Collapse of the UK housing market

[Nimrod103]

Before you ladies go any further down the rabbit hole, please -- step back.

It's obvious to anyone with a brain that it should be the cost of providing shelter is included in general CPI figures - if you regard CPI as a measure for the cost of living. That methodology then needs to reflect the economics of our housing market - including rents, owner-occupied, as well as public sector housing in representative measures.

Which rabbit hole are you referring to? If it is the 'measure for the cost of living', I can see why including house prices might be moot, although personally I think they should be in there. If the BoE/MPC was solely targetting 2% inflation, then really there is no reason not to ram interest rates up to 12% now, and leave them there for a year. That would have had the desired effect.

However, the "mandate of the BoE" is - Our mission is to promote the good of the people of the United Kingdom by maintaining monetary and financial stability.. I don't regard 13 years of emergency lowest interest rates ever, followed by a panic stricken and delayed rise, which is going to cause real pain to mainly young mortgage payers who were suckered into paying too much for housing during the low interest rate interlude. The whole episode is indicative of a BoE that really doesn't know what it is doing, and has no concept of moral responsibility.

[dealtn]

That’s a fair question and I guess that my argument is that house prices (not just the cost of finance or the cost of running a house) should be one of the things that’s included by the MPC when they are measuring inflation and thereby making their decisions on what to set the base rate to. It doesn’t necessarily have to be CPI if another approach achieves this goal

Please quote correctly, as only then do I get alerted you have replied, and presumably expect a response.

The MPC don't measure inflation.

The ONS won't include house prices within CPI (or directly in CPIH) because they literally aren't a component of inflation. Inflation is a very misunderstood macro-economic concept and isn't simply the change in the prices of (all) things. In particular "consumer" price inflation is there to measure things that we, as the retail population "consume". This too is being misunderstood. Consumption is not the same as buying.

So again, IF you, and others, believe the MPC when deciding what to do with monetary policy, and set interest rates, is too narrowly mandated along the lines of inflation, and specifically CPI, then absolutely fine. That is, and will be, a different argument, to the one that assets aren't captured by "inflation" and specifically CPI. Your argument isn't, although you might not see it, that CPI, as constructed is wrong.

[leedm]

Please quote correctly, as only then do I get alerted you have replied, and presumably expect a response.

The MPC don't measure inflation.

The ONS won't include house prices within CPI (or directly in CPIH) because they literally aren't a component of inflation. Inflation is a very misunderstood macro-economic concept and isn't simply the change in the prices of (all) things. In particular "consumer" price inflation is there to measure things that we, as the retail population "consume". This too is being misunderstood. Consumption is not the same as buying.

So again, IF you, and others, believe the MPC when deciding what to do with monetary policy, and set interest rates, is too narrowly mandated along the lines of inflation, and specifically CPI, then absolutely fine. That is, and will be, a different argument, to the one that assets aren't captured by "inflation" and specifically CPI. Your argument isn't, although you might not see it, that CPI, as constructed is wrong.

Hopefully I’ve quoted you correctly this time.

Lets see what the ONS says about Inflation

https://www.ons.gov.uk/economy/inflationandpriceindices

Inflation and price indices
“The rate of inflation is the change in prices for goods and services over time. Measures of inflation and prices include consumer price inflation, producer price inflation and the House Price Index.”

So let’s move on from whether CPI should include house prices.

Given that the above quote illustrates that house prices is a measurement the ONS captures to help determine the rate of inflation and I would be shocked if this information wasn’t also available to the MPC.

Why do you think that the MPC appear to have ignored this data when setting base rates for the 15 or so years prior to the recent increases ?

[Alaric]

Why do you think that the MPC appear to have ignored this data when setting base rates for the 15 or so years prior to the recent increases ?

Isn't it nearer 25 years, dating back to when Gordon Brown handed setting interest rates to the Bank of England?

I think the Treasury in the days of the Major government under Lamont and Clarke had some vague policy about taking the effcet on house prices into account when setting interest rates That was after they gave up shadowing the DM.

[Tara]

Interesting debate. Having read through it, I’m still struggling to hear a legitimate argument as to why house prices should not be included in the CPI.

Other than that they are an asset and "consumed" over multiple years rather than in just a single period.

Other than they don't represent the majority way a consumer pays for housing.

Other than they are equally as much a product that is sold by a consumer as much as bought by one.

What would convince you they shouldn't be in CPI (or CPIH)? Or are you simply making the different, but legitimate, alternative argument that monetary policy makers shouldn't ignore wealth effects, and in particular housing wealth (in this case), when setting interest rates?

Well perhaps this would have been the simplest solution. The BoE should clearly never have ignored the wealth effects of rising UK house prices when setting interest rates over the last 30 years.

When the ratio of UK house prices to UK average earnings started to rise from the long term average of about 3x in 1995 to over 6x average earnings in 2005, it should have set off the alarm bells at the Treasury and at the Bank of England. But they all just ignored it. Mainly because they were all benefiting from it through lower inflation, lower interest rates, and higher house prices. And now with UK house prices at about 10x average earnings the situation is even more critical. So all of the damage has now been done, just as the UK housing crash is set to begin.

Clearly the current measures of inflation, whether CPI,CPIH, or RPI, are not correctly capturing the cost of living in the UK for ordinary people. And that is mainly because none of these indices have ever included the soaring cost of buying a house in the UK.

Time to start a new UK inflation index, with a new name, that takes full account of UK house prices as a multiple of UK average earnings.

There will be a new government in the next year or two, and a new “fit for purpose” UK inflation index should certainly be on their “to do” list.

[Mike4]

There will be a new government in the next year or two, and a new “fit for purpose” UK inflation index should certainly be on their “to do” list.

Agreed.

But what should happen and what will happen are different things, and permabears often seem to struggle with this.

People who grasp and accept that what should happen is almost always different from what will happen, tend to be the ones who do well from investing in property.

[Tara]

There will be a new government in the next year or two, and a new “fit for purpose” UK inflation index should certainly be on their “to do” list.

Agreed.

But what should happen and what will happen are different things, and permabears often seem to struggle with this.

People who grasp and accept that what should happen is almost always different from what will happen, tend to be the ones who do well from investing in property.

Yes, most people are probably aware of the fact that they are governed by those who care nothing for them.

[Lootman]

what should happen and what will happen are different things, and permabears often seem to struggle with this.

People who grasp and accept that what should happen is almost always different from what will happen, tend to be the ones who do well from investing in property.

Yes, most people are probably aware of the fact that they are governed by those who care nothing for them.

Most people (who vote) live in owner-occupied homes and will not vote for a politician who stands on a policy of devaluing their prime asset.

Your problem is not politicians but rather your fellow citizens.

[Lanark]

Time to start a new UK inflation index, with a new name, that takes full account of UK house prices as a multiple of UK average earnings.

There will be a new government in the next year or two, and a new “fit for purpose” UK inflation index should certainly be on their “to do” list.

That would make a lot of sense, but I agree with others that it will probably never happen, political leaders on all sides have been hearing that there is a 'property crisis' for decades, but they still don't understand the issue, never mind have any solutions.

[Lootman]

political leaders on all sides have been hearing that there is a 'property crisis' for decades, but they still don't understand the issue, never mind have any solutions.

Is there a "crisis"? For decades, millions have achieved financial security via the tax-free appreciation of their homes. Millions more have inherited financial security the same way.

A bad thing?

[NotSure]

political leaders on all sides have been hearing that there is a 'property crisis' for decades, but they still don't understand the issue, never mind have any solutions.

Is there a "crisis"? For decades, millions have achieved financial security via the tax-free appreciation of their homes. Millions more have inherited financial security the same way.

A bad thing?

Possibly. It breeds complacency. That "security" could could be destroyed by an extended period of more "normal" IRs.

[Tara]

political leaders on all sides have been hearing that there is a 'property crisis' for decades, but they still don't understand the issue, never mind have any solutions.

Is there a "crisis"? For decades, millions have achieved financial security via the tax-free appreciation of their homes. Millions more have inherited financial security the same way.

A bad thing?

Yes, it is a very bad thing if it excludes many millions of young people in society from ever being able to afford their own home because UK house prices are now 10x average UK earnings.

When house prices have fallen to the long term average of about 3x or 4x average earnings then the situation will have improved.

[Lootman]

Is there a "crisis"? For decades, millions have achieved financial security via the tax-free appreciation of their homes. Millions more have inherited financial security the same way.

A bad thing?

Yes, it is a very bad thing if it excludes many millions of young people in society from ever being able to afford their own home because UK house prices are now 10x average UK earnings.

"many millions of young people" will inherit those houses.

[Tara]

Yes, it is a very bad thing if it excludes many millions of young people in society from ever being able to afford their own home because UK house prices are now 10x average UK earnings.

"many millions of young people" will inherit those houses.

And the millions who do not inherit?

And the millions of newly arrived migrants?

[Lootman]

"many millions of young people" will inherit those houses.

And the millions who do not inherit? And the millions of newly arrived migrants?

Life is not fair. Not everyone can be a winner.

[NotSure]

And the millions who do not inherit? And the millions of newly arrived migrants?

Life is not fair. Not everyone can be a winner.

Of course. But from a UK-future PoV, thinking you're a financial genius simply because your parent bought well in property is not a great basis for future prosperity, IMHO. We need innovation and talent, not just "my dad's made an unearned mint from his house, and it'll soon be mine"

[Tara]

And the millions who do not inherit? And the millions of newly arrived migrants?

Life is not fair. Not everyone can be a winner.

So you did not really have any solution then to the problem.

[Lootman]

Life is not fair. Not everyone can be a winner.

So you did not really have any solution then to the problem.

No, rather I disagree that there is any "problem" to solve.

[Nimrod103]

The problem goes to the heart of what the Bank of England (MPC if you like) SHOULD be doing. They are charged with the responsibility to maintain economic stability, yet one look at house prices*, the amount of money borrowed on houses, and indeed the amount of money borrowed throughout the British economy, shows that they have achieved nothing like financial stability. They have failed in their main task.

*primarily during the period of near ZIRP, but one can trace the problem back to 2000 when house prices really started to take off (https://www.housepricecrash.co.uk/indic ... inflation/).

[Mike4]

Life is not fair. Not everyone can be a winner.

So you did not really have any solution then to the problem.

And your solution is?