Monday, 15 November 2021

"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.


Bayard said...

Er, the BoE is a bank, is it not, banks are in the business of lending money and this measure means they can lend more money on the same houses? What's not to like, from their POV?

Mark Wadsworth said...

B, BoE isn't actually a bank. It's the government's debt management office which has strayed into propping up the commercial banking system.

Even if the BoE nominally benefits from credit bubbles (I don't see how), it will have massive costs in a few years' time when it has to bail out all the commercial banks again.

Bayard said...

Technically, it might not be a bank, despite the name, but it is run by bankers for bankers. Nor are they worried about "massive costs in a few years' time", because they have neither customers nor shareholders to keep happy, only the pols, who will, when the shit hits the fan, say to them "sort out this mess and here's a few billion to do it with" and off they will go.

Dinero said...
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Mark Wadsworth said...

B, yup, that sums it up. Still a bloody scandal.

Unknown said...

B.MW And the BoE is a de facto Marxist construct. Since it was nationalised post WW2 it has been engaged in the de facto nationalisation of the whole banking system. The central control of all money and credit. Every commercial bank is a de facto subsidiary of the BoE.
Or, to put accurately, it's a racket.

Mark Wadsworth said...

U, is it Marxist?

That's another of my theories

1. After a Communist take-over, the new government takes over/nationalises private businesses. Once the rot sets in, the politicians and their families end up running/benefitting from those businesses (the ones they haven't wrecked).

2. In a crony-capitalist 'democracy', big businesses take over the government, by bribes and the revolving door and run the country to suit themselves, like BoE bailing out banks.

2 is still preferable to 1, but from a distance, is it really that different?

In both cases, the 'government' is just a tool that wealthy-powerful-corrupt people use to stay wealthy-powerful-corrupt. And the little guy gets trampled on.

Robin Smith said...

Yup. Similarly with inflation. Especially in the puppet state. Where the people are now being blamed for inflation by "spending too much".

Isn't it true that the leaders we elect are there to earnestly keep things going as long as they can, until one day - for reasons unknown to man, and woman - the people finally go "this is a bubble isn't it?!"

And then "BOOOM!"

Robin Smith said...

BTW is anyone here going to be shorting real estate in 2025?

Bayard said...

Yes, me, if I can.

Robin Smith said...

Want to share strategies?

Bayard said...

It's not really a strategy, I am simply going to sell the real estate that I own, apart from my own home and put the money somewhere else until the crash is over, then buy different real estate to replace it.

Robin Smith said...
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Robin Smith said...

That's a strategy in my book. Nice one.

I've had similar for 10 years. From data from the last one. Where the break point appeared to be when mortgage approvals crossed over with MoJ repos. So it took some time with high repos before the nation finally woke up and 'saw' the bubble and responded.

I think the timing is important. Also taxation - CGT on second homes for the time since they stopped being your principle. And finally the expected price floor before it recovers which was about -30% in 08.

So if CGT plus SDT is greater than the expected fall in price, it's not worth the arbitrage.

I guess it all depends on how much prices boom in the next few years. If say a 500k house you bought recently reaches a million by the crash, thats 158k of tax out and back in. Whereas the fall in price is forecast as 150k! Is it worth the risk given the margin for error is quite high?

But if the price remains static there's only SDT to pay of 18k. Yet the drop was 140k. So quids in no risk. You buy back with 10k loss of rent, say 6 months later and you've made 100k.

I'm expecting a rather big boom though :)

There is an extra allowance for CGT though in addition to the 12k annual allowance. For the first year it's not your principle residence you get the first 9 months free from CGT.

Please correct my figures if wrong I'm no tax accountan

Bayard said...

CGT is only payable on the gain in price, whereas the fall in value applies to the whole price. So long as the fall in value is greater in percentage terms than the CGT plus the stamp duty, then you will always be better off selling at the peak, even if your capital gain is 100% of the value of your property at point of sale. If say your gain is 50% of the sale price, then you will lose out hanging on if the fall is greater than about 15%, if it is 75%, then the fall has to be 21% before you lose out by hanging on.
I'm not planning to sell my home, so those exemptions don't apply.

Graeme said...

Just as a precaution, I would be advising people to be putting money aside, because 5%inflation is something that people under 35 cannot understand. And if you have a mortgage, expect your payments to rise sharply and soon. Is it possible to get a fixed rate anymore?

Bayard said...

G, I would have thought that, if inflation were to go up, the last thing you want to do is to put money aside, i.e. save, as the higher the inflation rate, the faster your savings lose value. The same is true about debts, so you need to be borrowing money, not saving and buying stuff. I don't understand why mortgage repayments will be going up, unless the banks are going to be renegotiating the term of the mortgage.

Robin Smith said...

The main risk to consider is that the fall in oru e will be greater than the costs. Even if it's evens you've still raised the tax floor up to the current price for next time