Be Careful What You Wish For...

A recent Economist report has shown that, on key indicators (rents to value ratios etc) Canada has the most over-valued property in the world at the moment. Clearly it would be a good idea to get the guy that ran their economy to come and be our new Bank of England Governor. Oh, we already did...?

But I digress…

There seems to be a hope among frustrated FTBs that falling property values will make it easier to buy a home. I don’t think these people have quite thought this through.

Homes will be indeed be cheaper, as their values will be falling (let me know if this is a bit of a complicated point, Nick Clegg) but this does not necessarily mean that they’ll be easier to buy for most FTBs. In fact, if you think about it (and I do from time to time) falling property values will probably make it considerably harder for most first time buyers to purchase.

And by ‘FTB’ I mean the traditional first time buyers, for example a young family on average incomes attempting to buy a house – not a millionaire Qatari using London property as a safety deposit box (someone who also counts as a first time buyer and is also regularly used in ‘FTB numbers rising’ reports in the British press).

Let’s start from an a priori position:

This is how banks think (and I used to work for a bank as an Analyst): I will give you money, but how do I cover my ass? (I worked for a US bank, you see)

Here are three succeeding scenarios, two plucked at random from our recent economic history, with plucked from a potential economic future:

SCENARIO 1 House prices are booming, they will only ever go up!

SCENARIO 2 House prices are fairly static, they may go down a bit but probably not more than 10% at worst. Where is my Diazepam? I might need to take some.

SCENARIO 3 House prices are plummeting. Benzodiazepines are yummy.

Scenario 1 – banker thinks: rising prices, I will lend 105% of the house price as I will definitely get my money back! The house price will rise to cover it! Brilliant. I don’t even NEED my diazepam anymore, this is the best thing ever.

Scenario 2 – I am a banker and I need a 10% deposit against the loan, just in case. As ‘scenario 1’ has already pushed up prices to multiples of the historic average, this means the annual average wage as a deposit please. Cue most FTBs being excluded from mortgage finance. I will keep diazepam on hand. Just in case.

Scenario 3 – house prices are falling a lot, looks like they may go down another 25%. I am a banker, and I want to cover myself – I need a 30% deposit please. Cue total exclusion of ALL FTBS. Plenty wailing and much Diazepam was had by all.

Build lots of houses with the express intention of having house prices fall, and lending to FTBs will disintegrate completely (along with all bank’s loan books and subsequently what is left of the British economy, but that is a separate point).

Luckily the government has no intention of building more houses, they’re just pretending to want to.

So what is the answer?

Well, at what point will people realize that THERE IS NO ANSWER! There is no way out without pain.

The longer we try to avoid that pain, the worse that pain will be when it comes.

Here endeth the lesson.