House prices will fall again!

Swarbs, I actually agree with much of what you are saying, although I do think that our conclusions of the consequencies may be very different. I will give a few examples to show this. You mentioned how someone may have exaggerated their income by only a small amount which means they can still afford the mortgage. I agree, the chances are that most mortgage fraud may be of this type, but think of the effect that may have had on keeping house prices at artificial levels. After all, if you exaggerate your income by £5-10,000 a year, that probably gives you £15-40,000 more property than you would otherwise be able to afford. This type of fraud may never be exposed, because the people doing it can still afford the repayments. The fact is, it's still against the law and it has contributed to keeping house prices up and stopping the honest from ever getting on the ladder. It is also impossible to prove accept through mostly anecdotal evidence which suggests it was widespread. I think that had the market been properly regulated and policed from around 2000, house prices would probably have been around 30% lower at the high of 2007. I didn't actually say that banks have begun to re-introduce self-cert loans, what I pointed to is that it has been reported that it still seems to be popular as a form of fraud now that the lenders have actually tightened up on the loans they give, simply because it is more difficult to get a mortgage now. However, the banks are now on guard against it. I did read one article recently which stated that there are currently only 2 providers still dealing in self-cert mortgages, although I'm not sure how true this is (unfortunately I can no longer find the link). I also agree on which side the Government will come down on when there is systemic risk. However, it is the moral hazard that has been allowed to happen that results in systemic risk, so those with the power to do something about it should not be allowed to get away with simply saying that they could not see it coming. Perhaps our MP's were too busy filling out their second home applications and getting their mortgages payed by us to care? The fact is that as long as house prices were going up, no one, except Vince Cable, said a word when it would not have taken much to scare the banks into behaving more responsibly. The problem is they don't seem to learn the lessons of the past very well and I suspect that after a brief period of remorse it is likely to happen all over again. As for the current state of the market I agree that prices could continue to go up (in fact are currently reported as going up) on lower sales to those that can afford at these price levels. Unfortunately, these price levels were reached by a very different type of lending market which fortunately I don't think we will see again for some time to come. Unfortunately, there are social consequencies to this of course in that if there were problems of delivering housing need when sales were of the order of 100-130,000 every month, think about what it means now that sales are around 40-50,000. Just a pity that there are powerful vested interests that do not want to allow the free market to take its natural course in a properly regulated and policed market.

SevenPillars, I'm still unconvinced by how much of a problem any fraudulent mortgages may be. Taking out a fraudulent mortgage isn't like a Ponzi scheme or other fraud - you have to make the interest payments every month or risk repossession. So even if people have exaggerated their income, they most likely won't have done it to such an extent that they are completely unable to afford the mortgage. I know that's a big assumption, but it just seems common sense that people won't risk losing their home and all their possessions and facing bankruptcy by massively overstretching themselves. And I think that's borne out by your figure of £1 billion: that's still only half a percent of the total gross mortgage lending per annum. Like I said before, I think the whole self cert thing is just one facet of the excess global liquidity that fuelled the boom - that liquidity is gone because of the 20%+ losses made on US sub prime, not because of the 0.5% loss made on self cert mortgages in the UK. You say: However, the reason why this is important to the mortgage market, is that banks are unlikely to repeat the same mistake again, at least not for a decade or so, or until they can say "it's different this time". But you already mentioned that some banks have begun reintroducing self cert mortgages - in the current market they make at least 3% profit on their loans with LIBOR at 0.7%, so I think they aren't too concerned about the potential for 0.5% of their loans being fraudulent. Time will tell if this turns out to be a major issue on the scale of the sub prime mortgage fraud, but it nothing I've seen so far implies that it will be. The whole systemic risk vs moral hazard thing has been done so many times - the government will always come down on the side of avoiding systemic risks regardless of moral hazard. They did it with the New Deal in 1929, Japan in the 1980s, the dot com boom in 2001 and they'll continue doing it. No government is willing to sit on its hands and let the market sort it out - the majority of people demand that they do something, and so they do something. "How is that supposed to work accept for a minority of well healed earners with big deposits?" Precisely the point I made - the market currently only works for the minority of well heeled earners with big deposits. At current levels only 400,000 properties will trade hands each year - that's 2% of current housing stock and requires only 1.6% of households to buy a property. Even in the current crisis, the top 20% of earners in the country can still easily afford to buy and sell as they please. If they move house on average once every 10 years, the market stays exactly where it is, and moves upwards with inflation and under supply and demand pressures. Heck, in the current market a fair few of the properties are probably going for cash, which further reduces the demand for credit. The market's broke, but it's broke when stuck in high gear...

The next boom will be financed by Asia. China will be the dominant country this century and until they get state pensions/job seekers etc., their citizens will need to save somewhere.