UK house prices falling; Carney’s debt conundrum; Is the smart money fleeing China?

UK House Prices Falling

You have to pity those poor homeowners who don’t live in fairytale countries like Canada and Australia where fundamentals like price/income, price/rent, and affordability mean nothing.  In countries where fundamentals do matter, like the US and evidently the UK, it’s a different story.

UK House prices fall for sixth straight month

“U.K. house prices fell for a sixth month in December and will extend their decline in 2011 on “weak” demand and tighter mortgage-lending conditions.”

“Demand for homes, measured by the change in new buyers registering with real-estate agents, fell 4.8 percent in December from November, Hometrack said. That’s the biggest drop since January 2009 and the sixth consecutive monthly decline. The number of homes for sale fell 1.5 percent, the group said.”

Luckily for us, our home prices are so dislocated from fundamentals that even ‘weak demand’ on this side of the pond means that home prices keep rising!  Hooray!

“The housing market has weakened as banks tightened lending criteria, causing the level of home loans to drop below half of that seen at the peak of the property boom in 2007. U.K. banks approved the fewest mortgages last month since March 2009 when the economy was in the depths of the recession, the British Bankers’ Association said on Dec. 23.”

Thank goodness we didn’t see a similar credit bubble here in Canada and our banks aren’t pushing to tighten lending criteria.  

Thankfully we live in a magical country where house prices rise forever regardless of fundamentals.  Pity those poor fools who don’t.

Carney’s Debt Conundrum

ATB Financial economist Will Van’t Veld wrote an interesting piece last week.

The household debt conundrum facing the Bank of Canada

Van’t Veld describes two concepts often discussed on this blog:  The importance of real estate in buoying the economy, and the wealth effect.

“New home investment has contributed significantly to the economy and, given the current situation, no one wants to put the economy in peril by restricting the availability of credit too much.”

“A strong residential real estate market affects the economy through another indirect channel, known as the wealth effect. Household consumption patterns are obviously impacted by income, but studies show asset price changes also impact current spending. Furthermore, with access to home equity becoming more available over the past decade, the effect may have increased (see chart). The reverse can also occur, such as what is happening currently in the U.S. This has important impacts for advanced economies whose economies depend anywhere between 65 and 70 per cent on consumption spending.”

Indeed.  The growth in HELOCs is particularly worrisome.  If the recent CAAMP numbers are any indication,  home equity extraction is currently adding in the ballpark of 9% to the pre-tax income of the average household, significantly and artificially buoying economic growth and employment by extension.

But as Van’t Veld noted, HELOC growth is also highly correlated with house price appreciation.  When house prices turn negative, so too does equity extraction, becoming a substantial drag on economic growth and dampening attempts to stimulate consumption using monetary tools.

Is the ‘Smart Money’ Fleeing China?

Now for the must-read article of the day:

As Hot Money Rushes Into China, The Smart Money Is Getting The Hell Out

It’s a great read with too many important points to cover in one post.  If the basic premise of the article is correct, it lends credence to the story that Asian buyers are anxious to park their money in off-shore investments (like Vancouver real estate), while more importantly undermining the notion that this dynamic can NOT continue in perpetuity.

As I’ve said all along, I don’t question that there is an impact from so called ‘Hot Asian Money’ on Vancouver real estate, but I’m absolutely certain it isn’t the impact most people think it is, nor will it be enough to keep prices at astonishingly expensive levels.

For more on the Asian influence on Vancouver house prices, check these out:

Chinese investors in Vancouver: Is the HAM story more than just hogwash?

Rich Chinese investors back in the news

The ‘Hot Asian Money’ fallacy

Typical bull arguments

Cheers,

Ben

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2 Responses to UK house prices falling; Carney’s debt conundrum; Is the smart money fleeing China?

  1. Fish10 says:

    Unfortunately the problem is the Central Banks. They are like parents to refuse to enforce any discipline and let the kids do whatever they want and now they feign surprise at the fact that they have grown up to be drug abusing, law-breaking louts.

    The incredible thing is that the bozos who missed it all, like Bernanke and Trichet and Carney are the Bank of England guy – are still in power.

    It’s would be like giving the captain of the Titanic another ocean-liner to skipper… crazy!

  2. Pingback: Who’s the ‘hare-brained’ one? More hot air from perma-bull Jay Bryan | Financial Insights

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