These are the houses that Jack built, baby, and their prices reaches up into the sky

Sir, I refer to Merryn Somerset Webb’s “UK property: The recent gains could turn out to be a huge historical anomaly” House and Home, November 17.

I would argue that more than an anomaly we are living the results of a humanly understandable political mistake of historical proportions, namely that of trying to make houses affordable by means of many preferential conditions.

After society, God knows why, decided that a home owned was much more valuable than a home rented, many different favors were awarded the purchasing of houses, many like those Somerset Webb describes, but also some other much harder to detect.

For instance, regulators decided that since they perceived residential mortgages as very safe, banks would be allowed to hold comparatively little capital against these. Since banks could therefore leverage much more with residential mortgages than with many other assets, banks had higher incentives to give a house buyer, who otherwise would not be able to buy a house, an easy credit.

That easy credit to the first buyer increased the demand of houses, so houses prices in general went up; and so the next time when a second buyer also wanted help to afford the house, you had to supply him with even more easy credit than what you helped the first buyer with… and so up and up and up it goes…

And those who own houses benefit and feel enriched by the increase in the price of houses are happy, while those who have not been able to jump on that bandwagon feel more and more frustrated, because the see their dream of a “real” home being made less and less affordable. That is of course something that the redistribution and polarization profiteers try to capitalize on.

And parents, so as to get their children out of the basement, now have to use their house to obtain the finance needed in order to help their children to make the down payments on the houses they want to buy. The sad story is that if banks had not invested so much in “safe” residential mortgages and had perhaps invested more in loans to entrepreneurs who could give them jobs, the children would have been able to afford, on their own, the lower priced houses. 

And so houses morphed from being only homes into also being investment assets. How much of current high house price is represented by the home value and how much by the easy credit value is anyone’s guess, but it sure would be interesting to see how much of their prices.

Whatever, the moment all those investment assets are to be cashed in by too many at the same time, for instance to cover some retirement costs, it will be ugly, for house owners, and for the banks, and for the taxman who has also been so much financed by the house bubble, in fact it will be ugly for all.

It all makes me remember Alan Price’s “Oh my, my, my, my, my, my, my, it makes you wanna cry. This is the house that Jack built, baby, and it reaches up into the sky”

These were the houses that Jack built... with plenty of easy credit, and which were taxed by the taxman

@PerKurowski

The world will come to deeply regret central bankers avoided a cleansing hard landing in 2008... and opted instead for kicking the crisis forward (and upwards)

Sir, Merryn Somerset Webb asks: “The consequences of those solutions found in 2008, one of which was to make rich people richer in the hope they would spend more, look like they could end up neutering capitalism — the greatest poverty destroying system ever. Was avoiding a few more years of recessionary misery after 2008 worth that?”, “A post-crisis cure that has stored up economic pain” September 15.

Somerset Webb then proceeds to contrast the fortunes of a middle-aged man with a large mortgage in central London in 2008 and an equity portfolio [who] has had a brilliant decade, with the hardships of cash savers and pensioners suffering the impacts of low interest rates, and the many tenants who know they can never save enough for a house deposit. She is, sadly, so absolutely right.

In 2006, when troubles started brewing, I wrote a letter that was published by FT and in which I briefly but clearly (I think) exposed the benefits of a hard landing. 

When the FED, and later ECB, decided that the best thing to do was to kick the crisis can forward, and proceeded with a huge stimuli package that included foremost quantitative easing and ultra low interest rates, I accepted it. What was I to do? 

But what I never thought would happen was that all that stimuli would be injected into the economy, without eliminating the distortions that had created the crisis in the first place. And I refer here of course, for the umpteenth time, to the risk weighted capital requirements for banks; those that favor banks lending to what is perceived or decreed safe, like AAA rated securities, residential mortgages and sovereigns; and to stay away from the risky, like entrepreneurs.

Because of that, the stimuli had no chance of yielding sustainable economic result and we are now fretting and waiting for that huge growing by the minute can to roll back, with vengeance, on us, on our children or on our grandchildren.

Somerset Webb opines that “the political conversation these days focuses not, as it surely should, on wealth creation but on long-term wealth redistribution: new property taxes; rises in capital gains taxes; more corporate taxes; workers on boards; the nationalisation of industries in the UK; higher minimum wages; maximum wage ratios; the limiting of the rights of people who are non-resident for tax purposes, and the like.”

I agree. After besserwisser statist regulators have messed it up so completely, the last thing we need is for redistribution profiteers to expand the value of their franchise.

As I see it some of our priorities are:

First, to work our banks out of that corner into which regulators have painted them in, something which, as it includes a statist 0% risk weight for sovereigns, is easier said than done.

Second, initiate, even with very low amounts an unconditional universal basic income scheme. That will allow us to begin creating those decent and worthy unemployments we will need, before society begins to break down.

Third, stop the populist from promising heavens, by asking them to explain clearly how wealth, mostly invested in assets, could be redistributed without unexpected negative effects.

Sir, you know I am from Venezuela. I have seen my homeland taken to pieces in less than two decades, and the many Chavez and Maduro there are in the world frightens me. I guarantee you they will stop at nothing once they begin.

PS. Thank God Lehman Brothers collapsed when it did. Can you imagine if the AAA rated subprime mortgages securities craze, that regulators allowed banks to leverage a mind-blowing 62.5 times with, would had gone on for one or two years more?