Monday, 23 February 2009

When Will the Credit Crunch End?

Its hard to put a finger on exactly when the credit cruch will end as the hole we've dug is so deep that its hard to see the bottom. Once we hit bottom, of course we'll be able to see how far we have to climb to get out of it.

One thing I will say is that you won't see a recovery until house prices are significantly lower than their 2007 levels. I say that because an average house is around £200,000 to buy. Now a typical household income is around £20,000, so the average house price is 10 times their salary. Banks and building societies won't lend money based on those sorts of terms. Even if that house was half the price, it would still be a difficult ask. I remember when I bought my first house that lending was around 2.5 times my salary and no further. Thats the prudent stance and until the average house price is around three quarters the price it is now and starter homes/apartments are around 3 times the average household income, you won't see a recovery.

Of course printing money to create inflation is a sneaky way to address this problem. Under periods of high inflation, salaries start to track the inflation rate and because so much money is being spent on "normal" goods, house prices at best stay static, at worst collapse as people have to make a choice between food or house.

Eventually we get back to a sort of normality, where wages climb so high that houses become affordable again.

The only downside to this is that there isn't enough social housing to help even a fraction of those losing their homes. In my local borough, the council have NO social housing at all! Its been handed over to the private sector.

So a major policy for recovery should be to start a major social housing building programme NOW. That way people experiencing repossession have a safety net and somewhere to go in the long term, but in the short term it gives a boost to builders and the local economy.

Also it reduces the "5 years if you're lucky" waiting lists for council houses that are common in the UK.

Win-win.

So why isn't it being funded but instead we're funneling billions into the banking black hole? I wish I could find the answer.

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