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| The UK housing market: a bubble about to burst? |
Engineer Answer
by Andy B
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#1000833
of 3278
 15 Nov 2002
06:32 PM |
OK Engineer I am sorry for pointing out the obvious.
I believe wave theory etc can not predict the future very well.
To answer your question of the Asian economies - I admitted I had focussed on the UK - but I noted that there is a VERY big difference between an economy with inflation of 2.5% RPIx and Deflation economies.
Deflation is a nightmare. Just so you know when I went to put zero into my model (for inflation)I got an error! I think this is due to dividing by zero and getting infinity. But I did say that if you have a sustained period of zero then the mortgage cost to income curve is flat - over the life time of a household. This also means it is very unlikely demand side factors could increase prices.
But are we at the bust point? No - not at present with inflation of c2% and base rates at 4%. |
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Muddy waters
by Engineer
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#1000832
of 3278
15 Nov 2002
05:35 PM |
Andy B, the question asked of us is not "boom or bust?" It is "Do you think we are on the brink of a property market crash, or will the boom gently peter out?" i.e. boom AND bust, or boom and defy gravity.
When I first read your posting, I was not quite sure which side of the argument you were taking, but as you have now associated yourself with Hoogstraten I think that we have a clearer picture.
When you say that "Most economists have realised for years that wave theory doesn't work", what does that mean? Are you trying to say that there isn't an economic cycle, in which case Gordon Brown is clearly using a different theory to "most economists", or is your point that a simple wave equation can't be used to predict economic behaviour, which is nothing more than stating the obvious? You then muddy the water further by presenting the results of your own "analysis" by drawing an analogy to waves.
Judging from the range of predictions that have been offered by economists recently, I have my doubts that any of the mathematical models developed so far are sufficiently accurate to make predictions about the housing market that are significantly better than an informed "gut feeling". What is the "tolerance" of your analysis (i.e. how confident are you about the accuracy of the numbers you have put forward), or did you just pull them out of the air?
You also appear to have chosen to ignore evidence put forward by others that there have been housing market busts in other low inflation environments. Do you refute this evidence, or is it simply convenient to disregard it as it doesn't tie in very well with your current model?
I feel that you need to present much clearer evidence of why you think that the current boom should have different consequences to all previous historical booms that I am aware of. Perhaps your current model is just another "theory" that is about to be disproved. |
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On mathematical analysis
by Andy B
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#1000831
of 3278
15 Nov 2002
04:43 PM |
Valid points from JJ and Engineer - I also saw the wave programme.
Economics, being a social science does infact try to take the real world into account. The demand curve theory is derived from utility theory which is all about accepting people make personal choices to consume/own one good/service rather than another.
These choices change -we have fads or culture ways - mathematically economics still able to model these and the analysis I have put forward tries to explain the application of such analytical tools. Most economists have realised for years that wave theory doesn't work.
From my analysis we are not yet being hit by the 30m wave, but it is upto 12m. The sort the boats can survive - just as we will survive this shift in house prices compared to the rest of the goods/services basket.
PS Thank you - Hoogstraten - we seem to be winning the agrument and gathering support. |
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It's a bubble folks!
by Knowledge is Power
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#1000829
of 3278
15 Nov 2002
04:28 PM |
Ok, taking the concept that house prices will stagnate/plateau until wages catch up, can someone please explain to me how this is likely to happen?
Productivity is down (borderline recession), and the only thing propping up the economy is public spending in the service sector.
So if industry is struggling and people are being laid off in the financial sector, where are these magic pay rises going to come from. Sure the fire fighters want more pay (how else are they going to meet rising house prices), but the money isn’t there in the government. Nor is it in industry. Jobs are going abroad so as to reduce the wage bill (usually the largest contributor to a companies overheads). They’re not about to go up now are they? Exports are down & as globally the UK is looking better than most, it’s unlikely that we can look to exports in the future to bail us out & recover production.
Bottom line, it could take years for wages to rise in the proportions suggested to regain normality with wages/prices. In that time is it realistic to expect house prices to remain at 0% inflation?
Come on people get real, we’re borderline recession - there is simply no justification for a continued high inflation market.
Question: are house prices at a historically high level?
Answer: yes
Question: is there any economic justification for the massive rises in prices?
Answer: no, not when UK inflation as a whole is around 2%!
Question: Is the housing market a bubble? Go on honestly ask yourself is it a bubble!
Answer: some say no, the sane say yes.
Question: what has happened to every bubble in the history of man?
Answer: Well, it reaches a certain point and then levels off indefinitely waiting for more fuel to keep it going… COME ON, THIS IS RIDICULOUS! The answer is IT POPS, BURSTS, THE MARKET FALLS. Look at the London Buy to Let, it’s happening right now! |
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Theorems
by Engineer
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#1000827
of 3278
15 Nov 2002
03:51 PM |
Good point JJ, you have illustrated how the scientific process works, what its limitations are, and that the future is always uncertain.
However, I think we will all agree that theorems, however approximate, have their place - after all, I would suggest that it is largely through improved scientific understanding that we have been able to improve our mastery of our environment, and thus improve our general living standards.
If humans didn't rise above buying and selling property, we'd still be discussing the benefits of different cave styles (and we probably wouldn't even be able to communicate well enough to do that very effectively)! |
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On mathematical analysis
by JJ
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#1000826
of 3278
15 Nov 2002
03:29 PM |
I watched a fascinating programme on TV last night about freak 30 metre waves, which according to science and mathematic prediction couldn't possibly exist. Ships are built around a complex calculation that big waves are generally around the 12 metre level and aren't walls of water like the mythical freaks.
Well eventually through a turn of events scientists had to acknowledge that freak waves do exist and well actually they're are fairly common.
They discovered lots of these freak waves off South Africa and discovered that when the waves were going against a particular current it generated these freaks. Great thought the scientists and mathematicians! Solved and out came a new mathematical theorem to explain it.
Errr...well not quite! Some cruise ships off the Antartic were hit by these freak waves, German scientist used very sensative satellites to discover that these freaks occur fairly randomly all over the world. So that was the end of that mathematic theory.
So then came a third one, even more complex, based on something more akin to chaos theory. Freak waves originate from instability among normal big waves to put it very simply.
So much for mathematical theorums!
When it comes to markets you are dealing with factors of social science, which cannot be put into formulas the same way as can be done with natural science.
Markets are far from perfect. It is said that currencies never truly reflect their real value, which they can overshoot or undershoot for years (whatever real value is?).
UK residential property markets may have even bigger emotional factors at play than other markets, simply because they are completely dominated by consumers.
Also, the UK residential property market has proven to be cyclical. It would be amazing if it had succeeded in defying its economic cycle, by basically being able to go up for ever with occasional pauses for a breather. Property prices will at some point go into reverse, because people get carried away and the inevitable correction follows and it will end up oversold for a while.
Aside from all the normal market forces like fear and greed, the real estate asset class is also affected by the fact that people do actually have personal feelings towards what they're buying.
After all we all want to live in and enjoy a beautiful house or appartement?
Now anyone dare put that into a mathematical theorum?
In the meantime, for the sake of the UK economy let's hope property isn't hit by a freak selling wave. |
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Mr T. Cooper, RIP.
by spindrift
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#1000825
of 3278
15 Nov 2002
02:59 PM |
My brother's just sold his house.
There'll be Hell to pay when the council find out. |
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Mathematical analysis etc
by Engineer
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#1000824
of 3278
15 Nov 2002
02:50 PM |
Mr X, post #807 said:
"As for the doom mongers amongst us, I still fail to see any real mathematical analysis to say why we are heading for a bust. This is what I am waiting for."
I am afraid that you will wait for a long time for such an analysis, as I can't see how a system that is influenced by such a large number of factors, at least some of which are unpredictable, can be accurately modelled mathematically. We can, however, consider the general characterisitics of real systems and try and draw some conclusions.
We both agree that there will be a "limit" to the price increases. No practical system that I am aware of can accelerate indefinitely without running out of "fuel". However, I disagree with your suggestion that stagnation will occur, rather than a reversal. I am not aware of any system that behaves similarly to the current housing market, without overshooting its "target". I have asked for examples previously, but so far nobody has responded. If anyone can provide a concrete example of a comparable situation where a plateau has been achieved, then please present the evidence, otherwise there is no doubt in my mind that a reversal is inevitable at some point.
If you choose to classify me as a "doom monger" because I hold this view, then so be it. I prefer to consider myself a realist. I will suggest that those who propose the "stagnation" or "plateau" concept are wishful thinkers, or are alternatively trying to prolong the boom by making people discount the downside risks. This is a dangerous game.
It is hard for me to see how rapid house price increases are beneficial to the country. People would be better encouraged to try and make money by taking risks on genuine entrepreneurial ventures, rather than gambling their future on a largely unproductive asset. Property should only form a modest portion of any balanced investment portfolio.
I thought that, over the years, the balance of "wealth" was supposed to have shifted from landowning to capital-intensive industry, and more recently towards knowledge-based industries. Are we in Britain now trying to lead the world back to a pseudo-feudal system, with property 'haves' "ringfencing out" property 'have-nots'?
Personally, I think this is unlikely, and a variety of powerful feedback mechanisms will ensure that it doesn't happen in the long-term. Mr X, you may find that if the present over-emphasis on a piece of mud and a few bricks continues, there will indeed be stagnation, and the results will not be particularly pleasant for anybody! |
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Andy B.
by Hoogstraten
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#1000823
of 3278
15 Nov 2002
02:48 PM |
| Spot on. |
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Inflation & House prices
by Andy B
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#1000822
of 3278
15 Nov 2002
02:33 PM |
Sceptic - I appoligise for reverting to type and I have edited my #764 so maybe people will take it more seriously.
There is developing a group of arguements which tie togther. The present price of housing is now entering a range which will be damaging. Much of the past rise can be supported - see below on #764. Also a further price increase is possible due to spare debt capacity - see below again. But Rev.HK is right if house prices go up another say 30% - 40% then we can have a boom and bust. Also I am always cautious of Asian economies as examples but I admit I have not analysed their house market - I can not counter this arguement without seeing some fundamental analysis etc.
However, off the top of my head - after a reasonable period of zero inflation the life cycle curve of mortgage payments to real income flattens to a horizontal. (ie There is no erosion in the cost:income ratio over time and no advantage in buying now rather than later.) At this point the demand curve can not continued to shift up( as I have suggested below) and therefore prices have peaked. Deflation is highly damaging in any ecomony and this is why the Government has set a RPI target of +2.5%.
Sceptic: But 'reverting to type' is a litle below the belt given one only one posting the last 100 has even attempted to review the economic analysis I presented!
See below : edited #764
Now and again someone in this forum tries to anwser the question - initially asked - boom or bust? The ideal solution for the ecomony being a gentle correction over time, then a steading over time. I wish - you wish!
People have missed a few key points:
1. Not all houses have been sold at the present price - infact sales have been slowing down. Most of the households have made a large UNREALISED profit since only a small % of houses have been bought and sold at the prices seen in the last 18 months.
2. A bust needs a trigger to the demand side - No-one has answered my question of when have we seen major fall in house prices without a fairly sharp rise in mortgage rates?
Despite what has been said in this forum the ratio of house prices to average earnings has not reached the peak of 1989, but using the ODPM figures it is near to 90% of that peak. In 1995 it was at 65% of the peak. This fact is important in the affordability agrument (see later).(Interestingly the Halifax Stats (&Nationwide)on this show us further away from the 1989 peak - you just cannot trust them! on their figures!).
Mortgage advances to incomes are higher now than in 1989. Critically - first time buyers - per CMI figures - are borrowing (on average in England) 2.5 times their incomes. In 1989 through to 1999 this figure was below 2.3 times. (5 times is the exception not the average - we are not all stupid). This is explained - probably - by the impact of a low general inflation economy.
Low inflation flattens the life time curve of the ratio between Mortgage Payments and Income and therefore in simple terms you feel you can borrow more because you can afford more upfront. In real economic terms - there is no free lunch - so you infact end up in 15 years time with a larger mortgage to income (all in real terms). But it is the nominal values which drive the demand curve in the short term (not real terms). People think in actual shop window (nominal) prices.
In theory - In high inflation economies (say RPI 10% not 2.5%) the intial nominal mortgage cost is higher to nominal income, due to the high interest element. At a constant 10% RPI ( and mortgage rate say 15%) inflation does mean that over long periods the nominal income will also increase - but the mortgage payments are the same in nominal value terms - so in real terms the burden is reduced. With low inflation this does not happen to the same extent. Many people in the forum have used this analysis to agrue for a lower house price rate (Rob G and friends etc)
But if you read what the Bank of England said in the last few months they have used this agrument to explain why houses prices will, in real terms, remain higher than in past decades. They point to cash flow 'affordability'. The lower mortgage cost pushes the price up for good - or as long as inflation is under control. High inflation or the risk of it - is seen as a major cash flow risk to the household. High interest rates restrict cash flow and reduced the willingness (and ability) of
borrow to spend their income on a house.
A low inflation ecomony (but not deflation) can shift the house price to real earnings ratio - this is econometric speak for "moving the goal posts". So many of you have shot at a goal area which was their 10 years ago but has been moved. Rob G - you missed the goal but I did not have time until now to explain this.
There is another reason for the ratio to shift and this comes down to the supply side rather than demand. The number of vacant/unused houses has dropped significantly over time. I would like to but an old house and do it up - but there are very few left! Going back to ODPM data (and John Prescott will approve of this - if you know what ODPM stands for!) the ratio of houses to households has fallen from 104.5% in 1982 to 101.25% today. Therefore supply has fallen significantly compared to demand. The result - a higher price - in real / nominal and other money terms.
This supply side agrument points away from a bust - as the this ratio was just above 103% in 1989. The Halifax are therefore happy to use ODPM's figures here!
So from an ecomonic basis - house prices could be sustained at these high levels - unless we move away from the lower interest environment. And in theory they could rise more as people learn to live with higher mortgage payments - remember the 2.5 ratio was for first time buyers - the average ratio per the Bank of England's August Report was just over 2.3 for non- first time buyers. We have plenty of debt capacity left to push the prices higher. Ask the Halifax - they will lend you more!
Now most people have also said what they want to happen. I want lower prices but in my heart I know Steady Eddie and Gordon Brown will play it safe and try to avoid that crash. Only Saddam and Bush can help us - Oil prices of £40 a barrel and we could see a crash. |
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Buyers and sellers
by Sceptic
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#1000821
of 3278
15 Nov 2002
01:37 PM |
Jeff, I guess this is the same point I tried to make this morning.
If there are more sellers than buyers, then prices decline, exactly the opposite of what has occurred recently. |
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#765 and counting...
by Jeff Morgan
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#1000820
of 3278
15 Nov 2002
01:36 PM |
Rob G, just a couple of points.
Any good can be valued but it has a price only when a bid and offer are agreed. What people are willing to pay is ususlly a good indicator of price but isn't a price.
You write, 'The only way to have your house valued is to see what houses similar to your own have been sold for recently. If others similar to your own have been sold for less, yours is by implication worth less also. QED.'...
That's tough then because the last time a house similar to mine was sold was 4 years ago. Yet I had my house valued and it didn't prove to be hard. You might argue that the value was unrealistic and that's true but in the trivial sense that value is tested only when a contract is struck. |
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catching up, at #757 now
by Jeff Morgan
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#1000819
of 3278
15 Nov 2002
01:22 PM |
Slapper writes, '...may come a time with more sellers than buyers'...
er. - yes, and so?
So there's no market in houses any more. Excellent, so we can shut this debate down as well.
If there were no housing market it would not affect me one whit. How many are in the same position? |
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To Extra Dry #740
by Jeff Morgan
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#1000818
of 3278
15 Nov 2002
01:03 PM |
Extra Dry, you wrote '...that doesn't mean that some houses will rise in value' - to which I agree, indeed my prediction was for a fall in prices (less than your prediction) which I would believe to be general.
The gist of my argument is that, though value and contracted prices fall, in some areas that doesn't get translated into actual transactions. In areas where people like to live and where most have little or no debt associated with their property the other important effect of a major reduction in value is to severely reduce the number of transactions. This is not unknown in my area even now, in fact I can't get a 'value' on my house because there are too few transactions to record. [It's not lack of demand but shortage of supply]. |
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DJW Query
by Mr X
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#1000817
of 3278
15 Nov 2002
01:03 PM |
| Mortgage of £96,729 [stated in the posting] Interest rate at 5 % for 25 years is £572 per month on a Capital Repayment basis. Interest Only is £403.04 per month. |
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