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| The UK housing market: a bubble about to burst? |
Quid Pro Quo
by rev.hk
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#1000400
of 3278
 28 Oct 2002
10:57 PM |
Rather than reducing everything to cheesy number gazing where the numbers are picked out of a hat and have zero meaning, why don't we have someone from the 'two more years and then it will peter out' camp explain why, when it has never happened before, the over-valued and heavily-indebted US & UK property markets will just level off without correcting to levels in line with fair value - i.e. about 40% down from where they are today.
I know it is mid-week, but if you could throw in a bit about why, when the international capital markets are signalling a tightening of lending criteria and a worsening of debt-deflation, we should expect the banks to carry on lending to new buyers who's chances of redundancy are higher now than anytime over the last ten years? Perhaps even a bit about how a war in the gulf might push up oil and heating prices right at the time of year when fuel costs are at their highest. I'd be interest to know how that will also lead to more capital appreciation in the market.
If you could make your argument coherent and well argued, rather a treatise of glib quotes from newspapers, then the first time buyers in this column, who have huge liabilities running on your everyword, will know exactly why they should take the biggest risk of their lives. They'd be eternally grateful, I'm sure.
It should be pretty obvious where I think the UK property market is going. I expect a loss of a third in 1-2 years and then another 25% over the next two. I used HK as an example or a reason.
For the markets that matter, I'm looking for a bottom at TOPIX 650, S&P 500, NASDAQ 300 & US Long-end at 4%. KOSPI 900 & BSENSEX 4800. |
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But it's ***DIFFERENT*** this time round
by DJW
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#1000399
of 3278
28 Oct 2002
07:26 PM |
Rob G:
My point entirely. It seems that people are happy to use history to say why house prices wil go up forever, but not when it says that house prices will go down. (see the Nationwide Graph if you don't believe it!!)
This 40% decreas figure (after inflation is taken into account) comes from this graph. The size of the bust is a similar size to the preceeding boom. Look at the graph if you don't believe me.
Talking about quoting from papers - The Mail on Sunday (Jeff Partridges column - in Financial Mail) was saying there are warnings from America that their house price bubble might be about to Burst.
My predictions are that within the next 3 years we will see at least 40% drop in the average house price. The higher the boom goes up, the more it will come down. |
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A Picture Tells 1000 Words...
by Rob G
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#1000398
of 3278
28 Oct 2002
05:33 PM |
Quoting from DJW's post earlier:
http://www.nationwide.co.uk/Hpi/historical/PDF/CMQPRQ302.pdf
This is the quarterly review for Q3 September 2002. Now look at the graph in the top right hand corner of Page 10 - "Long Term Real house Price Trend".
I think this graph alone speaks volumes. Look at that last peak and tell me that the market is going to just plateau... |
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Bubble
by Curious
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#1000397
of 3278
28 Oct 2002
05:03 PM |
To ExtraDry Martini - Thank you for your predictions of an across the board reduction of 40 % in real estate valuations from the current levels within the next 1 - 2 years. My opinion is as stated 8 - 10 % rise for the next 2 years. Its good to see this level of conviction to support your individual theories. Clearly, each of us have shaped our beliefs based on personal experience, personal circumstances and of course what we see and hear from friends and colleaugues etc. Then of course there is also the economist's point of view as well to throw into the pot. And then of course, throw in the gut feel factor as well. Over the years to get to what I have now I have used all these different feelers. All this has led me, personally , to support the view that prices will rise a little yet and then peter out. Of course in 2 years time we will all know.
I do however, wish that the rev would now at least make an attempt at a guesstimate. |
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The doughnut man....
by rsl
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#1000396
of 3278
28 Oct 2002
03:06 PM |
Apologies to the price bulls who I earlier compared to doughnuts, that was rude. I am not angry with your opinions rather with the wealth of percieved wisdom which passes for "analysis" of the property market, referred to as "Sunday Express" on this forum.
Let's re-visit one of the central arguments for the bulls, "Supply and demand". You see one of the (imho) erroneous arguments put forward to sustain ever greater prices is the comming influx of immigrants into the UK or the change in demographics away from larger families towards smaller units (via say divorce). Skilled people used to migrate toward the UK based on a combination of factors including education, political stability, justice etc.... Now however London especially is gaining a repuatation for high cost of living, poor transport and low quality services like health and education. In a way countries too compete for the most skilled immigrants and poor quality, high-cost housing just like any other expensive good makes the country far less attractive. I am talking here of skilled economic migrants who can afford expensive housing. The other unfortunate group of immigrants are the brave but poor sorts who arrive after hanging on to trains, are they likely to drive house prices up with large bids. I think not! The same goes for the other demographic often trotted out, broken homes. Know any single mothers out there who fancy splashing out 5x the average wage for a house. Again I think not!
Ultimately the UK either has to become more productive or more attractive internationally to justify the rises in the real cost of it's housing stock. On both counts UK plc is on life support. Housing is due for a significant slowdown.
Personally I would not expect a violent crash, and I don't think you'll need any single event to set the whole thing in motion. You see half the attraction for current would be buyers is the hope of future sizeable capital gain. A year of negative performance and all of a sudden housing will be another hot potato to avoid.
Finally there has been talk along the lines of "If I don't need to sell then I won't and it'll go up in the long term". In a sense you are right, if you can hold the asset ad infinitum then it's market price is largely an irrelevance (unless you need to borrow against it's value). However people need to move for all sorts of reasons, job loss, job gain, illness, upsizing, downsizing and so often sales must be sought in non optimal conditions. Compare and contrast Share certificates there are even fewer reasons to be a forced seller, and yet few people who bought equities during the second half of 2000 are comfoted by such thoughts. |
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Quickly...
by Extradry Martini
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#1000395
of 3278
28 Oct 2002
02:41 PM |
Sorry - I know this has nothing to do with UK property (at least directly), but a quick explanation:
There are 3 reasons I believe this: the fundemental, the quantitative and the technical.
The Fundamental:
There is a huge excess of capacity and debt in the major world economies. In order for industry to divest itself of capacity and digest it's debt, it needs to downsize. The supply-side recession which we have already entered will turn deflationary as a result, and this is not priced into the stock markets.
The Quantitative:
Look at a piece called DOW 5000 written by a market guru called Bill Gross:
http://www.pimco.com
You'll need to click on archived articles to find it. What it basically says is that in order for the stock markets to give the returns of the past in the proprotions of the past, the DJIA needs to fall to 5000 first.
The Technical:
Technical analysis is also known as "charting". It looks for patterns in the price charts, compares them to previous patterns and then attempts to predict future price movements. It works on the basis that every price in the market represents the sum total of investment decisions at any given point in time. All investment decisions are ultimately made by humans,and all humans are subject to human nature so tend to repeat their mistakes.
All the major stock indices (with the exception of the DJIA) have what is known as a "head and shoulders" pattern in the chart. The patterns are perfect according to the rules (rising neckline, stronger left shoulder, broken neckline and attempted upward test), and indicate moves down to the levels I suggested.
If you want further discussion on the topic, email me at extradry_martini@yahoo.com - I'll be happy to continue it. Again, apologies to the rest of you... |
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One heck of a downturn
by Knowledge is Power
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#1000394
of 3278
28 Oct 2002
02:14 PM |
To Extradry,
Many thanks for your continued posts, They have been very interesting. One point I'd like you to exand on further is your recent post:
"For what it’s worth, my target on the Dow Jones is 5000, the S&P 375, the CAC40 1200 and the FSTE100 2500)"
That's a considerable slide from current values (that seem at a stagnation point). Is that speculation based on sinking inflation & a course toward deflation, or just the natural downturn of the market?
I'd of thought 2500 on the FSTE100 would be a tombstone for the UK economy. Do you really think it's going to go that low, and if so how long? |
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On learning...
by Extradry Martini
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#1000393
of 3278
28 Oct 2002
02:01 PM |
Curious:
By the way, I am not an economist, but through my job (in the financial markets) I have to have a good understanding of macro economics, and it is this that has driven my thinking (i.e. I am not sold to my previous opinions).
What is extraordinary to me is that people don’t learn more about macro economics before plunging into a debt as large as a mortgage. It seems that most people think they know better (or know all there is to know on the subject – like they do in stock market bubbles) just because a lot of people have mortgages. “Experts” are considered those that work in the property market (who have a conflict of interest anyway), and tend have very little idea of economics.
Think of this:
My first child was born recently. A lot of people have children. Therefore I already know all there is to know about children and how to look after them. No need to ever take him to a paediatrician. If he gets sick - it won’t be my fault - it’ll be the fault of the disease….
Now do you see how absurd it is not to do your homework? |
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As sustainable as a smoke ring....
by Extradry Martini
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#1000392
of 3278
28 Oct 2002
01:39 PM |
G:
Of course, you’re right to say that there can be big localised differentials in the property, as in any other, market. However, the numbers I have quoted in all my posts (and the numbers on the Nationwide website) are for the UK as a whole. Besides, given that the London market has been driving the rise elsewhere, when London collapses the rest of the UK will not be immune.
Curious:
You said:
“Why not this even simpler test - any sustainable rise above the official rate of inflation is a positive move: any below, then the bubble is pricked?”
The words “sustainable rise” are important. This is my point – recent and near-future rises are not sustainable, as the property market has become an investment bubble. In earlier posts you were asking for numbers and timing. The numbers are these: I say that in 2 – 3 years average real estate across the UK will be worth at least 40% less than current valuations. The problem is that bubbles inflate at their fastest rate near their own demise, so it is very possible that we see a big up-move before the crash. I am therefore comparing to current valuations without judging the future extent of the bubble - investment bubbles are by nature irrational so it is impossible to gauge reasonably the maximum levels of the market. Another feature of the last phase is that it is very quick – making money from it is extremely difficult, as very little changes hands at the top (i.e. the utter folly of it all occurs to everyone simultaneously).
The Rev’s priceless extract of a book review, in his posts number 378, sums up thinking in the last phase of a bubble beautifully. This is how it happens:
When the market goes past fair value in a bubble, “considered wisdom” justifies this by saying that old valuation methods no longer apply (“antiquated p/e ratios” in the eyes if the reviewer!). At the same time, they contrive new and rational-sounding methods to imply that the market is fairly valued, but will reach a “plateau” in due course. In the reviewers example this is simply the “new paradigm”, and in UK real estate parlance “affordability” and “permanent demand” (or simply a vague “supply and demand”). As the bubble keeps going, the mere fact that the market has gone up appears to vindicate “considered wisdom” and sucks in the majority of remaining doubters. It is at this point that the reviewer in the example is writing, as his arrogance suggests that he has been proven right and the author of the book wrong. OK, the Dow is not at 3000 yet, but it isn’t at 11500 either, and the Nasdaq is worth less than 25% of what it was when the review was written.
(For what it’s worth, my target on the Dow Jones is 5000, the S&P 375, the CAC40 1200 and the FSTE100 2500) |
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Recruitment crises in retailing............
by Shareholder
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#1000391
of 3278
28 Oct 2002
12:23 PM |
Rob G...wrote about the loss of manufacturing....
The news is that there is a recruitment crises in retailing , with high staff turnover and many leaving to take jobs in the pubic sector and public services.
So the Governemnt are creating more jobs in the public services and with taxpayers money! However we cann't all work for the service sector and the Government. Workers are changing jobs frequently, losing out on employment protection and pensions, spending time in and out of work.
So Rob G has raised the point that we cann't exist on service industries alone.
How does the more frequent changing of jobs affect the housing market and how does the drastic drop in manufacturing affect the housing market and economy?
It seems to me we are concentrating more on the present and worrying less about the future. Sacrificing long term for short term gains! However, one day the day of reckoning must come for those with high mortgages and no pensions. If interest rates rise there will be extreme problems for many recent home buyers, with negative equity traps once again. |
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Service Sector vs Manufacturing
by Rob G
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#1000390
of 3278
28 Oct 2002
12:00 PM |
On the UK economy as a whole; it's amusing how the apparent success in the services sector over the last 3 months vs recession in the manufacturing sector are portrayed in the press. There seems to be an obsession with ignoring manufacturing failure and praising ourselves with how fantastic our services sector is, and how by implication they cancel each other out.
I have trouble in believing that having an economy where the only 'wealth creation' is from moving things around rather than from making things you can pick up and hold is an entirely good thing. IMO service industries are essentially parasites which live off manufacturing.
Lets face it, at the bottom line, the price of oil is *the* fundamental around which the world ecomnomy revolves. Without cheap oil, no manufacturing economy can succeed and without manufacturing, services are a dead duck.
Too many of us seem to be forgetting these simple facts. |
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Catalysts
by Knowledge is Power
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#1000389
of 3278
28 Oct 2002
10:57 AM |
The most obvious sign of deflation is to look at current inflation rates, that seem to bob round the 1.5 – 2.1 %. With retailers & manufacturers struggling to maintain the sale & turnover of goods, across the board prices of goods are around the same that you’d pay for 2 years ago. So goods are getting cheaper. Unfortunately with UK industry & the service industry too, the reliance on consumer spending is horrific (and as Europe & the US are tough markets at the moment there’s little alternative). So you can see as things get tighter, the price of goods will fall & inflation will slow still further. A cutting of interest rates could help (so thinks the BoE), but in my opinion it’s prolonging the inevitable… growth is going to dry up pretty quick, leading to all the other nasty things mentioned in previous posts.
For a fast/dramatic change in a market, let's assume that you’d need a catalyst. It’s easy to look back at the crash at the end of the 80’s and say it was the rush on Mortgage tax relief, followed by ERM blunders & the inevitable rise in interest rates.
So what could a UK catalyst be this time: unemployment rises (possibly), war in the gulf (possibly), deflation (possibly), but to let (possibly), interest rate cuts/rises (possibly).
Sadly an economist can only theorise (based on knowledge and experience) as to what could happen & what could be the causes. To put a date on it is asking a bit much! |
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Deflation
by Horsefly
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#1000388
of 3278
28 Oct 2002
10:23 AM |
rev hk - Your posts are fascinating.
Forgive me for being ignorant, but can anyone suggest any indicators that might warn that we are moving into deflation. |
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manhattan
by rev.hk
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#1000387
of 3278
28 Oct 2002
07:59 AM |
Dear G,
I forgot to mention that there is a link between the Midwest and Manhattan. The Great Depression in the US was caused (partly) by a banking crisis in the Mid-West.
If you are interested there are a number of books I can refer you to. One of the best is called 'The Banking Panics Of the Great Depression' by Elmus Wicker.
One of its conclusions was that rising credit risk in one part of the country led to country-wide risk aversion in the banking sector which lead to a sharp fall in investment throughout the US as a whole - with the obvious ramifications for the asset markets. It was not the sole reason for the crash - and the total significance of its role is still disputed - but it would be folly to assume that what happens in one part of the country has no bearing on the rest.
The Asian Financial Crisis started as a one-country phenomenon but within six months had inguled most of tthe globe wide of 70 degrees east. The spread of the ERM crisis in 1992 was much the same.
rev |
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HK is not the UK?
by rev.hk
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#1000386
of 3278
28 Oct 2002
07:41 AM |
Dear G,
You’ve made some really good comments recently that have added significantly to the debate. In posting #381 you make the point that using Hong Kong as a yardstick for future price movements in the UK as a whole is wrong since only London conforms (loosely) to the Hong Kong model. While, it is certainly valid to say that there are regional differences in economic performance, I think you make a mistake to assume that one part of the country is immune to changes in others.
Take the example of mortgage-lending and let’s all think of dear old HSBC, the world’s colonial bank. HSBC has branches in most of the UK’s major towns and cities, but its regional lending policy is dictated by its country-wide balance sheet.
If one region of the economy suffers significant problems and the bank has to increase its provisioning for potential bad loans in one part of the UK, it will tighten its lending policy in the rest of the country to make sure its end-of year results do not significantly affect its share price and global expansion plans. It is almost a certainty that any dramatic rise in mortgage defaults in London will affect price movements in regional property markets – and not in a positive way.
If you go back to the last crash in England in 1989-1993, you will see that this what exactly what happened. The trick to all of this market gazing is to try to see the big picture and not just try to talk up the value of your own short-term bank balance.
In truth, Hong Kong and London are not the same and there are many significant differences between the two cities – one of which is that we have a much higher standard of living here with only 15% income tax. But there are many similarities - especially the obvious limits on new property developments in the short-term and the dark-clouds looming on the international horizon. The arguments given to justify wild over-valuation of properties in Hong Kong in 1997 were identical to those which you find in this forum and it should be of great concern that prices here have fallen so much – even in a market where 75% owned outright and there was no nanny state to bail them out.
First-time buyers need to be very sure they know what they are getting themselves into, regardless where they live. |
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