Sunday, 25 September 2011

On the trend of housing price

"It is a fallacy to think that loose monetary policy can solve the large structural problems we are facing. Central banks must not become the victims of their own success and should not become overburdened. Historically, whenever policy makers tried to broaden the role of monetary policy beyond its original role as a guardian of the value of a currency, it had to compromise on its objective of price stability. For monetary policy to remain effective, its responsibilities must remain within clear limits.

Instead, we need a growth model that is different from the one during the years before the financial crisis. We need economic growth that is based on a genuine increase in productivity, and not on low interest rates and the accumulation of debt. The unlimited accumulation of private and public debt before the financial crisis has now become a burden on economic growth and should be reduced progressively. [14] To achieve this we need far-reaching structural reforms that increase competition in labour and goods markets, more financial supervision, and a stronger fiscal policy framework.
", Jurgen Stark, 24 Sept. 2011

I always liked Mr Stark, too bad he resign from the ECB executive Board.

One important thing, He is highlighting is that the crisis as show that private or public accumulation of debt as witnessed in the past 20 years is not sustainable.

It interesting, in fact, to see that the the crisis that started in 2007-2008 marked a turning point in the economical model we were accustomed. In particular, it is at that point I thought that the housing price rise driven by massive credit growth was put in question. Of course, it takes time before the trend reverse, you are dealing with "agents" that shift their behavior with a drastic lag.

Most people would not consider that price of housing will be lower than it is today in the year to come- it is not what they have been conditioned to.

Bankers still want to ride on easy-to-take profits at the expense of people, promoting all but a stable economy.

Real Estate are also accustomed to easy commission, easy sales and would not think that their industry would start to shrink in the year to come with plummeting commission and higher competition.


Andrew said...

Stark is also saying he does not like the new normal of higher than acceptable inflation as a way of moving forwards out of the present disaster.

Anonymous said...

good article, thanks for sharing.

I was wondering what is your take on Finland being an AAA+ rated country? How will the Eurocroses affect Finland in the long run?

Anonymous said...

The triple A is in a way a reward for past achievements ... Finland never defaulted on its debts even during terrible recession such as in the 90s ...
Therefore their behavior (and tradition) should prevent them from loosing this ...
But who knows ... with Nokia going down full speed, the Paper industry clearly dying ... Finns will need to find new accelerators ... which will be difficult ... adding to this, an ageing population and borders which are clearly not open for immigration ... I would say that the future of Finland is grim ...
Therefore, their internal issues might be the reasons for loosing their AAA