Monday, 16 March 2009

There's no way back to 2007

In 2007 my London home was worth more than five times the price I'd paid for it and like millions of others it was this equity, to supplement my increasingly modest pension provision, that I was looking to realise on retirement. Well, those plans are truly shattered now.

The focus not only of UK but international government policy has been to re-capitalise the banks and push money back into the economy to stimulate spending, even explicitly to get the banks lending again at 2007 levels. There is still a hope amongst some that this is just a blip, albeit a big one, and that with concerted government action we can all go back to the way we were in 2007.

This is risible pap. There's no going back to 2007. Deflating the worthless derivatives bubble has a long way to run yet, and it will take other asset prices - houses - with it. The London financial market will never again occupy all the square mile's buildings, and we might as well start converting the Gherkin to social housing right now. Canary Wharf will slowly empty as shrunken banks and financial institutions retreat back to the City. Canada Square will be filled with pound shops and fried chicken bars in five years time.

We'd better start getting used to the fact that the big competition with Singapore and New York is over. Financial services will form a far smaller part of a future British economy. And a sustained period of modestly high inflation - say 10% - 15% a year for three or four years - is about the only thing that will erode the burden of personal debt in the UK, that will restore some growth to house prices and get things moving again. Unfortunately at the expense of the banks and lenders, but heh.

But whichever way, let's stop pretending and get on with it.


hatfield girl said...

The same applies to our political institutions and way of life. There's no going back, no restoration possibilities. Only we shouldn't get used to what we have and get on with it. We need to be clear about what we want and try for it.

Anonymous said...

Not just at the expense of the bankers and lenders, Mr. R.

Also at the expense of the savers, who will be wiped out so that the feckless can get back on their merry-go-round.

"Heh" would not be my comment. "Feh" more like.

it's either banned or compulsory said...

Me and my 'O'Level Economics reckon that if the Banks are going back to sensible lending, ie 3X annual income after a substantial deposit C/O Mum & Dad.
Given average income of £30k (ONS) x two for coupled folk = £60k X 3 = £180,000 ( + say £20k deposit ).
Means that a couple on average earnings will be able to get a mortgage when prices fall to around £200k.

According to

Average prices in London are still £250k - £300k so it seems to still have a long way to go before even couples can sensibly afford a house.

Or are we missing something ?

Donny B said...

Why would we want to go back? An economy dominated by spiv bankers and hedge fund hogs was going nowhere . We provided the playground ( London ) for them , now they've gone bust and a new set of masters of the universe will emerge but they don't want to be tainted by the last lot so they will need a new playground with better rules.
Probably somewhere a bit warmer but with light touch regulations that will allow the carnival to start again.

Newmania said...

The Empire state building is full of charity shops , abnd what abouit Dubai.... that will be renamed Du don`t bai...bumtssk

formertory said...

Hell's teeth....(1) What's so good about about a period of "moderate" inflation? Why on earth does anyone want to see house prices rise again as they did before? Have people learned nothing?

Inflation (as Anonymous so rightly says) wipes out the prudent, the savers and those on pensions (except public sector pensions). Inflating house prices create an illusion of wealth and will inevitably lead to another bust in a few years time - what you're hoping for, in other words, is a house price boom so you can make some money, then to get out before the inevitable bust, leaving everyone else to clear up the after effects of your greed.

Hell's teeth.....(2) Banned or Compulsory - What is it with "prudent lending practices" and 3 x income? It's the same downright wrong crap trotted out by Vince Cable, who knows sod all about mortgages and probably hasn't had to pay one for the past 30 years or more.

If I earn £20,000 and you lend me 3 x income, is that the same risk as lending me 3 x income if I earn £100,000 a year? No, it isn't. Also, what is it that's causing people who've taken too much debt on to be squeezed? Very often it's not the mortgage at all (for those 40+% or so on variable rates whose payments have decreased dramatically) - it's the credit card and personal loan debts they loaded on for "home improvements" and other stuff "guaranteed" to enable them to "maximise the value in their house" and so soak up their debt. Or even just so they could have a Discovery in the driveway. Loans and credit cards aren't regulated and affordability checks are pretty bloody limited. Not a problem when the good times roll but just wait for later this year when the bad debt provisions for unsecured lending get made.

People really do need to get a grip on the key concepts of "risk" and "responsible lending". One size fits all rules are a poor solution for the ills of the banking sector, or borrowers. It's not "irresponsible lending" of 3, 4 or even 5 times income that's brought the banks down - it's the inventive ways they found to package their securitised debt coupled with the breathtaking incompetence of the "rules-based" FSA. Given a set of rules, people's attentions all fasten on how to work round them legitimately. Much less effective than the raised eyebrow of the Governor of the BoE.

The banks aren't blameless - not by a long chalk. But Gordon Brown's succeeded in convincing everyone that the problem is "irresponsible mortgage lending" and now many folk look no further for the culprits.