"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.

"It's different this time."

Spotted by Lola. From This Is Money:

The Bank of England is considering easing mortgage rules in a move that could boost house prices.

The central bank, led by Governor Andrew Bailey, will announce next month whether lenders can increase the volume of large mortgages they dish out. Banks are limited in the home loans they can give to borrowers who need more than 4.5 times their salary. These customers must represent no more than 15 per cent of the new loans that banks issue.

The Bank of England referenced the rules in an update last month, saying 'there has been little evidence of a deterioration in lending standards or a material increase in the number of highly indebted households'.

a. This will all go horribly wrong again in 2025-26, just like it did in 2007-08. And in 1990 and 1973, although those busts weren't as bad as 2007-08 because back then we still had some Georgism Lite policies keep a bit of a lid on prices.

b. They appear to be perfectly aware that easing loan restrictions push up prices by the same amount, so actually it doesn't help anybody onto 'the ladder', they buy the same house but with more debts.

The 18-year house price cycle

Just for fun, using Nationwide's numbers for UK house prices adjusted for inflation.

The previous three troughs were 18 years apart, +/- six months. The previous two peaks were exactly 18 years apart. If this repeats, the peak average house price will be over £300,000 (adjusted for inflation) in mid-2025, and then it will all turn to shit again.

Land Value Tax would sort out this nonsense.

Another Official Property Scam

Recently there was a piece on Radio 4 about "shared ownership", which is buying a house on the never never, but with the added joy of paying a mortgage on the part that you "own".

As far as I can see this is yet another "initiative" to try to blow some air into the housing bubble and get round the rules on lenders designed to stop borrowers reducing themselves to penury whist they desperately try to get access to the magic money tree that is housing in the UK. It combines the worst aspects of renting - it's not your house to do what you want with - with the worst aspects of buying - the properties are leasehold and, so long as you only own a small percentage, your share is almost unsaleable, so you are stuck with it.

It has all the makings of a mis-selling scandal of the future, I expect the ambulance chasers are already gearing up.

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.

"London on course to become next house price bubble fatality, warns UBS"

From The Telegraph:

Soaring house prices in London have fuelled a "bubble-risk" that has left the capital most in danger of a correction out of all major cities in the world, UBS has warned.

The Swiss bank said foreign demand from investors seeking safe-havens, the Government's help to buy scheme and "alluring yields" on buy-to-let investments had all "propelled London house prices to new heights" as demand continued to outstrip supply.

It's a bit late for that, but actually, the report said that it was artificially low interest rates/easy credit  which pushed up prices, which is indisputably true.

Further, The Telegraph completely contradicts itself. If the yields on buy-to-let are "alluring" than that means they are high, or at least higher than mortgage rates. So for a given absolute rent, that means that selling prices are if anything on the low side relative to rents. Which they are not, so it's factually incorrect as well as flawed logic.

And 'lack of supply' has nothing to do with it:

Its real estate bubble index shows London property is now the second-most unaffordable of the 15 cities studied by UBS, behind only Hong Kong.

The next most expensive places are of course Sydney, San Francisco, Vancouver, Amsterdam, Geneva, Zürich and Paris etc.

So we note as an aside that the most expensive five places are in the Anglosphere.

But we also note that most of the cities on the list are also the largest cities in each country or state*. By definition, those are the places with the most supply, so you can increase supply and people keep coming along and living in the new homes, hey presto, the new homes are now too off the market but the city is even larger.

What happens to prices then?

* Zürich and Geneva are the two largest Swiss towns, their populations are only 366,000 and 178,000 but Switzerland is attractive for other reasons. San Francisco is not that big (850,000), but it is just nice and exclusive, and Sydney and San Francisco also have a large premium for being near the coast - even in the UK where nowhere is that far from the coast, there is a massive premium for houses with a sea view.

Fun Online Polls: Jeremy Corbyn & The Global Financial Crisis

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

You will/would you vote for as leader of the Labour Party?

Jeremy Corbyn - he'll make Labour unelectable = 41 votes
Jeremy Corbyn - I might not agree with him, but at least he has principles = 28 votes
Jeremy Corbyn - I agree with the majority of his policies = 3 votes
One of the three faceless soft-centre Tory-lite candidates = 2 votes
None of the above = 16 votes
Other, please specify = 1 vote

I think he's got this one sewn up.

Thanks to everybody who took part.
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Something which has been bugging me for years is the Tory notion, subscribed to by the three out of four Labour leadership contenders who aren't Jeremy Corbyn, that the UK has been mired in recession for the last seven years because Labour was running up deficits in the preceding years.

That is the Economic Myth from Hell, if you ask me. Of course Blair-Brown are guilty as charged when it comes to their part in stoking the UK land price bubble and then transferring bank liabilities to the taxpayer, but the Tories have merrily continued this strategy and in any event, the Tories are running far larger deficits than Labour did.

Just as sickening is the Tory notion (again, subscribed to by the other three Labout leadership contenders) that this should be blamed on people now under 25 over-claiming benefits instead of working. Apparently, we can fix the deficit by taking away their benefits; this will magically get them all into jobs; and this in turn will magically put the economy on the road to recovery. That's like blaming a war on dead soldiers and civilians.

But what do you think?

Vote here or use the widget in the sidebar.

Reader's Letter Of The Day

From the FT:

Sir, David W Green (Letters, December 1) is right to point out that some money goes the way of spenders from savers through the low bank interest rates that so disadvantage savers.

But most of the low-rate bank lending goes on property, often producing bubbles, which Martin Wolf would cover by imposing a from hereon land value tax acting in a Pigouvian manner to disincentivise further over-investment in the inelastic supply of land.

DBC Reed, Northampton

Reader's Letter Of The Day

From The Evening Standard (20 May 2014, page 40):

It's disappointing that so many newspapers have allowed the Governor of the Bank of England to get away with blaming the UK house price bubble on lack of new supply and holding up his home country Canada as a counter-example.

Yes, per capita, Canada is building three times as many new homes as the UK, but they are suffering a house price bubble every bit as bad as ours - one which he presided over until his move to the UK.

Mark Wadsworth, Young People's Party.

Carney's Canada comedy

From the BBC:

Mr Carney will say: "When we look at domestic risk, the biggest risk to financial stability and therefore to the durability of the expansion [of the economy] those risks centre in the housing market."

Mr Carney says the fundamental problem was a shortage of homes - and the Bank of England had no solution to that...

He will say in the interview: "There are not sufficient houses built in the UK. To go back to Canada, there are half as many people in Canada as in the UK, twice as many houses are built every year in Canada as in the UK and we can't influence that.

So as a result, there was no house price bubble in Canada..?

From CBC News:

Vancouver ranks second only to Hong Kong in having the least affordable housing, according to Demographia's 10th annual survey of 360 housing markets in nine Western countries.

The survey divided median housing prices in Australia, Canada, Hong Kong, Ireland, Japan, New Zealand, Singapore, the U.K. and the U.S. against median gross household income to come up with its ratings.

Under this rating system, homes in Vancouver cost 10 times median income compared with 15 times income in Hong Kong. Three times median income is considered affordable.

Read the full Demographia report.

"Bank of England rate rise panic: police hunt for man who dumped house price increase"

From The Evening Standard:

Police were today hunting for a man who abandoned an average monthly London house price increase in the middle of the street outside the Bank of England causing a massive interest rate rise panic.

Bank Underground station was closed and all roads around the area were sealed off while maco-prudential tools were deployed to defuse the threat of a rate hike.

Witnesses said the man left a dark green Toyota Avensis - believed to be worth approximately as much as the average monthly increase in value of a typical London home - abandoned in the road at the junction outside Bank station before walking away...

City of London police said the interest rate time bomb was made safe at around 1pm today, two hours after first arriving at the scene. Tougher affordability tests were used to check out the price increase before it was examined by officers in protective clothing.

A spokesman for the Bank of England said there had been talk of a bubble which proved unfounded but added that employees continued to remain vigilant.

I assume that they look at the same charts as everybody else...

From The Evening Standard:

The historic owner of swathes of Mayfair and Belgravia today said it had sold off hundreds of millions of pounds worth of “super prime” property in London because of fears about the capital’s overheating market...

Grosvenor’s sell-offs included 11-15 Grosvenor Crescent, which it sold in December last year for £114 million to private developer Wainbridge. The company pumped sale proceeds into rental schemes in more affordable areas of London such as Bermondsey.

Here's a chart of Nationwide's average prices in London compared to the rest of the UK (excl. Outer Metropolitan), if they published the figures for Central London it would be far more extreme:
Assuming your aim is to collect as much rent as possible and you are indifferent to absolute house prices, it would have been a good strategy to simply sell up in London and buy 'everywhere else' at the peaks and then buy back into London in the troughs. Which is presumably what these ultimate rent seekers are doing.

This might be like 1988 all over again...

From Wiki:

Mortgage interest relief at source, or MIRAS, was a scheme introduced in the United Kingdom by Chancellor of the Exchequer Roy Jenkins in 1969 in a bid to encourage home ownership; it allowed borrowers tax relief for interest payments on their mortgage.(1)

In the 1983 Budget Geoffrey Howe raised the tax allowance from £25,000 to £30,000. Unmarried couples with joint mortgages could pool their allowances to £60,000, a provision known as Multiple Mortgage Tax Relief.

This remained in place until the 1988 Budget, when Nigel Lawson ended the option to pool allowances from August 1988. Lawson later publicly expressed regret at not having implemented the change with effect from the time of the budget, as it is generally accepted that the rush to beat the deadline fuelled a sharp increase in house prices.(2, 3)

1) As we well know, the first really big post-war house price bubble was between 1970 and 1973, probably largely as a result of this subsidy, which duly popped.

The UK government then rushed to stoke inflation in order to mask the resulting house price declines. Back in the day the UK still had fairly strict currency controls, so they could do this quite easily and so nominal prices did not really go down at all.

2) So maybe part of the explanation for the recent meteoric rise in house prices, in London and the South East at least, was people rushing to beat the deadline before the new Mortgage Market Review came in:

From 26 April lenders will have to stress test borrowers' affordability to take into account the impact of expected future interest rate increases with reference to market expectations over the next five years...

Coreco director Andrew Montlake says: "Lenders are now stress testing against rates of around 7 per cent, so for those borrowers who do take lower fixes initially they are already being underwritten as being able to afford a higher rate when that expires in two years' time."

Crikey. Seven percent!

3) Getting rid of Domestic Rates and replacing it with the Poll Tax managed to maintain the price momentum for another year or so, but we all remember what happened to house prices after that double sugar rush had worn off - see chart from (1).

China's plopelty bubbre 'FINARRY AT BULSTING POINT'

Flom The Maraysia Chlonicre:

BEIJING - Businessman Arren Zhao has been waiting since the middre of rast yeal fol plices in the scenic southeln city of Hangzhou to lise high enough this yeal to serr his two-bedloom apaltment fol about 2 mirrion yuan (S$405,300).

Rast Monday, he was hollified to heal that his neighboul ret hel prace go fol just 1.7 mirrion yuan.

"That is not much mole than the plice I paid in 2012," said a luefur Ml Zhao, 45. "Now I'm legletting not serring ealriel - mole bad news about the plopelty malket keeps coming in evely day."

The plopelty sectol woes have kept coming: avelage new home plice lises acloss the countly have srackened fol thlee stlaight months; plopelty deveropels in big cities ale offeling discounts to plevent sares flom prummeting; and foleign investment in China's lear estate has farren to the rowest in at reast a decade.

Arr this has red to Nomula economist Zhang Zhiwei citing a plopelty malket downtuln as the biggest lisk to the Chinese economy this yeal and next yeal.

Fun Online Polls: High house prices or high wages & smoking in cars

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

For a given size of an economy, which would you choose:

High house prices, low wages - 4%
High wages, low house prices - 96%

There was an impressive (by this blog's standards) turnout of 576 votes, achieved by linking to the poll in several places.

The result is pretty conclusive, and this shall henceforth be my new campaign slogan.

If people are interested in how this would be achieved, we can steer the conversation round to how things used to be in the good old days (hefty Domestic Rates keeping prices down) and see how it goes.
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THis week, smoking in a car with a child present.

Vote here or use the widget in the sidebar.

"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?

George does statistics

From The Evening Standard:

George Osborne today denied his controversial Help to Buy scheme is fuelling a London house price bubble.

The Chancellor stressed three-quarters of people using the government-backed mortgage initiative lived outside the capital and South-East.

That's probably because three-quarters of the UK population live outside the capital and the south east, isn't it?

Reader's Letter Of The Day

From the FT:

Sir, I was glad to see Merryn Somerset Webb’s article “The perfect tax” (House & Home, September 28), but I would like to respond to one point.

Ms Webb refers to an out-of-control property bubble in the US from which, as far as she can see, Pennsylvania was never immune. It should be noted that only 20 or so towns in Pennsylvania have (partial) location value taxation, so a property bubble that included, at least, other parts of Pennsylvania does not refute the idea that an LVT can suppress the boom and bust cycle in real estate.

Also, the boom and bust cycle was notably severe in California and Florida, which have low property taxes, and mild in Texas, which has no income tax and relies to a larger extent on the property tax.

Nicholas D Rosen, Arlington, VA, US.

Just to back that up with some boring statistics:

The IRS isn't the only one who wants a piece of your paycheck - 41 states have a broad-based individual income tax. Only seven states lack an income tax altogether. They are:

Alaska
Florida
Nevada
South Dakota
Texas
Washington
Wyoming

Two states have a limited income tax on individuals. These states tax only dividend and interest income:

Tennessee
New Hampshire

Will I Pay Less Taxes Overall in These States?

Not necessarily. States need revenue to function, and these states will have to make up for the lack of income tax somehow. New Hampshire and Texas, for example, make up for it in property taxes. Both states have some of the highest property taxes in the nation. The cost of higher property taxes, sales taxes, fuel taxes, and other taxes could amount to higher overall taxes in some of these states.

That being said, most (but not all) of these states did make the Tax Foundation's top ten list of states with the lowest overall tax burdens.

And quoting from The Tax Foundation:

To rank the state’s tax burdens, the Tax Foundation compared the total taxes that state residents pay as a percentage of per capita income. Included in the total taxes are local taxes such as property taxes and local sales taxes. The states whose residents pay the least in taxes are:

Alaska at 6.4% of income
Nevada at 6.6% of income
Wyoming at 7% of income
Florida at 7.4% of income
New Hampshire at 7.6% of income

It’s interesting to note that none of these states have an individual income tax.

"Quick! Pour more accelerant on the fire!"

Via Ennui at HPC.

It must be clear to everybody that the Conservatives' re-election hopes are largely pinned on stoking a nice house price bubble before 2015 to create the "feel good factor" which has been key to winning more or less every UK General Election for the past few decades.

But oh no, what's this?

The August data from Land Registry's House Price Index shows an annual price increase of 1.3% which takes the average property value in England and Wales to £164,654. The monthly change from July to August shows an increase of 0.1%...

The region in England and Wales which experienced the greatest increase in its average property value over the last 12 months is London with a movement of 7.1% and the North West experienced the greatest monthly rise with a movement of 1.3%. The region with the greatest annual price fall is the North East with a decrease of 2.2%. Wales saw the most significant monthly price fall with a decrease of 2.1%.

So their votes might be looking pretty safe in London/South East for the time being, but it's ebbing away elsewhere.

But fear not, help is at hand:

Polling since Mr Miliband’s speech last Tuesday suggests that his policies are popular with voters, who have seen their energy bills rise sharply, while average wages have stalled. Mr Cameron believes that too many young professionals are being priced out of the property market because they cannot raise enough money for a deposit.

The Help to Buy mortgage guarantee scheme will be brought forward from January 2014 to next week.

Under the three-year scheme, the Government will provide up to £12 billion of “guarantees” to encourage mortgage lenders to offer more loans worth 95 per cent of the price of a property. The government guarantees are needed to reassure banks and building societies because of the risk that mortgage holders with such high loan-to-value deals will default.

The scheme is expected to enable banks to release £130 billion of loans for buyers of properties worth up to £600,000 who could not raise a larger mortgage deposit on their own. A smaller government loan scheme for people buying newly built properties began in April.

To cut a long story, the very same people can't afford to scrape together a decent deposit on an over-priced house are being expected to be able to repay a mortgage on a house where the price has been pumped up by yet another fifteen per cent or so?