BeanStruckbyBubbleBlindness
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No HousingBubble ‘Emerging‘ intheUK
BoE deputy governor Charlie Bean had a few more pearls of wisdom to dispense on occasion of his Jackson Hole visit. According to Bloomberg: “BOE’sBeanSaysCan’tSeeSignsofHousing Boom Emerging”. Of course not! Why on earth should there be even the remotest danger of a housing bubble emerging with the BoE’s administered interest rate stuck forever and ever at a punitive 0.5% and the UK’s true money supply soaring by 10.9% year-on-year after the BoE bought up a quarter of the outstanding government debt with money from thin air? To even think that this could lead to the emergence of a housing boom is preposterous!
“Bank of England Deputy Governor Charlie Bean said he isn’t worried the U.K. housing market is poised to suffer a new bubble.
“We wouldn’t want to see a house price boom emerging which would have potential problems further down the road,” Bean said in an interview with Bloomberg News published yesterday. “I can’t say we see signs of that at the moment. At this stage, you certainly wouldn’t say there’s a problem.”
WithhousinghavingstruggledduringBritain’srecession, signs are mountingthat a recoveryintheproperty sector is now underway, partly because of government measures to boost demand. A home-value gauge compiled by the Royal Institution of Chartered Surveyors rose to the highest in almost seven years in July.
Speaking during a Federal Reserve Bank of Kansas City conference in Jackson Hole, Wyoming, Bean said the central bank would like to see an increase in housing transactions and that home prices were for the moment increasing in line with general inflation.
“I don’t think that we’d want to see a situation where house prices are running ahead at an unsustainably rapid rate,” he said. “Clearly it’s one of the things to look at as all the activity indicators pick up — are there any signs of excesses starting to emerge?”
(emphasis added)
So a 5.5% leap in UK housing prices year-on-year is ‘in line with general inflation‘? Can we assume then that the UK statistics office is not entirely truthful about the rate of UK consumer price inflation, or is it just that Mr. Bean hasn’t looked at the data lately? Below is a long term chart of UK house prices. Note that the most recent data are not yet included, so this chart doesn’t yet show the recent resumption of the bubble.
UK house prices from 1994 to 2012. In 2013, the bubble has resumed.
The Government’s Crazy ‘Help to Buy’ Scheme
The government has started a ‘Help to Buy’ scheme that allows buyers to get a mortgage with just a 5% down-payment. Nothing can possibly go wrong when such measures are introduced. After all, it worked splendidly in the US sub-prime segment for a number of years. Never mind the slight hicc-up in 2008 – that is all forgotten by now, as the bubble has resumed in the US as well, this time driven almost exclusively by investors (households are too broke).
There are a few other data points Mr. Bean may not be aware of. UK house prices are at six times the median UK income. According to the OECD, prices are therefore 21% overvalued against incomes, and the 8th most expensive in the world, with only the bubbles in places like Norway, Australia and France even more egregious at this point in time.
Currently UK house prices are just 1.6% below their 2008 bubble peak and following the recent 5.5% increase in prices year-on-year, recent forecasts call for a 7% increase for all of 2013 and a 12% increase in 2014. That’s all ‘in line with general inflation’? According to the chief economist at Fathom Consulting, Andrew Bridgen, the reason for the change in forecasts is “almost entirely down to the ‘Hep to Buy’ scheme, particularly the fact that anyone can now buy a house with a 5% deposit rather than a 20% deposit”.
The government provides a ‘low cost bridge loan’ to buyers for three quarters of the deposit, which is making these 95% loan-to-value mortgages possible. $130 billion have been set aside for this mad-cap scheme to reignite the bubble. Although Mr. Bridgen doesn’t mention it, one cannot overlook current interest rates (which are the lowest in history), as well as the pace of monetary inflation in the UK, which is lately going gangbusters:
The UK money supply: year-on-year growth of money TMS has accelerated to almost 11%, with quarterly and monthly annualized growth rates at 13.1% and 15.9% respectively. Both the growth in currency and in uncovered money substitutes have soared in recent months. Chart via Michael Pollaro.
Conclusion:
Due to the combination of monetary pumping and the government’s subsidy scheme, the housing bubble in the UK, which has actually been in train since 1994, has resumed at full blast. How far it will go is unknowable at this point, but it is certainly par for the course that the second in command at the country’s central bank ‘cannot see any signs of an emerging bubble‘.
Bubble blindness is an affliction that is widespread among central bankers. At some point down the road, when this new bubble bursts again, they will tell us that ‘no-one could have seen it coming’ and that it was anyway definitely not their fault. How many times must people see this movie before they come to their senses and draw the correct conclusions? Central banks are impoverishing us and are holding back economic progress. It is probably no exaggeration to state that they actually represent one of the greatest dangers to civilization. It is high time for the world to wake up and stop believing that social engineering by a handful of bureaucrats who cannot even see the booms and busts they are creating when they are staring right at them, will ever work.
Charts by: Globalpropertyguide.com, Michael Pollaro
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