Before aiming at any target, central banks must cure their shortsightedness

Sir, I refer to Martin Wolf’s “What central banks ought to target” FT, March 3.

With risk weighted bank capital requirements, the regulators are targeting what’s perceived as risky, thereby de facto fostering the creation of the excessive exposures to what’s perceived as safe, but that could end up being risky, which is precisely what all major bank crises are made off. In other words, they are putting future Minsky moments on steroids.

And if to the distortions in the allocation of credit to the economy that produces, you add the QEs, then you end up with such a mish-mash of monetary policy that no one, not even Mr. Wolf, should be able to make heads and tails out of it.

Wolf writes, “Central banking is art, not science… it must be coupled to deep awareness of uncertainty”. Sir, I ask, can you think of anything that evidences such lack of awareness of uncertainty than the risk weighted bank capital requirements?

So, before discussing what else to target, it is essential that central banks and regulators get their shortsightedness corrected.

Of course, “the central bank [should] set a rate that is consistent with a macroeconomic equilibrium” but, what would those rates be if banks needed to hold as much money when lending to the sovereign (the King) than when lending to citizens?

And when Wolf reports that “the New Zealand government has told its central bank to target house prices”, that makes me ask: Is anyone aware of the implications of having a central banks placed in the middle of that real, though not named, class war between those who have houses as investment assets and those who just want affordable homes?

Finally, as so many do, Wolf also signs up on that: “If people want less wealth inequality, they should argue for wealth and inheritance taxes”. But just as most do, he does so without explaining what assets, and to whom, the wealthy should sell, in order to reacquire that cash/purchase power needed to pay the tax that they handed over to the economy when they bought these. Not doing so, leaves one quite often a sort of populist aftertaste.

PS. Inflation? Just the same old confusion

@PerKurowski

As a consequence of too much regulatory subsidized credit, whether by deflation or inflation, both houses and sovereign debts will be worth much less.

Sir, Martin Wolf writes: “monetary policy fosters risk-taking, while regulation discourages it — a recipe for instability.” “How the long debt cycle might end” May 15

Over the last decade I have written hundreds of letters to Wolf and other at FT about the dangerous waste of any stimuli package when you simultaneously distort the allocation of bank credit to the real economy, as is currently done with the credit risk weighted capital requirements for banks.

Just looking at some of the risk weights: like 0% for the sovereign, 20% for anything rated AAA to AA, 35% or less for residential mortgages and 100% for loans to unrated entrepreneurs, should have sufficed to know where we would end up, namely:

A banking sector abandoning much of its traditional “risky” lending in favor of what is perceived, decreed or concocted as safe; forcing most of those that used to keep to what was perceived as safe, like individual private savers, pension funds and even insurance companies, to get into the world of what’s risky, something for which they are much less prepared than banks.

And excessive bank exposures, as usual, morph what is very safe into being very risky. Having, with too much financing, pushed houses from being homes into being investment assets, have made households house-rich and money poor. Just wait till many of current owners, out of need must convert houses into main-street purchased power at any cost. Whether by deflation or inflation, those houses will be worth much less.

Of course, lower bank capital requirements for loans to sovereigns than for loans to citizens, translates, de facto, into a belief that bureaucrats know better and are more responsible than citizens about how to use bank credit, and will therefore cause excessive sovereign debts. 

With respect to it Wolf writes: “Those in emerging countries are particularly vulnerable, because much of their borrowing is in foreign currencies”. That is so but let me also add to that the Eurozone nations who, de facto, do not take on debt denominated in a domestic printable currency. 

But, let us be clear, a nation printing itself out of excessive public debt, does also expose itself to inflationary pressures and so again, whether by deflation or inflation, in real terms, that sovereign debt will be worth much less than what its buyers’ paid for it.

Sir, finally, Martin Wolf opines that those who recommended another route of adjusting than with the stimuli package to the 2008 crisis were “fools”.

That could be but, as a consequence of taking “the smart way”, the world just kicked the crisis can forward and renounced to the long-term benefits of a hard landing. There will come a time when too many will regret not having taken the fools’ way.

http://subprimeregulations.blogspot.com/2019/03/my-letter-to-financial-stability-board.html

@PerKurowski

Central banks, when targeting, should start by making sure they are targeting the correct target; and the last thing they should do, is to promote distortions in the allocation of bank credit.

Sir, Marie Owens Thomsen writes: “Today, governments tend to run only budget deficits, making them rather structural. This leads to ever-rising debt levels and poses a potential policy dilemma. Thanks to the blissfully low rate of inflation, it is possible to ignore this fact. But should inflation hypothetically shoot up, it would quickly become apparent. Central banks could find themselves unable to raise policy rates enough to combat price increases without causing a debt sustainability crisis at home.” “Central banks need to be less dogmatic on inflation targeting” May 8.

Scary stuff, but even more so when one considers the following:

First, that the targeting of inflation is based on an entirely subjective measure of inflation. Just as an example it is based on the cost of renting houses but not the price of houses.

Then second, the artificially imposed risk weighted bank capital requirements, which among other much favor “safe” sovereign debt over “risky” loans to entrepreneurs and SMEs, is distorting the allocation of bank credit to the real economy, and sends out the wrong interest rate signals. For instance had the EU authorities not assigned a 0% risk weight to all Eurozone sovereigns, even though these were getting indebted in a currency that de facto is not their domestic (printable) one, Greece would never have been able to build up the exposures to German and French banks that doomed it to a crisis.

@PerKurowski

If the inflation-measured basket used house prices instead of rental costs, the story would be different.

Sir, Rana Foroohar points to “The latest Consumer Price Index figures show that almost all core inflation… was in rent or the owner’s equivalent of rent (up 0.3 per cent) [while] Core goods inflation, meanwhile, was down 0.2 per cent” and argues “that the housing market is once again completely out of sync with the rest of the economy.” “America’s new housing bubble” March 18.

Yes and no! No! “Rent” in much is a laggard response to the price of houses, and so it would be more precise for the arguments made by Foroohar to compare core goods inflation to what is happening to those prices.

Yes! “Hyman Minsky would have had a field day [more precisely many field years] with his Financial Instability Hypothesis that [argues] two kinds of prices — prices for goods and services, and asset prices.”

And yes, Daniel Alpert is correct: “What we have now is a form of inflation that’s never been seen before — it’s all concentrated in housing.”

To explain that with as “something the US Federal Reserve has actually exacerbated (albeit unintentionally) via low interest rates and quantitative easing that boosted housing prices in the very cities where the best paying jobs are located”, is correct but quite incomplete.

If banks needed to hold as much capital against residential mortgages as against for instance loans to entrepreneurs, something that was the case before the Basel Committee got creative, that would be happening much less.

As is, the resulting abundant easy financing when purchasing a house has helped morph houses from being homes into being investment assets. 

PS. In a letter I wrote and that FT published in 2006 (before it stopped doing so) titled “The information Mr Market receives could also be neurotic” I argued:

“Inflation as they, our monetary authorities, know it, is just obtained by looking at a basket of limited consumer goods chosen by bureaucrats and that although they might be highly relevant to the many have-nots, are highly irrelevant to measure the real loss of value of money. 

For instance, who on earth has decided for that the increase in the price of houses is not inflation? And so what should perhaps be argued is that really our monetary authorities have not been so successful fighting inflation as they claim they have been.”

@PerKurowski

The crisis of modern liberalism is caused more by authoritarian besserwisser distortions than by market forces.

Sir, Wolfgang Münchau writes: Margaret Thatcher’s successful brand of entrepreneurial capitalism in the UK in the 1980s… Through the sale of council houses, she turned tenants into property owners.”, “The crisis of modern liberalism is down to market forces” December 25.

True, but later immense injections of liquidity, ultralow interest rates, and extreme preferential risk weighted capital requirements for banks when financing the purchase of houses, has helped turn houses from being just homes into being investment assets. That of course has left all those who do not own these investment assets, even further behind.

Therefore I cannot agree with Münchau’s conclusion that liberalism is failing because of market forces. At least in this case the distortions are not caused by market forces, but by regulators and central bankers who have insufficient idea about what they’re doing. Of course, if crony statism forms part of market forces, which perhaps de facto it sadly could be, then I would be wrong.

When Münchau finally opines, “Any system that leaves behind 60 per cent of households will eventually fail” that is not necessarily so. The world is plagued by examples by how such systems have too often proven to be even more resilient than those who do not. On a small model scale, just look at how Venezuela’s current regime has been able to hang on to power for at least a decade more than it should have been able to.

@PerKurowski

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

Should not a “State of the European Union” analysis be an indispensable document, when searching for a solution to the Brexit vs. Remain quantum entanglement?

George Parker and Alex Barker discussing the “brutal reception in cabinet and in parliament the Brexit withdrawal agreement received mention one cabinet minister saying: “The people who are criticising the deal don’t have any alternative, that was true before the Chequers meeting, it was true before this week’s cabinet meeting and it’s still true now. People can suck their teeth and say it’s a betrayal and talk about vassalage, but they don’t seem to have given any thought to what the alternative might be.” “May heads for a hard sell” November 17.

In terms of Brexit mechanism that might be true, but there is of course also the alternative of holding another referendum, which might provide a Remain instead. 

What I sorely miss in the whole Brexit vs. Remain heated discussions is a “State of the European Union” analysis that would help to bring some perspective on it all, and that could also be useful to all Europeans, independent from what happens down the line.

I say that because I sincerely think the EU is not doing well, and that there are huge problems brewing there, which sometimes, like yesterday, have me thinking that though Brexit is an absolutely awful solution, a Remain could be even worse.

Sir, could you imagine the national embarrassment for Britain to change its mind and go for a Remain, and then finding EU gone? 

PS. Quantum entanglement is a physical phenomenon which occurs when pairs or groups of particles are generated, interact, or share spatial proximity in ways such that the quantum state of each particle cannot be described independently of the state of the other(s), even when the particles are separated by a large distance—instead, a quantum state must be described for the system as a whole.

@PerKurowski

Brexit is sure a bad idea, but how can you be sure Remain is not even a worse one?

Sir, Alex Barker and Jim Brunsden quote Catherine Barnard, a professor of EU law at Cambridge university: “Never before has a treaty been constructed of this kind,” “The EU is a unique organization. What the Brexit process has revealed is just how deep the integration is in reality.” “Accord leaves Britain bound to Brussels” November 16.

On the first, indeed, to for instance adopt a Euro in order to push forward a union instead of letting a union produce a common currency, is a truly strange way to construct a union.

But, on the second “how deep the integration is in reality” I beg to differ. Having a member like Greece walk the plank, especially as EU authorities were most to blame for its problems, is not the doings of a real deep union.

Sir, let me refer to a speech delivered by Mario Draghi, President of the ECB, at the Frankfurt European Banking Congress, given today, “The outlook for the euro area economy”. 

It concluded with: “I want to emphasize how completing Economic and Monetary Union has become more urgent over time not less urgent – and not only for the economic reasoning that has always underpinned my remarks, but also to preserve our European construction.”

I agree, because as is, Italy will not walk the plank as Greece did, and that could bring on the end of the euro, as we now know it, which could bring an end to the European Union, as we know now it, or, clearer yet, as we perhaps really don’t know it.

Sir, whether Brexit or Remain supporters, does not Britain (and all other UE members) have the right to know what “completing Economic and Monetary Union” to “preserve EU our European construction”, which Draghi urges really entails?

Draghi also mentioned “as urgent as the first steps were in euro area crisis management seven years ago”, “The completion of the banking union in all its dimensions, including risk reduction, and the start of the capital markets union through implementing all ongoing initiatives by 2019”

Sir, does not Britain, a nation where banking means so much, have the right to know exactly what that entails so that it banks are not castrated in the process?It is not just me a foreigner asking. Let me remind you that seven years ago, Alex Barker in [Mr. Brexit Negotiator] “Barnier vs. the Brits” wrote about the fears of Sir Mervin King that Brussels reforms would reshape a vital British industry, banking, to the benefit of eurozone rivals.

Draghi also said: “Household net worth remains at solid levels on the back of rising house prices and is adding to continued consumption growth.” 

That is an untrue statement. A much truer one would be: “Household net worth remains very fragile since it rides almost exclusively on rising house prices, as a consequence of the distortion produced by too much and too favorable financing being offered for the purchase of houses. A distortion that helped to anticipate much of the consumption we have seen, but that will come back and hurt house owners, whether by house prices falling, or hurt everyone, by inflation eroding our real consumption power.

Sir, when that happens, and the crisis needs to be managed so as to impede the destruction of all social cohesion, would you prefer to do that on a national level, instead of on the level of a union in which very few know how to sing its anthem?

Sir, I’m no one to give a recommendation but, should not the Brexit vs. Remain discussions refer more fundamentally to the future of Britain and of EU, instead of being turned into another profitable venture for some opportunistic polarization profiteers?

Should not FT inform its readers, in a much more balanced way, of all challenges that lay ahead, not only those of a Brexit but also those of a Remain?

A long time friend and admirer of Britain 

@PerKurowski

When the tide that turned safe homes into risky investment assets goes out, the wreckage will be horrific

Sir, Paul Mortimer-Lee in his letter “The tide that floated all ships is going out”, October 12, commenting on Martin Wolf’s “How to avoid the next financial crisis” (October 10), writes:“easy money has been pushing on a string as far as inflation is concerned”.

Not really, the problem is that, as I answered Martin Wolf in a letter published by FT 2006, is that when measuring inflation in housing, what is registered on the string is the cost of rental, not the prices of houses.

With low interest rates and especially low capital requirements for banks when financing the purchase of houses; unelected authorities have transformed houses from being safe homes into risky investment assets. When the tide goes out on that, the wreckage will be indeed absolutely horrific.

@PerKurowski

If only inflation had also measured the price of houses and not just rentals, a lot of problems could have been avoided.

Sir, Jamie Smyth reports on “the end of a five-year expansion, which saw house prices in Australia’s biggest city rise 70 per cent and household debt surge above 120 per cent of gross domestic product — one of the highest levels in the developed world.” “End of Australia housing boom sparks fear of disorderly crash” September 7.

In the housing sector inflation is solely measured based on the rentals, which surely lag house prices. In 2006, in a letter that FT published, I asked: “Who on earth has decided for that the increase in the price of houses is not inflation? And so what should perhaps be argued is that really our monetary authorities have not been so successful fighting inflation as they claim they have been.”

If inflation had also partly measured house prices, it would not have shown such low figures, and then inflation targeting central banker would have had to tighten monetary conditions, and bank regulators, their credit and capital requirements conditions. 

How central bankers can just turn a blind eye to it could have something to do with that a great majority, or perhaps all of them, are house owners, and therefore only see good in the value of their houses going up. Now when things are getting out of hands, let’s make sure they are not given any preferences, so that they can learn the lesson in ways that helps them to remember it.

The political convenience of helping house buyers with preferential access to credit only results in house prices going up, and thereby having to provide even more preferential credit. Of course Saul Eslake of University of Tasmania is right arguing, “a gradual deflation of property prices, though painful for some, will do more social good than harm.”

Sir, as I have often written to you, much better that helping young buyers with affordable credits to buy houses is helping them to afford houses, c'est pas la même chose.

A house used to be a home; now authorities made these homes and investment assets. The journey back to being solely homes will hurt, many, a lot. The alternative of inflating ourselves out of the mess could be even worse.

PS. And when push comes to shove are not shares just another type of assets to be included in inflation calculations?

@PerKurowski

If building houses where they are actually wanted, which we should, what do we do with the unwanted lot?

Sir, Robin Harding holds “What should not be in doubt is that supply limits are the single biggest problem with housing… reform the planning rules, and let people build homes where they are actually wanted.” “Planning rules are driving the housing crisis” August 15.

I agree, of course we should build houses where they are actually wanted, but the challenge of what to then do with the unwanted lot, poses major difficulties. 

It is not solely “the role of falling interest rates in pushing up house prices” that has caused houses to become financial assets. Much other preferential treatment is given to the financing of house purchases. Among other, because the financing of houses is perceived so safe by regulators, banks need to hold much less capital against residential mortgages than, for instance, against loans to entrepreneurs. (Those entrepreneurs who could create the jobs that would allow for mortgages to be duly serviced and utilities to be paid).

All that has helped house prices to shoot up and become the most important financial asset for way too many, whether for the owners, or for the banks or other who have helped many owners to extract whatever equity he had in his house.

As a consequence our society, our economies, have become mindboggling exposed to the need of keeping up house prices, while simultaneously needing house prices to become more affordable. To navigate well those waters will not be an easy task. 

Looking at some demographic realities perhaps what needs to be done is not to build more houses, but to build more senior citizens residences, thereby freeing many upstairs so that children could move up from the basements or other young move in.

@PerKurowski

More important than giving millenials affordable housing, is to help them afford houses. C'est pas la même chose.

Sarah O’Connor writes, “Home ownership rates for young people have been declining for decades as house prices have detached from incomes.” “It’s time for millennials to fight for our rights” July 25.

Not really so! It is the price of homes that have become detached from the price of houses, as these have turned into investment havens.

Access to credit in preferential terms (like generating for the banks low capital requirements) and the support O’Connor mentions of “Bank of England [with low] interest rates and quantitative easing [tried] to shore up the economy, in part by propping up house prices” has made houses “safe” investments in a turbulent world.

When O’Connor mentions, “Loosening credit standards to help more millennials buy homes would be one method” my answer would be in the form of the following riddle:

How much easy financing has now to be provided to house buyers, only in order to finance the easy finance provided all house buyers previously? 

O’ Connor recommends “It would be better to build more houses in areas of high demand, including more social housing” and to “take measures to boost productivity so incomes rise”.

The first is indeed a sensible recommendation, for all times, but the second requires among other to stop favoring with the risk weighted capital requirements for banks the access of credit for the safer present (consumption - houses) which means de facto disfavoring that of the “riskier” future (production - entrepreneurs).

Let me be clear much more important than helping to give the young access to affordable housing, is to help them to afford houses; which of course c'est pas la même chose.

What I most miss though in O’Connor’s article is a reference to a Universal Basic Income. If the society is not able to generate decent and worthy unemployments, then increasing social conflicts will prove to be the greatest menace to the millennials (and to us oldies too)

@PerKurowski

The financial crisis can was just kicked forward. At any moment it will roll back on us, with vengeance.

Sir, Raghuram Rajan, though indicating problems, writes: “The world economy has finally managed to recover from the financial crisis” “Bond markets send signals of a looming recession” June 29.

Sir, on the surface the signs of a recovery are there but, under the surface there are huge build-ups of asset values, shares and house prices, and of personal, public and corporate debt, that herald difficult times.

In August 2006, when trouble was already in the air, you published my letter titled “The long term benefits of a hard landing”. Clearly nothing of what I there argued was considered.

With QEs, Tarps, Asset Purchase programs, fiscal deficits, low interest rates and the keeping of much of the insane low capital requirements for banks, the crisis can was just pushed forward. 

Add to that Eurozone, China, Brexit, robots grabbing jobs, trade wars, migrant issues and so many unresolved problems, and one can perhaps begin to understand a not to be named reason for how so many want to legalize the use of marihuana.

Sir, again, much of the current mess is directly produced by the frantic efforts of regulators and central bankers to hide their responsibility in causing the 2007-08 crisis and ensuing hardships.

For God’s sake! In Greece they are hauling in front of courts a statistician for telling the truth, while those that with their absurd and irresponsible 0% risk weighing of that nation doomed it to excessive public debt, are free to roam and lecture us about good economics. 

@PerKurowski

The regulatory subsidy of house financing has caused much of the financialization of property markets.

Sir, Gillian Tett writes that since some investors are treating housing more like a tradeable asset, chasing yields around the world… [the] housing market is more “financialised”, [and so] a decade of ultra-loose monetary policy in the west has lifted so many geographically dispersed real estate boats” “New York property jitters herald declines elsewhere” May 25.

Since decades regulators allow banks to leverage much more their equity when financing the purchase of a house than for instance financing an entrepreneur. That means that compared to when banks held the same capital against all assets, which it did during most of its history, they now earn higher expected risk adjusted returns on equity when financing the purchase of a house, than for instance financing an entrepreneur.

Anyone who does not think this directly influences house prices should not be writing about finance.

What could the price of houses be in the absence of this regulatory subsidy? It’s hard to say. A static analysis would clearly yield the answer of much lower (30%?), but a dynamical one could perhaps yield higher prices, as a result of so many more affording houses because of more jobs created by entrepreneurs.

How do we get rid of the distortion? The sad fact is that for the redistribution profiteers it is much more interesting to offer affordable houses than to have more people affording their houses, which of course c'est pas la même chose. 

PS. One question I often ask myself is: nowadays when we finance someone’s purchase of a house how much of its price do we need to finance just because of the subsidized financing?

Dodd-Frank rollback on mortgages heralds even higher house prices and even less financing of job creation.

Sir, I refer to Barney Jopson’s and Ben McLannahan’s “Dodd-Frank rollback heralds mortgage push” May 17.

Because of the risk weighted capital requirements bank credit is geared to finance what is perceived or decreed as presently safe, like houses and the government, and to stay away from financing the “riskier” future, like entrepreneurs.

Of course I am glad for “a bill aimed at giving small banks relief from post-crisis reforms that had driven them out of parts of the market” so to give these some “more opportunity [to] offer mortgages to folks we know”

I just wish the roll back had meant the risk-weighted capital, so to incentivize small and big banks to give more credit opportunities to entrepreneurs, in order to give “folks we know” more chances of finding the jobs that will help them to service their mortgages and utilities.

PS. One very needed research is on how much of current house prices are the result of regulatory or other subsidies to the financing of mortgages. When now buying a house, how much might we currently have to finance because of the financing of all other purchased houses? 

@PerKurowski

Preferential access to bank credit for those buying houses have also turned houses in attractive investments, and so a house is no longer just a house

Sir, I refer to Sarah O’Connor’s “Cities only work if they accommodate rich and poor” March 21.

She is correct although it would be more precise saying that cities only work if they accommodate all those workers required to make a city work.

Here is my take on this issue.

By politicians and regulators giving so much preference to the purchase of houses, the prices of houses have been inflated beyond reflecting the need of houses, and so have also turned houses into attractive investments. That has created a financial disequilibrium because most workers who would anyhow struggle to pay for just houses, will find it impossible to service mortgages that also reflect the value of investment assets.

Most politicians would naturally want to be seen as helping people buy affordable houses, but they do wrong in that. What they should do is to help people to be able to afford housing, something which is absolutely not the same thing.

Before we clear out this distortion, our cities will suffer from what O’Connor’s describes. Alternatively, current house asset owners, might be required to start building houses where they allow the indispensable workers to live at a reduced rate… something that could affect the value of their houses.

In many places that are too distant for the firefighters to arrive in time, we have already heard of building houses in order to provide homes close by to these.

PS. For the purpose of the capital requirements for banks regulators have risk weighted  residential mortgages with 35% and loans to entrepreneurs with 100%, which means bank can leverage much more with residential mortgages than with loans to entrepreneurs, which means banks earn much higher expected risk adjusted return on equity with residential mortgages than with loans to entrepreneurs, which mean we will end up sitting in houses without the jobs that could provide the income to service mortgages or utilities.

PS. How much of current house prices is the direct result of easy financing? I ask because it would be interesting to know how much we are financing with easy financing of houses the easy financing of houses.

PS. One of the biggest pension crisis will be when we see all those who trusted houses to be safe investments, trying to cash out in order to convert these back into main-street purchase capacity to use in older days L

PS. Too much preferential finance for the purchase of houses, which increases demand for houses, which increases houses prices, and turns safe homes into risky investment assets, also promotes inequality as those without a house are further left behind… until L

@PerKurowski

What if all finance help provided house buyers in Canada, which increases demand, reflects 30% of current house prices?

Sir, with respect to Ben McLannahan’s extensive report on the Canadian house market February 9, “Canada’s home loans crisis”, I would just want to ask:

What if regulatory and all other support developed in order to provide house buyers in Canada easier financing, something that obviously increases the demand for houses, translates into being, let us say, 30% of the current house prices in Canada?

Who has that then benefitted, buyers or vendors?

Does this mean Canada must now help with new financing to house buyers only in order to pay for old financing help?

How could something like that not end in a disaster?

As I see it much more important than helping our young to affordable houses, is helping our young to afford houses. Ce n'est pas la même chose!

http://perkurowski.blogspot.com/2018/01/many-of-our-young-will-be-without-jobs.html

@PerKurowski

Parent regulators, not even aware they were the ones blowing the bubbles, shamelessly put all the blame on their toddler banks when these burst.

Sir, Tim Harford writes: “As any toddler can attest, it is not an easy thing to catch a bubble before it bursts” “Forever blowing bubblemania” January 13.

That is entirely true. But though we should not expect our toddlers to know it, parents are fully aware that the bubbles their dearest are chasing, were blown up by them, in the clear expectation that these would burst, or delightfully disappear in the skies.

Harford concludes in that “It’s very easy to scoff at past bubbles; it is not so easy to know how to react when one may — or may not — be surrounded by one”

Not entirely true, because that should not excuse the case of parents not even being aware they’re blowing bubbles.

In the western world, regulators, for instance, by allowing banks to leverage their equity so much when financing residential houses, are, no doubt about it, blowing up a house credit bubble that will surely blow up in our face… even though we cannot exactly know when that will happen.

When with Basel II in 2004 regulators allowed banks to leverage a mindboggling 62.5 times their capital, only because an AAA to AA rating was present, it should have been clear to them that they were blowing a bubble. Seemingly they did not. Worse, when then the AAA rated securities backed with subprime mortgages exploded in their face, they should have been able to put two and two together, but no, they put all the blame on the banks, the toddlers in this case. Even to the extent of describing the excessive bank exposures to AAA rated assets, or to sovereigns like Greece who with a 0% risk weight they had decreed infallible, as an irresponsible excessive risk-taking by bankers. They should be ashamed!

PS. Like Harford’s senior colleague I was also very skeptical about Amazon’s valuation. In April 1999 I wrote in an Op-Ed that Amazon had “joined the rank and files of ‘tulipomanias’” Yes, I admit, it is now worth much more than it ever was at that time. That said, and though Amazon is now way more than about books, I still suspect that, long term, because of: “‘shopping agents’ will permit clients to quickly compare one company’s prices to those of its competition, which would seem to presage an eventual fierce price wars, would create an environment that is not exactly the breeding ground for profits that back the market valuations we are now observing”.

But then I also assumed institutional “efforts aimed at prohibiting any monopolistic controls of the Web”, and in this perhaps I could have been way to naïve.

@PerKurowski

High house prices, besides a function of low interest rates, is a function of senseless bank regulatory favoritism

Sir, You write: “With or without a price crash, [resulting from interest rates rising] thinking about real estate must change… A house is not, after all, a productive asset. It is a shelter.”, “When property becomes a roof and a floor again”, July 15.

With Basel II regulators allowed banks, when financing residential houses, to multiply their capital with 35.7 times the net risk adjusted margin, in order to obtain their return on equity. When lending to an unrated SME or entrepreneur, those who could help create new jobs, banks were only allowed to multiply that same margin 12.5 times.

The only reason for that senseless distortion was and is that regulators, as did and do the banks, considered financing houses something much safer than financing some risky enterprises. 

Sir, compared to the case in which such regulatory differences did not exist, what gets much more credit than it should, and what much less? Or are you among those naïve enough to believe bankers have a responsibility, for the good of society, to overlook such skewed incentive structure?

Extrapolates that, and the logical result is the future, we would all end up sitting in ample homey shelters, but with no jobs to be able to pay mortgages, utilities or food.

Sir, such is the short-termism of regulators you have cared nothing about to understand and denounce. On the contrary, you have dedicated yourself to silence my warnings.

PS. By the way if an AAA rating was present, like in the AAA rated securities backed with mortgages to the subprime sector, banks could multiply that margin by 62.5.

PS. Where do you think fiscal sustainability is heading if house prices crash and much property tax revenues vanishes?

@PerKurowski