Sunday, March 06, 2016

The Idolatry of our House Prices

How long will the UK housing bubble last? Max Keiser and Stacy Herbert host a world-ranging video discussion of current housing bubbles and related economic news (particularly Australia and UK/London) with Prof Steve Keen and Ross Ashcroft [KR883] Keiser Report: Global Housing Bubbles .  
In London the Cameron/Osborne government has added credit fuel to the housing mortgage market. What started out as Help to Buy (2013) has just become London Help to Buy and 200,000 first-time buyers under the age of 40 will qualify for an initially interest-free loan (after 5 years you pay a 1.75% fee i.e. interest) for a newly built home. This is a government guarantee to the mortgage provider that the extra deposit money is safe, but not a guarantee for the buyer if they fail to pay back [NB. Beware a lifetime debt millstone and no house if you default]. Steve Keen says that this scheme to boost an obvious asset bubble is being launched by people 'who don't understand the system...they have power, not control' Max K. asked why, when the global macroeconomic tendency is deflationary would a government encourage investment which is based on inflation? Ross Ashcroft thinks they are 'terribly deluded'.  
So are we in the UK  due for a re-run of the Japanese housing boom/crash from the peak around 1989/90? With (27 years later) the Japanese index showing an 80% drop from peak prices. Steve Keen thinks the current UK government has some scope for 'dragging people into this market for a while' because the UK proportion of mortgage debt to GDP is 70% and falling, but Australia is more dangerous as the figure is 95% and rising. 

Another bubble detector by way of a contrarian indicator was suggested from Japan at the time of the 1989/90 peak. Then, 9 out of the world top 10 banks were Japanese; now, with Australia having 3 of the top banks OZ may be at a similar danger point, with the New Zealand financial and banking system also dangerously exposed. Prof Keen says the cause of the bubble is the banks creating credit which feeds the property price rise. He says it is a myth that government spending caused the 2007/8 credit crisis, the cause was a private credit bubble which burst. The current government has it that the previous Labour administration's need to raise government spending to compensate for the crisis was the cause of the crisis! So now the cut-back in government spending and the ensuing austerity makes the problem worse - as more people become unemployed with less spending power.  

'There is free lunch in the housing market' said Stacy, and Max agreed: 'many, many free sandwiches in housing in the UK!'. Phrases chiming in step with the book The Free Lunch - Fairness with Freedom .  Brian Wakelin at Christ Church, Winchester on 21 Feb 2016 (Our Response to World Mission: Isaiah & Matthew) called the widespread attitude to the phenomenon 'the idolatry of our house prices' [audio: at min. 2m 00s.]. But young people are unable to buy or even to rent locally. 

As Stacy pointed out (agreeing with Brian Wakelin's sermon point without the theological terms), the general population is indeed complicit and likes the chance of a gain through government subsidy such as London Help to Buy, even though only a few get it - 1 in 10 among 2 million renters. 

So where are we in the bubble cycle? Fred Harrison for years has warned of the 18 year peak-to-peak property price index. He told the New Labour government when they took power in 1997 about a coming 2007 peak (which happened); that a financial crisis would be caused by the housing market breakdown (it was)  and that a recession would ensue (it did). The Max Keiser panel last week reminded us that Mark Carney now Governor of the Bank of England oversaw a house price boost when running banking in Canada and that the same is happening now in the UK. So with the power of the Bank of England behind Chancellor George Osborne's encouragement of property speculation it would be brave to say the price peak has already been reached and the bubble is about to burst. Albeit any temporary slowdowns which may happen to confuse. 

George Osborne is raising his tax take from high value property with new taxes which is suppressing those prices but not making the houses more affordable, because of the high tax charge. Offshore-owned homes are to be subject to an annual tax which is really the most sensible property tax, but it should be on the land value of all the real estate and apply whoever owns the underlying land. This would moderate the housing market making homes more affordable. 

We await a Chancellor and a Bank of England Governor who could extend home ownership by lowering prices through land value tax without crashing the system. Is anyone clever enough? Making an annual land value tax charge an allowable deduction against annual income tax would probably be an essential start.
Posted by Charles Bazlinton. Author The Free Lunch - Fairness with Freedom

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