who was disgracefully treated by his party (he warned of a coming crunch in his 2005 shadow budget), Jonathan Ruffer of the eponymous fund management firm, and Bernard Connolly, a brilliant economist who worked for AIG at the time but was ignored by his company (he now works for Hamiltonian Associates).

Writing in The Chaos Makers in 1997, Fred Harrison of the Georgist-leaning Land Research Trust, made an eerily accurate prediction:

“By 2007 Britain and most of the other industrially advanced economies will be in the throes of frenzied activity in the land market to equal what happened in 1988/9. Land prices will be near their 18-year peak, driven by an exponential growth rate, on the verge of the collapse that will presage the global depression of 2010.”

I’m not a Georgist and disagree with many of that philosophy’s tenets, but this was pretty spot on.

The HIC is definitely a Home-Owner-Ist and not a Georgist, but he's never actually said why he disagrees with it apart from the usual "attack on wealth" nonsense. Are things like taxes on output and profits, planning restrictions and recurring financial recessions not themselves "attacks on wealth"?

"Key risks to the UK financial system"

From page 2 of the Bank of England's Systemic Risk Survey 2013 H1:

There are three new entrants to the top seven risks: the risk of property price falls (cited by 25% of respondents, up 11 percentage points), operational risk (up 10 percentage points to 24%), where 'cyber' security was most frequently mentioned, and risks surrounding the low interest rate environment (the fastest growing risk, up 16 percentage points to 24%).

Participants' perceptions of an increased risk of property price falls (in particular residential property price falls) could be consistent with views of prices becoming overinflated or about to become overinflated. Responses in the low interest rate category focused on the risk that artificially low interest rates are creating distortions in asset allocation, potentially leading to overinflated risky asset prices.

The complete and utter po-faced state of denial here is staggering.

It is the self same Bank of England which is pushing down interest rates with the sole aim of driving up asset prices (as distinct from their values), which for the man in the street means land prices i.e. a house price bubble.

Some older savers are rightfully unhappy with miserably low interest rates and annuity rates, but happily, the Bank of England has blinded or bribed a larger majority with the Fool's Gold of a house price bubble. And if ever their lovely bubble looks in danger of popping, well, there's only one thing for it isn't there? Reduce interest rates even further in the vague hope that they can fob off the priced out generation by telling them at least interest rates are low and there's always the Help To Sell scheme to help them onto the ladder etc.

Under Wadsworth's Square Law of Nequity, it is overall far, far cheaper to allow house prices to fall and to write down individual loans to the new lower value of the homes on which they are secured (so that nobody is stuck in nequity for years) than it is to try and keep a house price bubble inflated. The former is a knowable and affordable sum of money and this solves the problem. The latter is a huge and unknowable sum of money that merely results in larger costs in future.

But for some reason, they can't and won't contemplate that.