|
|
| The UK housing market: a bubble about to burst? |
It's the economy!!
by Extradry Martini
|
#1000537
of 3278
 07 Nov 2002
05:10 PM |
John:
Let me start by saying that I have enjoyed your posts as it is clear that you have made an effort to understand the situation.
However!
You say that the UK property market is now so diverse that it cannot be seen as a whole. This is very wrong for the simple reason that general economic conditions are the same across the market. Every asset has a part of its value that corresponds to the general valuation of the asset class (rather than the relative value within the asset class), and this component is very large. As a result of this the number of properties that have gone down in value (after taking into account deterioration etc.) in the recent boom has been negligible, and the number going up in value during the bust will be equally small. The real estate market has only a fraction of the diversity of the stock market, but there is not a single stock in the FTSE 100 or the S&P 500 that has risen in value in the last 2 years. So, the diversity argument is erroneous.
You say (again that nothing can be gained by looking at history. I refer you to the following points in history: The US stock market between 1928-34, the price of gold between 1978-1982 and the US stock market again from 1997 onwards. These manias and subsequent crashes were all induced by the same set of human emotions that have produced the current UK property market bubble. That is the human history. For the economic history, look at the 1930’s (or 1990’s Japan) for when the economic forces, currently at work in the global economy, were last active. (Incidentally, it is a mistake to amplify the differences between the Japanese economy and the Western economies to claim that the economic cause and effect there is different from ours – it isn’t).
I think where you are really going wrong is that your assumptions are not properly researched. You talk about the government’s resolve to avoid deflation – what is it that you think the government can do? If it is so resolved, why isn’t it doing it already? You said, rather strangely, that Japan “has signalled that deflation is more of a problem than inflation.” Japan has been suffering from deflation for nearly 10 years, so I think that this akin to them saying that the Emperor Hirohito is feeling a little poorly. The Japanese might have been able to avoid deflation and certainly could have shortened the recession through early reforms, but they didn’t. Likewise the “government” is doing nothing to avoid deflation now. Besides, this is the job of the central bank who isn’t doing anything either (a cut today could have been a start).
Having said this, the UK real estate market will crash before there is any real deflation – for a number of reasons. Not least of these is that there is a credit crunch going on as companies find that borrowing term funds is more and more expensive and more and more difficult, while the debt that they took out during the boom presupposed absurd projections of revenues and pre-crash asset valuations. So companies are trying to downsize capacity and debt and at the same time, banks are making higher provisions for doubtful debts. So, fine, we have a small recession and a small correction in the property market then we can get back to marvelling at how rich we are, no? Er, no. The only reason why the correction in the property market was small, and negative equity burdens weren’t more commonplace was that inflation bailed us all out. In real terms, UK real estate lost 40% of it’s value rather than the 14% it appeared to lose. This fact has contributed to a feeling of invincibility in the market this time around. But inflation is dead and will not be around to pick up the pieces.
John, I think your starting point is wrong – you cannot look at the property market as something isolated from economic cause and effect. It’s fine to talk about supply and demand if you know what is causing them (and how quickly they can change) , but they are meaningless terms outside the economic context. So, while I respect your logic, I think you need to dig a bit deeper. |
|
second guessing
by Si
|
#1000536
of 3278
07 Nov 2002
04:02 PM |
If people hadn't been '2nd guessing' in the last year or 2 (buy now before it's too late or you'll be renting for the rest of your life) then we wouldn't have seen the massive recent price-rises. If people took your good advice, John, then house-prices (and shares, bonds, etc) would not be subject to cycles. People would buy according to need (living or investing), with a long-term view.
You're right that the market IS fragmented, it'll be interesting to see if this leads to some market anomolies in house-prices. But I reckon (I admit that I'm biased) that anywhere that has seen these big price increases recently is likely to see a correction according to the principles already outlined in this discussion. Although 'nice' areas will regain negative-equity reasonably comfortably in the aftermath.
If there's a big deflationary recession though, this could be quite a while. So, in the absence of 2nd guessing - buy in an established nice residential area, if you can afford it and are sure your job's secure for the medium-term.
And if there's a REALLY big (global) deflationary recession - now that could be scary.... |
|
Up in the clouds again
by Engineer
|
#1000535
of 3278
07 Nov 2002
04:00 PM |
John,
You present a set of opinions that are quite widely held in society, but that does not necessarily mean that they are correct or logical. The main point always seems to be that 'things are different now' and we must have faith in a bright future. This is a pleasing vision, but doesn't really contribute a great deal to the debate.
I too am tired of reading the same old comments from estate agents on the property pages, along the lines of "with interest rates at a 40-year low, there's never been a better time to buy a home". Yeah, right ... not everyone believes the 'spin' that is so prevalent in our modern society, and that is why this forum is so refreshing.
You are correct that history does not necessarily repeat itself, but it is only by looking at what has happened in the past that we can try and understand the dynamics of a system. Any prediction of the future is just that - a prediction - but it is hard to see how completely ignoring the available evidence from the past will be an aid to making an accurate prediction of the future.
You say that "We need to get USED to low growth, low inflation, no boom/bust stuff, and then we can progress". Well, does this include low house price growth, because we haven't had that? And what about the boom/bust cycle that has been playing out on the stock markets? Can you be sure that the housing market won't just lag the stock market by a number of years, and that the 'settling point' for your wonderful stable future won't be much lower than the present lofty heights?
Agreed, we may be on the threshold of a new 'information revolution' - only time will tell - but I fear that the consequences may not be quite as simple or benign for the first world countries as you make out. Remember, improved communications means that location is no longer so critical. A productive person working in one of the new 'information' fields can create products or perform services for the global economy from almost any location in the world. Naturally, those places with lower living costs will tend to have a price advantage ... will the UK be competitive?
Being in a technical field, I will concur with Rob G that many of the productivity improvements, particularly w.r.t. software, have been well over-hyped. That is not to say that they don't exist, but rather that there have been too many charlatans milking the unwary. Witness the dot com boom and bust. Hoping for a bright future is a worthy goal, but putting your head in the sand and pretending that things are bright when that is clearly not the case is not particularly clever. |
|
IT Efficiencies - Yeah, *Right*
by Rob G
|
#1000534
of 3278
07 Nov 2002
03:34 PM |
I work in IT. In fact I have done since 1988 and I've seen a lot of change, and not all for the better.
Most IT projects are considerably late and over-budget. A large percentage never even goes live successfully.
Software consistantly under-delivers on specifications. If most software was any other product, it would be returned as being unfit for the intended purpose.
The paperless office? I use 10-100x as much paper now than I did in the days before the laser printer became commonplace.
IT a productivity increaser? Yeah, sure - with people spending upwards of 10% of their worktime browsing the web or emailing friends and not contributing a whole lot to the business.
Most companies being forced to write off IT expenditure over as little as 2 years because the hardware and software manufacturers render it extinct practically before it hits the desktop.
IT is a money-pit and for my benefit, long may it continue.
Please, just don't expect it to rescue the economy!!! |
|
Si
by john
|
#1000533
of 3278
07 Nov 2002
03:28 PM |
Indeed. I am just a bit tired of reading the "newton" type comments. Pices up, therefore will fall.
C/F stockmarket, prices down = good buying opportunity!! Yeah right!
The housing market is more complex and fragmented than ever, and nobody knows how it will react to anything.
Note to everone tread cautiously, don't try to second guess, that's the mugs game. The market could probably go either way.
Would love to have a really good public debate with some of the "interested parties" and throw some alternative views at them. |
|
John
by Si
|
#1000532
of 3278
07 Nov 2002
03:12 PM |
Fair enough.
The primary thing that made me doubt the medium term buoyancy of the housing market was the gay abandon with which first time buyers I know are willing to saddle themselves with huge mortgages, and unsecured debts to go on holiday with afterwards. I'm no expert, just an interested renter who's rent is currently cheaper than the interest I'd pay on a mortgage, which is why I've started some deeper consideration of the subject.
For the most important buying decision of most people's lives, many are putting in less thought than they do to filling in the football pools or choosing lottery numbers.
Time will tell, and thanks for your comments. |
|
Si
by john
|
#1000531
of 3278
07 Nov 2002
03:03 PM |
I am really just trying to put the case that there are other factors to consider other than: the market has gone up, very much, therefore it will come down very soon!
I am playing the devil's advocate to a certain extent, but I simply do not believe we are on a precipice looking at a housing market collapse. |
|
ps
by Si
|
#1000530
of 3278
07 Nov 2002
02:57 PM |
The South Sea Bubble was in 1720, at the beginning of the industrial revolution, just when capital and trading was liberalising. Does anyone seriously believe that continued liberal markets and technological advances are going to prevent asset bubbles? Convince me that IT really is THAT big a paradigm shift and I may start to believe you.
But thanks for your comments anyway, John, I just find them a bit hard to swallow. |
|
mass psychology
by Si
|
#1000529
of 3278
07 Nov 2002
02:36 PM |
'many of the posts suggest that as this has been the nature of the past, it must also be the way of the future. No.'
Whatever you can say about a shift in the economy, human nature does not change. This is why the economic cycle is unlikely ever to be iradicated. |
|
Yeeha!! the forum comes alight!!
by john
|
#1000528
of 3278
07 Nov 2002
02:30 PM |
520 EDM:
drivers of price change have not changed. they have become more focussed. and regionalised. consequence of increased information. the "housing market" is a thing of the past, look at different sectors, rental, purchase, different sizes/prices of property/ demographics etc, the market will behave differently than before because, as the dog licks its b**ls - it can.
again I say viewing history here is a mugs game, no pointer AT ALL to what is likely to happen.
I never said the Government could stop anything, remember the EMF and that strange man Mr Lamont, but they can have an influence, I merely gave a logical view of where I think the influence will be focused.
I do however disagree with the argument against "organised support" that WILL happen. Japan has signalled that deflation is more of a problem than inflation. Do not underestimate the Govt's resolve on this!!
finally, in response to Extra Dry, we teach history in that things like the industrial revolution changed things forever. The IT revolution is just beginning. Do not hold onto historical stuff that is probably invalid, as your guidance!!
Jeff, 522: superb point. there is an argument that as profitability improves through productivity, we have no limits. There is no reason why "if things go up therefore they must come down" in this. Improvements in productivity should improve our quality of life. less time working more time playing, but we are muppetts to the cause and continue to strive for material gain.
Rob G 523: 25 year mortgages are invalid as people, on average, move every 7 years. Why should 50 year mortgages not have equal "invalidity"?
Gareth 524: there will be no crash. not with rates at 4% (rediculously high by global standards) and going downwards.
rev.hk 526
people are productive, and are making gains profit. this makes economies secure. Our focuses are more accurate and we could talk our way into problems if we compare things now with an irrelevant past. Debt is an issue, and a big one, but stap talking armageddon, and smile. We aint doing that bad, and there is not real threat anywhere on the horizon.
Generally, people use hyperbole to make a point. Things are ticking along nicely, yes there are problems, but minor ones. We need to get USED to low growth, low inflation, no boom/bust stuff, and then we can progress. many of the posts suggest that as this has been the nature of the past, it must also be the way of the future. No. |
|
Debt Recession?
by Gareth
|
#1000527
of 3278
07 Nov 2002
02:28 PM |
| how on earth can this be a debt recession? the only thing that is keeping the uk economy afloat is high consumer spending. Of course if the debt bubble does burst before the economy is in the clear then we will have problems. But surely, the aim should be to boost investment through lower interest rates. Although this does encourage futher consumer borrowing, will may find that the uncertainty with job security will prevent the public from going overboard. Over measure the bank of england could take would include tightening up UK banks reserve requirements, to restrict the level of borrowing and reduce the risk of bad debt. |
|
Pass the blinkers please
by rev.hk
|
#1000526
of 3278
07 Nov 2002
01:50 PM |
Here come the inflationists with their madness once again. It's different this time, honest. we need new metrics for the UK property market. Old valuation methods no longer work and the UK governemnt is far too sophisticated to let anything like a property market crash get in the way of our delusion.
Please, where do you get this stuff?
When you all finally wake up and realise that the on-going collapse in global equities has destroyed your pension and job opporutinities, the only way you will be able to save for the future is from your salary - if you have a job.
Are you seriously trying to tell us that this will have no impact on thhe property market?
Gareth, you are right you know nothing about Japan since it was their wild unproductive fiscal expansions in 1992-2001 that got them into all this mess.
This is a debt recession ladies and gentlemen and you lot are up to your necks in it.
If you really believe that everything is tickey-boo then you are forecasting a rise in interest rates and not a decline. Did you realise that and do you know if you can afford it? |
|
Japan
by Si
|
#1000525
of 3278
07 Nov 2002
01:30 PM |
| Actually, in japan there was huge govt fiscal stimulus, such as building airports that weren't really needed, and a soccer world cup, as well as more mundane stuff. Furthermore, consumer debt was much lower there than it is now here, giving the Japanese government much greater leeway to borrow the economy out of trouble than the uk govt has now. Also, I bet Japan's public sector is more efficient than the UKs in converting money into productivity.... |
|
Biased Views?
by Gareth
|
#1000524
of 3278
07 Nov 2002
01:21 PM |
Interestingly, most of the views posted here seem to predict a catostrophic crash of the economy.
I am no expert, but I think this must be a minority view and conflicts will most economists current thinking.
Ok, the economony isn't doing great, but will we really go the same way as Japan?
The current monetary and fiscal policies of the UK should avoid another 'great depression'. We have an expansiory fiscal policy (high govenment investment) combined with a monetary policy designed to stimulate the economy (i.e. low interest rates).
Normally problems with fiscal expansion occur such as crowding out (government spending can actually reduce the overall level on investment in an economy).
However, in our current low inflationary economy this effect is much less significant, and this combination of policies might just do the job.
I haven't followed the Japan story, but I bet have followed their monetarist instincts and only reduced interest rates without much fiscal stimulation.
Anyway, my prediction is house prices will stabalise as consumer confidence weakens, but will not fall dramatically since lower interest rates will maintain a reasonable level of demand, but the market won't overheat because of the high risk of job losses.
Comments? |
|
The 50 Year Mortgage
by Rob G
|
#1000523
of 3278
07 Nov 2002
01:17 PM |
| It'll never catch on. |
|
|
