Last week we looked at Nick Clegg’s crazy proposal to use pension funds as deposits on houses. And I also talked about why how you should consider property as part of an overall portfolio.
Houses and house prices always make for heated debate, so thanks to anyone that left a comment. But today I’m afraid I have one final controversial housing topic I want to address.
I’m talking about what many refer to as a fantastic housing conspiracy – one that could see millions of people losing their homes over the next few years. It’s a pretty far fetched conspiracy – as you’ll see. But it does point the way to a potentially devastating event for the UK property market…
Here’s how it works
The conspiracy is this: the boom and the bust that we have seen in housing in recent years was no accident. In fact it was the deliberately created by central banks, at the behest of the banking industry.
Why would they do such a thing? Well this is an idea that is regularly argued by Austrian economists. The basic idea is that central banks look to create credit bubbles to rob people of their savings. The central bank lowers interest rates. Banks sucker in borrowers while rates are low. And then when the central bank cranks up interest rates your borrowings become unsustainable. And so the bank ends up owning your property.
These credit bubbles rob people of their savings. They load you up with debt. Then they take away your property in the final bust – as happened during the Depression in the US.
Could this really be happening today?
Well many Austrians would point to the States. Here interest rates haven’t even started to go up yet, but banks have certainly been busy taking homes from delinquent owners. If rates go up, the takeover rate will undoubtedly increase.
And this week I read an interesting article in the Times which told the story of a pair of hotel owners who borrowed some money from RBS to refurbish their hotel. Valuations suggested it would be worth between £7.7m and £9m following the works. But one week before the hotel was due to open, RBS shut the business down – claiming they had no money left.
Ultimately RBS transferred the property to its own books, leaving the pair of businessmen short by (they claim) £4m. They’re pursuing a fraud case against the bank, saying that they were solvent at the time, and they’ve been done out of their life savings.
Could we see more of this kind of action from the banks? I suspect so.
There is certainly no doubt in my mind that the banking industry is an unfairly protected industry. There are countless powerful lobby groups looking after the interest of big business. But in the case of banks, they have the most powerful lobby of all – the central banks.
Yes, we’re supposed to believe that the main purpose of banks like the Fed or Bank of England is to serve the public good. But this isn’t really the truth of it. The central banks were set up to ensure the longevity and health of the banking industry. And of course, to a large degree that suits the public – I mean, we don’t want banks going down every week.
But let’s not forget, the primary aim is to keep the banks in good shape. They can literally do whatever they like... including creating new money and handing it straight over to the banks.
I mean just look at the latest quantitative easing effort by the US Fed. Under QE3, the Fed will print vast sums of money to buy mortgage paper. This bails out the banks. But it could also leave the Fed with a very tidy property portfolio by the time this thing is finished.
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But is it really a conspiracy?
Now I can’t go for the whole conspiracy idea. I don’t buy the idea that the Fed and the banks actually want to usurp millions of homes.
I suspect the whole thing is as much to do with the public’s ignorance. Not so much of finance, or economics, but history. They don’t recognise that there will always be boom and bust. It’s just a societal condition. If we’re not getting into a frenzy about dotcom stocks, then it’s probably housing, or something else.
I for one, am very happy to ride a bull market – and more profitable still, to ride a mania. But if you’re going to do so, you want to a) be careful when using leverage. And b) know when to get out.
If you use leverage and don’t have a good sense of timing then you can lose the lot. Now is that a conspiracy?
Not to my mind. It’s just the madness of crowds.
And in this case, sure, the banks may end up with an awful lot of property on their books. And yes, there may be some cases of fraud along the way. But the vast majority of property transfers come down to homeowners that simply played a bull market too long and with too much leverage. From the bank’s perspective, I’m sure they’d rather not fill their balance sheets up with delinquent property.
The date with destiny?
For the moment the central banks seem committed to keeping rates down. And for the moment most over-leveraged homeowners will sleep easy at night.
But here’s where I think its starts to get worrying.
Because the real danger here is not that central banks have too much control. The real danger is that central banks are actually losing control of the economy.
I mean history shows that central banks can lose control – just look at the UK in the 1970s. Interest rates can go up – and wildly so in panic situations.
In the past it was the bond markets that put the central bankers back in their place. But frankly, the Bank of England is buying up so many bonds that it practically is the bond market right now.
And if Mervyn King keeps printing money we’ll soon have another problem... runaway inflation. If inflation ramps up, interest rates will too. Well, so history tells us.
The proportion of private home ownership in this country has never been higher. And an interest rate nightmare could be mechanism by which homeownership reverts to mean. Who will be left owning a home? Well probably just those who aren’t over-leveraged – those with significant savings.
That’s treacherous talk I know… I shall be expecting venom. Please, feel free to leave your abuse below.
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