That was the week that was

The Stock market fell badly
House prices are falling quickly
Bentley announced a three day week
New car sales are well down
Second hand car prices are low and falling
Property specialists are getting gloomier even after a 20% fall in commercial property values
The pound fell further
There are fewer jobs on offer

Some of my readers seem pleased that house prices are falling. Some still think we should be fighting inflation because the pound has fallen and imports are dearer. All the evidence is that the big problem now is the downturn. Inflation will fall rapidly next year. Fewer and fewer companies will have any pricing power. The Stock Market is waking up to the profits squeeze that will now follow the squeeze on family incomes.The government still refuses to cut back itself, intensifying the squeeze on the rest of us.

Some of my readers ask why keeping house prices up matters to politicians. It matters to them because it matters to most of their electors. Most people’s main asset is their home. They do not want it to fall in value. When it does it not only makes them feel worse off, but it limits what they can borrow to sustain their lifestyle. Of course rising house prices on the scale we have experienced in recent years is bad news – it creates a bubble which will burst. It would have been better to have controlled the economy so house prices rose gently. There is one thing worse than house prices rising too rapidly, and that is them tumbling. Many people will pay the price of that. It will mean lost jobs, shattered dreams, repossessions. Do not curse us to even bigger falls in house prices. It just means more economic misery ahead. It means people thrown out on the streets, and it means many others tightening their belts even more whilst big government spends on as if nothing had happened.

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21 Comments

  1. Posted September 6, 2008 at 10:55 am | Permalink

    More for the list. The weather is crap and the ONS withdrew some statistics reports because its creative accounting got a little too creative, even by ONS standards.

    Yours, "seasonably adjusted", nAroc

  2. Posted September 6, 2008 at 11:42 am | Permalink

    John,
    you say …."Most people’s main asset is their home. They do not want it to fall in value. When it does it not only makes them feel worse off, but it limits what they can borrow to sustain their lifestyle."

    Is this not the problem ? If people lived the 'lifestyle' they could actually afford rather than borrowing, they would not be in trouble now; it works the same with governments.

    If people suffer for having borrowed to the hilt against the 'value' of their house and spent it on their 'lifestyle choices' of designer clothes, expensive holidays, plasma TVs while I have gone without, should I shed a tear over their predicament ? should I pay a penny piece towards their rescue ? I think not…. and neither should the government.

  3. Posted September 6, 2008 at 11:51 am | Permalink

    I simply don't understand the house price comfort blanket mentality. It doesn't really bother me if my house is worth 2p as long as I can buy another similar one for 2p. It's not good news for property speculators, but as in any business enterprise there's a risk. Perhaps we should go back to a pension being a managed well spread portfolio of risk. Instead of staking all our chips on the future value of one large illiquid asset.

    You still, I believe, express an over optimistic belief in the market for curing inflation woes. An interest rate cut would just be a short term boost and leave the fundamental problems in the economy unresolved.

    There is simply too little competition in the market these days for inflation to be fought that way. Grocery retail power resides within the hands of a small number of large corporations. They will engage in price wars, but they will be of little consequence in terms of meaningfully reducing overall prices. These are very similar to government wars on terror and climate change. Largely a noisy distraction to make people feel all is well, but ultimately improving conditions very little.

    The minimum wage increase kicks in next month. This policy has been massively inflationary had pushes up wages thoughout the entire wage hierarchy. Quite possibly many people will fear for their jobs and not try and force higher wages out of their employers. They don't need to, though, the government makes a claim for them anyway.

  4. Posted September 6, 2008 at 11:54 am | Permalink

    And Osborne boasts Cameron ( and his ) Conservative clause 4 moment was to kill off and talk of tax cuts, which be inference means he doesn't have any desire to cut back the blaoted client state.

  5. Posted September 6, 2008 at 12:08 pm | Permalink

    Is it really such a bad thing that borrowing to sustain an otherwise presumably unaffordable lifestyle is no longer an option?

  6. Posted September 6, 2008 at 12:25 pm | Permalink

    "The government still refuses to cut back itself, intensifying the squeeze on the rest of us."

    Dead on. Now that oil prices are falling there is no fundamental reason for recession except the vicious circle of, so long as government spending is rising or static, a recession cutting even harder into the productive fraction of the economy.

    You are right that it is painful for people who believe they are worth £300,000, all in house value, suddenly finding they are worth half that, or less if the mortgage is big. However evenm negative equity doesn't actually make them any poorer in real tems unless they are planning on selling up & living in a tent. If it stops people taking out a 2nd mortgage & blowing it that is no bad thing. In any case the pain of those who cannot afford houses is greater & tangible.

  7. Posted September 6, 2008 at 1:10 pm | Permalink

    "It would have been better to have controlled the economy so house prices rose gently."

    Bollocks.

    What's with the socialism? When did you cross the floor? Or, is this a one party state?

    It would have been better to have allowed house prices to fall year after year and never to have allowed the seeds of expectation of house price rises to be sowed in the first place.

    • Posted September 7, 2008 at 8:22 am | Permalink

      In fact it would have been better to allow housebuilders to meet demand rather than restricting supplies by stupidly restrictive planning policies which in part, created the inflationary pressures on house prices.

      As always, it all comes down to the fundamantals of supply not being allowed to expand to meet demand. Can anyone be surprised when prices rise under such circumstances?

  8. Posted September 6, 2008 at 2:40 pm | Permalink

    I should have added this to my earlier response:

    The fact that a house has fallen in market value has no bearing at all, in itself, on the likelihood of its being repossessed. In my opinion, people who secure loans against their homes to pay for a "lifestyle" they can't afford to fund from their incomes are idiots, and I don't feel any sympathy for them, still less any inclination to bail them out.

    I have slightly more sympathy with those who used such loans for investments such as buy-to-let (although the availability of those mortgages seriously distorted the lower end of the market, pricing first-time buyers out of many of the properties they would otherwise have been able to afford). But I still think the best thing to do when offered a massive windfall profit on something so fundamental as the family home is either to sell it and buy something cheaper to release the capital or to accept that sometimes there are offers which have to be refused.

    Mortgage deals are another matter. I'd like to see pressure put on existing lenders to extend current loans on similar terms to those originally offered. The present situation is at least partly their fault and they should bear some of the cost of stabilising the market. As for new loans, perhaps the old-fashioned mutuals have been right all along, requiring several years of saving history and maxima based strictly on verified income.

  9. Posted September 6, 2008 at 4:24 pm | Permalink

    The main point of buying a house is to lower your living costs over time thus helping you not to being held to ransom by landlords and employers. The area becomes more prosperous so landlords charge more for rent and more people want to come to the area increasing rent even further and driving wages down. In effect to give yourself wage rises and to protect yourself from inflation in some way and stopping you from being forced out to a less prosperous area. If you have to move you will have an asset that has increased.
    Employers tried to get around this problem by employing Poles living five to a room. Worked for a while too, but they where not the 'magic bullet' many had hoped. Wonder why?
    If you borrow money against the rise in value, then you will never have any security protecting your standard of living and the money raised very expensive because of the length of the loan The only way to spend the money is to downsize to a smaller house. Not easy at any level. It would be better if they stayed the same price in relation to wages. You would then be able to choose the size and type more rationally.
    The only way that will happen is to build more. Which the private sector clearly is not able to do.
    I've got a house that I'm happy with, a tiny mortgage and have no intention moving. So I'm alright Jack.

  10. Posted September 6, 2008 at 5:01 pm | Permalink

    Your respondents don't seem to share your view on this occasion and I agree with them. You seem to have bought into the Labour notion of live/spend now, pay later. That is what has led this country into the dire position it now faces. Those more prudent in our society who knew how to live within their means are now unfairly expected to pay for the mistakes of government, politicians and those who followed their lead and can no longer pay for the profligate lifestyle they could never afford. I agree that there is a desperate need to see less government spending (wasting) but your party regrettably and inexplicably is not even proposing that. We expect a more responsible approach from the Conservatives or are all politicians the same these days?

  11. Posted September 6, 2008 at 7:54 pm | Permalink

    Normally, I agree with much of what you write, but I disagree with you regarding inflation and and government intervention in house markets.

    Labour have encouragred the credit boom and therefore house prices under the correct assumption that British people will ignore the true state of the economy while house prices are rising. Note that static house prices are not good enough, they have to be increasing. so our current account deficit has been truly appalling for several years, but "growth" – Brown's sole target – has been fine, principally due to Brown taking more of our money and borrowing more, then spending it on our behalf with wanton abandon. PFI has also played its part, a fact that future generations will all too readily appreciate. The fact that none of my sons, although earning a reasonable amount of money, can afford to buy a home is a sad state of affairs. Buying a house is a little different. Many people, realising their pensions were being bankrupted by the chancellor, used the equity in their houses to fund purchases of two or three other properties. I see no earthly reason why the government should intervene to boost these people's investment, using other peoples' money. What would you do to get my Barclay's shares back up to 750p?

    There is no evidence whatsoever that inflation will fall in 18 months time. What will we do to reduce it? Pressures are from foreign owned companies who supply our energy needs and from food producers. We have no manufacturing base to make things to sell. We have no natural resources to sell. Our banks are nearly bankrupt and have no money to lend. Our reputation for financial services is shot to pieces given the supremely inept FSA. I suppose we could devalue the pound, but that seems to be happening anyway. Given that this may take some time and given the supremacy of the unions in governing Labour policy over the next 18 months, you can be sure pay demands won't stay low. Even if the Tories get in, how will they cap wage increases? A Prices and Incomes policy? Labour allow 10% increases but as soon as the Tories get in they cap rises to 2% – that should guarantee a Labour win in 2015.

    We already have rampant inflation so unless we have a rate increase we are merely making the future worse.

  12. Posted September 6, 2008 at 8:00 pm | Permalink

    John,
    Firstly, if one has been profligate and irresponsible then you have to suffer theconsequences! Secondly, what about the level of our savings ratio as a nation? We need to get back to a more sensible attitude to both debt and how we fund out 'lifestyle'. The phrase of living within your means may jst become meaningful to people. Finally, John as I have posted before, it sad that people will be 'hurt' by the recession, but frankly many people have been as irresponsible as the government and only have themselves to blame. Financial discpline is needed both in the personnal sector and by government. I wonder whether the conservative government in waiting has the 'guts' to do what is necessary to revitalise and unclog our stultified economy. I suspect not, and just like on the EU issue the Tories will yet again fall at the first hurdle. I would love to be wrong, but my instinct tells me I am not.

  13. Posted September 6, 2008 at 8:03 pm | Permalink

    John,
    Firstly, if one has been profligate and irresponsible then you have to suffer the consequences! Secondly, what about the level of our savings ratio as a nation? We need to get back to a more sensible attitude to both debt and how we fund out 'lifestyle'. The phrase of living within your means may just become more meaningful and relevant to people. Finally John, as I have posted before, it sad that people will be 'hurt' by the recession, but frankly many people have been as irresponsible as the current government and only have themselves to blame. Financial discpline is needed both in the personnal sector and by government. I wonder whether the conservative 'government in waiting' has the 'guts' to do what is necessary to revitalise and unclog our stultified economy. I suspect not, and just like on the EU issue, the Tories will yet again fall at the first hurdle. I would love to be wrong for our country's sake, but my instinct tells me I am not.

  14. Posted September 6, 2008 at 9:22 pm | Permalink

    I can see where most of the above people are coming from.
    Where house prices make a huge difference, of course, if for the people who are (like ALL my 4 children and their families!) thinkning of moving abroad where, starting at France, house prices are much more compatible with what people on ordinary incomes can afford.
    Actually, come to think of it, why are English prices so high?
    Honestly, is this country that much better than, say France of Spain, Dubai or Australia?

    • Posted September 7, 2008 at 8:27 am | Permalink

      Dubai does not artificially restrict the supply of new housing, or anything else for that matter. Thus, fantastic, affordable homes. Rather better than having the local council force you into a cramped expensive flat by refusing consent for sufficient alternatives I suggest.

      Next time you see a protest group a la "No new homes in wherever" stick around, about ten minutes later they start moaning about unaffordable house prices without seeing the absurdity and the inherent contradiction of their position.

  15. Posted September 6, 2008 at 10:47 pm | Permalink

    Dear John, house prices will find their level. I agree the government ought to have provided economic measures to prevent the boom. But it's not possible to go back and change things now.

    Broadly speaking, this is a time when private individuals and the government (one can only hope) are paying back loans.

    Some private individuals have borrowed and spent too much. Some have not. The government has very evidently spends too much and seems unrepentant.

    Anyone (including the government) who has borrowed too much should be encouraged to spend a while paying it back and get themselves back on track.

    So, IMHO, lowering interest rates now would get the inflation and the borrowing going again, just when we need it to be at a much *lower* level.

    When is the time we need to have borrowing at a low? When we're heading into a recession. We are heading into a recession now, yet we (both private and public, remember) are indebted.

    The principal lever the government should pull is not interest rates, but tax levels. Lower the taxes, reduce the spending.

  16. Posted September 6, 2008 at 11:24 pm | Permalink

    Surely it is all pretty academic whether we want house prices to stay up or go down. The market will decide. House prices inflated well above the 'natural' market rate because of massive injections of money into the housing market through loose credit. Now that ludicrous credit has disappeared house prices will fall back to the equilibrium level.

    House prices are falling because the market has bitten back. End of story. We can express approval or disappointment but it will not affect the price.

  17. Posted September 7, 2008 at 12:28 am | Permalink

    Just in case Gordon Brown is in any doubt how bad things have become for the motor trade and car owners as a result of Government Taxation and the recession he should hear about this.

    A motorist with a 3 year old Mercedes ML450 enquired at the local Mercedes dealership about the trade in value of his car against the cost of a new ML.

    The dealer offered him just £1,000 for it…

    True story.

  18. Posted September 7, 2008 at 4:33 am | Permalink

    So what's your solution to the crisis John? Keeping prices high will have dire social and economic consequences, so getting the correction over with as quickly as possible with the collateral of repossessions and negative equity is the only answer. We had a chance to deflate the bubble rather more gently in 2005, but no, political thinking meant they had to keep the party going and simply pretend there's no danger ahead.

    I'm disappointed you subscribe to those la la land economics, John. Not what I expected.
    REPLY:I have set out how I would achieve greater stability of prices through proper monetary management, which a government and Central Bank has to do. It is just that we have lived through six years of bad money management, inflating too much and now deflating too much.

  19. Posted September 7, 2008 at 10:34 am | Permalink

    What causes inflation? Too much money chasing too few goods.

    Why did house prices soar? There was too much money. And it was funny money now depreciating even further.

    Whose fault? The banks – central, investment and retail who between them expanded the supply of money and debased the coinage.

    Who pays now? All of us.

    The last laugh? Gordon's little stamp duty giveaway will be paid for by cutting the budgets of the Regional Development Agencies.

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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