I drive at 30mph if I’m in an urban zone. I don’t drive at 20mph which might be safer or 40mph which would be more dangerous. Effectively I let the government set a safe limit and I stick to it. I don’t exercise a great deal of judgment and, so far, the arrangement has worked well. I do, however keep my eyes open and slow down if it snows or if it’s school time and there are children about.
International regulators of banks have set up similar rules which govern lending practice and institutions such as Northern Rock have responded by delegating the decision, about how much to lend, to the regulators and have lent as much as they possibly could even if it meant handing out cash to people with poor credit histories using inadequate collateral as security. Operating at the limits regardless of conditions can be reckless if no judgment is exercised.
This is another downside to government intervention that has combined with excessive stability to produce the biggest bubble in money supply that we have seen so far.
Economic stability has been one of the goals of the current British government. One of the measures of this has been the interest rates that people pay to build businesses and to buy their property. In the last ten years the mortgage rates have been tethered in a tight band that has enabled people to plan with greater confidence. The downside to this is that young consumers. those looking to buy their first or second houses, are not considering the risks of interest rates in the mid teens. This has encouraged them to stretch their finances further in the belief that interest rates will always sit in the comfortable 5-8% band.
My first mortgage in the mid eighties went, if I remember correctly, up to 16% but this was not an issue as I was subject to stricter rules about income multiples than current borrowers.
Which environment was better? The current bubble and reckless pursuit of growth has led to masssive immigration and an overheated economy that is going to come down with a bump.
There will be tears before bedtime!
The crisis in the banking system which culminated in Northern Rock’s near demise is now having a visible effect in the housing market. I was called yesterday by an estate agent who was keen to inform me that one of his properties had just been reduced in price by 13%. Also, a local estate agent has a shop window that now features a good number of properties with “New Price” emblazoned across them.
It is interesting watching this unfold as statistics are being mis-used in some fairly standard ways. The difference between descriptive and predictive statistics is a slightly subtle one that can be understood by understanding that just because prices have risen strongly over the last year does not imply that price rises will continue. The price is an indicator that lags behind a whole bunch of underlying factors and events, ephemeral consumer confidence being one of the most significant, that govern what people want to pay for a property.
The financial system is unravelling at the moment. Northern Rock, a bank that specialises in mortgage lending, has come unstuck as it got caught between a wholesale finance market that is reviewing its attitude to risk following the sub-prime scandals in the US and its own sub-prime lending. Nobody wants to lend money to the bank any more and the Bank of England has stepped in as the lender of last resort. If the bank’s assets are really valuable then a buyer should be easy to find but it looks as though the latest property bubble market is bursting and Northern Rock’s willingness to lend up to 130% of the value of the house (sic) will leave it with a great potential for repossessions that will write off a few millions of its assets.
The Council for Mortgage Lenders has some interesting stats on repossession trends and lending standards that look alarming to me.
If 0.2% of mortgages are repossessed each year and an average mortgage lasts for 10 years then I calculate that we have a 2% chance of any given mortgage being repossessed.
If I have 50 friends then what chance do I have of knowing someone who has been repossessed?
If a lot of people know someone that has been repossessed then what confidence is there in the market about prices?
Just read Peters and Waterman’s In search of Excellence (1982). Just starting to read Small is Beautiful (1973) by E F Schumacher. Reading two Very Important Books close together can lead to extra insights or different points of view that can be thought (and behaviour) provoking.
#1 What if Schumacher had lived for 25 years after his book was published and Peters had not? (I don’t mean any ill will to TP who is a very clever guy with some very good messages).
#2 Schumacher’s messages call the game into question while ISOE explains how to play the game to the best effect and the greatest humanity. Small is Beautiful is quoted positively in ISOE and both seek to promote humanity.
We can now look on both with hindsight that tells us how successful US companies have been in promoting their view and how ’successful’ we have all been in using up the Earth’s finite resources.
Perhaps we should regard the faltering US car industry as a sign of hope that people have had enough of this ‘progress’ and that it’s time for a new approach – or a re-kindling or Schumacher’s call to recognise that there may be limits to what we should have.
Filed under: Economics
The BBC recently ran a story on cutting out estate agents by using DIY house sale websites. How many house buyers still use the physical offices of the estate agents to go through books of details? I suspect that the majority of people who have enough cash to go buying a house are on-line. If I am selling my house though, can I afford to ignore those who are not online? The trade-off should be fairly simple in that I would lose some potential buyers but I would save the 1-2% fee. The other major change in the economics would be that I would lose the services of an experienced salesman but on the other hand I would not have the man in the middle pressuring me to take a sale that would suit him but may not give me a good price. The way that agents like to write their contracts is that they make a simple percentage of the sale price. This motivates them more to sell at any price rather than to hold out for a better price.
The private websites look good but do they attract the traffic of the majors? My suspicion is that until one of them stumps up for a major ad campaign and accepts ads for free then they won’t have enough stock to hold enough punters for repeat visits. If I haven’t seen a banner ad for The Little House Company or MouseSale then they may not be exposed enough to get to a tipping point. Until then I suspect that they will remain as obscure minority websites that tick over in a corner of the market.
At the same time, the major property websites in the UK seem to have moved against the DIY seller by refusing to accept private sales. It seems to me that this may not be in the public interest and that there is an opportunity for the Office of Fair Trading to stick its nose in.
