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

There´s a hole in the bucket dear Andy dear Andy

Sir, when we can read about 500 billion Euros in bank capital shortfall in Europe alone, and no one swears that would suffice, it should be clear that no one wants to be the first drop in the bucket… and I am reminded of Harry Belafonte singing “There´s a hole in the bucket dear Liza dear Liza”. 

And yes, I agree completely with Andrew Haldane in that “We should go further still in unbundling banks” October 3, especially since we really have not even started doing that. But, how can you unbundle without solving the lack of bank equity issue? Are you intent on leaving all those nude and famished bundles lying there on the beach for everyone to see? 

No, any unbundling has to come hand in hand with monstrously large equity injections into the banks. And these could in my mind only occur in two ways. By government injections, and for which I would much recommend you look into how Chile intelligently handled that during its 1981-83 crisis, or, by giving private capital massive incentives to invest, for instance by assuring it significant long term tax benefits. 

And of course, you need to convince the market that you have a different banking sector, a safer one, so that investors could be satisfied with lower returns. And for that, throw out the concept of risk-weights which determine the effective capital requirements for any particular bank asset, and that so much confuses, distorts and makes it so complex to stop regulators from understanding what they are regulating and for what purpose.