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| The UK housing market: a bubble about to burst? |
From the BBC...
by DJW
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#1000462
of 3278
 01 Nov 2002
09:02 AM |
This is an interesting article:
http://news.bbc.co.uk/1/hi/business/2370085.stm
It contains such statements as:
"As a rule of thumb, when stock markets are at a low ebb the housing market does well. People are quite rational in investing in property at this time."
- Lecturer in Economics at Exeter University
There are huge pressures to buy in the UK. If you are in your thirties and renting people wonder what is wrong with you," says Dorothy Rowe, a clinical psychologist and author of 'The real meaning of money'.
"Renting is a stigma like being unemployed - you are perceived widely as not having a stake in society," she adds.
What a load of tosh! |
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house boom or bust
by max southall
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#1000461
of 3278
01 Nov 2002
08:47 AM |
| Houses are a different animal to other assets - firstly they are homes as well as houses. Firstly the levels of volatility in the housing market are historically low, secondly the structure of house buyers has changed so that there are more buyers than in the past. Admitedly short term investors are included by the majority of the sharp increase is a simple economic phenomenon of supply and demand. Secondly the economy has seen greater income distribution at the higher tier of high income earners - increasing the ability of people to buy earlier in their life. All these factors point to a structural shioft in the asset pricing model not an asset price bubble - the boom will peter out as prices reflect the true market value and all buyers equate to supply conditions. |
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Good forum
by Davo
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#1000460
of 3278
01 Nov 2002
06:37 AM |
This is a great forum with some excellent views.
We are in Sydney, where the house price bubble is easily equivalent to that in London (3 bed house in a decent suburb costs 20 times avg salary). We return to the UK in May next year with a lump of cash for a house deposit and have been watching the housing market in the UK closely (and are more than happy to rent until prices collapse, even though buying immediately is comfortably affordable for us). I have a vested interest in believing the arguments for a bursting of the bubble so maybe I am biased, but I have seen not one convincing economic argument against this happening in the UK. I have to say that I find the direct comparisons to the Asian crisis somewhat overplayed, but I do take the points being made. If there's one thing my economics degree taught me - its all about confidence, pure and simple. You can chant about people not needing to sell and low debt levels and undersupply all you like. Fundamentally if confidence collapses that means nothing. The negative economic indicators around the globe are mounting and with that comes the inevitable confidence crisis as bourne out the recent stock market collapses (and incidentally - long term p/e ratios suggest stocks are still way over priced). Confidence is waning, be warned.
Oh, here in Sydney the chairman of the biggest lender stated that when house prices fall his bank is well positioned to cope with the bad debts, and even stated that they could cope with a 30% collapse. Thats the scale of the collapse they are clearly budgeting for here - I'd put money on Nationwide et al doing the same internal calculations! |
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To Rob G - Erosion Vs. Real Cost
by SL
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#1000459
of 3278
31 Oct 2002
08:14 PM |
Rob,
I take your point regarding inflation no longer reducing the burden of debt during periods of low inflation. However, my question still stands: Will the reduced overall cost of paying back a loan due to the reduced interest the loan attracts over the loan period (and hence the reduction in the real, overall cost of the asset)affect the house price average? On all other loans, people look carefully at the total amount repayable as well as the monthly cost. In an environment where inflation is no longer a softening factor, this value becomes key.
Whatever happens with customer confidence, greed etc, I cannot believe that a long term reduction in rates will have no effect at all... |
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The hidden danger
by Extradry Martini
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#1000458
of 3278
31 Oct 2002
04:34 PM |
Michael Dunsire said:
“The biggest potential catastrophic situation occuring in the medioum term may well be those somewhat gullible individuals going into ever more debt by taking out supposed "equity" from their homes. Many of these people may well risk finding themselves in later life with not even their house paid off.”
Absolutely right – people seem not to realise how foolish this is. It is actually just as speculative as buying to let, just more widespread. |
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More on reserve requirements
by Extradry Martini
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#1000457
of 3278
31 Oct 2002
04:25 PM |
Tam,
Thanks very much for your reply.
Obviously, if there is no cost to borrower/lender then there is no point, as it is designed to protect the rest of the economy from false valuations, and therefore false collateral levels. No, I wasn’t saying that the borrower should be severely punished at all, but make it gradually, but progressively, more expensive as prices rise further above “fair” value, and make it easier as they fall below it. I recognise that this is a question of degree, but even a very small amount of reserve would take some of the froth out of the booms and help the busts.
I don’t think that people would go to loan sharks at all as the loan shark would not be able to secure the property as collateral unless he too deposited the reserve…
You are, of course, right that the absolute level of monthly repayment would be unpredictable. But monthly repayments already change with interest rates, and I think that it is exactly this complacency (i.e. that house prices can only move inversely to interest rates) that has caused the problem in the first place. In other words, part of the rationale behind the reserve requirement system anyway would be to remind people (in a gentle way) of the risks they take when they borrow such huge amounts of money.
Just to remind everyone, the purpose of reserve requirements would be to protect the financial system (and therefore the rest of the economy) from over-leverage in speculative markets. It is my view, however, that the crash in the property market that is about to happen will be so severe, and affect so many people, that property will remain close to fair value for another 60 or so years afterwards. When people get burnt (and I mean really burnt), it takes them a long time to repeat the mistake – perhaps even a lifetime. It is no coincidence that there are (and were during the tech/telecom bubble) few people alive who witnessed the 1929 Wall St. crash first hand. So, this would probably be a question of locking the stable door after the horse had bolted, but it could be extended to other markets as well…
Once again, I’d appreciate your (and anyone else’s) comments…. |
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Pah Humbug!
by rev.hk
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#1000456
of 3278
31 Oct 2002
04:10 PM |
Q. Does anyone out there know a single person who has made money over a 3-5 year period by buying a market that has already doubled in value over the previous three? Any asset class will do.
A. I bet none of you do, unless you have friends in fund management who got the NASDAQ right in the early 1990s. And if you don't, then why are you expecting it to happen in the UK property market? |
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Debt Repayment
by Daniel
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#1000455
of 3278
31 Oct 2002
04:01 PM |
I wanted to ask a question to those that are more informed than myself.
Do all the figures of repayment of debt only include mortgage repayment?
It seems that every week we hear more and more new reports of consumer debt rising at it highest levels ever. The average guy in the street will have a credit card or 3, a car loan and god knows what else on finance. When working out the increase in monthly repayments for the nation I think these figures should be included. In the late 80's most debt was with a mortgage, now it is spread out over mainy items.
How much would the average person's monthly payments rise if we went up 1-2 points? The bank and Credit card rates would go up (substantially if there were no new customers coming in). Would the end payment equate to around 40% of incomings?? I'm not sue but I’d like to find out! |
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Debt Erosion
by Rob G
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#1000454
of 3278
31 Oct 2002
03:28 PM |
| SL, see post 447 and you'll perhaps realise that this is a false (but unfortunately very common) assumption. |
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CGT
by Judge Dredd
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#1000453
of 3278
31 Oct 2002
03:26 PM |
someone wrotw -"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"
The real brake on worker mobility is high costs of moving, especially stamp duty. Adding a whopping CGT bill will mean nobody will able to move at all without a substantial increase in borrowing. If whoever wrote this thinks it's a good idea for people to borrow to pay tax, he is dangerously wrong. |
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Lenders, Mortgages and Reserves
by Tam Freestone-Bayes
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#1000452
of 3278
31 Oct 2002
02:37 PM |
Extradry Martini:
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.
Yours is an interesting idea. From the borrower's perspective, however, they might as well go straight to a loanshark! Your suggestion implies that the borrower would be severely punished should house prices rise. The predictability of monthly mortgage repayment amounts would vanish - this would be unacceptable to most borrowers (and, indeed, lenders).
I think if you removed the requirement that the reserve deposited on a particular mortgage changed in line with inflation/deflation of the respective property post-purchase, then the plan may be workable.
I also think that lenders offering mortgages with LTVs of, say 60% as per your example, should insist on the 40% deposit being present in a suitable account before a mortgage is granted (to dissuade risk-loving borrowers from raising the 40% deposit from an "unofficial" lender with no reserve requirements). |
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Interest Rates and Cost
by SL
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#1000451
of 3278
31 Oct 2002
02:29 PM |
| There has been a number of postings supporting the likelihood of a crash in the near future. I agree with this view, but I also wonder what the long term effect of lower interest rates will be on property prices. Instead of looking at the short term "affordability" of a loan, I am considering the total amount repayable. If interest rates stay low over a long period of time, or even over the full 25-year period, this effectively reduces the repayable amount and therefore the true cost of the property. Surely this must make a difference to average house prices over time, if people are really considering how much they are actually prepared to pay for any given property? |
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Reply to Mrs Shorter's article below
by Michael Dunsire
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#1000450
of 3278
31 Oct 2002
01:52 PM |
Yes, Mrs Shorter, it is indeed true (which most people fail to realise)that an asset price is determined by the buy/sell market at any given point in time - this is true for the stock market, for property, for cars, for yachts, for house rentals etc..
And clearly at any given point in time, only a small fraction of the population are actually buying or selling properties. It is this small fraction of the population which hence determines the market or property prices at any moment in time. For this small fraction of people buying or selling if those wishing to buy exceeds or vastly exceeds those wishing to sell then prices rise, and vice versa.
So, for a property collapse to happen, supply has to revert to outstrip demand.
This could happen if the UK econonmy falls into recession, unemployment increases significantly as companies lay off more workers to restore profitability, interest rates increase (hence increasing cost of financing homes), a bail out of buy to let investors wishing to sell out near the top or for a variety of other reasons.
But as with everything, economic fundamentals tend to rule in the long run, and overvalued assets tend to revert back to their true values. The biggest potential catastrophic situation occuring in the medioum term may well be those somewhat gullible individuals going into ever more debt by taking out supposed "equity" from their homes. Many of these people may well risk finding themselves in later life with not even their house paid off.
And many first time buyers may find themselves in a deep negative equity situation until middle age.
However, neither UK Government nor the banking system wish to see such dreadful things happening...
so they may well become inventive and start inventing 100 year mortgages (as they did in Japan) to prevent the UK economy collapsing entirely and from ending up losing its status as one of the worlds leading economies. . |
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Demographic changes
by Martin H
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#1000449
of 3278
31 Oct 2002
01:44 PM |
In Derrick's post #442 he raises a valid point, but the answer is yes it is too simple.
Older people are likely to be leaving family homes, whilst younger people will be looking for something more suitable for their needs.
Result a possible glut of family homes and a distinct shortage of first time or starter homes. People will have to be more prepared to move into larger property earlier than they would otherwise have done to maintain a market equilibrium.
Aslo bear in mind that the demographic changes have indicated for the past 25 years a reducing younger population. That has not stopped house prices rising, rather it has reduced house building - the main prop supporting prices at the moment. |
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The Bubble
by MF
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#1000448
of 3278
31 Oct 2002
01:44 PM |
Having been involved in the property market for circa 15 yrs up to 1997 I have seen the regularity of Booms and the consequences.
One thing is certain - the surveys and government figures are always 3/6 months out of date and never represent todays market. The reason is that the average house sale still takes 10 - 14 weeks and most surveys are based on completions not current sales. I used to provide figures/statistics for the SW london area and it always amused me at how out of date they were by the time they came to press.
There is no doubt that london and the SE are in recession and as one trying to move at the moment I am seeing constant price reductions on properties that are just not selling - this includes my own. Job security is a major factor and it matters little how low base rates go if you lose your job.
I personally think that there is worse to come next year especially in the overheated South East and that the government are carefully manipulating the statistics - C'est la vie |
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