A panel of Pieria experts discuss the UK's property conundrum of simultaneously requiring rising prices and improved affordability in response to the question - "Can the UK wean itself off its property price addiction?".
Frances Coppola:
"Here's a helpful tale. Sometimes the way the US does things makes it easier to see what's going on.
In the disintermediated US system, RMBS and CDOs - which are property lending derivatives, of course - served as risk-free collateral in the shadow banking system. Risk-free, because it was assumed that property prices would always rise, so the collateral would never lose value. Therefore money funds lent against that collateral. When the value of those property-backed securities started to fall, funds responded initially by demanding larger haircuts (equivalent to banks expecting larger deposits) and eventually refused to lend at all, causing severe funding distress to banks. That was the proximate cause of the failure first of Northern Rock ( run on MBS ABCP) then Lehman, HBOS, RBS and the rest (run on MBS tri-party repo).
Following the failure of property-backed securities as risk-free collateral, banks turned to sovereign debt as collateral - principally USTs, but also other sovereign debt. Until the Eurozone crisis, sovereign debt was also regarded as risk-free. Now, of course, it isn't....so part of the collateral scarcity is the fact that there are not many AAA-rated sovereigns left in the world.
QE done by central banks of investment-grade sovereigns (not necessarily AAA) provides the nearest thing we have to a completely risk-free asset - namely, cash.
