Comments: Darling sups from the poisoned chalice

Nice. :)

I was on Oxford St. yesterday and it was *packed*. But I don't think retail can save us in the end, it's only a matter of time before it all feeds through.

Posted by Minh at November 25, 2007 09:53 AM

Agreed, retail can only do so much. Its a matter of time before the credit crunch crunches on consumer spending. Its just not sustainable.

Posted by JohnofScribblesheet at November 26, 2007 08:17 AM

....and that's what you get when all you've got is a country who's last ten years growth has been based on spending on cheap money - which has now all gone away.

Is anyone REALLY surprised?

The housing market will decline also in the abscence of the money to prop up the prices, and ergo we give you a housing crash, that leads to recession, or you could say lack of cheap money, constricting growth (economic and hpi) that hits confidence causing a recession, causing house prices to crash?

When the economic recession (well over due) arrives, what will WE blame it on?

Posted by Dan at November 26, 2007 01:34 PM

No, we'll see what impact the credit crisis/crunch has, but that is not the story of the UK economy in recent years. As I've often explained on this site, well over 90% of consumer spending has been financed out of income and the UK has created a net 4m new private-sector jobs since the early 1990s. Whatever happens from now on, it is hard to think of a period in UK economic history to compare with the macro record of the past 15 years, for 10 years of which Gordon Brown was chancellor.

Posted by David Smith at November 26, 2007 01:43 PM

Not sure about that really, you only have to look at the debt to put that one to bed, most of it's secured on assets that have their value supported by the same cheap money that was fueling the high street - which I was just saying, has now all gone away.

Posted by Dan at November 26, 2007 06:46 PM

I don't believe 90% has been through the creation of new jobs. Just look at the personal debt burden. It's tripled since 1997.
The economy has been created by spending the earnings of the future now!!!

I feel sorry for Darling, as he has inherited Gordon Browns big brown mess!

Posted by Kev M at November 26, 2007 09:06 PM

I don't think either of you are familiar with the numbers. Of course debt has risen but it has risen by much less than assets against which it is secured. Roughly speaking, debt has risen by £800-900 billion, the value of the housing stock by £2,000 billion-plus. Unsecured debt has risen at a much more gradual pace, particularly recently. So this has been a story of strongly rising employment and incomes and sustained economic growth. In this environment, people have felt confident enough to take on more debt. Debt obsessives always get this the wrong way round.

Posted by David Smith at November 26, 2007 10:39 PM

“House prices are a matter of opinion whereas debt is real.”

Posted by David M at November 26, 2007 11:00 PM

"Of course debt has risen but it has risen by much less than assets against which it is secured. Roughly speaking, debt has risen by £800-900 billion, the value of the housing stock by £2,000 billion-plus."

And what percentage of the housing stock is this debt secured against?

Posted by David M at November 26, 2007 11:05 PM

The figures I have provided for the rise in the value of the housing stock are, of course, excluding mortgages, so the equity gain has been for both owner-occupiers with mortgages and those who do not have them. People trot out this old chestnut about house prices being a matter of opinion but it is trite. Housing is traded, and we know what houses have been trading for, so house prices are real. Whether they are traded for more, less or the same in the future is a matter of debate.

As for Clive, what a sad person you are. I make a joke against myself and you repeat it. Talk about humourless.

Posted by David Smith at November 27, 2007 12:21 PM

I'd love to see everyone market their house to sell at the same time.

I'm pretty darn sure they wouldn't get what they wanted for it, and I'm pretty darn sure it would drive prices down to much lower than the debt burden.

Posted by Kev M at November 27, 2007 01:31 PM

Hmmm .... hardly likely is it? What do we do? (a) All emigrate to Australia (b) Live on the streets (c) Sell to rent, creating the biggest buy-to-let boom in history.

Posted by David Smith at November 27, 2007 04:56 PM

David, exactly my point. So its hardly relevant comparing the debt to the alleged wealth in peoples homes.

Posted by Kev M at November 27, 2007 06:10 PM

Sorry, but it's no point at all. Suggesting something that could never happen doesn't prove anything. Suppose house prices fell by 20%, as they did - on the most extreme measure - in the early 1990s, Would housing wealth exceed mortgage debt? Yes. As it would if they fell by 40% or 60%.

Posted by David Smith at November 27, 2007 06:40 PM

"Of course debt has risen but it has risen by much less than assets against which it is secured. Roughly speaking, debt has risen by £800-900 billion, the value of the housing stock by £2,000 billion-plus."

For me, there is a flaw in this proposition. The (paper) value of the entire housing stock has risen by £2,000 billion plus BECAUSE debt has risen by £800-900 billion - due to low interest rates people have been borrowing more an more money to buy houses, which has pushed the price of houses up further. Allowing people to borrow more money to buy houses. etc etc.

There is a feedback loop here that can very quickly turn from a virtuous circle into a vicious one, as we have seen in the US.

Posted by Top Cat at November 27, 2007 07:13 PM

Where's the flaw? Yes, people use debt to buy houses and always have done. The fact is that collectively we have been able to afford to take out more debt because of low interest rates, rising real incomes and rising employment. The fact that asset prices have risen by much more than the debt taken out to purchase those assets shows that the average homeowner with a mortgage is sitting on an enormous chunk of equity. As is the case in the US incidentally, even after a 4.5% drop in house prices over the past year.

Posted by David Smith at November 27, 2007 07:21 PM

Even sadder. And thicker. You really don't know anything do you? Come back when you've got an argument and a few facts.

Posted by David Smith at November 27, 2007 07:54 PM

OK, here's the facts:

An economist with any predicitive ability would have been making money by being long oil & gold over the past 6 months, rather than trying to emulate smarter people's profits, e.g. the authors of Freakonomics.

Posted by clive at November 27, 2007 08:18 PM

Is that the best you can do? Pathetic. Now go away - you've nothing useful to contribute.

Posted by David Smith at November 27, 2007 08:21 PM

It's dangerous to assume that house prices can only rise, but never fall. In Japan house prices have fallen now for 15 years on the spin. Debt levels have increased (the major driver behind rapidly growing UK house prices)

The markets are edgy. They obviously feel that there are doubts about the value of mortgage securities. Why is that?

1. Rising risk of repos, debt soaked consumers can't pay their interest even at historically low rates. Commercial rates of interest will continue to rise as the crunch bites. Repos will increase

2. Without access to 7x salary mortgages and such like the demand for housing will drop off. Forget immigration and other bogus 'demand and supply' arguments. House prices are drive by effective demand, not potential demand. And effective demand is determined by the ability to borrow. No more borrowing = no more demand. How far can prices fall? It all depends upon how tough the credit squeeze is. If house prices fall commercial banks make bigger and bigger losses when houses are repossessed. That's why mortgage backed securities are for all intents and purposes worthless.

So in conclusion it might be wrong to suggest that our current debt levels are nothing to worry about because they backed by loads of equity. The problem is that this equity could crash as property prices head south a la Japan. This is why the banks are so worried. In a worst case senario would their balance sheets be able to cope with all tha bad debts

I agree with Merv: the debt is real. Even a junior accountant understands that you can't realise profit until the goods have been sold. Who says our housing stock is worth X? An estate agent. You only know what a house is worth when its been sold

Posted by Nigel at November 27, 2007 11:16 PM

Some people will indeed get into difficulty over debt, though the evidence from all the surveys is that these will be mainly those with unsecured debt and no assets. My point is that most people don't realise the asset cushion that the household sector as a whole has - £1.4 billion of debt against £7 billion-plus of assets. They also, judging from your comment, don't know about the numbers when it comes to mortgages. The average advance to first-time buyers is 3.38 times income. To movers it is 3.02.

Posted by David Smith at November 28, 2007 10:15 AM

The problem I see here, is that asset value is surely linked to the ability to secure funding to aquire it.

So lets say I have a house that's now worth £340,000. Whether or not I am forced to sell or I choose to sell, the norm for "Joe Bloggs" on the street is to apply for a mortgage. If lending criteria and and the credit crunch, conspire against me then surely my asset becomes only worth what a bank is willing to lend a buyer on it.

What I'm saying is, I can value, or an agent can value my property at whatever the hell they want to, if the finance is no longer there to aquire easily as it has been over the last 10 years then surely the value of the asset has to fall in line with lending criteria......Well either that or you simply won't sell it to anyone who's of normal ilk (someone who has to ask the bank for finance).

Banks are nervous about lending to each other these days, much less Joe Bloggs off the street.

Posted by Dan at November 28, 2007 01:14 PM

Fair point. The banks are nervous but they are still lending, as we've seen in the figures since August. The question is whether they will be lending enough.

Posted by David Smith at November 28, 2007 02:38 PM

David Smith: "my not-so-million-selling The Dragon & the Elephant".

David, it should be clear from the above the way to sell a million economics books is to write one on the UK housing market. Your original article didn't contain the words 'house' or 'mortgage' and yet look at the response. It's the only thing people want to hear about.

Posted by sandid at November 29, 2007 07:49 AM

Sandid. You're quite right of course. Free Lunch did better, though that may have been because people believed they were getting something for nothing.

Posted by David Smith at November 29, 2007 10:08 AM

Is it a matter of lending enough? Surely they'll move towards a higher risk based stratergy? e.g, ok you can have the loan but you need to stick down X% LTV which would have been next to nothing 4 years ago, but now could represent a significant sum of money, they're not silly and know that in the abscence of rampant price inflation, the only thing shielding them from excessive risk is wage growth, which is staying around the 4% mark, and I'd be surprised if the banks considered it a safe bet.

A market collapse could be brought on by the banks wanting to limit current exposure and cover past exposure by more reserved lending and asking for bigger deposits now at a rate that quite simply people can't afford.

Posted by Dan at November 29, 2007 11:30 AM