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| The UK housing market: a bubble about to burst? |
Semantics
by Extradry Martini
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#1000668
of 3278
 12 Nov 2002
04:49 PM |
Rob G
In general, investment and morality considerations do not exist in the same dimension. Making or losing money from the asset markets (as long as you are doing it fairly and legally) is neither moral nor immoral. The character Gordon Gecko in the film “Wall St.” famously said “Greed is good”. It isn’t, but neither is it bad.
I congratulate Jeff on making money, but making money in a bull market is as easy as falling off a log – spotting the turnaround before the rest of the pack is a little more difficult.
As a trader in the financial markets, I feel no emotions whatsoever towards the direction of the UK property market. I wish those involved well, but I will not shed a tear for anyone that was stupid enough to get over-leveraged.
Incidentally, those people that think that others are trying to “talk the market” down or up are clearly more worried than they let on. Markets do not make major moves because people talk about them, they move because of changes in individual and general economic conditions.
Jeff:
It comes down to the difference between money and capital.
Your point is that the money does not get destroyed as it just gets passed on – you are right. However, it does not get passed on as capital. Capital is made up of assets (which can include money) and is the stuff that gives the lever for business to be transacted and therefore employment and growth etc. If capital gets destroyed then the business leveraged from it cannot survive (and vice-versa) and the debt raised against it has to be repaid, causing unemployment and bankruptcies.
The trouble is how does one repay the loan if the asset is not generating the income that it was (erroneously, in a frothy bull market) supposed to generate? The only way to do this is by selling the asset itself. But everyone else is trying to sell at the same time, thereby pushing down prices (in itself deflationary), and getting less for the asset. In the meantime, lenders and investors increase the compensation requirement for taking on credit risk, and financing becomes more expensive. This is exactly what has been happening in the corporate world as a result of the stock market collapses.
The recession is a “when”, not an “if” and the level of speculative activity in the real estate market means that it will be preceded by the property crash.
Just one more point Jeff: Make sure your tenants have locked themselves in on a price basis for the next 2 or 3 years – you don’t want them moving to a lower rent when this blows…. |
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The Big G
by Rob G
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#1000667
of 3278
12 Nov 2002
04:45 PM |
I am no socialist. However, I believe that government intervention is required in this instance to bring the housing market back into reality.
Clearly interest rates on their own have proven to be insufficient as a system of regulation.
I would like to suggest the following measures:
70% CGT on sales of 2nd homes.
Doubling stamp duty on the purchase of 2nd homes.
Increasing the level at which stamp duty becomes payable on purchases of 1st homes, so less tax is payable.
A 'vacancy' tax on properties left empty for longer than 3 months of the year increasing in percentage at 6 and 9 months (i.e. holiday homes).
Penalties for local planning authorities who delay planning applications unnecessarily.
A tax on building luxury housing to subsidise building affordable housing. |
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Missed morning martini?
by Hoogstraten
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#1000666
of 3278
12 Nov 2002
04:39 PM |
What have we learnt from Dry Martini, apart from the fact that he has an almost pathological hatred of bank tellers?
In posting #1000619 of 649 he argues an alleged “credit crunch” means that “It is only a matter of time before this higher cost [i.e. higher interest rates] gets passed on.” This proposition of higher rates appears to be his rationale for the coming Armageddon in the property market. There seems to be no possibility of lower rates in this mail – higher spreads on 30 year bonds are seen as terminal for the future mortgage interest rates, which must rise. Affordability will therefore decline and the property market will crash.
In posting #1000654 of 645, he states that “In my opinion, the only solution is much lower rates now, and a lower currency obtained by central bank buying of reserves.”
Leaving aside the fact that Dry Martini has revealed his socialist tendencies, by favouring exchange rate intervention by the Government, is this consistent with his earlier posting that higher interest rates and property collapse were inevitable?
Most likely, the 2 diametrically opposed views were probably copied from 2 different textbooks.
Frankly, the case for the collapse of the property market is based predominantly upon the wishful dreaming of the poor, huddled masses, yearning to buy property, but unable to afford it. These people will the property market down with voodoo economics, like the new age cult members they are.
To stay rational and calm in the face of this hysteria is uncharitable – property collapse represents these peoples only chance of “making a go of it”. Faith (based on hope) is sometimes unshakeable, even by the most rational arguments. |
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fanning the flames
by Si
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#1000665
of 3278
12 Nov 2002
04:26 PM |
Jeff,
Your reasoned context is very sensible and is what I try to do myself. I think that the answer to your question is that people right now do not apply such a context such is the panic currently gripping my generation of 20-something graduates.
All the people I know leaping into property right now are ignoring the total amount of debt as if is irrelevant, and despite rentals being so competitive, are seeing the substantial extra mortgage costs (even just considering interest payments) as small compared to the gains they believe they will make. Some of them intend to take out 'equity release' from their new properties' future gains as a deposit on a buy-to-let in the next few years. There is an extremely gung-ho approach amongst some 20-somethings, to investment and, more crucially, to highly-geared investment and debt. There is also great social kudos conferred on those 20-somethings who have a mortgage, and even more to those that have more than one! |
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why havent they crashed yet?
by david
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#1000664
of 3278
12 Nov 2002
04:23 PM |
| Didnt Abbey National forecast an immiment deduction in price 12-18 months ago? It is obvious that increases won't continue at current rate but why havent they decreased significantly yet? |
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Irresponsible people
by Jeff Morgan
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#1000663
of 3278
12 Nov 2002
04:13 PM |
People who 'fan the flames' are irresponsible and they are the last thing the market needs just now.
But it is possible for people to resist. I have found that sensible tests are, 'If I invest in does it increase my total exposure beyond my comfort (feeling), does it unbalance my investments and does the risk-reward offering stink (like, is this a great return with such low risk you wouldn't believe! - I don't believe).
Do people not apply their emotions in some sort of reasoned context, especially in what will probably be the biggest financial exposure they take on? |
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Cash and Wealth
by Si
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#1000662
of 3278
12 Nov 2002
04:06 PM |
Jeff:
If organisations have commitments (ie insurance companies need to meet potential claims, high street banks need to meet demands for cash) then the premiums/deposits which those organisations have invested in the stock-market to profit from must be realisable. If their investments have fallen (ie stock market falls) then they need to be able to meet these liabilities another way - hence lost wealth, and your £40,000 mortgage repayment may not go straight back into another risky investment. True, the total amount of cash may be more or less constant, but how much of your money is actually cash these days?
Even being in the bank doesn't always count - ask an Argentine (extreme case).
I'm no expert either so fair enough I suppose. |
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to 'Knowledge is Power'
by jeff morgan
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#1000661
of 3278
12 Nov 2002
04:03 PM |
I do agree that the present situation is unsettling and that emotion has a lot to do with buying and selling houses. I think it's therefore a factor to be considered in prediction though I don't see why it should affect the discussion itself.
Apropos of what happen next, my political beliefs bias me against government action generally (I lean towards an-archy as a preferred method of government). Do you see a sensible course of action that does not rely on the government applying yet another feedback loop, thus risking more instability? |
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Once again...
by Engineer
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#1000660
of 3278
12 Nov 2002
04:03 PM |
Jeff Morgan, #657
I do feel that we can be fairly certain that prices will not continue to rise at their current rate indefinitely. Also, I find it extremely hard to believe that they will simply level off when they do reach a limit, because I have not seen any examples of such behaviour in the real world. If anyone can produce evidence of such behaviour, anywhere, please bring it forward and maybe I will have to re-evaluate this position. So I guess I have to say that yes, I am quite confident that there will be a correction at some point. I would not like to predict exactly when the correction will occur, but I do believe that real prices will drop well below their current level when it does.
As to the mention of "greed", I have to admit using this word and I do believe it has played a role in the recent speculation. Perhaps, to be charitable, it is mainly a case of wishful thinking and unrealistic expectations, with people looking for an alternative "quick" way to build up a pension. I have also used the word "fear in the same sentence as "greed" - there are a lot of younger people taking on too much debt out of fear, and I believe that this fear is stoked up unnecessarily by those with unrealistic expectations. Both are to blame for the bubble, and both will probably suffer when it corrects itself, and there is probably little that anyone can do about this now. But I do regard those who continue to fan the flames (ie lots of scope for further growth, get in now before its too late) as irresponsible. |
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Re: Jeff Morgan
by Knowledge is Power
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#1000659
of 3278
12 Nov 2002
03:51 PM |
Jeff,
I agree, the fine line of objectivity has been crossed, to which I apologise. Housing is an emotive subject, and I think this highlights a potential discussion point below:
Your recent posts suggest that the housing market must be examined without any emotive bias.
I would advocate that in fact it is precisely this emotive bias that has brought us to this point in the first place. The “panic buy” mentality that consumes the market should not be underestimated. Nor should it be overlooked when evaluating the current/past/future market.
Peoples’ lives are intrinsically wrapped up in this process, a factor that no equation, ratio, or calculation can viably represent.
The government must do more to protect & inform the public. Rather than to constantly milk this labouring cash cow with blatant disregard for its safety and wellbeing. |
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...and to Extradry
by Jeff Morgan
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#1000658
of 3278
12 Nov 2002
03:45 PM |
also, thanks for the additional information. As you say, if house prices returned to 1989 valus in real terms by 1999 they will now be at historically high levels.
I'm not sure about the 'destruction' of money though. Wealth can be destroyed for sure. I read somewhere that in the dot-com boom and subsequent crash in the US, some $180 Billion was taken out of the market - but that it ended up in the pockets of the people who set up the dot-com companies. The people who invested in those companies at a late stage lost a lot and their paper was worth a lot less - but their money had gone to someone else.
I'm no expert so if I've misread your point please let me know.
PS: I didn't invest in any dot-com companies, nor did I set one up. In 1997 I decided that the internet bubble was another South Seas Bubble, so I was with Warren Buffet. |
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Thanks, Engineer
by Jeff Morgan
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#1000657
of 3278
12 Nov 2002
03:33 PM |
Engineer, #653.
Yes. Thanks for explaining your reasoning about risk and reward - I thought it might be along those lines but wasn't completely sure.
I agree with you that these enormous swings are not good; I also think the current steep rise in prices isn't sustainable but I don't echo the certainty of some contributors as to what will happen, for the reasons of unpredictability touched upon. I'm not sanguine about the future of house prices, I could see a 'flip' and a significant loss, especially if deflation really got hold. I don't believe it's likely but it surely is possible.
My circumstances are singular like everyone else's; I do though want to point out to people who argue with emotional overtones (about greed and so on) that it simply clouds the issue. The people who will suffer most from a crash are not people like me, who are fortunate (and who took risks that came off) to be relatively financially secure. It's the people who were in my position of 25 years ago that I feel sympathy with and it's those people who need protection - more than greedy landlords need taking down. |
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random event
by jeff morgan
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#1000656
of 3278
12 Nov 2002
03:21 PM |
Like many things in life it was a random event. We were in the US enjoying apartment living, so bought in to one in the UK 'off plan'. When we returned we realised we liked our house more so didn't sell it. We were committed to buying the apartment so made the best of a bad job by renting it out. Our tenant has asked to stay for 2-3 years so that's it for now.
You might have a long wait in the queue. With our current mortgage property prices in that development would have to reduce by more than 65% to give us negative equity - and we'll be paying off 25% of the remaining mortgage next July. For us to be in financial trouble the stock market would drop another 50%, we'd both lose our jobs, our insurer would go bankrupt, the rental market would go completely pear-shaped and we would not be able to sell our main property (in a desirable part of London - also a random choice) at 70% discount.
The risk of all those factors occuring at the same time is small and we are taking steps to reduce our exposure anyway.
I guess sometimes these things just happen. |
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Rob G - that's a little harsh!
by Knowledge is Power
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#1000655
of 3278
12 Nov 2002
03:19 PM |
Rob G,
I am not a home owner, but I am alarmed at your comments. Let's face it, the unwashed masses need help & support with the purchase of homes, and this advice must be balanced and objective.
My real concern is with the accountability (or lack of) that lies with estate agents. After all, these people are the ones conning everyone and at present have little to no accountability.
If anything is to be gained from a future house price crash, then it should be a tightening of legislation to make the hole process far more transparent - highlighting both the risks and gains of any potential purchase. Not as it currently stands to "talk the market up".
As for second homes, well that's an interesting one. It is something that only a few can enjoy the privledge of, often at the expence of others. Sadly there's nothing much that can be done in a capitalistic society to solve this "unjustice", but Karma has a wonderful way of evening things out in the end... |
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Again: It's not called capitalism for nothing
by Extradry Martini
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#1000654
of 3278
12 Nov 2002
03:15 PM |
“Inflation remote forever”:
Interesting question. Printing money is an alternative of very much last resort. The reasons why it is so problematic is two fold:
Firstly, if you inflate your economy you instantly make the investment of any foreign company in the UK worth less. This can cause funds to be repatriated and put large numbers of people out of work. It would also take a long time for investment to come back, thereby missing out on potential job creation. The avoidance of this by keeping a strong currency is a centrepiece of monetarist thinking and has been policy (to varying degrees of success) in most Western central banks since the early 80s.
The second reason why printing money is difficult is because most central banks have it written in their constitution that they cannot (in order, again, to give comfort to foreign investors).
Of course this doesn’t mean a government (via the Central bank and the mint) cannot print money – it is sovereign after all, but it would have to be an act of utter desperation – we may still get there.
As you rightly point out, increased government spending is not really an alternative either, as debt exposures should be kept to a minimum, otherwise we’ll all be paying it in higher taxes over the years.
In my opinion, the only solution is much lower rates now, and a lower currency obtained by central bank buying of reserves. Of course this would mean the bubble in the real estate market getting even more ridiculous, but this could be offset by a reserve requirement with the BoE (see earlier posts).
Jeff Morgan:
If you’re new here, welcome to the discussion.
You are right to say that if you can afford to pay your mortgage under most circumstances (unemployment etc) then a crash will have little impact.
I think you have the wrong end of the stick re the last crash. What was being said was that 1999 prices reverted to their real, not nominal, 1989 levels. In nominal terms the UK (note: as a whole) market only fell 14%, but in real terms it fell 40%. Inflation will not be around to bail us out again, and the risk of deflation means that our home loans might even get bigger rather than smaller. There is your fundamental shift. There has not been a supply-side recession since the 30’s and that is why “since the second world war, mortgaging has been preferable in the UK). Another point is that rents and the interest element in a house have to converge in the long term – otherwise there would be no point letting a property out – you’d be better off selling and lending the money. Is there any chance that rents will rise again to meet mortgage payments? Not really. Is it more likely that house prices come down to meet rent levels? Of course.
You say:
“Unless people are going to keep their money in old socks a housing crash will probably mean more investment in equities and / or bonds.”
I don’t think you understand what is causing all of these concerns. The problem is that when a stock market loses nearly half of its value, a huge amount of capital is destroyed. When capital is destroyed, so is collateral, and if the economy is deep in debt then the debt is under-collateralised and there is a problem – this is how the credit crunch began. Similarly, when the property market collapses, you will not see people take their money out and put it into another asset class – their money will have been destroyed in the crash. Most people don’t sell in a crash because they do not get the chance. So, like the paper increases, there will be paper decreases, except of course that there will be huge loans secured against the “paper” value. Now, imagine what happens if you can’t make your payments on that loan…. |
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