Interesting article here
from MoneyWeek about Britain's housing market.
A small excerpt below:
Britain’s housing market has left the economy paralysed
Ben Bernanke – the world’s top central banker - is not the type to admit to uncertainty, or the possibility that he might be wrong. His solution is usually to do more of what he’s already been doing. So if growth continues to deteriorate, you can probably expect to see a ramp-up in quantitative easing from the direction of the US.
But Sir Mervyn King has always been a more sober-minded chap. It doesn’t stop him from pursuing the same policies as Bernanke, but you sense that his heart’s not really in this great academic experiment into the limits of monetary policy.
He and other members of the Bank of England have warned that the Bank isn’t going to rush into printing more money in November. And it’s not just because of the GDP bounce. It’s because he’s not sure it can solve Britain’s problems.
King reckons – and I wouldn’t disagree – that the basic problem is the banks are still sitting on too much bad debt. The debt needs to be recognised and its value written down (or written off). The banks then need to be patched up. All that needs to happen before banks are willing to lend again.
“In the 1930s, faced with problems of sovereign and other debt similar to those of today, the pretence that debts could be repaid was maintained for far too long. We must not repeat that mistake.”
However, we are repeating it. The trouble is, the “significant writing down of asset values” that King refers to, would involve allowing house prices to fall. In Britain, house prices are the single most important economic indicator, politically speaking. When house prices are falling, governments lose elections.
It’s why public policy, the tax system, and central bank activities, are all horribly skewed towards propping up the property market. Yet with the banks aware that they are over-exposed to an over-valued sector of the economy, they aren’t going to be keen to lend more until the risk is no longer so high.
This unravelling could take a very long time to play out. We can’t expect rampant global growth to help us out. So the Bank of England will continue to have to walk the line between allowing ‘too much’ inflation to get into the system, and keeping rates low enough to cushion those with large debts. That leaves Britain vulnerable to nasty external shocks.
So, is the U.K. housing market is a Government run Ponzi scheme set up to advantage governments, banks, developers and the real estate industry at the expense of ordinary tax payers?
Could it be argued that governments and the banks are complicit in trying to keep property prices high and rapidly changing hands for selfish reasons?
Playing Devil's Advocate:
It stands to reason that the government has a vested interest in investment property changing hands at ever increasing prices because of the revenue it will accrue from capital gains and other taxes. For the Government, one of its major sources of funding is stamp duty, which is greater when more property changes hand at higher values. Local Governments love development because it attracts investment into an area and because developers pay the lion’s share for the provision of new services – such as roads, water, waste and utilities – which are otherwise the responsibility of councils.
For banks, the more mortgages they write at higher loan values, the more interest income they will accrue. In addition, while property prices increase rapidly people “feel” more affluent and so there is presumably less demand for wage increases, which helps business by keeping down staffing costs.
To try to keep the prices of property high and to encourage property transactions, the Government uses various mechanisms. With the negative gearing provisions, the Government encourages small investors to speculate on the property market by allowing them to deduct from their income expenses association with rental properties. Could it be said that this increased demand does little more than artificially inflate property prices, making it more difficult for the battlers, such as first home buyers, to afford to enter the market.
Is it that the property industry and its stakeholders are staging a massive confidence trick on an economy-wide scale?
We have seen evidence of the property industry provides selective statistics to support the property market and advantage their members, particularly developers. And, rather than looking at the motivations of the stakeholders, the popular media report this PR credulously. The Government, eager for tax revenue, and no doubt worried about the property bubble bursting, provide tax breaks and subsidies to keep property prices and turnover high. State and local governments ease regulation for developers and do their part to support the industry and increase their share of the pie. Banks do everything possible to bolster the industry also, mindful of losing their exaggerated interest returns.
So who are the real winners and losers in the U.K. property market?