Thursday, 28 April 2011

OECD - UK House Prices Need To Fall 40%

Last night's "Newsnight", covering the fact that the UK economy is flat-lining, according to the latest data from the ONS, was interesting. Despite the Government trying to spin the data to claim that things were on track it is clear that this data was very bad, though not as bad as I'd expected - but we've still to get the revisions and final reading. The Government's own Office For Budget Responsibility, as well as the Bank of England, had been expecting growth of 0.8%, as opposed to the dismal 0.5% it turned out to be.
Some City analysts had been forecasting growth of as much as 1.1%. But, then when you are getting massive salaries, and bonuses in the millions, you are bound to get a much rosier view of the state of the economy than if you are earning Minimum Wage in McDonalds, or one of the Government's new Slave Labour Camps known as an Enterprise Zone.

But, it was not just Labour's ex City Minister, Lord Myners, who thought the data was bad.
Fund Manager, Nicola Horlick, also thought the data was bad, and was due to the Government's economic policies. After all when you've been in office for a year, its much harder to blame the previous Government. Besides, in the second and third quarter of 2010, as a result of Labour's stimulus package, growth was 1.8%. The fact that the economy has flat-lined ever since, even before the Cuts take effect, is clearly down to the Liberal-Tory Government's incompetence, and the way they talked down the economy with scare stories that Britain was in the same dire straits as Greece. Even the former CEO of ASDA, one of those people who signed the letter supporting the Tories proposals for Cuts, thought the data was bad, and things were going to get worse. He seemed much less confident now that these polices were going to lead to a bonanza of private sector jobs and growth.

But, the elephant in the room, also made its appearance. That is the question, I have been raising for nearly a year - house prices.
Vince Cable was asked directly by Gavin Esler if there was not still a massive bubble in house prices. Cable evaded giving an answer. But, there is no doubt that there is such a bubble. The OECD, as Lord Myners pointed out, have themselves said that UK House prices need to fall by 40%, to come back to a long-term average against incomes. As Deutsche Bank state,

"For both the US and the euro area the indicator crossed the long-term average in 2003 and reached new peaks in 2005 (US) and 2006 (euro area), respectively, with levels 12% to 18% above the long-term average. However, the regional differences were significant, with price-income ratios topping the long-term average by more than 40% in UK, Spain, Ireland, Finland and the Netherlands."

The IMF have arrived at a similar figure. But, as I've pointed out previously, that is just one measure of how much they are over priced. With real incomes being squeezed considerably - the ex ASDA CEO said the data he was still getting showed that real incomes had already fallen by 6% in the last year - this measure considerably understates how much house prices will need to fall. As illustrated by the figures I have previously given, showing the movement of house prices adjusted for inflation, UK house prices are around 4 times where they should be, meaning a 75% fall would be required. And measured against the very, long-term average rise in house prices of 4% p.a., house prices are around 10 times where they should be, requiring a 90% fall in prices.

Those figures might seem extreme, but they are not. In the 1930's, house prices fell by 90%. In 1997, property prices in Japan fell by 90%, as the Government attempted to remove its previous monetary accommodation. In 2001, in a similar bubble of Technology Share prices, the NASDAQ fell by 75%. In 1990, after a similar, but smaller, shorter lived bubble, UK house prices fell by 40%, and finally over the last year, house prices in Ireland fell by 60%, similar falls have been seen in the US, as the bubble in its housing market has burst, and renewed falls are being seen again. The figures provided by Deutsche Bank and OECD in the link above, show that the situation in other EU countries such as Spain is even more extreme, and shows the danger that these countries are in, and particularly that the Banks that lent to blow up this property bubble - including many from the UK and other Northern European countries - face when that bubble relly does burst.
It is no wonder that the financiers, and the politicians want to keep this quiet, because it threatens to blow the financial system wide apart. As I've said before, this private debt, much of it tied to housing, is far bigger, and a far more serious problem than Government debt. Government's can always print money to pay off their debt. Individuals cannot, and beyond a certain point, there only option is to default, and leave the Banks holding a worthless asset.

That is one reason the Bank of England is resisting raising interest rates despite soaring inflation. The Economist, which on its Price to Rent basis of calculation says UK house prices are 30% overvalued, says that house prices are now dictating interest rate policy not vice versa.

"What would such a prospect imply for a still-fragile economic recovery? Purists say that a further drop in house prices would merely shuffle wealth around. Homeowners would suffer, but those saving to buy a home would benefit. Reality is messier. Many householders have onerous debts, and would cut spending abruptly should prices plunge. For this reason, the housing market is likely to determine interest-rate decisions, not the other way round. If rate-setters prove cautious, house prices will take longer to reach bottom, but they are likely to fall all the same."

But, the experience of the 1980's is that Governments and Central Banks do not control Monetary Policy, except in places with a central planning system, such as China. The biggest part of money creation takes place in the private sector through the creation of credit, and money creation by Banks and other financial institutions. But, similarly, that experience showed that when the Money Markets decide that interest rates are too low, then whatever oficial interest rates, central banks set, is irrelevant.
The "Bond Vigilantes", can simply stop buying Bonds, and push interest rates up, and it is these rates that the Banks and Building Societies have to pay to borrow money - especially now that near zero interest rates have caused a liquidity trap, with no incentive for private savers to deposit their money.

On CNBC, yesterday, legendary oil man, T. Boone Pickens, warned that if the trouble in the Gulf escalated, and drew in Saudi Arabia, oil prices could go to between $300-$400 a barrel.
Even without that, oil prices were going higher, he said, because of continued and increasing demand from the dynamic economies in the world such as China and India. Meanwhile, China and other dynamic economies are suffering rapidly rising inflation, largely driven by the massive amount of money put into the global system by the US and western economies, which is monetising the rise in primary product prices. Slowly, at the moment, China is revaluing the Yuan against the dollar, so as to reduce its dollar cost of imports of these products. The consequence is that the cheap Chinese imports, that the West has relied on over the last 20 years, to keep down its own inflation, and more particularly the Value of Labour Power, is going to go into reverse.

The hope, clung to by the Bank of England, that inflation is going to fall, is doomed, and sooner rather than later, the financial markets will decide enough is enough, and UK interest rates will be forced higher, whatever the Bank of England decides. Already, finance for house purchase is only being offered to people who the Banks feel are likely to be able to pay it back. They still have, however, huge amounts of outstanding loans, to people who increasingly, even with interest rates at 0.5%, are finding they cannot pay, and are going into arrears.
For now the banks have had an incentive in not pushing for repossession, which would cause a firesale of houses to start, sending prices spiralling down, and meaning that the Banks would be likely to only get a fraction of their money back. This is at a time, when the question of default on loans is being spoken of openly more generally.

The EU has said that after 2013, Bond holders should expect to have to take a haircut - lose money - on any money they lend to Governments such as Greece or Ireland, or Spain or Portugal, that cannot pay it back. Already, the option of a partial default is being raised in respect of Greece. Iceland already defaulted on its debts, and has benefitted by doing so.
Unless the EU can find a way - such as selling EU Bonds, as I've suggested in the past,of raising money to cover the debts of the periphery more cheaply than currently available through the EFSF and EFSM, then a default is inevitable, because it is clear that the austerity measures in Europe are being as destructive to the peripheral economies, as the Liberal-Tory measures are in Britain.

This heightened level of risk will mean that interest rates are raised in any case, but, as happened with the Credit Crunch in 2008, if lenders fear they will not get their money back, they will be reluctant to lend at almost any price, and will begin to try to retract the loans they have made to prevent the risk of them going bad.

The initial effect, of a significant house price crash, be it just the 40% the OECD say is necessary, or the 75%-90% crash, I think history suggests is more likely, would be pretty catastrophic. Not, it has to be said for individual homebuyers. If your house has a paper price tag on it tomorrow only a tenth of what it is today, it really does not make any difference to you in terms of its affordability, or in terms of what it offers you as a house. A house is a consumer durable the same as a car or a washing machine, and people should get away from the ridiculous idea that it is in some sense "an investment". If you were going to buy another similar house, or a more expensive house, then the price of that will have fallen just the same, so relatively you are no worse off, in fact, in absolute terms you would be better off if you were moving up to a more expensive house. The problem only arises for those people who can no longer afford their mortgage payments, which has nothing at all to do with the actual market price of the house, but is determined by income and interest rates. In those cases, of negative equity, people could not sell their house at a price that would cover the amount they had borrowed. But, in reality, that is a much bigger problem for the Bank that made the loan than the individual that defaults on it.
That is why the Government and the Bank of England are doing everything they can to prop up the banks and their shareholders by propping up the housing market. But, that dam is bound to burst.

The consequence will be that the banks will face a flood of defaults and bad loans on a far larger scale than in 2008. That will have an impact across Europe, particularly in the periphery such as Spain where house prices are in an even larger bubble.
Many more banks will have to be taken over by the State across Europe, and that will mean those States will need even bigger bail-outs than has been seen in Ireland and Greece, and shortly to be seen in Portugal and Spain.

But, for all those millions of people who for the last 30 years have been unable to buy a house as prices soared to astronomic levels it will be a very good thing. If house prices fell by 75-90%, then millions of people would be able to buy. It would force land prices down markedly, reducing the cost of building new homes too. That would give a huge incentive to house builders to start building many new houses, creating jobs for thousands of building workers. The question is how much of a hold does Financial Capital have over the Government to continue a policy of "Socialism For The Rich", as opposed to a real rebalancing of the economy away from this fictitious Capital, and towards real productive investment, and economic growth?


vngelis said...

A collapse of the housing market will if it falls by 40% will collapse around 100 subisidiary industries linked to it, from carpet manufacturers to plumbers.
Those who have taken out mortgages in the last 5 years will suffer massive negative equity and the debts may be called in.

Boffy said...

Not true. The fate of those subsidiary industries is tied to the rate of new house building, and churn. That is when people move they buy new carpets and so on. The reality is that the current situation has reduced churn.

A substantial fall in property prices, reducing land values will make new builds more economical, thereby stimulating demand. That will provide work for unemployed construction workers, and when people move in, for carpet manufacturers etc.

Its true that those who have bought in the last five years will suffer large negative equity. But, the only reason their debts would be called in by Banks would be if they were unable to make their repayments. The very last time that a Bank wants to call in a debt that is likely to be defaulted upon, is at a time when the asset against which the loan was made, has become worthless! In fact, one o the reasons that Banks have not called in loans on houses over the last year or so, has been for exactly that reason.

vngelis said...

The housing market in new house building is based on 40% going over to social housing. In so far as there was an expanding private sector and new immigration linked to it, then one could assume a percentage did create new demand in all the subsidiary industries linked to building.

But the Blair-Brown years were defined by the massive rise in Buy to Let property growth. This new industry led to a massive growth in all the subisdiary industries

But total mortgage lending is linked directly to the price rises in property over the last decade and a half.

Your arguments centres on the fact that a collapse in property prices will stimulate demand, in other worse a crash brings about a boom and life goes on. If liquidity in the form of mortgage capital is taken out of the market as has been for first time buyers, when they need 25% and more deposits, then this will not be the case at all.

vngelis said...

* LLOYDS' "extend and pretend" gambit to paper over its multi-billion-pound property black hole has a new variant. The bank holds the deeds to about 3000 repossessed buy-to-let properties, acquired along with good old HBOS. Flogging the homes at auction would reveal their true value - probably close to £350 million. Instead, residential manager Grainger has been given a contract worth £3 million a year to tend about a third of the stock, with the rest perhaps coming its way. It is easy enough to see why Lloyds extends ownership: it saves a potential £150 million writedown. But City Spy wonders if it is wise of Lloyds to claim it knows the price will rise to £500 million again. Especially as the bank holds distressed property on its books which it insists is worth... £16 billion. Hmmm

City Spy Evening Standard
3rd May 2011

Boffy said...

There is actually not a shortage of mortgage funds at the moment. The reason new mortgage lending is low is because of lack of demand from people who can actually provide the necessary deposit, and who are able to make the monthly payments even with the historically low interest rates.

But, if prices fall by 40-50% or more, then the amount of mortgage, and the repayments reduce equally, meaning that more people can obtain a mortgage. Moreover, in such a situation buy to let becomes much less favourable, because a) there will be a substitutional shift from renting to buying, and b) Rents will fall also.

The empirical evidecne can be seen from every previous serious house price crash, including 1990. Moreover, there are many more people who bought 10,15,20 or more years ago than those who have only bought in the last five years. House prices have doubled since 2002, so its unlikely that anyone who bought 10 years ago would be in negative equity unless they remortgaged. That means that as new demand comes in for their now, much cheaper house, the much more expensive house they always wanted to buy, also now becomes affordable, because the percentage price fall means in absolute terms they have become better off in relation to more expensive housing.

It facilitates churn. The Banks may still get burnt in such a situation, but they will then be bailed out by the state, which will then print more money. In Spain today its been announced another large Caja is to be taken over by a big Bank, but sooner or later those banks will need to be bailed out by the state, at which point Spain will need to be bailed out. The EU will eventually have to address that need for recapitaisation and restructuring of European Capital.

vngelis said...

A shortage of mortgage funds is created when you ask for 25% and you dont offer 130% mortgages like Northern Rock used to.
A market collapse in prices is pre-determined when housing benefits have had price limits linked to it and these are set for this year and every year they will gradually go down, until they reach zero. Housing benefit props up the private sector and was a mainstay of the buy to let debt fuelled bonanza. With stagnant or declining wages alongside jobless 'growth' new house buyers can't re-start the housing market. This isn't necessarily a crisis like the ones before it. What we dont know is what the % of mortgage holders are whow will be affected with negative equity as it will affet people differently in different parts of the country as generally London house prices are 60% more than the rest of the UK.

Boffy said...

Requiringt 25% deposits - which is not exceptional in historic terms, the 100% plus mortgages of the last 20 years are what are exceptional - does not lead to a shortage of mortgage funds, but of effective mortgage DEMAND! The banks and building societies have plenty of funds available for those that meet the criteria. In fact, some are now making loans on less stringent criteria once again.

The effects of Housing Benefit cuts are contradictory. They put downward pressure on rents, and thereby make Buy To Let less attractive, meaning more housing supply, pushing down prices. But, for renters higher rents for them, make purchase possibly more attractive, except in general they would not be able to buy, certainly at current prices. That could change if prices fell dramatically.

London prices are like for like more than 60% higher than elsewhere. Like for like London prices are 3 to 4 times those elsewhere! But, geography does not particularly affect neg. eq. because the percentage rise will have been at least as much in London. Generally speaking it is simple mathematics that there will be 4 times as many people with mortgages that are between 5 and 25 years old than there are those that are less than 5 years old.

If my sisters house fell by 90% it would still be 6 times the price she paid for it in 1972. With that kind of price fall the amount she could have saved during that period would mean she could buy a house that on current prices would be way beyond her means. The same will be true for first time buyers.

vngelis said...

They may not be exceptional in historic terms, the raising of deposits but they came about due to previous crashes. In the 1980's you couldn't buy a second house unless you had something like 50% deposit and even then it was hard. Buy to Let, or Debt to Buy became a way of kickstarting the housing market once more and creating an artificial boom.
The only real reason we haven't as yet had a crash is because interest rates are near zero and banks haven't been pushing for reposessions as their books 'balanced' via the bailout.
A lot of people when house prices were rising remortgaged 2 or 3 times so their mortgage may actually be towards the limit of the house price so a downward pressure on prices may reach them on the brink. Banks of course may introduce 40 and 50 year mortgages in that situation Japanese style.
But the subsidiary business related will still be going to the wall eg FOCUS group allready...

Boffy said...

The rise in deposits now is not due to previous crashes, but due to the fact that Banks had been lending on the basis of house prices continuing to rise i.e. irresponsibly. Under current conditions they are keen not to lose money by lending more than they expect to get back.

Buy to let grew because large numbers of people could not afford to buy, and because there was not enough Social Housing. There were other social changes too, such as the fact that many young people believed that they had a right/should have their own home, whereas in previous generations they would have continued living with parents until they married, and sometimes for a while after they married. That meant a shift in the demand curve for housing, also added to by the immigration of young workers to meet an employment gap in the 90's/early noughties. This meant that people who had a modicum of Capital could buy houses to rent, and from the rent could then buy additional houses due to the lax requirements on deposits and earnings. These conditions are now being reversed. I don't think its true to say this kickstarted the housing market. In many ways it artifically inflated prices, and thereby choked off real demand.

Some people did remortgage, but by no means the majority, and people who had bought say 10, 15 or 20 years earlier were sitting on large paper gains. Those who bought earlier were/are sitting on astronomical paper gains.

I have said previously myself that the reason the Banks are not repossessing is because the extremely low interest rates since end 2008 have meant that many people were able to cover repayments, and Banks would risk starting a firesale in which they could not get their money back. A number of housing and finance economists now agree that situation cannot continue as real incomes are squeezed and interest rates rise.

I maintain that rapidly falling house prices will not have a pass on effect to subsidiary industries, possibly quite the opposite. FOCUS has gone bust, because it has been in a bad way for several years, including during the period of booming house prices. It is struggling to copete in a crowded retail space. As its CEO admits sales have fallen - not because of falling house prices, which would normally cause people to stay put, and do renovationbs/extensions - but, because of a general dontrend in retail sales as people's real income is squeezed, and consumer confidence falls due to fears of unemployment.

Boffy said...

According to this article from 2008, based on S&P data the average loan to value ratio in the UK is 54%.

S&P calculated that a 26% fall would put 14% of people into neg.eq. It said every 1% fall over that would add another 60-80,000 to that number. Whilst prices fell 20% after the Financial Crisis, during the second half of 2009, and first half of 2010 that fall was largely recouped.

On that basis I would estimate that even a 50% fall in prices would only place around 25% of people in negative equity. Even an 80-90% fall would only put around 40% of people in neg.eq., and some of those would be only marginally so. Moreover, this is only those who have outstanding loans. There are of course, many more homeowners who bought in the 50's,60's, and 70's, and early 80's, whose loans would have been already repaid.

For them, any savings they have accumulated since paying off their loans becomes transformed into high powered money in any serious house price crash. A 90% fall in prices turns every £1,000 of savings into the equivalent of £10,000 in relation to current house prices.

vngelis said...

There have been two house price crashes before in the early 80's and the early 90's. Both were ended by the govt ensuring financial institutions released massive amounts of credit thus engineering new house asset bubbles. In the early 80's London councils promoted the creation of flats by giving out non-refundable 5 year loans, in the 90's Buy to Let went mainstream alongside self-certified mortgages. Alongside this bubble a massive expansion occurred of estate agents, solicitors for property sales, architects etc. If prices dropped 90% no building will exist due to current prices of labour as it will cost more to build than to sell so why build?

Boffy said...

I'd have to check about the crash you cite for the early 80's. However, what you say about the early 90's is definitely not correct. The crash of the early 90's came after a period of lax monetary policy, which followed the stock market crash of 87. The property crash was sparked by an economic crisis in 1990, which saw rising unemployment and falling wages, and was exacerbated by rising interest rates. In fact, interest rates remained high for a long time. During the ERM crisis they went up to more than 15%! Even when Britain left the ERM, interest rates only fell to around 8%. It was only in the late 90's, and early 2000's that interest rates fell much further, sparking the new bubble in prices. In fact, even nominal house prices did not recover their pre-1990 levels until 1996.

But, in fact three have been many previous crashes of house prices. In the early 1930's, house prices fell 90%. Yet by the mid 1930's, house building was growing in the Midlands and South-East where new types of employment in cars, and electronics was growing. It certainly was not due to Government stimulation.

You make a good point about labour costs in new housing, but I previously pointed out that in any such crash the price of building land would also tumble, so a primary cost in the building of new houses would also be hugely reduced. And, as I have pointed out even a 90% fall in current prices would still mean that much of the existing housing stock dating back to before the 1970's would still be at prices which are at many multiples of the original nominal price.

If the current price of housing is based on a bubble, which it is, and if part of the reason for that bubble being able to inflate is monopolistic conditions in housing supply, which it is - due to restrictions on access to the market - then the normal consequence of that is for their to be a certain degree of rent seeking from all factors of production involved i.e. very house prices facilitate higher input costs for land, labour, materials and for the profits that can be made upon it. A crash would undermine the possibility of such rent seeking, and bring about a fall in input costs, and of the absolute level of profit, whilst maintaining, or even seeing a rise in the rate of profit.

As in the past, more sustainable and growing demand, and a stable or rising rate of profit, are always the conditions which lead to increased investment, and output.

vngelis said...

I didn't make a comment about the early 90's crash only how the govt aided in getting out of it. Or how it came about.
According to this report 28% of US homeowners are underwater eg negative equity has set in that is almost one in three since 2008.
I done see how that can occur there but not here ie only 15% here.

Boffy said...

You did comment about there being a house price crash in the early 1990's. My point is that your statement that it was ended by the Government pumping large amounts of liquidity into the market is false. Prices fell 40% in 1990, but interest rates remained high.

The 40% fall did not bring about any substantial fall in new house building. House prices immediately began to recover though very slowly, after the collapse, despite the high interest rates. It took until 1996 for them to regain their previous nominal level, but they DID rise. Interest rates did not substantially fall until the late 90's. In particular liquidity was increased after the rouble crisis in 97, the Asian crisis in 98, and in advance of the problems anticipated with the Millenium Bug, in 99. I agree that increase in liquiidity sparked the latest bubble which began in 98, but it was not a means to end the crash of 1990.

As for your question in respect of the extent of negative equity in the US the answer is obvious. The US is not the UK, just as the UK is not Greece, which is the answer to the Tories attempts to portray Britain's debt as being the same as that in Greece. The strcuture and duration of the debt in both cases is completely different.

In the US the Sub-Prime crisis arose because of selling mortgages to people who had absolutely no chance of repaying them; the so called NINJAS (No Income, No Job). However, bad the Banks and Building Societies in the UK, they were not that bad. Moreover, although I'd have to check the figures, my recollection is that prices in the US have fallen by around 50-60%, so a figure of 28% negative equity doesn't seem that far out.

But, the US is an illustration of another point I made, which is that in the US, where people were massively in negative equity, they simply walked away from the house leaving the Bank with an increasingly worthless asset. Some even set fire to the house, in order to claim on insurance.

That was the point I made above, which is that massive negative equity is a problem for the Banks not the homeowner, because if they can't repay they will simply default on the loan - just as its likely that Greece and other economies will do on their debt. That is why another Credit Crunch is forming. When it hits the Banks the State will have to intervene to bail them out, and the only way that can be achieved is by printing even more money.

Boffy said...

The points you make in respect of ERM and interest rates confirm the argument I have been making, and contradict the argument you have made. The crash happened in 1990, and interest rates did not fall to 5% until 1994, so your argument that the Government responded to the crash by introducing liquidity is clearly false.

I've said nothing at all to lead anyone to believe that the Economic Crisis was caused by lending to sub-prime borrowers in the US. I only referred to sub-prime ledning to answer your odd query about why fewer people in the Uk would be put in negative equity than in the US.

I have never suggested that such a house price crash would NOT be a problem for Governments. On the contrary, I've argued that its for that reason that they have been attempting to prevent it happening!

But, to claim that it will bring these Governments to their knees is I think to engage in catastrophism. The reality is that State's can always deal with such situations in the way they have done in the past - they can print money to cover the debt. The reality is that State's will not print money to hand to individuals to cover their private debts - though via inflation they always achieve that end, and in the US the State did provide various subsidies and assistance for those having problems paying the mortgage - instead they will seek to shift Public and bank debt on to individuals. But, at the point that individuals begin to default in large numbers - repossessions in the UK rose 15% in Q1 - and Banks start to get into trouble as in Ireland, as will soon happen in Spain, then the State will step in and take them over.

Sooner or later the only rational means by which those states can deal with such a situation is to monetise that debt.

vngelis said...

Britains attempt to join the ERM and ditch sterling led to a collapse and only after it left did interest rates fall (which are govt policy) from the high of 15% to 5% by 1994, thus creating added liquidity by lowering borrowing rates.

Buy 2 Let was inaugurated in 1997. By 2007 it became a £68billion business

You seem to also be arguing the mainstream economic view that the outset of the economic crisis is solely because they borrowed money to the poor in America, not the two wars going on or the massive amounts of debt created for corporations spending binges.

In the US it might be a problem for the banks if negative equity sets it but it is also a problem for the govt due to their ownership of banks shares also if one is made homeless by a repossion, housing benefit kicks in, which comes from the government again.

So the coming house price crash is unlike the others that went on before, it will bring the government to its knees, if present regulations exist and housing benefit isn't abolished totally...

Boffy said...

The points you make in relation to the ERM confirm my argument, and speak against the argument you previously made. The house price crash was in 1990, and interest rates remained high, and even went higher during the ERM crisis. Even after Britain left the ERM interest rates were still at 5%. They only caqme down to the low rates in the late 90's. That was what provided the fuel for the property bubble that set in after 1997/8.

I've said nothing that could lead anyone to believe that I was arguing the Economic crisis was due to lending to Sub-prime borrowers. The only reason I reffered to Sub-prime was to answer the rather odd question you raised about why a certain level of price falls in the US would cause a different level of negative equity there, than a similar fall here!

I agree that a house price crash will cause problems for Governments as well as Banks. That has been precisely my point! It is why they are trying to pretend no problem exists, and why they are trying to prevent such a crash. But, to say that a Crash will bring these Governments to their knees, is I think to engage in catastrophism. I think Bill Jeffries at Permanent Revolution has in the past cautioned you against that tendency, which is common of the Left.

The reality is that such a crash will mean that large numbers of individuals DO default. The cost will fall on Banks, at a time when the costs of other defaults i.e. that of sovereigns such as Greece, also dent Banks Balance Sheets and Capitalisation. But, the answer to that is quite simple. It is for State's to nationalise what Banks need to be nationalied, and to print money to cover the debts, and recapitalise them.

The main problem preventing that in the EU is political posturing, and manouvring for advantage. But, rather than see a serious economic, political and social crisis emerge that is what they will do. It is why the smart money is moving out of paper currency and into Gold and Silver.