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The Housing Bubble

Borrowing (See Lending and Borrowing) can allow a boom to go on for far longer than it should provided it is supported by the lending institutions. It is the duty of lending institutions to ensure that a loan can realistically be secured on the asset being purchased. Banks should have observed the changing sentiment and thus only lent what might reasonably be secured however they often lent 125% of a house value based on absolute belief in an ongoing upward trend.

A limit on the supply of new housing due to land use restrictions has stopped the creation of more houses.

A limit on what people can pay per month based on wages and interest rates has effectively tied house prices to interest rates for some time, but now new restrictions on lending has served to remove some demand and has seemingly led to prices sinking below the interest rate limit.

The housing bubble like most other bubbles is based on an absolute confidence in the price of a particular class of asset.

The housing boom has subordinated house owners to work to pay interest on mortgages and caused governments to put huge emphasis on job security taking flexibility away from employers to hire good people and fire bad.

Notes

Australian housing bubble will burst as restrictions on mortgages toughen. But gone from 92% to 87%. This puts down affordability. Was 105% just over

USA went from 125% to something though

Interest rates what is the effect on firms debt.

How much internal spending was borrowed money and how much not.

If firms go bust then how much will employees cut back on spending and how far will this effect other firms.

Housing Bubble Comparison: US, UK, Canada, Spain, Australia, Japan

The Economist has a fantastic interactive graphic of housing bubbles over time, shown below. It may take a while to load.

YouTube Video


The biggest expense for the working population in the UK has to be their mortgage. Driven by intense competition for housing, a general liberalisation of the attitude to debt and a banking industry willing to make loans secured on the housing its self we are witnessing an economic bubble in house prices where the value of a house far exceeds the costs involved in its construction.

This liberal attitude to debt is based on unprecedented job security for which UK industry pays the price in terms of lack of competitiveness because businesses cannot fire workers whose work is poor or who cause trouble in the work place. It is all of us that pay the price for bad workmanship indirectly in terms of deterioration in quality and price of the products and services we receive, and more directly in terms of the loss of jobs of good workers as business are brought down by bad workers. Management not only has a duty to the business but also to those workers who support it, to remove descenting workers.

On the other end of the scale poor management again leads to problems and it is impotent to ensure that workers can freely leave badly run businesses and organisations.

To optimise organisations membership should be by consent of both the member and the organisation and both the member and the organisation should be free to terminate membership if they so wish. This may still not lead to optimisation where action is taken founded on bad reasoning or false information.




(C)2010 Tom de Havas. The information under this section is my own work it may be reproduced without modification but must include this notice.








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