Sunday, 16 September 2007

"Cameron hits out over bank crisis"

"Flails arms petulantly and stamps foot on ground" more like.

Take a note of this Dave:

1 - NuLab are overspending massively, but apart from the fact that they don't include future public sector pension liabilities in official government net debt, I am afraid to say, that the official debt-to-GDP ratio is lower than ten years ago, altho' it is rising again*. I wish they'd wasted less and paid off more debts, but there you go.

2. - There is no particular correlation between government borrowing and private borrowing. If anything, you'd expect there to a negative correlation - if government borrows, then it pushes up interest rates, so you'd expect there to be less private borrowing. In any event, what does government borrowing have to do with the Northern Rock collapse?

3 - Yes, there has been a massive expansion of private debt. That's called a credit bubble. And, what's the other half of a credit bubble? An asset price bubbble. And which assets are we talking about? Residential properties. As soon as credit tightens a bit, then *pop*, there's your house-price crash. Are you, as Tory leader brave enough to point out that everybody's house if massively overvalued? Nope, I thought not.

What do they teach them on the Politics, Philosophy & Economics degrees nowadays?

What do they teach them at Eton, for that matter?

*The official figure for government debt is £600 bn-odd. The true figure for government debt would include a further few billion for PFI stuff, and approx. £1,000 billion for unfunded public sector pension liabilities, so it would be two-and-a-half times the official figure, but I do not know what the corresponding adjustments would be to the official figure of ten years ago.


Anonymous said...

It isn't so much a question of Dave being brave, it's more like a complete waste of breath trying to explain to anybody that the house they are selling is not necessarily going to reach the market price they think it should.

The average person thinks of worth as a fixed thing rather than a point of mutual agreement. If there were more haggling in day-to-day life they might get the idea, but there is really very little negotiation in most peoples' lives.

Even when estate agents signal that negotiation is in order, such as putting 'OIRO' and 'asking price', people still don't seem to take the hint, no matter how many daytime TV shows about auctions they have watched.


It will be interesting this time round to see what effect, if any, the internet has on the supply of houses for sale.

Last time out that housing bottomed, which I would put at 1995-6 depending on the area, market information was still highly dependent on either requesting property details by phone or going round to the estate agent and going through the catalogue. It could even take a little while to find out which estate agents were in an area as the internal admin at that point meant that even offices in the same chain were reluctant to share information, regarding any enquiry as 'theirs'.

This meant that if you said you wanted a house two hundred miles away, they would look blank and say 'why don't you just stay here and buy a house from us?'

There was one point at the bottom of the market where sellers just would not come out to play. I walked in to one estate agent where the bemused lady said 'I'm sorry. I just haven't got any houses in the mid-range. None'

I had to do a move across country at that point, and it was still very difficult to find out all you might need to know about proximity to schools etc.

Now, with the searchable property lists, some of the land registry on public access on line, and plenty of area information including interesting applications of Google Earth, finding out about a property and its location means I can build a detailed picture in a single morning out of what might have taken two weeks previously.

So it could go either way. In general, widespread information helps keep a market turning over simply by bringing more buyers and sellers together to increase the chances of a transaction.

On the other hand, people may be able to compare price and availability much more easily and come to the conclusion that if they wait, the prices are going to drop.

The trick - as ever - will be to be standing with cash, ready to go on the day after the estate agent runs out of houses, because surely the next instruction marks the point where the tide starts to turn again.

Mr Raft and I disagree about the effect of HIPs on the volume of sales. He says they will have a negligible effect, I think they represent a huge psychological barrier to sellers, while doing bugger-all for purchasers except create a thousand pound argument about why the sellers won't reduce the price any futher.

I base that argument on the observation that despite what they say, a huge number of sellers are manifestly not 'serious' until the point they find somewhere they would much rather be, which is not an easy trick. It is difficult to explain or quantify, but it is glaringly obvious when you walk round a house which sellers mean it and which ones are looking for a reason to collapse the deal.

Instead of coming in to the market and going ahead with a sale if they find the right buyer, these sellers will not come in to the market at all if they have to sod around with an info pack first.

So, the buyers will be waiting for price falls. The sellers will be reluctant to come in to the market. Based on that, I predict a much smaller traded volume of houses, but for the restricted supply to keep the price up. So Dave probably should not say anything about houses being over valued, because the ones in the market are not.

Buyers will continue to whinge but with good reason as HIPs does nothing for them except perhaps cost them an additional £1000 on the mortgage.

I am of the opinion that if one wanted to do something about the speed of property transactions, wiring solicitor's dangly bits to the mains and turning them on if they don't do the conveyancing on time would be the most practical and effective market lubricant.


Mr Raft, who it must be noted worked for a financial institution at one point, argues that the one place depositors are safe at the moment is Northern Rock because they have been guaranteed by the Bank.

Therefore, it makes sense to put deposits up to £35K there rather than any other institution, especially if you don't know what pile of poo any other bank might be holding.

What we wonder is exactly how much of a banking crisis the BoE could act as lender of last resort for. One bank? Two? A dozen? At what level does it become impossible for the government to maintain confidence in the banking system?

Mark Wadsworth said...

WOAR, another fine comment, but I see no reason why house prices wouldn't fall by up to half, relative to wages (i.e. approaching 1995 levels). So the government is going to have to stoke up inlflation a bit to try and mask this, i.e. at least house prices won't fall much in nominal terms (like in the early nineties, they only fell by 15% in nominal terms over five years).

Henry North London 2.0 said...

Did anyone catch News 24 and that lady complaining she couldnt get access to her online account?

I know her in real life Shocked the hell out of me to see her on telly at 11 pm last night

Penny Pincher said...

I'm counting small mercies - that we have under £35k in Northern Rock and that we last moved in 1999 - but hope that house prices don't fall too low as will want to release equity in property at some point in our later years to make up for the shortfall in our main pension which was with Equitable Life. Sigh ..

Scott Freeman said...

My evil plan:

Open an account with Northern Rock and put in all my savings (less than £2000). Their current, and unusually high interest rates, will net me a nice windfall and if they go bust I get 100% of my money back via HM gov.

CatWoman said...

So I see you have the same situation in real estate that we are having.
In Chicago they keep on building (new) but no one's buying. And no one can get rid of their home or condo (old). It is taking over a year for us "eastenders" to get rid of a property. Sad state of affairs, here.

Mark Wadsworth said...

CW, are house prices actually going down in the US? Or are they just not increasing any more?

Anonymous said...

It is from your blog that I came across the idea that the unfunded public sector pension liabilities are >1000bn but the devil is rather in the details.

The number you bandy about matches the number Neil Record came up with for the IEA, from the paper "Sir Humphrey's Legacy" but after reading this paper I think Mr Record is being disingenuous. The largest of his estimate in comparison to the GAD estimate, is a 40% increase when he uses different discount rates. Mr Record uses market values for index linked gilts and noticeably uses values at March 31st 2006. For example, at that date, the yield for 2030 gilts was 1.16%. Yet if a skeptic goes to the DMO and get the data for more dates than Mr. Record's date, we see the same gilt's yield fluctuate from 2.2% in Oct 2003 to 0.85% in Feb 2006. What does the rest of that yield curve do over time. What does the liability do over that time? Could be that Mr Record's calculation is somewhat volatile and so best not relied on in argument.