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| The UK housing market: a bubble about to burst? |
Market psychology
by Semi-Detached
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#1000698
of 3278
 13 Nov 2002
10:55 AM |
Hi All
Pardon me, but aren't most people ignoring the idea that markets are, IMHO, irrational most of the time, especially a market such as housing where I guess most people take their decisions very much based on gut feeling?
Contributors to this forum have done something fairly unusual - they have applied their brains to this thorny issue, whereas I say most people make their decisions with their guts (and little nudges this way or that from their bank balance, the papers, their friends and neighbours, but decidedly not Eddie George). And maybe they are right ...
This booming market has been driven up by greed and fear, and it will be driven back down by greed and fear. The numbers don't matter nearly so much as how people feel about them. For example, when first time buyers read that prices are plateauing, what are they likely to do: Hang on, wait and see, hope that the market turns down in their favour. Demand in a crucial sector of the market dries up and we get a positive feedback loop, even with no change in interest rates. Engineer is wasting his time trying to be dispassionate about this (and I speak as an Engineering PhD) - people don't behave according to equations - the 'science', loosely speaking, of that is called economics, and we all know how dismal that is. That is why it is common to say that people can 'talk the market' up or down. The biggest driver of markets is hot air, and it will always be thus, I contend. Better to study mass psychology.
Note: I am not saying that buying in a rising market is irrational. Following what the herd is doing may be eminently rational, because that herd is largely driving the market conditions, and will continue to make prices rise until enough of them feel enough pain to make them turn and rush off in a different direction.
The people who make money in markets are those that can anticipate the turns of the herd (not that I can always, I hasten to add), can exploit greed and smell fear and have the courage to act appropriately.
My opinion: Sell soonish, I reckon, unless you like where you live and you aren't up to your armpits it debt.
Just my bit of hot air ...
S-D |
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Tenants
by confused
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#1000697
of 3278
13 Nov 2002
10:34 AM |
Hello sparkey 597
If a tenant walks, there is little you can do about it. Normally they will disappear without a forwarding address.
The issue that I have has is that they want to make the bond, the last month's rent payment. This means that they can leave without risking their money.
It's a shame that the idiots out there spoil it for the 90%, who are honest and trustworthy, IMHO.
Good luck! |
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Calm down, it's only money...
by Extradry Martini
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#1000696
of 3278
13 Nov 2002
10:18 AM |
Jack Straw, Curious et al,
I see that my analysis has upset you and others. This wasn’t the intention – I suggest you take a deep breath and try to consider all this objectively and coldly.
I think you need to read my posts again. I never said that interest rates were going up – in fact quite the opposite – I think the BoE should be cutting rates to as close to zero as possible as soon as possible. What I said was that lending rates could go up. This is a crucial difference – lending rates relative to interest rates have gone up on average by 200% in the corporate debt market in the last two years, and are still rising. This has meant that average corporate borrowing rates in the UK have stayed the roughly the same despite the base rate falling 200 basis points in the period. So monetary conditions for business have not changed – not the Bank’s ideal situation. This has occurred because the compensation that lenders and investors require for taking on credit risk has risen to record levels and is still rising. Without further cuts from the Bank, this would mean that term lending rates would actually be higher than 2 years ago. Now, look at the mortgage market – to say that the credit element of the lending rate will not go up as well is ridiculous, so it’s just a question of whether BoE cuts in interest rates can compensate enough so that lending rates do not go up.
You seem particularly upset by my prediction of house price falls. But they really are not extreme at all. Remember that I predicted a fall of at least 40%, with a suspicion that they might reach 60-70% owing to the “elastic band” nature of speculative price movement. This is nothing new. In the last bust, the property market fell 40% in real terms. In this one it is likely to fall more as speculation is much more widespread and debt levels are astronomical. In the top right hand corner of page ten in Nationwide’s study….:
http://www.nationwide.co.uk/Hpi/historical/PDF/CMQPRQ302.pdf
…. there is a graph showing real movements in average UK real estate prices and a long term trend. The peaks are higher than the trend line and the busts are lower. It is fair to say that it is likely that the higher the boom, the worse the bust: So there are your numbers: 40-50% to fair value plus another 20% or so for overreaction.
The reason why the last bust did not feel like 40% was because inflation changed 40% to 14%. But inflation is dead so will not bail us out this time.
One of you said that the economic instability required for this to happen would be comparable to the plague. That is a curious analogy given that the plague was a disease and was not caused by economic forces, so I will correct it – the economic instability required for this happen would be comparable to the Great Depression. That would be right. The forces at work in the global economy have not been seen since the 1930s and the current instability in the capital markets is indeed only comparable to that time.
Someone said that I had been “proved wrong” by the latest Halifax numbers. That is like saying that someone being bearish on the Nasdaq when it was at 4750 was “proved wrong” when it went to 5000 the same day in March 2000 (it is now under 1000) – in other words ridiculous. I think a rise of nearly 5% in one month only proves that we are in the final phase of the bubble.
Just a quick note about localised price movement differentials: For a short time, it is possible that prices in one area move up while others move down, but that period of time has to be very short. Asset prices contain a large component that belongs to the asset class due to the homogeneity of general economic conditions, while the rest of the value is relative to the others in the class. That is why in the latest boom almost no properties fell in value, and why almost none will escape the crash. After all, the stock market is far more diverse in nature than the real estate market, but there is not one stock in the S&P500 or the FTSE100 that has gone up in the last two years.
Curious: Now that you have returned, are you going to back up your arguments with any facts? Also, why are you surprised at my numbers, when I first gave them at your request?
BP: Thanks for the kind words!
Jeff: From what you’ve said, I think that congratulations are even more appropriate!
First time buyer:
You said:
“In the end I view both interest costs (on a mortgage) and renting costs as dead money, surely I should opt for the method with the lowest rates?”
You are absolutely right to think this. The two will converge. My money says that house prices come down rather than rents going up….. |
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Wow things are getting a bit heated
by Knowledge is Power
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#1000695
of 3278
13 Nov 2002
10:17 AM |
It appears the frantic pace of the housing market is heating up this debate. Fantastic, it needs this kind of in-depth discussion.
BP;
Spot on, I agree.
Extradry;
I complement you on your controlled and informed postings, and wish to a) thank you for your continued excellent postings, and b) say that Hoogystraten is way out of line and in my opinion these personal insults should not be allowed in this forum.
HocusPocusStraten;
Not commenting on my earlier comments (#680). I'd argue that it is in fact you who are too ignorant to be informed of MPC policy & operation. Your earlier posts demonstrate this magnificently. Funny how selective you are at responding to criticism. Perhaps it is you that have a weak underlying argument and are too fearful of revealing your true ineptitude.
If you have no valued contribution to this forum other than to insult it’s other members then what role do you serve in this debate? I suggest you consider you attitude to this forum, whilst you still have the opportunity to do so.
MY PREDICITION
It’s Christmas coming up, so expect an excess of spend & debt. Throw in the collapsing By to Let (rent down 15-20% this year), and the Tax rises in April. I give the market 6 months (whilst it slows) and would expect a fall in prices over the next 3 years. 40% to 60% would seem a reasonable figure - considering in the last 5 years house prices have risen over 100% in the Lon/SE area. |
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First time buyer...........
by Shareholder
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#1000694
of 3278
13 Nov 2002
09:49 AM |
There is a lot more to having your own home than straight economic or financial comparisons. You can do what you want move when you want and live where you want, decorate as you want and have the freedom of mind and spirit that goes with being in your own place.
However , why anyone would want to live in a one bedroom flat in London is beyond me!
Think on what you want from life, where you want to spend your time, you only have some three score and ten (a bit more these days ) and you only go this way once!
So invest those days and years wisely, you only have one shot make the most of it!! |
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In defence of Dry Martini
by BP
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#1000693
of 3278
13 Nov 2002
09:49 AM |
Dry Martini is the most interesting, informative and coherent contributor to this forum.
Hoogstraten has his moments, but his arrogant humour seems to hide an underlying fear that he is wrong.
Hoogstraten, you seem to be in denial about what is going on in the housing market.
House prices have risen by over 30% this year alone. Think about it. This is not sustainable. You might desperately want prices to reach a plateau, and grow by modest 0-4% a year, but this is a goldilocks scenario.
They will fall. Maybe not by 60-70%, which implies a Great Depression scenario, but a 40% decline sounds reasonable to me. This would only bring them back to the levels last seen in 2000. But a much larger decline is perfectly conceivable. |
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congratulations not in order
by jeff morgan
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#1000692
of 3278
13 Nov 2002
09:48 AM |
Extradry martini seems to be getting some stick recently.
I don't call names, but I don't believe the prediction he (she?) made about house prices. In oder to be fair I should give my own prediction even though it's against my better judgement. I believe that house prices will decline by maybe 10 - 20% over the next year or so, that decline will vary across the country and it will be followed by a couple of years of flat price performance.
There, that's my finger stuck in the air.
The other point I want to make is that congratulations to me (and my wife) on making money are really misplaced. We did not make a fortune and we did not make it (directly) because of the bull market. What we did was, some 17 years ago, take a significant risk and invest in a company that my wife and some others started. They went public in 1997 having grown to the fourth biggest UK business in their sector and we sold about two-thirds of our holding in 2000, when the markets were still high.
Our success is a mixture of courage and good luck. Many others could have achieved the same.
In reply to Si #665, I'm sorry people are buying in what I believe to be an unconsidered way but I hope the market stays up long enough that their lives and prospects are not damaged as a result. I'm all for people taking risk provided they have thought it through - I don't have a lot of time for people who take stupid risks, or who didn't think first - but it could be that, just now, buying is still a good idea. |
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Rent vs Buy in the short term
by FirstTimeBuyer
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#1000691
of 3278
13 Nov 2002
09:25 AM |
After 3 years of hard saving I am now in the position of being able to buy a 1 bed flat in the centre of london. However the recent price rises now mean that it is actually cheaper to rent than it would be to repay the interest on a mortage, even in the current low interest rate economy. My view is that I should continue to rent for a few more years. My current out goings would be less, meaning I would still be able to save and continue to build on my savings. However this does mean that I will not benefit from any future house price growth but if house prices fall, or do not increase, I will benefit greatly because my deposit will be a greater percentage of the property and my borrowing cost will be reduced.
In the end I view both interest costs (on a mortgage) and renting costs as dead money, surely I should opt for the method with the lowest rates?
Can anyone point out any errors in my reasoning? Any comments are appreciated. |
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ripple effect
by Jack Straw
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#1000690
of 3278
13 Nov 2002
01:47 AM |
Mr Si,
hello
Thank you for expanding the discussion. I guess what I was actually referring to would be the ripple effect. If we look at a certain popular area, say Clapham, south London. A great number of people are interested in purchasing in this area. However due to demand / availability / and price they may be forced to look elsewhere.
This has led, in the case stated, to price rises in Stockwell, Tooting, Battersea and Oval. Since these areas are in the lower price brackets, then percentage rises occurring are actually higher due to the initial lower cost base. The knock on effect expands the area of popularity. Afterall :-
It's not only fine feathers that make fine birds.
Aesop
Therefore what we get is comparative maturity in one market sector, as demand reduces, whilst we benefit from high growth in another. I guess if you consider this shunning good residential areas for an area “where your place will be broken into” then I guess yes. We can easy look at market price by postcode for the last 4 years and well see this in practice.
To compare the housing market to the dot com bubble is quite interesting. I guess the ripple effect did run though the dotcoms valuations
But I do think, what we can agree on, is that long term house ownership does provide a solid investment return in the meduium to long term. The 70% losses predicted by martini could not happen. Afterall people have to live some where, but can take a choice not to own stocks. If they did drop 70% I would be “shaken but not stirred.”
I also know of an interesting quote by disraeli, on gladstone. Perhaps this can be associated to martini,
Inebriated with the exuberance of his own verbosity, and gifted with an egotistical imagination |
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DryMartini abducted by aliens
by Hoogstraten
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#1000689
of 3278
13 Nov 2002
12:43 AM |
It is to my credit that I was the first person on this board (to my knowledge) that unmasked DryMartini as an eloquent charlatan.
I quote his increasingly shrill predictions:
“It [property prices] will fall to at least 40% of today’s prices (and probably 60-70%)”
PROBABLY A 70% FALL IN PROPERTY PRICES!!!!!!
Arguing against this sort of prediction is much like arguing against people who believe they have been abducted and gang probed by aliens – what does one say? Where do you start?
However, it is in my nature to be charitable. I am prepared site unseen to purchase DryMartinis properties for 31% of the current independent market valuation – this means DryMartini will probably clear 1% now over what he thinks the property will be worth in 2 years, and I am happy with my side of the bargain! However, with respect I would require reports from DryMartinis medical practitioners, which attest to the fact that you are of sound mind, least redress is sought later in the Courts. The truth is out there.....
Other clangers from DryMartini include:
1. Arguing in one mail that mortgage rates are going up, and then reversing this position in his next mail to indicate mortgage rates are going down!
2. Telling the readers as a fact what is moral and what is immoral. “Making or losing money from the asset markets (as long as you are doing it fairly and legally) is neither moral nor immoral.”
3. Advocating a dirty float or managed exchange rates (much as the Japanese have done for many years). Macroeconomics is clearly not DryMartinis strong suit. Although socialists would indeed also probably support direct currency intervention by the Government, this practice is probably actually advocated most vociferously by Keynesian economists. I could go into the details of Keynesian policy as to why they advocate this stance, but frankly explaining first year macroeconomics to DryMartini is not the point of this forum, and starting from a blank slate is never easy. Suffice to say for now that this is the economics of defeatism and failure.
4. DryMartini uses two diametrically opposed methodologies, and tries to argue using both! On the one hand, he states:
“Markets do not make major moves because people talk about them, they move because of changes in individual and general economic conditions.”
This is an Efficient Markets Hypothesis view of the world, where valuation is based on the best available information at the time. Chartism according to this world view makes no sense, because the charts are just a random walk, that reflect disseminated new information processed by rational people. A person believing in this world view would not take charts seriously, and would certainly NOT use them to predict anything.
Contrast this with DryMartinis later posting, which justifies his ludicrous predictions:
“In posting I am looking at average house prices in the UK, that have moved more than 40% away from their long term fair value trend (See the Nationwide’s own report on this). As markets tend to overreact, I expect a move of more like 60-70% before it bounces.”
This is a chartists view of the world – which is clearly inconsistent and mutually exclusive with his earlier fundamentalist view of the world.
This distinction is simple first year finance.
The people that contribute to this site generally seem to subscribe either to the view that property prices will rise by 70% or fall by 70% from present prices. I do not understand why they seem to find it inconceivable that prices could rise from now at perhaps 0-4% per annum. I suppose there is more drama in throwing huge numbers around. |
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interpretation of stats, and socio-economic factors
by Si
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#1000688
of 3278
12 Nov 2002
11:03 PM |
Curious,
Welcome back!
I don't think you can tell much from a few month's housing figures, especially where the Nationwide and Halifax suggest different scenarios this month. The fact that £million+ houses are excluded from the Halifax's survey also plays a part, as these are falling in value in the SE. This COULD be seen as the beginning of a decline, but frankly it's impossible to tell from scant data. Bad science. That's why it's dangerous to try and 2nd-guess the top of a market. This is a very common point from those who expect to see a fall: the exact details are near-impossible to predict. No-one that I'm aware of seriously predicted the remarkable post sep-11 performance of the housing market, either. The B of E appear nervous enough to have held interest rates, not suggesting that THEY think it’s going to cool off benignly according to recent figures.
Mr. Straw,
Hello.
Socio-economic factors clearly influence decent areas/locations that have proven to be good long-term investments, which normally have good communications, schools, policing etc.
Are you suggesting that the reason that people are currently shunning good residential areas where they can get competitive rentals, and buying in 'up and coming' (ie not very nice) areas, is because there is a fundamental socio-economic shift to have empty let properties in nice areas, while people prefer to buy in poorer areas where they'll get broken into? I would suggest to the contrary that it is a classic investment mania, just like the dot-coms, where people believe that this way lies the path to riches. Socio-economics compels people to live near a nice school, or cool bars if that's what you want. To buy in a poor area is currently a demonstration of property-investment mania, and in contravention to established good property-investment advice (ever heard the mantra 'location, location, location'?). In addition, demographics explains the long-term higher house prices in the UK than the continent, but give me a break, not 30% a year! Has a lost civilisation of accountants suddenly been found just off Anglesea or something?
Also, if 'People are currently able to lock in at low rates and purchase houses at prices, which would have been beyond their means 2-3 years ago' then how come they are paying more on their mortgage interest than they need to, or would be prepared to, on rentals? So what if they can afford more now, to do so is irrational as rentals are so cheap! Unless of course you come back to the circular argument that says it is because they are seeing prices rocket and they'd better get in before it's too late. Otherwise known as irrational exuberence, which is a much more powerful driver than the social desire to own one's own place at the moment.
There IS a corrective process, however, including socio-economic influences, to deal with the debt burden/2-speed economy which Britain is currently experiencing. It's called a recession. |
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Housing
by Curious
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#1000687
of 3278
12 Nov 2002
07:35 PM |
I'm back [sorry rev !!]Regretably Extra Dry's forecasts are proving laughable [as will the rev's]See postings 400 and 397 and those around that time.
So far, my predictions are in the direction I anticipated and Extra Dry's and revs have alot to catch up on.
Ca'nt wait for the November figures to emerge in a few weeks time !!
Have a happy Xmas - I'm off business travelling and we'll catch up in the new year. |
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answer to question
by Jack Straw
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#1000686
of 3278
12 Nov 2002
06:54 PM |
Yes anyone can get on the list.
However to qualify for a house there is a points scoring system. These points are scored based on poverty levels, current position and number of dependents.
Therefore some investment banker earning 1 million pounds per annum could apply but never qualify. |
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JJ & Martini
by Jack Straw
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#1000685
of 3278
12 Nov 2002
06:51 PM |
I agree with you to a point. Clearly prices will move to more inline with inflation.
However currently we have an Indian summer in housing prices created by many different triggers. From the low prices of borrowing, to lag between areas.
People are currently able to lock in at low rates and purchase houses at prices, which would have been beyond their means 2-3 years ago, and this stands for all income levels.
Further we need to achieve parity around all areas. Certain parts of the country are rising now as a result of lag. They are purely catching up with some of the rises in other areas of the country.
You will notice that, areas in the north in particular, where property has not reached the same levels in increase are areas of population decline. One such example would be Liverpool where the govt expect a 10% drop in the population over the next 10 years.
This is the flaw in Mr Martini’s concepts. Socio economic factors have a greater influence than pure economic. If you don’t believe me ask the property owners on flood plains, near a nuclear plant or in East Anglia attempting to sell houses with no power.
Until we account for all the triggers in the housing boom there will not be a reduced slow down. As for property price dropping 70%, as stated by Martini, that is completely laughable. Ill sell him that trade – 70% property losses being parity.
Such a drop would result in the complete collapse of the property market – impossible! The economic instability that would be required to create such market stress has not happened in the UK since the plague.
My final comment to Martini would be to quote Warren Buffet, on Internet start-ups,
“ When the tide goes out well see whose swimming naked!”
. |
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Council Homes
by a question
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#1000684
of 3278
12 Nov 2002
06:38 PM |
| You say wealth for the working classes, can't anyone get on the council housing list? |
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