by David Steven | Apr 29, 2010 | Economics and development, UK
If the BBC leaders’ debate tonight devotes more time to bigotgate than to housing, I am going to dedicate the rest of my days to working for the Corporation’s demise.
Britain’s unsustainable housing market is at the root of many of the country’s problems and could wreak appalling damage on voters during the next parliament. It must feature in the debate.
Someone should start by reminding Gordon Brown of a promise he made in his first budget speech in 1997:
Stability will be central to our policy to help homeowners. And we must be prepared to take the action necessary to secure it. I will not allow house prices to get out of control and put at risk the sustainability of the recovery.
As I argued recently:
When Brown spoke, the average house cost £75k – about £10k above the early 1990s nadir. A long long boom was just beginning. Prices would peak in February 2008 at an average of… £232k!!!
In other words, Brown promised not to let house prices spiral out of control and then allowed them to treble, during a period when household disposable income increased by only 30% or so.
2007 saw what is often called a housing price crash, but as this graph shows, it was really only a blip.
As the government pumped money into the economy and pushed interest rates to unprecedented low levels, the bubble started to inflate again. House prices are now back to the levels of June 2007.
Second guessing the housing market is a mug’s game, surely this is unsustainable. British houses are overvalued by nearly a third, according to one measure. Worse is the amount of mortgage debt outstanding – $1.238 trillion. By comparison, government debt is ‘only’ £950 billion.
Low interest rates and buoyant employment (relative to the economy’s woeful performance) have kept householder’s head above water – but the highly-indebted remain highly vulnerable to any increase in interest rates or to further job losses.
My best case for the housing market is a long period of stagnation (we desperately need lower prices). Worst case would be a sudden, vicious and self-fulfilling collapse. I believe this is currently the most serious economic risk facing the British people (one which is, of course, interrelated to Europe’s sovereign debt problems).
So what do the major parties have to say about this in their manifestos?
- Labour wants to expand home ownership and exempt all houses under £250k from stamp duty (likely to push house prices up). It says it will build 110k houses over two years (likely to push prices down).
- The Conservatives promise to exempt first time buyers from stamp duty if their house costs less than £250k. It wants to put communities in charge of planning, which is highly likely to reduce the number of houses built.
- The Lib Dems plan to use loans and grants to bring 250k empty houses back into use.
Pretty weak beer, all told. No party questions the shibboleth that Britain needs more homeowners. None is prepared to explain how they will manage risks that have been increased by the response to the financial crisis.
Far less do they have policies to fulfil Brown’s promise from 1997 – to end boom and bust in the housing market radical proposals (see my Long Finance paper) to prevent the mortgage market from screwing borrowers every twenty years or so.
So here’s my question for tonight’s debate:
In 1997, Gordon Brown promised he’d never let house prices get out of control again, but then presided over a housing bubble that has left British householders owing £1.2 trillion on their mortgages. In government, what will you do to stop the housing dream from becoming a housing nightmare?
by David Steven | Apr 29, 2010 | Economics and development, Europe and Central Asia, UK
If you’re in any doubt of the seriousness of the Greek sovereign debt crisis, read Mohamed El-Erian in the FT. A banking crisis has fuelled a sovereign debt crisis, which could in turn spark another banking crisis (with the whole caboodle, as I have argued, part of a sustained episode of financial instability that stretches back to the 1990s):
A number of things have to happen very fast over the next few days to have some chance of salvaging the situation. At the very minimum, the government in Greece must come up with a credible multi-year adjustment plan that, critically, has the support of Greek society; EU members must come up with sizeable funds that can be quickly released and which are underpinned by the relevant approval of national parliaments; and the IMF must secure sufficient assurances from Greece (in the form of clear policy actions) and the EU (in the form of unambiguous financing assurances) to lead and co-ordinate the process.
This is a daunting challenge. The numbers involved are large and getting larger; the socio-political stakes are high and getting higher; and the official sector has yet to prove itself effective at crisis management.
Meanwhile, the disorderly market moves of recent days will place even greater pressure on the balance sheets of Greek banks and their counterparties in Europe and elsewhere. The already material risks of disorderly bank deposit outflows and capital flights are increasing. The bottom line is simple yet consequential: the Greek debt crisis has morphed into something that is potentially more sinister for Europe and the global economy. What started out as a public finance issue is quickly turning into a banking problem too; and, what started out as a Greek issue has become a full-blown crisis for Europe.
Election or no election, the UK simply cannot afford to sit on the sidelines while this crisis runs out of the control. Alistair Darling needs to stop giving speeches to activists in Scotland and get back to work at the Treasury.
Lord Adonis stopped campaigning as soon as Eyjafjallajökull erupted. Darling must do the same as the UK faces contagion from Eurozone turmoil.
by Alex Evans | Apr 28, 2010 | Economics and development, Global Dashboard, Global system
As regular readers will know, I’ve been banging on for a long time about the need for a comprehensive database that tells us exactly how exposed international trade is to peak oil – or, for that matter, to the maritime sector being brought into the international climate regime and made subject to really severe emission controls.
After all, the bunker fuels used to power container ships and bulk carriers are much less easily substitutable than other kinds of fossil fuels. You can replace coal-fired power stations with renewables or nuclear; you can replace petrol-fuelled cars with ones that run on electricity or hydrogen. But ships? That’s another story. As a UK government study published just before Copenhagen found, for instance, “it will be extremely challenging, and expensive, to reduce emissions of carbon dioxide from shipping and aviation … there are a number of options available in each sector, but currently most of these are not economically viable”.
But if we don’t have readily available substitutes for marine bunker fuels, then what happens to maritime trade – to globalisation itself, in other words – if oil costs start really soaring again, or governments start to get serious about carbon pricing?
In particular, as I asked in The Feeding of the Nine Billion, what happens to the import bills of countries that depend on food imports from overseas (like most of the fragile states in West Africa, for example)? And what does it mean for China – whose advantages on wage costs could easily end up offset by increased transport costs, as actually happened when oil costs went into triple digits?
Although a number of analysts have been asking that question ever since the oil price spiked in 2008 (most notably Jeff Rubin – see the link above and also this), what we’ve all lacked is a really serious database that works out the costs of maritime trade, and how exposed these are to energy prices. Until now.
For it turns out that the OECD have been compiling a large new Maritime Transport Costs database. Although they didn’t make a lot of noise about it, they also posted a working paper (pdf) on their website a few months back – which confirms the significance of the issue (emphasis added):
Maritime transport costs represent a high proportion of the imported value of agricultural products — 10% on average, which is a similar level of magnitude as agricultural tariffs. This study shows that a doubling in the cost of shipping is associated with a 42% drop in trade on average in agricultural goods overall. The tendency to source imports from countries with low transport costs is therefore strong. Trade in some products is particularly affected by changes in maritime transport costs, in particular cereals and oilseeds, which are shipped in bulk.
Most valuably of all, the database goes into massive levels of detail on fuel costs in particular – making it a truly indispensable part of the toolkit for working out what happens to globalisation in a world of emission controls and peak oil. So, where can you access the database?
Answer: you can’t. For news reaches me that its publication is being blocked, by one OECD member state alone – namely, the United States. For, it is said, reasons of national security. How do you like them apples? (Locally grown, I suppose.)
by Alex Evans | Apr 28, 2010 | Europe and Central Asia
To anyone who’s been following Europe’s inability to co-ordinate itself in climate talks or the G8 or G20, Alan Beattie’s commentary on Europe’s approach to co-ordinating the Greek bailout will sound horribly familiar:
Repeated inconclusive meetings of European finance ministers; public squabbling over lending conditions; debates about the role of the IMF; doubt, even, whether bail-outs are permitted by EU and national law. A bizarre diversion halfway into talk of creating a European Monetary Fund completed the picture of an exercise in cat-herding. The delay and confusion has made default more likely and squandered the benefits of IMF involvement. Since the fund is providing some of the loans, Greece will be branded with the IMF stigma, for sure. But, apparently for reasons of self-esteem, the eurozone wants to do most of the lending itself – at higher interest rates than the IMF – and to set the conditionality. At a stroke this dilutes the benefits of the fund’s cheaper lending, forsakes some of its policy credibility and diminishes its use as a political flak jacket.
Even now, approving the loan in each of the 16 eurozone states will take another week. Adherence to constitutional niceties is admirable, but this is a debt crisis in the capital markets of the 21st century, not the Congress of Vienna. If it takes nearly three months to get agreement in the eurogroup, then the eurogroup should not be leading a financial rescue. The house is burning down, and the eurozone is sitting around debating the constitutionality of calling the fire brigade or filling a bucket of water.
by David Steven | Apr 27, 2010 | UK
It is often in the aftermath of a crisis that the government definitively loses control of the agenda – it moves on, while the media cements its narrative on who was to blame, and why.
So it is with the ash cloud. We are told that the Met Office plane that should have been up in the air monitoring the ash cloud was undergoing a refit. As a result, many journalists are now convinced the whole crisis was a con. “Remember that ash cloud?” asks the Daily Mail. “It doesn’t exist, says new evidence.”
Jim McKenna, the Civil Aviation Authority’s head of airworthiness, strategy and policy (great combo), appears to admit the decision to close British airspace was a cock up:
It’s obvious that at the start of this crisis, there was a lack of definitive data. It’s also true that for some of the time, the density of ash above the UK was close to undetectable.
Head to the CAA website, however, and you won’t find anything on these claims. The most recent item on the ash cloud is a highly-defensive op-ed from its chairman [sic], Dame Deirdre Hutton, written three days ago. There’s nothing at all from Jim McKenna – either to explain what went wrong, or to place his quote in a broader context.
NATS stopped updates on the volcano on Friday, while the Met Office’s website is a car crash, and its latest update typifies the jargon-heavy style that the UK’s weathermen and women have made their own. Here’s a defence of the Met’s predictions in the nearest the Met comes to using plain English (more detail here):
We use multiple dispersion models endorsed by the international meteorological community. The output from the Met Office volcanic ash dispersion model has been compared with our neighbouring VAACs in Canada and France since the beginning of this incident and the results are consistent.
The results from our model have been verified by observations of volcanic ash from a variety of sources, including from instruments carried by Met Office, FAAM and NERC research aircraft, balloon and land based LIDARS.
So did the cloud exist? Was Jim McKenna the source of newspaper claims that “the maximum density of the cloud was only five per cent of the safe flying limit”? Who knows? And there seems to be little chance of the UK’s public sector telling you.
Update: Just because it’s wonderful, have a butchers at this superb video of Europe’s airports coming back to life.
[vimeo]http://vimeo.com/11205494[/vimeo]
