As British taxpayers discovered to their cost during the financial crisis, big banks such as Lloyds Banking Group and Royal Bank of Scotland Group were simply too big to fail.
When it came to the crunch, we had to bail them out. If we hadnt, the entire banking system would have collapsed, and taken the UK economy with it. The only beneficiaries would have been tin food manufacturers as a panicking population dashed tostock uptheir larders.
Big And Bad
The financial regulators have subsequently cracked down on banks, forcing them to build their tier 1 capital ratios, shrinktheir investment banking ambitionsand limit risky lending. Slashing interest rates and launching QE helpedease the transition.
The banks are no longer the biggest domestic threat facing the UK economy, that dubious honour now belongs tothe housing market. At the start of this year UK homes wereworth 5.75 trillion in total, around 2.7 times GDP, according toSavills. The UK property sector is too big to fail and the regulators are partly to blame, because their easy money policies have ramped up houseprices to todays crazy levels.
The property market is now a Ponzi scheme. It can only be kept going by sucking in new blood at the bottom,and banks are happily obliging by opening up a new front in the mortgage price war, with a blitz of cheap dealsaimed at young buyersborrowing 95% of their propertys value. Precisely the ones who are most vulnerable to a crash.
Dash To Crash
Property experts assure us this isnt anything to worry about, that lowmortgage ratesmake todays high house prices affordable. They point outthat last years regulatory clampdown, the Mortgage Market Review, has forced lenders to tighten their criteria and stress test borrowers againstfuture rate hikes. Strong demand and supply shortages justify todays high prices, they say.
Their self-justifying arguments seem plausible, but only while interest rates are at all-time lows. If base rates climbto around2%or 3%, let alonetheir long-term average of 5%, their logicwill come crashing down like so much bricks and mortar. Too many homeowners just cant cope with higher borrowing costs.
That wont happen though. Despiteits macho talk, the Bank of England is running scared of hikingrates, because it can foreseethe impact on cash-strapped households. It may make a token move only if the US acts first butwill continue to hold rates low for years, storing up even bigger problems for the future.
They say the greatest trick the devil ever pulled was convincing people he didnt exist. It is the same with the housing bubble: people no longer worry about it. Theyassume priceswill stay thishighfor years, and they may well be right. The bubble wont burst because policymakers wont allow it, regardless of the distortions this policycauses.
The housing market is too big to fail. It must be protected at all costs, even if it means trashingthe rest of the economy.
House prices may have risen to dizzying highs but you can’t say that about the stock market. After recent dips, stocks and shares are trading at far more sensible levels.
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