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| The UK housing market: a bubble about to burst? |
S&P may be the key
by Harish
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#1000615
of 3278
 10 Nov 2002
09:09 PM |
Property prices have been pushed up by excess demand over the stock available. However, this demand be it from first time buyers setting up homes, BTL investors looking to provide pensions, or foreigners is not IMHO the primary cause of the surge in prices in the UK.
That honour, I believe, goes to the UK banks.
The 2nd half of the 90s was a period of high risk or low demand for the traditional UK banks in their overseas business (problems of the SE Asian tigers, central and southern Americas). These problems reduced their customer base.
Since that time and to this day UK interest rates have also remained above those of EU so that UK has been attractive for capital inflows. (Depositors have been subsidising the bubble). What could the banks do with all this money? UK manufacturing sector was one outlet, but it was by no means a growth area. Luckily (or maybe luck had less to do with it) for the banks, during the 90s regulations changed and they were given free access to the mortgage market. The UK house buyers and property investors were welcome prospects for the banks. The banks became highly effective in marketing loans to the property buyer. With loans available easily and fixed supply of properties the bubble had to happen.
What will signal the start of the burst? It will have to be something that causes the banks to tighten their lending. I doubt that the Govt/MPC will raise interest rates to control the bubble. The risk of economic recession will cause them to procrastinate on that.
On the other hand an organisation like S&P that is not worried about votes might just be the catalyst for tighter lending. Reading the earlier postings, I would not be surprised if at least parts of some bank's balance sheets were looking risky. A downgrading by the agency could set the ball rolling! |
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housing
by lanlord
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#1000614
of 3278
11 Nov 2002
07:45 PM |
To sparkey 597. Yes I had a tenant who thought he could just walk away from his obligations at the 4 month stage. He even had the cheek to ask for his 3 month deposit back. So I said "go for me" He got nothing and I got 1 extra months money for "damages"
Story ends |
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What shall I do?
by Nick
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#1000613
of 3278
10 Nov 2002
03:54 PM |
I have spent the weekend reading up on this discusion to some 10 pages in total.
I realise now that from the arguements presented I may have been short sighted in my previous comments...
This week I am due to sign to buy my first flat. But now I am having second thoughts. I am tempted to bail out and cary on renting for another year... or until prices are lower then present.
I am putting an 18% deposit down and I have a years mortgage payments in hand. This provides a buffer however what if the prices come down I will loose out big time. But the thought of having my own place is such a nice one and I have been seduced by all those home improvement magazines.
The thought of a place of my own or a healthy balance sheet....
What shall I do??? |
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Government (cont.)
by sho_ryuken
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#1000612
of 3278
11 Nov 2002
12:05 PM |
Hi Confused
Thanks again for your comments.
The house price boom was already happening prior to 9/11. Agreed, lowering interest rates has made it worse, but the trend was already there. People were already piling into property, either because they thought it was the next free lunch after the dotcoms or because they were so scared that if they didn't buy now they would be excluded from the market forever (typical bubble mania).
As I said below, governments can only act to dampen down or increase the underlying trend - in this case cutting interest rates amplified it. The only way governments can have a decisive impact is by the kind of interventionism that has been thrown out of the window with the monetarist fad. Governments are rightly scared to do this because of its potential impact on investment.
The "dark forces" you refer to are the market forces against which, according to classical/monetarist economists, the government is powerless anyway. We have certainly seen that in the examples I haved quoted below (Japan, ERM crisis etc).
Yes, the government did promise us no more boom and bust, and as you rightly point out that has not proved to be correct. All that does is vindicate my argument that governments are powerless to overturn market forces and the economic cycle. Boom and bust is due to the herd instinct of investors who will all pile into the same area of the economy at the same time, causing the kind of distortions we are seeing now. How is the government going to stop that - pass a law to stop people buying houses ??!?!?!
As for the USA, what makes you think they can control the "basics in their economy" either ?? It is the recession in the US that is causing widespread problems in the rest of the world. With interest rates now at 1.25%, they don't have much ammo left with monetary policy. Maybe they need to take their head out of the sand and try an approach that actually works before they end up like Japan with rates at zero and an economy a long way up that creek and no monetary paddle to get them out of it. |
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Government
by Confused
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#1000611
of 3278
10 Nov 2002
07:35 AM |
Hello sho_ryuken
Interesting that you seem to think that the Government had nothing to do with getting us to where we are, so they are somehow blameless.
Surely if they had left interest rates alone post 9/11 then the massive run (30%) on asset prices would simply not have happened.
You say; nullI feel sorry for the MPC, because if they don't raise interest rates they will be blamed for the house price boom, and if they don't lower them they will be blamed for the manufacturing recession, when to be honest there are other factors at work
You make it sound as if the MPC have the luxury of deciding if we want a boom or not - too late!
Are these other factors the dark forces that the Queen was on about? Seriously, I connot agree that the BofE and the Government are not giving each other the nod or wink every time a descision is made. Gordon Brown might want to stage manage some sort of independent MPC, but in reality, the two are as tight as ever.
Blame the herd instinct, blame greed, blame the MPC, but please don't blame the Government ???
At the end of the day the Government promised us "No More Boom and Bust". What has happened - boom - can it save getting egg all over its face and somehow stop a bust, and the misery that that will cause for a generation of homebuyers, oh yes, did I forget to tell you that these are real people, who might of got caught up in a herd because they were the young and vunerable who were worried sick that if the did not buy a house this year, they would never be able to, and a free lunch was never part of the plan.
As the UK stands there, shoulder to shoulder, with the USA, the greatest superpower ever to rule supreme over land, sea and air, we are going to look pretty damn silly if it suddenly turns out that we cannot control the basics in our economy.
What will probably happen is that Brown will be given a mandate to somehow hold the HPI at the top of its cycle, we will join the Euro, general inflation will rocket, but no one will realise, just like the rest of Europe, in the confusion. And suddenly house prices will seem reasonably priced again. |
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Think back...
by Adrian
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#1000610
of 3278
09 Nov 2002
11:44 PM |
If this question was asked 1 year ago, I'll bet a lot of the comments would be much the same...
'the sky is falling'!
Go ahead, miss out on a year of gains! |
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Hope Yet
by Hoogstraten the Hero
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#1000609
of 3278
09 Nov 2002
10:13 PM |
I had a dream of impending property collapse in Britain, and the meek inheriting the earth! It happened as follows:
1. Britain and US invade Iraq.
2. Green aliens from Mars join the battle on Saddam’s side, and the running dog capitalist imperialists are crushed in the mother of all battles.
3. Aliens take control of the Government.
4. The aliens are great connoisseurs of the carnival - their demand for caravans is phenomenal, as they seek to live in trailer parks with the pikies.
5. City professionals join the gypsy goldrush, offloading their London properties at a 50% discount to a year before, so they can join the procession to the trailer park. They might as well – the sky is forecast to fall down this year because of the alignment of the stars, so why not go bohemian in the meantime?
6. Your bank manager regards your CCJ’s as quirky and amusing. He happily agrees to give you the money to trade in your caravans for plush residences in Knightbridge.
As you can see from my dream, you need not despair – there is still hope for you. |
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Gman is simply right!
by Andy B
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#1000608
of 3278
09 Nov 2002
09:47 PM |
If you have bought a house to live in and you can afford it with a reasonable buffer for an increase in interest rates then you are OK.
The issue is - will there be a bust?
Every time there has been a bust we have been in a period of high RPI inflation. Interest rates have had to rise and killed the housing market. Give an example when this was not the case and I will re-think !
Rob G - I do not need an ecomonics lesson. I was answering the question on boom or bust. - and do not go down the route of is 100% inflation good or bad over three years! Your not God.
But there are two schools debating - 1. Based in London where I understand people borrow 5 times their salary. This group are related to those that invested in the telecoms market.
2. The rest of country (and I do feel sorry for those living near London - being sucked into the mayhem).
North of London we do not get 5 times mortgages so we need not worry as much!
I do think if you analyse the market on the basis of it being an investment then you conclude it has peaked, but if you consider it the place you live in and own for many years then it comes down to how much it costs.
Outside London prices are much closer to salaries and the reason housing has increased is the real cost of borrowing has fallen. (apart from London)
I would like lower prices, but the question we have been asked to debate is will there be a crash. If there is a God then only in London - someone has got to kill off those dot.com nutters. |
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The government (cont.)
by sho_ryuken
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#1000607
of 3278
09 Nov 2002
07:03 PM |
Thanks for your comments Confused.
You are right - we are up a creek without a paddle, and I think that it is convenient to blame the government for it.
At the end of the day it is people that push up asset prices through the herd instinct, and all that governments can do is either mitigate or increase that trend. With the monetarist fad for "free markets" they are certainly not going to do much to intervene.
I feel sorry for the MPC, because if they don't raise interest rates they will be blamed for the house price boom, and if they don't lower them they will be blamed for the manufacturing recession, when to be honest there are other factors at work other than just the interest rate.
I'm not sure that dumping interest rates will avoid a crash, it will just prolong the agony. As for making Labour unelectable, well they can always blame the MPC, as they set interest rates, but in reality it is the herd looking for the next free lunch that has got us into this mess. |
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The Government
by confused
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#1000606
of 3278
09 Nov 2002
06:57 PM |
Hello sho_ryuken
I am trying to point out that the Government allowed us to drift, sorry, white-water rapids ride, up this creek and now we find we do not have a paddle.
I think that whatever they do, they are going to cause massive harm to the economy, even by doing nothing.
They have to take full responsibility for creating the current boom in HPI.
No easy choices IMHO, and what ever they do decide to do, there are going to be a lot of casualties.
To let the bubble burst really makes the Labour party unelectable, if you remember the sorry state of the country after the last bubble burst, and the long, long years until we finally saw a recovery.
What can they do to avoid a crash? Dump interest rates, slowly drip feed more building land into the supply side, encourage a shake up of mortgage multiples as a measure of what one can borrow, and base borrowing limits on a percentage (say 35%) of net household income to give FTB's the ability to enter the market and still pay less than they are paying in rent.
Property is not like dot.com shares, or even the FTSE100. Property is what we have all been conditioned to chase, either as an investment, a home, a status symbol, a need, a nice to have, I could go on.... |
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Property Prices
by Chris
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#1000605
of 3278
09 Nov 2002
05:26 PM |
Anyone who visits pretty much any other country on a regular basis will know the enormous differential in property prices when compared with the UK. As far as I can see, the only real reason for the difference is the price of building land. Yet we have countless hectares of land lying idle by design and the overwhelming majority of the UK's land mass comprises rural areas. Just look out of the window the next time you are flying over our green and pleasant land.
Why can't the rules governing building in the "green belt" be relaxed in a limited and responsible way? Releasing just 2% or 3% of current agricultural or green belt land for sensible property development would surely transform the property market by taking the demand-driven heat out of property prices - and there could be another benefit. Given that the value of the land would increase substantially with planning consent, the Government could also impose a "windfall" tax of say 50% on land sales. That way, hard-pressed farmers would gain to an acceptable extent while there would be a very welcome boost to GB's coffers.
Where's the problem? |
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The government
by sho_ryuken
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#1000604
of 3278
09 Nov 2002
05:06 PM |
Confused - I am also confused, as you seem to be arguing both for and against a crash.
When you say "The Government cannot allow a crash", are you being sarcastic ??
As much we would all like to think that governments can step in and bail us all out, this is not going to happen. There seems to be a lot of people in this forum who have taken the line "the government would not allow a crash to happen". Well, if they let it happen in the late 80s/early 90s, what makes you think they can do anything about it now ?? Why did Greenspan allow the NASDAQ to crash in 2000, and why did they let the stock markets crash again this year ??
The fact is that flows of capital are far too powerful and often far too quick (more in the case of more liquid markets than the housing market, I grant you) for governments to be able to reverse the prevailing trend - they can only dampen it down at best. Look at the UK's exit from the ERM in 1992 - as much as they wanted to stay in, the power of the markets forced them out. We could also mention the crises in Latin America, Asia, Mexico, etc, etc where governments proved their impotence. It is merely arrogance to assume that we are somehow more sophisticated than these other countries or the people who got crucified in that last housing market crash.
So why should the flows in and out of the property market be any different ?? Answer: there is no fundamental difference. As soon as confidence falls, the government has limited power to do anything about it. It can keep on cutting interest rates as far as zero, but we have witnessed in Japan and now increasingly in the US that monetary policy can lose its effectiveness to encourage investment. Once you go so far, cutting interest rates becomes a panic measure and will not impress the markets.
The UK is heavily reliant on our trading partners coming out of recession, of which there is no clear sign to date. When are we going to stop our obsession with the housing market and spending our way out of recession by racking up a huge debt burden, and actually focus on some constructive supply side reforms that will add some real value to our economy ?? That is what the government should really be doing !!
Boom and bust has NOT gone away despite what our inflationist friends in this forum would have us believe - just look at the return you would have made if you had invested in the UK stock market 6 years ago. Absolutely zero - now how did the government let THAT happen ??!?!?!? |
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Three options
by Confused
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#1000603
of 3278
09 Nov 2002
03:58 PM |
Will the the market crash?
No! I think the pain that would be inflicted on recent buyers of property and, on businesses like carpet factories, wallpaper factories, furniture factories, building companies, white good retailers, estate agents, solicitors, accountants (as all the small businesses go bust AKA 1991+), removal firms, garden designers, garden centres, oh! the list is endless, the misery that this would cause would be terrible. If you were in business during 1990 to 1996 - it was tough, equally so if you were caught in a negative equity trap with a growing family. The Government cannot allow a crash.
Will the market get higher?
No! I think we are already off the scale. Red lights are flashing and at some point Joe Public is going to cave in, turn his back on it all and run for cover. If prices do keep going up, there will be a point when it becomes cheaper to rent again. This is what it will take to stop price rises, and then what ? One God almighty crash that wipes out a generation of homeowners. The government cannot allow prices to rise any further.
Will the market stabilise?
No! If this happens general inflation will need to go into overdrive to catch up. People's savings; yeah the prudent amongst us, will see the value of their cash dwindle quickly over a short space of time and, because the gaps between rungs on the property ladder are so great, the market will not be able to flow properly, due to the huge borrowing needed to move up the ladder, so the market goes into a dormant state for a period. During this time we will have a two tier society of the have's and the have not's. This will cause social unrest. The government cannot allow the market to stabilise at today's prices.
The Government caused the run on houseprices to postpone a recession, what is it going to do now that the threat of recession has come back, bigger and badder than before? |
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Definitely a crash...
by Timlagor
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#1000602
of 3278
09 Nov 2002
12:44 PM |
... but not for a little while yet.
Look at the figures: The price/income rations are worse than they were at the height of the last bubble. The only thing keeping negative equity at bay is the low interest rates.
That said there IS a strong overal trend fuelled by increasing demand so the market could come to a gentle rest - theoretically. I'd be VERY surprised if ti happens though. Personally I reckon that Mr.G.Brown is setting us up for a most impressive crash in everything; and he isnt' even fixing the public services!
The real challenge is spotting the moment to get out. I don't think it's come yet but don't quote me on that 
I wonder if there's moneyt ot be maxde buying up a street or two in the north -some houses are going for 5k each apparently because of bad neighbours... perhaps you would have to buy half a dozen streets but I'm sure there's an opportunity there for the /really/ adventurous  |
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House Prices
by David from Cornwall
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#1000601
of 3278
09 Nov 2002
11:14 AM |
| How can anybody in their right mind think this can go on.Once again we are in the grip of a lemming like scramble to get on the housing ladder at all costs.While the people that actualy make things and produce wealth for the uk have their backs up against the wall housing costs continue to go through the roof.Here in Cornwall we have the lowest incomes in the uk,most people earning about 15k.Even raising a multiple of five times that figure will not now buy you a house in this county.There's not a chance the young first time buyers can raise the sums now needed to get a start on the ladder.While local estate agents feed the frenzy, advertising property here in the home counties as second home or investment property.I have lived and worked in several parts of the world over the years and it's not until you get back to the uk you experience the almost fanatical obsession with property.Something is very,very wrong here with our economy,being so geared to the housing market.The governments statements about no more boom and bust seem to have a hollow ring.We are witnessing the economics of the mad house that somewhere along the road will again end in tears.Until we start building houses and invest in our industries this crazy unbalanced economy will lurch from one boom to yet another bust.yachtsurveys@freeuk.com |
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