Jul182014

British legislators learned the housing bubble perils while American’s did not

British legislators want to curb housing bubbles to avoid the economic pain, whereas American legislators want to reflate our housing bubble.

a_house_deflationDuring the 00s lenders attempted foolish financial innovations that proved dismal failures; these loan products, deterioration of standards, and securitization of mortgages inflated massive housing bubbles in several countries around the world. Each country dealt with the problem in its own way. China, Canada, Norway, and Australia still deny their market bubbles, and so far, none popped (although China’s may be bursting now). Housing bubbles deflated in Spain, Great Britain, Ireland, and many other countries.

Iceland decided not to bail out its bankers when the Ponzi scheme imploded, and they endured a deep recession, but Iceland is doing fine now.  Ireland warehoused it’s homeowner debt so the citizens can pay it in their retirement, an egregious policy, and some in the Irish press are writing about the problems reflating their housing bubble will have on ordinary citizens. The Brits are reflating their housing bubble too.

California and Great Britain have much in common with regards to its real estate. California has witnessed three catastrophic bubbles over the last forty years as has Great Britain. Each bubble had different causes, but the timing was similar. California has strict land-use controls which creates artificial shortages of housing, and so does Great Britain. California’s economy has become dependent upon rampant HELOC abuse to fuel unsustainable booms and heart-wrenching busts.4.2.7

The one key difference between California and Great Britain is that some in Great Britain see the folly in what they do and are proposing methods to end it. Here in California, we sit and wait for the next house price party.

Carney Details New Weapons to Cool British Housing Market

By JENNY ANDERSON, JUNE 26, 2014

LONDON — Mark J. Carney, the governor of the Bank of England, announced measures on Thursday to try to cool England’s blistering housing market, a sector that he and other policy makers have identified as the greatest potential threat to Britain’s economic recovery.

Can you imagine a US legislator or bureaucrat suggesting we need to cool the US housing market? Everyone here is bought off by banking interests who need peak prices restored, so we have unanimity in our desire to heat up housing, and not because higher house prices do us any good.

I find the difference in attitude, approach, and public comments truly remarkable.

Mr. Carney said that while the housing boom did not currently imperil the country’s economic and financial stability, the new policies would act as insurance against potential future overheating.

We have seen time and again how quickly ‘responsible’ can turn to ‘reckless,’ creating risks that ultimately derail the U.K. economy,” he said.

We have seen that many times here in California as well. 4.2.7I have hope that the new mortgage rules and the ability-to-repay rules will prevent a return to reckless lending, but my faith may not be well founded.

The bank’s Financial Policy Committee, formed to help curb persistent boom-and-bust cycles, moved to restrict the number of new residential mortgages that were equivalent to, or more than, 4.5 times a borrower’s annual income.

At low mortgage rates, it’s easy to finance more than 4.5 times income and still have the payment be manageable. I think our approach of legislating a maximum debt-to-income ratio of 43% is a better approach.

The panel said that banks could have no more than 15 percent of such loans in their portfolios.

Lenders here in the US would move these loans to off-balance-sheet investment vehicles to easily circumvent any such law. I don’t know what protections British legislators have in place.

The committee also said that mortgage lenders, when assessing affordability, should apply a stress test to determine if borrowers could still pay the loan if interest rates rose three percentage points higher in the first five years of the loan.

4.2.7The new mortgage rules required the lender to qualify the borrower based on the maximum possible interest rate in the first five years, making a stress test unnecessary.

Mr. Carney said the new lending rules “should not restrain current housing market activity” but would kick in if house prices continued to rise drastically or incomes failed to grow. …

The new mortgage rules are restraining our market activity, but in a good way. The ban on affordability products is preventing a new housing bubble.

The moves take the Bank of England into uncharted territory as it seeks to use relatively new and untested supervisory powers to curb market distortions.

The Financial Policy Committee has so-called macroprudential powers to remove or reduce systemic risks in the financial system, including imposing lending rules and conducting stress tests, currently underway, to see how financial institutions would weather a major correction.

Can you imagine if the US had a super-regulator with power to curb market distortions? The first thing they would do is abolish the federal reserve because the central bank is the source of nearly all market distortions.

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