Apr222014

Reflating housing bubbles goes global

Bankers around the globe learned from the US how to reflate house price bubbles by removing distressed inventory and lobbying for government subsidies.

fight-globa-housing-bubblesBankers in the US discovered the formula for reflating housing bubbles: remove distressed inventory from the market through loan modification, denying short sales, and permitting long-term delinquent mortgage squatting, then lobby the government for a variety of housing subsidies and stimulants to stoke demand. This two-prong approach reduces supply and increases demand forcing house prices to go up; in fact, the more severe the housing bubble and resulting crash, the more effective the policy is because greater residual mortgage distress equates to larger supply restrictions as underwater owners control most of the inventory.

Bankers in the US implemented this policy of housing market manipulation to save themselves. At one time, they were exposed to $1 trillion in unsecured mortgage debt. If the borrowers in those properties were to default, and if the banks were to foreclose, the resulting losses would wipe out the banking industry. The only way to correct this problem and keep the existing banks in business was to restore the value to the collateral backing all those loans, and the only way to accomplish that feat was to reflate the housing bubble — and as it turns out, bankers around the world all have the same problem.

The success of this policy of market manipulation has not gone unnoticed internationally as many other countries struggle with the aftermath of their housing bubbles:

The Irish housing bubble

What fascinates me personally about the housing bubbles around the world is how much differently the financial press reacts in Ireland and Great Britain. Here in the US, it’s an unspoken agreement that everyone wants to see higher home prices at any cost; very few reporters criticize the government or the banks for their behavior. Overseas, the financial media is not letting the government or the people forget the madness of the housing bubble and the pain it inflicted on the whole country. They don’t want to see it happen again. Sometimes, I think we do.

A re-inflated property bubble proves we are mad enough to make the same mistakes all over again

Apr 04, 2014 11:00, by PatFlanagan monkey see monkey do

If you were suspicious you’d think there are forces trying to make sure there is a new housing bubble. Now who could that be?

A monkey burns his hand in a fire once he’ll never do it again.

A Paddy does likewise and he says bring on the skin graft.

I am frightened by the lessons lenders learned from the housing bubble. Now that they know they can prevent a swift and lasting decline in house prices, moral hazard dictates they will try to inflate as massive of a housing bubble as possible in order to maximize their potential interest income. As a result of this moral hazard, the next housing market deflation will be a long, slow grind.

After suffering the worst housing crash in the history of mankind it looks as if it’s going to happen all over again.

If it’s true that insanity is doing the same thing over and over again and expecting a different result then the Irish are stone mad.

lender_lamprey_00sEver since lenders figured out they could take in $100 in deposits and make $10,000 in loans, they inflated a variety of credit bubbles and introduced needless volatility in our financial system in order to siphon off as much money as possible from weary borrowers. Fractional-reserve lending benefits bankers at the expense of everyone else, but we continue allowing it.

Property prices are rocketing by €5,000 a month in the capital and what do we do?

That’s right, Bank of Ireland pours petrol on the flames by offering to pay the stamp duty for first-time buyers.

At least we are easing back on the subsidies and increasing borrowing costs to reduce the government footprint in housing finance. The Irish are taking the opposite approach.need_an_fcb

And to prove the good times are rolling again for the rich, the Irish Times yesterday published an 18-page property supplement.

You’d have imagined the ghost estates, Priory Hall and the ongoing pyrite scandal would act as warning signs on the road to future ruin.

And the plight of 100,000 families in mortgage arrears and many more in negative equity might deter anyone from joining them in home-loan hell.

The memories haven’t deterred buyers here either…

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But no, it appears us Paddies are genetically programmed to purchase property and the madness of the past boom is set to start all over again.

The signs are all there with queues forming outside estate agents as frantic buyers try to outbid each other for homes which are already overpriced.

Sounds like the rally we had last year as well.

On Dublin’s northside homes are being bombarded with leaflets urging owners to consider selling to take advantage of the property shortage. …

I get tired of the crap realtors hang on my front door, don’t you?bank_axis_evil

So plans to bulldoze those ghost estates in Longford and Leitrim might be premature, they could be needed to accommodate those who can’t afford to get on the property ladder in Dublin. The 150km commute could be making a comeback.

How long before high prices in OC and LA cause house prices to rise in Riverside County again?

If you were suspicious you’d think there are forces trying to make sure there is a new housing bubble. Now who could that be?

Seven years ago the banks were touting massive 110% mortgages on overpriced property to people on modest salaries.

It’s refreshing to see a report in the financial media pointing the finger squarely at the banks. Here in the US, we cloak it as helping out the poor underwater homeowners who are struggling with their payments.

Now young couples can save €2,000 on a €200,000 mortgage thanks to the big-hearted bankers at Bank of Ireland.

But if they are that stuck for a couple of grand why the hell are they taking out massive loans of more than €300,000?

The average resale price of a house in Dublin is now €329,700 – a jump of nearly 25% in the past year.

They had the same bubble reflation rally we did — and for the same reasons; their bankers learned from ours how to manipulate the housing market.break_up_too-big_to_fail

Rich pickings for Richie Boucher and the bank which refuses to even contemplate debt forgiveness for the indebted mortgage holders who fell for such tricks in the past.

It is unclear if AIB and the other lenders will come up with similar plans to snare first-time buyers. …

I think it’s sad how banks ruined the previous generation of first-time homebuyers, so now we are straddling the next generation of first-time homebuyers with huge debts under somewhat better terms in order to pay off the mistakes of the housing bubble.

Ordinary people desperate for a home cannot be aware of the dangers when there has been no official inquiry into the last banking and property crash.Despite promises, the present Government has still not conducted a proper investigation to find out why the economy was brought to its knees and who was responsible.

As the Central Bank, which failed to spot never mind stop the crash, … hopefully they will remember those who don’t learn from their mistakes are doomed to repeat them.

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