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.

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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?

I just thought I would share with you a conversation I have been having with someone on Twitter, as their view of the U.K. housing market is pretty much what the above post alludes to.

I will reproduce the tweets in order below. I am @4_walls and the other person is @tachiwarwick (no relation, lives in Warwick!):

4_Walls: Join the discussion: Home ownership declines 64% in England and Wales in latest ONS data http://t.co/8QbMBVty

taichiwarwick: @4_Walls inevitable. who's suprised. buy to let pushes up rents that are paid for in housing benefit by us. rich getting richer as always.

4_Walls: @taichiwarwick House prices are dictated by market forces i.e supply & demand .. and so are rents. BTL does not push up rents.

taichiwarwick @4_Walls BTL has replaced social housing as major provider. Rents higher or lower? Its public money going into private pockets.

taichiwarwick @4_Walls and if there were more houses available - ie not all BTL - then there would be less demand. don't con yourself

taichiwarwick @4_Walls there are people in my town who own whole streets and every tenant is on HB. That's our tax feeding private bank accounts. SELFISH

4_Walls @taichiwarwick Where would they live if those people were not providing houses?

taichiwarwick @4_Walls who would provide? if cheaper people could buy their own. and we need more social housing

taichiwarwick @4_Walls When a house is a source of income before it's a family home it's WRONG. You wonder why ownership is down? Unsustainable prices.

taichiwarwick @4_Walls it's not that they're higher - they prop up BTL. Project rising prices into the future and think about sustainability.

taichiwarwick @4_Walls if any price rises above inflation it becomes unreachable at some point. my daughter pays £800/mnth for 2 bed

taichiwarwick @4_Walls most of that is HB and she works. in warwick social housing is half the price and HB goes back to public coffers.

taichiwarwick @4_Walls if HB was cut the prices would have to fall as few can afford full rent House prices need to fall so that people can have homes.

4_walls @taichiwarwick However I agree that housing benefit being higher than private rent is wrong. I pay tax too!

taichiwarwick @4_Walls prices need to be realistic, a lot of people are sitting on imaginary money. BTL is the last prop keeping prices artificially high
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What do you think of these views?

The tweeter seems to be under the illusion that people on housing benefit would be able to generate cash for a purchase of a property. No bank would fund a benefit claimant purchase, so someone who has to ask for help from government would have to have 100% of the property value in cash.

Social Housing is being replaced by PRS, that is nothing to do with PRS that is the lack of investment from Government.

Thanks Adam.

I am glad I am not the only one who could not make sense of his argument!

Some people just do not understand. It is common this happens when they confuse political views with economics. It appears the other person does not understand who pays to build and operate social housing. Like it is free and HB is a way to reward the rich.

Agree John.

Because of that, decent landlords are lumped into a generic category of "greedy landlords".

Decent landlords provide a much needed service, but people with an axe to grind (or jealousy) seem to ignore that simple fact.

If all the private landlords exited the PRS, then there would be homelessness on a massive scale as social housing does not come close to accommodating the demand.

I hope that there is increased awareness and education to stop this "them" and "us" scenario and for people to work together for higher standards within the PRS. Hopefully, sites like Property Tribes can be part of that movement ... .

MoneyWeek and 'interesting' do go together.

They come up with some complete crap. I just can not tell if they know they are making it up or if they somehow are naive.

Quote:The trouble is, the “significant writing down of asset values” that King refers to, would involve allowing house prices to fall.

Says who? The assets of a bank are the loans. What loans would then have to write down based on normal assessments of bad debt? If a loan is being paid as agreed and there is no requirement for a maximum LTV (residential loans), how could MoneyWeek think the debt is a bad debt?

Banks do make provisions. King believes many loans are not correctly provisioned. Has anyone heard him say the issue is residential loans? Or could it be commercial loans to businesses and maybe commercial real estate loans?

Reading MoneyWeek is a waste of time. What they have to say on property that is useful will be found somewhere else. Just stop reading the publication if you want to understand the market.

Maybe they have something useful to say about other markets. If that is the case we would not be interested here on PT.