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| The UK housing market: a bubble about to burst? |
The UK housing market: burst!
by Hoigby
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#1000447
of 3278
 31 Oct 2002
01:41 PM |
Rob G below is absolutely spot on, but to add to his comments…
In addition to the panic of first-time buyers, and the speculation of the buy-to-let herd (you can kid yourselves that you are investing for a pension, but in today’s market this is outright speculation), borrowers have bought into the illusion that debt has 'never been cheaper' (or at least not in the last 40 years). An illusion because gone are the days when debt servicing (i.e. interest) was the name of the game, today it is all about capital repayment. As inflation falls the mid to long term burden of debt increases, the debt capital is no longer eroded by general price increases and substantial pay rises. Ironically it is often cheaper in the long run to borrow when interest rates are high as this is usually associated with high inflation. Taken to the extreme, debt capital actually increases in real terms during periods of deflation, and this is a risk that is starting to loom on a global scale (just look at Japan in recent years).
Finally, the one constant in every market boom in history is that people have always said “this time it’s different”, well maybe this time it is, but are you going to bet your house on it?! |
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by Extradry Martini
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#1000446
of 3278
31 Oct 2002
01:36 PM |
Tony:
You said:
“Property is (compared to the stock market or bonds) clearly a lower risk investment”.
I would disagree totally – as an “investment” (your word), it is just as risky as any other open-ended (i.e. that doesn’t cease to exist like a bond) investment class in the sense that it is subject to the same emotions – fear and greed. Just because it has gone up more in our lifetime than it has gone down (which owes itself to inflation much more than rising values) does not mean it will continue going up. Please let us know what makes it so secure.
Julian Rooth:
Please elaborate on why you think the UK property market will do what no other market has done in the history of mankind and find some kind of “plateau”. Are you saying that when the buying stops there will be no sellers either and the market will be dead in the water? “Buy to letters” are finding tenants scarce, and those that do have them find that monthly rentals are not covering their mortgage payments. How long do you expect these people to lose money before they start to sell? I think you have fallen for the biggest fallacy around.
You are right to say that more people out of work will force sales, but you are looking at the drop in rates the wrong way round. The BoE is cutting rates precisely because there is a credit crunch in the pipeline (actually, it has already started). |
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The UK Housing Market: a bubble about to burst?
by Michael Dunsire
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#1000445
of 3278
31 Oct 2002
01:19 PM |
A burst in the short term is unlikely to happen, as interest rates are likely to stay low for quite some time, to avoid the UK economy tipping into outright recession. Over the medium term house prices will at best stay where they are or fall. Remember house prices now are ridiculosuly overvalued and in terms of interest rate sensitivity at their highest ever recorded i.e. in late 80's when property bubble burst interest rates were at 15% and average net % income spent on mortgage payments was approx. 40%. Today average net salary paid is 22% of net salary. However at 4% interest rates, hence at 15% this value would be approx. 75% of net income.
This property bubble is hence probably the worst ever seen to date. Normally speaking prices would need to plunge by 40-60% to come back to their real values and in some parts of the country by up to 70%. The only reason this might not happen is that we are probably embarking now on a 10 year period of low interest rates and deflation, as happened in Japan over the last decade.
Expect property prices at best to be where they are today in 10 years time from now.
Any astute investor should be selling all his properties in the UK now and buying undervalued shares of companies.
dunsire@2innov8.co.uk |
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housing boooooooooooom
by mina harballou
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#1000444
of 3278
31 Oct 2002
01:14 PM |
| I think house prices are exagerated ,and I believe that they will be corrected soon.As many people can't afford even studio flats, they will give up looking for houses, sending demand down, as well as prices. |
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The Prospects for a House Price Crash
by Julian Rooth
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#1000443
of 3278
31 Oct 2002
12:44 PM |
| There will not be a crash until either the cost of a mortgage or the rate unemployment increases dramatically, or both!, just a s happened in the late 80's. Until then house prices will find a new level in response to the downward adjuxtment in interesdt rates that has occurred over the last few years. Thsi equilibrium is about to be reached and with the prospects for a relatively low growth economic outlook, and no significant adjustment to rates or hikes in unemployment anticipated, this environment will persist for some time. To solve the so called "key worker" problem, the governemt shoudl abolish CGT exemption on primary residences. This would immedialtely encourage people to see house price rises in their true light, a real brake on labour mobility and a constraint on our quality of life. |
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demography
by derrick
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#1000442
of 3278
31 Oct 2002
12:36 PM |
| Forgive for being too simple, but if I look at the demographic constitution as shown by the last census, then it won't take a genius to figure out that in the long term (15 odd yrs) property is a bad investment with fewer young people coming up the market, and more older ones leaving it. Or is this too simple? |
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house price boom
by tony
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#1000441
of 3278
31 Oct 2002
12:02 PM |
Traditionally house prices stall in November, december and January. So it could well be that we are seeing an entirely seasonal slow down in the rate of price growth.
Property is (compared to the stock market or bonds) clearly a lower risk investment. And the frequently vaunted lack of liquidity that is cited against it is definitely compensated for by the fact the it has a different profile to many other investments. If the value of a home you love falls (which is still very unlikely given the propect for global rate) you can easily remain in it for years enjoying its location (almost unsubstitutable) and the ambience that you gave created within it.
Property is the only investment from which you can continue to enjoy its returns regardless of what the market says because it is so deeply personal. |
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Percentages
by Extradry Martini
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#1000440
of 3278
31 Oct 2002
11:12 AM |
“Confused”, you are of course right to say that if prices go up, say, another 25%, they have to fall 40% to be 25% lower than they are now. It is the nature of bubbles to spike up and collapse very quickly. A good example is the Nasdaq index in the last months of the tech bubble in 2000. At the beginning of February 2000, the Nasdaq was just below 4000. On the 15th of March, it reached 5000, a 25% up move in 6 weeks. At the beginning of May, another 6 weeks later, it was at 3500, a fall of 30%. A year after the March 2000 high, it was at 1650. It is now below 1000.
The point is that bubbles are by nature irrational so it is difficult to assess how far they go before they burst. What one can say however, is how far they might eventually fall relative to current levels by making some kind of determination of “fair value”.
I say at least 40%, and probably more like 60-70%, from current levels within 2 to 3 years irrespective of how far they continue to rise in the short term.
Incidentally, anyone that has access to graphs in the financial markets (e.g. a Bloomberg terminal) should have a look at 3 graphs: The Dow Jones Industrial Average between 1928-34, the price of Gold between 1978-1982 and the Nasdaq between 1997-2002. They are identical – why? Because they are a graphical representation of the boom and bust of manias. Now, have a look at the graph last few years of the Halifax House price index. It is exactly the same as the first half of the other graphs….. |
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BUY! SELL!!
by Rob G
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#1000439
of 3278
31 Oct 2002
10:25 AM |
I think you'll find that (as per Martini's previous post) proces don't depend on everyone selling. The majority of peoples' properties are worth vastly more than they were 2 years ago without them having had to buy or sell, so it follows that neither do they have to do anything for the prices to drop.
The whole pricing model is currently based on herd mentality and panic buying by first timers because they feel they will never be able to afford to buy if they don't get in quickly. Exactly the reverse will be true when the curve hits the top (because they are eventually priced out of the market completely) and starts coming back down. The pressure to BUY NOW! will be removed and first time buyers will give up and sit out the market.
Add to this a country up to its armpits in debt, a looming recession, taxes and unemployment rising, consumer confidence dropping and I think you can see where this is heading...
With no new money coming in at the bottom, the pyramid selling scheme will fail, and prices will drop accross the board. |
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The Housing Issue
by Confused
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#1000438
of 3278
31 Oct 2002
09:47 AM |
I refer to the FT Heading on the Home Page that prices have risen 1.4% in October, but set for a slowdown. Confused I am - refering to precious posts with the Rev, ExtraDry and Curious forecasts with the former talking about crases and Curious with a steady growth.
I claim to be no mathematician, but based on these forecasts given, does that now mean that month 1 's upsurge means that the downsixing forecasts have now to be far greater to match the original forecast ?
If the posts who provided those forecasts could please elaborate. |
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The Housing Crisis
by Mrs Shorter
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#1000437
of 3278
31 Oct 2002
12:02 AM |
I am a new reader to your column. I have been through the last few pages of your postings [there are far too many to read ] and am faced with the overwelming opinion that prices are to crash. However, many of the philosophies put forward seem to be based on talk of demand and supply, oscilating cycles and so forth. However, not all can be based on the assumption that just because prices will appear to fall, that people need to sell, thereby affecting the market value of houses. If my flat were to drop in price in what can be considered to have been a paper money increase in the previous years, then frankly I would not need to sell - surely, that is something if many people are in that position [and there are of my age] would not need to do. It seems that its only those small percentage of properties that are advertised as for sale that then have a valuation placed on them, for a small percentage of potential buyers to going chasing them. The vast majority do not hit the market.
So, it seems to me that the real market is only based on what an overall small percentage of people who need to sell.
Correct me for being so right. |
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Some clarification
by Engineer
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#1000436
of 3278
30 Oct 2002
08:51 PM |
To construct an even remotely accurate model of the housing market would be an extremely difficult if not impossible task, in part because it is affected by a huge variety of external factors that we cannot really predict. As far as I can see, the best that anyone can really do is make educated guesses about likely trends based on the historical information that is available and our understanding of the dynamics of the market to date.
Having only recently discovered this forum, I have found the comments made by most contributors to be very interesting. However, my impression is that a lot more reasoned analysis has been presented by those who believe that the market is overvalued and due for a correction, than by those who believe that the current trend can continue indefinitely. Please, can anyone present some real examples of previous market behaviour (any market!) that can lend some credence to the views of the optimists.
Now to return to the long term real house price trend graph in the Nationwide document: Knowledge is Power makes some good points, and has certainly spent a lot more time studying the details of this curve than I can claim to have done! However, I do not believe that the main points that I was trying to make have been refuted, and my theories are not solely based on that data set:
(1) In the real world, an accelerating change in prices similar to that evident in the current boom will inevitably reach a limit at some point.
(2) Since the behaviour of the system is not well-damped (and I argue that its behaviour is always driven at least partly by positive feedback), it is most likely to reverse its direction once it reaches that limit rather than converging to a stable 'new correct value'.
Having read many previous posts, it seems that most people accept that the present rate of increases cannot continue indefinitely. The main point of disagreement seems to be about whether the market will simply level off once it stops increasing, or whether a collapse will occur.
Repeated short-term deviations above and below a long-term reference are surely not a sign of a stable system! I was not intending to suggest that the 'oscillatory' behaviour seen in the graph is any form of simple harmonic motion, or that we might be able to predict with any accuracy what the peak and trough levels or any future crossing points of the trend line may be, or even that the factors limiting the peaks and troughs are the same for each boom and bust. Since the trend line apparently uses data going back to the 1950s, it is presumably a reasonably stable reference relative to the time-scale of our 'oscillation' (if it is properly computed). Actually, I am a little suspicious of this trend line as it seems to have a gradual monotonic increase built into its slope - more wishful thinking or am I missing something here?
What I do believe, is that once the current increase reaches a limit (due to whatever reasons), the positive feedback in the form of greed/speculation and fear that is currently at least partially driving it will to a large extent be reversed - as others have pointed out, buyers will wait in the hope of lower future prices and will be afraid of losses if they buy, and enough sellers will be keen to cash in on their gains or avoid/manage losses. This will ensure that the curve moves down, rather than plateauing. I would argue that this positive feedback mechanism is always present, as it is part of human nature. The limiting effect will come from some sort of 'soft limiter' - a build-up of reasons making further increases more and more difficult - as in many practical oscillators (e.g. there is no specific 'barrier' that prevents prices from rising above a certain level (a 'hard' limiter - in fact, this is the only way that I can think of that a plateau could occur!). These limiting effects will also encourage the down-trend to begin, after which it gets assisted by positive feedback again.
So to conclude with my theory (not a proof!), I think that there is a fairly consistent form of positive feedback in the form of greed and fear (or call it what you will) that tends to magnify changes (both positive and negative) in house price values once a trend emerges, and this results in house prices deviating above and below a sensible long-term 'fair value' reference. Various (different) limiting factors may come into play on the up and down sides of these fluctuations, but there will always be something to limit up or down swings in the real world. These fluctuations seem to have increased in amplitude in the last 20 or so years - I can think of various reasons why this may have occurred (eg less stringent lending criteria) but it is probably a combination of many factors.
For those that don't believe in oscillatory effects in the markets - reference is regularly made to the 'economic cycle', so where does that term come from? |
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Clarification
by Knowledge is Power
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#1000435
of 3278
30 Oct 2002
06:34 PM |
To DJW,
My message was a direct response to “Engineer”, with regard to his analysis of a specific data set. I merely wished to demonstrate that advanced analysis of the data is not possible. It is too small a set/sequence/timeline to draw his conclusions.
To quote myself (to include the second sentence you precluded); ‘However, IMHO, it is not possible to draw any weight bearing conclusions from this data. Only if it is extended further back, or further forward (I wish), could this be done.’
I agree with you, and so does PWC, house prices are too high.
BUT: It is one thing to think there will be a crash, another to assume that the market behaves like a slow feedback oscillating system. That was the specific distinction I was trying to address. My apologies if I did not explain this clearly. |
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In defence of the Nationwide Graph
by DJW
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#1000434
of 3278
30 Oct 2002
05:52 PM |
[Knowldge is Power Wrote]
"However, IMHO, it is not possible to draw any weight bearing conclusions from this data. "
I disagree - the fact that a boom/ bust cycle can clearly be seen, and the lack of a convincing argument on why this time should be any different -clearly does draw the conclusion that we are heading for a bust? We have yet to hear convincing arguments on why:
-House prices will go up indefinitely
-Why, if they do slow down they will just come down gently or level off
-Why a bust is NOT going to happen
Anyone except the challenge? |
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from a scientist to an engineer
by Knowledge is Power
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#1000433
of 3278
30 Oct 2002
03:55 PM |
Hi Engineer,
Very interesting post, and you've made a convincing argument based on more of a system perspective. However, based on the Nationwide Long Term Real House Price Trend chart on it’s own, IMHO it is not possible to draw these conclusions (it’s too premature).
Firstly, the second house price rise, does not pertain to the increased oscillation argument you propose. However it does look like an outlier, and could be disregarded from the data.
Secondly, as the trend line is based (I assume) on an aggregate average, there will be both deviations below and above this. However, I do not believe that this is an oscillatory effect (there is no absolute constant or other fixed point for reference). There are however interesting parallels with a slow response feedback system, but something I feel that may be attributed to the antiquated policy and response mechanisms of the housing market in general.
Finally, the point that you discuss concerning overall increases in oscillatory magnitude would appear correct. However, based on the trend line, it appears that there is a constant between the market peak/trough, and the long term trend. This relationship (baring the second peak) appears to be a uniform constant (i.e. the ratio between peak/trough position & overall trend is a constant across the rises and falls). And as the overall trend has increased, the associated rises and falls have increased in proportion. This I would argue is not a non-linear increase as your message suggests.
However, IMHO, it is not possible to draw any weight bearing conclusions from this data. Only if it is extended further back, or further forward (I wish), could this be done. But then, if it was something this straight forward, you’d of hoped that someone would have spotted the tend by now!
Many thanks for your message, I have enjoyed looking at this relationship in further detail. I hope this offers yet another angle on the discussion. |
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