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| The UK housing market: a bubble about to burst? |
Reserve Requirements
by Extradry Martini
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#1000432
of 3278
 30 Oct 2002
02:20 PM |
Engineer: great post, great point – perpetual motion cannot exist in asset markets any more than it can in the physical world..
Tam Freestone-Bayes:
I’m pretty sure that any co-operative restrictions on mortgages is anti-competitive and therefore subject to the same laws against price fixing. This is why the CML asked the Bank to tighten monetary conditions for them. However, the Bank is more likely to continue easing in the face of a deflationary recession. I think the CML is desperately worried about the property market and therefore the collateral against which they have been lending (and are continuing to lend). In this way your point about people taking on too much risk are screwing it up for the rest of us holds true. At the end of the day, responsibility lies more with the mortgage lender. The mortgage market is far too competitive for it’s own good, and when the collapse happens there will be lots of lenders pulling out of the market or even failing. I heard a saying years ago: If you owe the bank a million dollars and you can’t pay it back, you’re in trouble. If you owe the bank a billion dollars and you can’t pay it back, the bank is in trouble.
I think a solution (it’ll have to be for the next property or asset bubble – which is unlikely to happen for a long time after this one) would be reserve requirements. Anyone lending above a certain proportion of loan to value, say above 60%, will have to deposit a certain percentage with the Bank of England at 0% interest. This proportion would be re-adjusted every year according to real house price fluctuations. So, for example, imagine that 50% of the loan value above 60% of the house value had to be deposited interest free with the bank of England. On a house worth £100,000 with a mortgage of £90,000, that would be 50% of 30,000, or £15,000. If interest rates were 5%, then the lender would be losing out by £750 a year on that money, which he would have to pass on to the borrower From the borrower’s perspective, it would be a rise of 17% on the initial interest rate element of his mortgage. As he paid back the principal element, this cost would reduce. If the property market prices rose then his proportion of below 40% equity would fall, thus the lenders deposit would fall. However, the Bank of England would demand larger deposits (known as reserve requirements) in general when real prices rose, so this would offset some of the rise without affecting the positive impact of inflation on the borrowers loan. The index could come from something like the average price change in the Land Registry.
In this way, as inflation-adjusted prices rose, the cost of borrowing goes up disproportionately, thereby dampening demand naturally in inflated markets. On the other hand, the deposit that the lender has in the BoE represents further collateral. Naturally, if the market falls, the reserve requirement of the BoE would go down (and in extreme cases negative), thereby making mortgages more attractive.
(For anyone that’s interested – this is how currency controls are often implemented – anyone lending abroad has to deposit money with the central bank)
The major problem I see would be the starting point. How would one determine fair value in average property prices?
Would appreciate comments! |
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Restricting Credit Facilities
by Tam Freestone-Bayes
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#1000431
of 3278
30 Oct 2002
11:09 AM |
I posted this in the "Are UK interest rates at the right level?" forum, but I've reposted it in here as I'd be interested in other people's comments given that I perceive this to be a housing market bubble:
I think the Bank of England's decision to maintain base rates at the same level is the correct one under the circumstances.
I think that the Council of Mortgage Lenders - who cynically asked the Bank of England to raise rates a couple of months ago to protect themselves from a forthcoming crash in house prices - should take responsibility for their own investments. I believe their members should cooperatively lower their average Loan-to-Valuation figure (the percentage amount they are prepared to lend based on a property's value) from 80%-95% to 50%-60%. This would dampen house price inflation whilst leaving room for the low interest rates required by businesses and their investors.
A collapse in house prices, driven primarily by growing unemployment within traditionally well-paid industries, will result in far worse domestic economy than the current dismal environment. Its threat really must be acknowledged and dealt with.
Addendum:
Someone in this forum suggested that no official body should be trying to ensure individuals do not get into unmanageable debt, and that it was an individual's responsibility to avoid high risk themselves. I would agree with this if individuals operated in a vacuum. They don't, however.
The failure of the man in the street to handle debt will impact much more than hinmself and his family. A collapse of a market, driven like all others by typically uninformed greed and fear, affects *everyone*, and usually badly. I live in a country and a society that I enjoy - I don't want it to become a shadow of itself because a lack of responsible policy allowed millions of others to unwittingly lead to its collapse. No matter how wise my own investment decisions may be, the upbeat, solvent and even affluent society in which I wish to live may no longer exist. To me, this is a loss as important as any personal financial loss I might suffer. |
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A matter of WHEN, not IF
by Engineer
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#1000430
of 3278
30 Oct 2002
10:54 AM |
It is, of course, only a matter of WHEN the market will hit a peak, not IF.
From an engineering viewpoint, the market is clearly an unstable system since positive feedback is at work. By this I mean, when the output of the system (house prices) changes, then everybody notices this and their inputs (buying/selling decisions) tend to reinforce this trend (mainly due to fear and greed), meaning that the output changes even further in the same direction etc. Note that the rate of change of prices increases as time progresses (which can be nicely seen in the increasing steepness of the curve in the Nationwide curve referred to in other postings).
In the real world, there is always some limiting factor that prevents this feedback from driving the output of the system to infinity. In the housing market this can come in the form of interest rate changes, or changes in the job market, or simply the inability of new entrants to pay the requested prices etc (as covered in other postings) : counter-trend or negative feedback influences. The point is, at some time the system hits a limit, and when this occurs there tends to be a reversal (which is also self-reinforcing by the same feedback mechanism). Again this can be clearly seen from the Nationwide graph (for previous booms). In fact, this Nationwide graph looks quite interesting - it seems that the housing market is an oscillator, oscillating about the fair value or trend line. A worrying aspect, is that the magnitude of the oscillations seems to have been increasing over the last 20 odd years, so WHEN the market hits its limit this time, it looks like there is a possibility of a serious bust.
Just my two pence worth, from a slightly different perspective. |
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Aseet-liability management is the key
by rev.hk
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#1000429
of 3278
29 Oct 2002
11:15 PM |
Printing money is a bit of a misnomer since there are a number of ways a central bank can stimulate the economy (note: central banks print money not governments...unless it's a tin-pot shop like e.g. Zimbabwe).
To assert that a collapse in sterling is bad for the UK housing market is a bit rash. In the early half of 2000, GBP went from 1.62USD to 1.4USD, a fall of almost 15% and in just a matter of weeks. It obviously had no material effect on the UK housing market since the vast majority of people buying houses were British. When the fall ended, a lot of USD-based punters rushed in.... hence my previous note about Asian people buying London property and now thinking of selling it because they've made their money and sterling is rising (for now).
In a deflation, a fall in the currency may well be positive since it would put some upward pressure on the price of things you import and help to offset the fall in prices at home. But it isn't necessarily so and you need be on top of a few other issues before you can say that it would or would not. The most important of these is debt and the currency in which is it booked. The household sector's debt is normally in home currency. In Asia's case in 1997, and South America's case in 1998-now, devaluation was a disaster since most companies had loans booked in foreign currencies. When the currency flopped they couldn't pay the creditors. When the corporates went bust the ordinary population didn't have any money to pay their mortgages. If FX debt is small, the devaluation can be very positive. If not.........
That aside, I think this forum needs to get back to the central issue, which is whether or not the UK property market represents relative value for potential entrants. A first time buyer in late 2002 is being asked by the inflationists to take on a huge debt just at exactly the time when the world economic engine appears to be faltering and central banks are sitting on their hands. If conditions get worse, then the first time buyer will be facing a very different world to the one face by those who have now paid off their mortgages - thanks partly to inflation eroding much of the real value of their debts. The world in which the opposite is true is a brute....especially if the fall in the equity market has halved the value of your pension and your savings and the knock on effect is not threatening your job. That is why I posted the url on where the world's major equity markets might now be heading.
We stil have to hear the well-argued reason why the world is still the same as it was twenty years ago. |
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The Housing Post
by Doubter
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#1000428
of 3278
29 Oct 2002
10:40 PM |
Hey Rev - as your posting 405 - had a look at paragraph 2 of the What the Financial markets are tellig you bit. Says that the majority of govt officials and economists are saying the economy is growing and the ordinary people say its slowing.
Seems to me that Curiuos is the ordinary man and you are the economist but with role reversal. In other words can Curious be right ? |
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The Housing Bubble Issue
by Miss Hazel - Skegness, UK
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#1000427
of 3278
29 Oct 2002
10:04 PM |
I am a first time respondent to this particular topic - and find it very intriguing. The rev and martini appear to constuct their arguements on economics, but curious seems like a practical person with his ear to the ground. Clearly they shall never agree on what they are all trying to talk the market to do.
I can only say that it will of course be very interesting to see what future press reports will reveal so that the readers to this site can subsequently compare these very opposing views.
I here am far too ignorant of economic matters to make a valid assessment of house values in the near future - but can only express that from the standpoint of the East Coast can only see them going up for the next 1 to 2 years particularly as we have a lot of Southerners moving up to this relatively cheap part of the country. No bust I am afraid, is what I can see - certainly not here. |
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Don’t worry first time buyers, the euro will bale you out…
by g
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#1000426
of 3278
29 Oct 2002
05:38 PM |
Sterling will have to devalue if it is to join the Euro. Perhaps this house price boom is politically motivated in an attempt to persuade the general population it’s a good idea to join the Euro. Either way, after a big bust in house prices people wont want to go out spending when they are drowning in negative equity. Low consumer spending means job losses, a similar outcome envisaged by Martini in 422 as the result of devaluation of Sterling.
My point is that joining the Euro is a one off event that would effectively disguise the devaluation of Sterling, which would alleviate the symptoms of a traditional devaluation (ie .’ To even show that you are considering it (devaluation) means outflows of capital, job losses etc,’ Martini suggests. )
If you think this covert devaluation hasn’t happened before, look at the Decimalisation of Sterling and try to convince yourself it wasn’t also a devaluation.
Campaign slogan of ‘join euro for freedom’ (at least from the shackles of your mortgage!) Anyone fancy campaigning on a ‘keep out mortgage debt real’ ticket? Blair may even pull off his old trick of being most things to most people.
Foreign investors will be fed pretty words of lower currency risks, wider markets, strong manufacturing exports etc. If they do all scarper, well we blame it on the introduction of the euro of course (if you hadn’t guessed by now.)
We will be able to join the European dream of everyone subsidising everybody else with no accountability.
G
PS don’t take this posting too seriously, I didn’t. Remember it there are many different scenarios, only one of which will come to pass.
PPS HK people, Curious is obviously playing the devils advocate in this arguement, a necessary evil!
PPPS Always remember economics is a 'political' science, what the wider picture?
I hate people who put too many post scripts... |
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Judge dred
by chris
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#1000425
of 3278
29 Oct 2002
04:15 PM |
| the 'judge' missed my point about CGT. What I'm saying is why isn't CGT applied to all property transactions? It's applied to all share transactions or all antique sales for example. The exemption for principal residences is the 'privileged' tax treatment that I was citing. Apologies for any lack of clarity. |
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nonsense
by mike
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#1000424
of 3278
29 Oct 2002
03:57 PM |
i actually had the priviledge of seeing D.A.D. yesterday and pierce in my opinion forfilled the role particularly well.
in attacks post he mentioned a card game...? this was not in the cut i saw yesterday, has anyone else heard/seen anything?
PS hi to viks, c u on thursday if you are still going!!!!x |
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Boom & Bust
by Knowledge is Power
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#1000423
of 3278
29 Oct 2002
02:23 PM |
Boom & Bust - the nature of capitalism & human nature. Suggesting that people's opinions shouldn't impact on the market is a worrying concept. After all, people pay what they think something is worth. Remove that freedom of choice and we'd be in an even greater mess.
So, to stir the pot, and excersise my freedom of speech - House prices are ripe for a fall, due to UK PLC illhealth & greedy consumerism. Save what you can & good luck! |
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Printing money
by Extradry Martini
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#1000422
of 3278
29 Oct 2002
01:54 PM |
Printing money is an option, but one of very much the last resort. (Actually quite a few people are now suggesting it in Japan). The problem is that inflating the currency by printing more of it means that everyone that has invested in the country loses out through the devaluation.
Effectively, this is a betrayal of anyone investing in your country and a promise not to do this under any circumstances is one of the lynchpins of monetarist thinking.
If this happens, it can happen again and that is what makes investors run a mile and stay away. It was because of this that so many countries adopted a strong currency policy in the 80’s and haven’t abandoned it. Part of the success of the global economy comes down to it, and it spells ruin for extended period of time. To even show that you are considering it means outflows of capital, job losses etc. |
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Fortresses
by Horsefly
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#1000421
of 3278
29 Oct 2002
01:34 PM |
| Some people seem to be suggesting that those who don't own or buy property now will be trapped in poverty forever, whereas those that do will be cosily holed up with their tins of baked beans surviving some kind of total economic catastrophe. I personally think this is the kind of scaremongering that booms and busts are made of. |
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Worth and Substance
by Extradry Martini
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#1000420
of 3278
29 Oct 2002
01:33 PM |
Ok, point taken, I'm sorry - I agree, the word "worthless" was unnecesarily strong.
Let me elaborate on what I meant, assuming Curious does give the forum another glance:
Curious:
You have not backed up your refutation of the economic arguments with facts or analysis, and as such simple refutations a have no value (hence the "worthless"). Please back up your statements with reasoned arguments. |
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Currency - more..
by sl
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#1000419
of 3278
29 Oct 2002
01:22 PM |
| This came from an earlier posting by another contributor, asking what was to prevent this option - there was no response, either positive or negative. My question was whether or not this scenario was a possibility - are you stating that it is not? Again, I'm worried about the situation and I appreciate the constructive, informative responses from other contributors. I don't make any claim to be competent to state a view. |
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License To Print Money
by Rob G
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#1000418
of 3278
29 Oct 2002
01:11 PM |
Well, the government can print all the money they like, but how do they distribute it?
Are you suggesting that they use the Firemen to distribute the cash to the rest of the country by giving them a 40% pay hike and paying them cash-in-hand? |
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