Thursday, September 10, 2009

The madness continues II – the UK example

It is also reported that House Prices in the UK rose for the second successive month in August. House prices rose 0.8 per cent in August, on top of a 1.2 per cent rise in July.

From FT: Martin Ellis, economist at Halifax, said: “Demand for housing has increased since the start of the year due to better affordability and low interest rates. This, together with low levels of property available for sale, has boosted house prices over the last few months.”

This evildoer is partly right, low interest rates and low levels of property for sale has boosted sales somewhat. But do you know what? Britain’s taxpayer-owned banks are actually also selling repossessed property assets to their own subsidiaries to avoid billions of pounds of losses that would be incurred by selling them in the open market. Not sure what this means? Let me explain.

A bank gets themselves another bank, a lending institute, or just starts one. Then they make this institution buy homes from the bigger and more sinister counterpart at “market value” which makes the books look nicer. So why don’t put it out on the open market? To keep the price up because the market is not willing to buy at that price, and higher prices and more incoming revenue make the master-bank look solvent. All in all, making prices go up. Isn’t this a nice little move?

The same thing is going on in the US, which is the main reason why any closed bank gone bankrupt is written down 20-30-40% and sometimes over 50% in value. These giant losses being raked up can ONLY be dealt with if prices continue up in addition to people getting back to work and wealth accumulation takes off again. If this doesn’t happen… well… let’s just say bon voyage…

Read more in this times article

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