Something Wicked This Way Comes

Nick Clegg is terrified. He snuck some money out of Miriam’s purse this morning to buy booze, and is pissed already (I know this because he always texts me when he’s drunk), and the pubs aren’t even open yet. Carney could barely bring himself to eat his waffles and maple syrup this morning. Even chief alien lizard-creature Osborne is worried: and no wonder. With an election only a year away, we are now several  months into the housing crash that I predicted would start “…in the autumn (of 2013), which will wipe at least 30% off headline values, possibly more given a market’s tendency to over-shoot.”

Ok, so clearly I know nothing about economics – the proof perhaps being that I worked as an analyst for an investment bank, as good as having a certificate in Economic Ignorance.

I’d also point out that pretty much every prediction on house prices I’ve made for seven years now has been almost comprehensively inaccurate, so at least I’m consistent.

BUT! And there’s always a but…I would quote this, again from myself (and I don’t quote myself because I think my writing is especially worthy of quotation. That’s for other people to think): “there is no rational analysis possible. All you can really do is try and predict what the executive is going to do next.”

Except…we will hit the end of the limits of government market manipulation at some point. House prices are up almost 10% this year, more in my own personal surveying experience; first time buyers are paying 6% more than a year ago (Help to Buy is set up to help First Time Buyers, remember, look into my eyes…) and 92% of people reportedly think house prices will rise this year…except wages have been falling for years in real terms, and are predicted to do so until 2017 at least (ONS figures). Is this really sustainable? With base rate at 0.5% and interest rate swaps at similar lows in perpetuity, possibly.

Except… they won’t stay that low for ever. They just won’t: and the longer they stay low, the worse it will be when they rise. I note that unemployment is down to 7.1% - very close to Carney’s forward guidance limit, which he said would trigger a rate rise. Which he has now said he will ignore. On a side note, I would mention he is really very slippery, but no one seems to notice: Carney now talks about how “phase 1 of forward guidance is nearly complete” – but he never mentioned a phased programme before, did he? Yet now he talks as if this was always the plan. Scary, if you ask me.

The most pernicious part of this whole asset bubble is, I think, the way the market-warping of the economy manifests itself in the fact that inherited wealth now accounts for 20% of total personal wealth in the UK. It had dropped in the 1960s/1970s to a low of 5%, and is now (unbelievably) back up to Victorian levels. This is fine if, like me, you have parents who own an expensive house outright, among other assets. But this is bad if, like me, your father has gleefully told you for almost three decades now that every single penny of his personal wealth will go to Sidmouth Donkey Sanctuary in his will.

I would note that, on average and with alarming regularity, recessions occur every seven years. And it’s been, what, almost…seven years since our last one? And what would happen if the economy tanked now? Private debt is larger than before 2007. The national debt is much, much bugger. The banks’ balance sheets are hardly in much better shape – in fact, under the new Basel regs they need to hold even LESS of a capital buffer than in 2007! If mortgage rates rise to a modest 3% - very low by historic standards, of course – then almost 25% of people’s income will be eclipsed entirely by debt repayments*, leaving nothing to buy food.

Notwithstanding famous housing analyst Kate Moss’ well known quote “nothing tastes as good as mortgage payments feel” – this isn’t, I think, a good situation to be in.


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*Edited to add: by which I mean that, with rates at 3%, 25% of the total population will have debt repayments larger than their income. This does currently read a bit like the "60% of the time, it works every time" quote from Anchorman regarding "Sex Panther".