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| The UK housing market: a bubble about to burst? |
Cassandra
by Jeff Morgan
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#1000899
of 3278
 19 Nov 2002
12:51 PM |
Hey rev-hk, you sound just like my investment advisor! Maybe you are the same person - are you called Derek by any chance?.
Lot's of echoes for me in what you wrote, especially the '...debt accumulation that is slowly being paid, written or restructured off their balance sheets'. But, it is being written off, and the debt problem is gradually easing - doesn't mean we are out of the woods by any means though. [By the bye, Derek believes Vodafone has too much equity floating around!].
I suppose that, reading my own reactions to the various postings, I believe we are in a really risky state at the moment and any of these risks could tip the scales to something nasty. Nonetheless (some) people and companies are listening to present-day Cassandras and the longer these risks don't happen the more likely we'll escape the really bad stuff.
I'm not obliged to swallow the pill (I'm sorry if this is a bitter pill...) because I didn't throw my money away in the internet madness and, though I do have an outstanding mortgage (on my apartment not on my house), I have a low-risk strategy to reduce it, in the meantime I have significant cover for it and my wife and I both work for organisations that have secured business for the next 5 or so years.
The good thing about having Cassandra around is as an antidote to incurious optimism; to me the right response is to listen carefully, take action to reduce your own risk, but not be spooked.
On the other hand, if I was a first-time buyer I would be hard-pressed to find a reason to buy in the present conditions and, as another poster wrote, that in itself would affect the market if such decisions were widely followed. |
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More deception?
by rev.hk
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#1000898
of 3278
19 Nov 2002
12:37 PM |
Thank you for that lovely insight into the angry world of H. The one where in order to combat an opinion about share price potential we are treated to all that H. knows about macroeconomics from philosophy 101.
The misquoting from my earlier postings is now reaching such a cresendo that it is hard to listen to someone who thinks that anyone with a different opinion to his own makes that person a communist or some other name that springs to the frothy mind.
That technological change has been the driving force behind economic growth and wealth since the beginning of time is long known - probably to most people in this forum. That capitalism is the most efficient means of distributing capital to the venture capitalists that drive long-term growth is also well known -just read Schumpeter dear boy.
Sadly for the spectators to this time-wasting, my comments had nothing whatsoever to do with the distribution of capital. They have everything to do with the ability to corporates to make monopoly profits over the long term and therefore justify their continued existence as highly priced listed companies in the capital markets. That there has been a terrific short-term mispricing of capital by venture capitalists is the reason why share prices are falling and will continue to do so for some time. What this has to do with angry Hoogstraten's angry ravings about Karl Marx and the internet being bad for society I will probably never be able to fathom.
You need to get off the campus old chap.
rev.hk |
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Elementary economics
by Hoogstraten
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#1000897
of 3278
19 Nov 2002
11:41 AM |
Rev.hk, I am bemused with myself that I am continuing to take you seriously. With respect, I do not believe you have even the most basic understanding of economics (although you may do, because your views do correspond very closely to one economic theory).
You say:
“The internet simply increases competition since it reduces the barriers to competition. This leads to downward pressure on margins which dramatically reduces a company's ability to make long term profits.”
Your basic thesis is that the Internet is a bad thing because it increases competition, reduces barriers to entry into markets and reduces profit margins. By implication, the higher margins, higher barriers to entry and lower competition that monopolies enjoy are in your world generally a good thing.
I am afraid I must inform you that you are not the first person to write this view. This idea is replicated in the Communist Manifesto by Karl Marx, and forms the basis of the state owning everything, which was later implemented by Lenin et al.
Proponents of capitalism would argue that perfect competition results in a normal rate of return – participants would enter or exit the market concerned until a normal rate of return is achieved, thereby achieving a normal equilibrium level of profitability. Of course, there is no such thing as perfect competition in the real world. One of the tenets of perfect competition is perfect information. Anything that improves information flows would be seen by believers of capitalism to move closer to a state of perfect competition, which would provide higher living standards.
Higher living standards in the capitalist world-view would be achieved because resources are allocated under capitalism to the most efficient companies – the inefficient companies fall by the wayside. To achieve higher than normal rates of return, innovations would need to be created. These innovations would create supernormal profits in the short term, until other businesses entered the market, thereby bringing the profitability back to the normal rates of return. This is what generates progress.
If you cannot understand this, I suggest you start with Adam Smiths book, “An enquiry into the nature and causes of the wealth of nations”
I was not one of the “legion of idiots who ploughed money into the tech-wreck in 1999/2000”, but I do recognise that improved technology improves living standards. People who do not believe this are known as luddites, who were known for smashing technology.
Your knowledge of the history of railroads is almost as poor as your knowledge of economics, although at least you are consistent in that your luddite philosophy again comes to the fore.
Finally, what you said in the first mail was:
“Traditionally, long bull markets give back most, if not all, of their gains once the bust takes hold.”
What you said in the second posting was:
“BTW, I never said that over time all market bull markets were exactly matched in terms of market capitalisation changes. You did.”
What do you mean by bull markets give back all their gains once the bust takes hold, if you do not mean by this market capitalisations? If you simply mean the number the indice is at is the same...? What did you mean?
[Edited to remove inflamatory language.]
[This message was edited by Monitor_JDW on 19 Nov 2002 at 12:10 PM.] |
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Comment
by Engineer
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#1000896
of 3278
19 Nov 2002
10:39 AM |
Some interesting information over the last few days, but I'm not entirely convinced by the conclusions some would draw. I may comment more later, unfortunately too busy right now.
Andy B, I think we can safely say that the discussion is really about the short-to-medium term (eg the next 5 years). It's still not completely obvious to me what you really think is most likely to happen over this period - perhaps a clear prediction with some logical reasoning would be in order.
I'm also interested in learning a little more about your mathematical model that was mentioned on Friday. I would be interested to know what factors are taken into account by this model etc. |
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Humbug hoog
by rev.hk
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#1000895
of 3278
19 Nov 2002
09:42 AM |
Armchair economists always try to back up their theories by resorting to 'common sense'. Unfortunately most of it is rubbish. H's ramblings are a classic example.
The internet simply increases competition since it reduces the barriers to competiton. This leads to downward pressure on margins which dramatically reduces a company's ability to make long term profits unless it has new ideas that allow it to charge monopoly profits. Those that are listed are worthless since they cannot offer long-term growth prospects and don't have any good ideas.
It's not a terribly concept difficult H. although the legion of idiots who ploughed money into the tech-wreck in 1999/2000 seemed to have a hard time getting it.
The railways were laid out with the same gay abandon that fibre optics and telecommunications were laid out in the 1990s. It took almost 40 years before the benefits of the railways were felt and the original investors lost most of their money. It wasn't until there was a critical mass of demand for railway services that the effects were positive. And those positive effects were mostly loaded into the final years of the 19th century, long after the tracks were laid. Check your facts next time.
As usual H. you think that if you wander a bit from the topic you will divert attention from the issue that there is a slow motion crash that makes the UK housing market a disaster waiting to happen.
If you don't like 1991/92 as the start of the current bull market then why don't you choose 1982 when many market historians believe the boom started.
BTW, I never said that over time all market bull markets ere exactly matched in terms of market capitalisation changes. You did. |
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Empirically and theoretically wrong
by Hoogstraten
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#1000894
of 3278
19 Nov 2002
08:59 AM |
I see rev.hk has not abandoned his defeatist economic views:
“Traditionally, long bull markets give back most, if not all, of their gains once the bust takes hold.”
Untrue and absurd. The course of human history shows wealth (and share market wealth as a subset of this wealth) rising over time. Real (after inflation) market capitalisations are not the same now as in 1900 - they have risen.
“that boom began in 1991/92 and we have a long way to go before those levels are reached.”
No basis is given for why we should go back to 1991 levels – this is because no basis for assuming this exists.
“Those that use the technology as their public portal are seeing their margins squeezed dramatically since the Internet is simply a device to improve competition. There are very few barriers to entry and everyone has access to the same technology. In the medium-term, high debt-equity companies have much of their work outs ahead of them and those that simply act as conduits for information are worth nothing. The market is only slowly coming to realise this.”
You say that the Internet improves competition. An improvement in information flows and competition improves living standards – people will buy from companies that offer the most value using information flows that are more readily available from this new technology. This will improve economic efficiency, because resources will be allocated to the most efficient companies. To say that this increase in competition (and economic efficiency) has no positive real effects to the economy is contrary to both standard capitalist economic theory and common sense.
The development of the railways was also associated with a boom and bust share market. The fact is economists have since estimated that this development added over one percent per annum to GDP for the next 50 years, by increasing trade flows and so forth. The fact that some capital was wasted in the Internet boom does not mean that there will not be real and sustained benefits to living standards as a result of its development. Start again. |
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Equities, long term ......
by rev.hk
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#1000893
of 3278
19 Nov 2002
12:55 AM |
Dear Jeff.
I think the word decline was a badly chosen one on my part since it conjures up inaccurate impressions. Long-term correction would be more appropriate. (If you are interested there is a new book on long-term asset market returns called Triumph of the Optimists by Dimson, Marsh and Staunton)
In fact, the recent up-down-up-down-downs on the world equity markets are not that important. What is important is the effect of the long bull market in equities that brought with it a huge build up of debt in listed companies. Traditionally, long bull markets give back most, if not all, of their gains once the bust takes hold. How long it takes to work off the losses is hard to say, but you shouldn’t just pick 1997 as your benchmark, you need to find the beginning of the bull market. For the global standard (S&P500), that boom began in 1991/92 and we have a long way to go before those levels are reached.
Of course, this is where the internet jockies will come storming in to claim that things have changed. Well, sadly they haven’t. Those listed companies that have developed the new technology have done so through massive debt accumulation that is slowly being paid, written or restructured off their balance sheets – BT is a good example of the deflationary forces at work. This is a significant drag on the economy and the equity markets. Those that use the technology as their public portal are seeing their margins squeezed dramatically since the internet is simply a device to improve competition. There are very few barriers to entry and everyone has access to the same technology.
In the medium-term, high debt-equity companies have much of their work outs ahead of them and those that simply act as conduits for information are worth nothing. The market is only slowly coming to realise this.
I’m sorry if this is a bitter pill, but this is why I have been consistently saying that there is more to this debate than simple one-point affordability indices that don’t really mean very much on a five year horizon…the crucial period for first time buyers. You have to look at the entire household balance sheet rather than just their after-tax take home pay. See my posting #323.
Yours
r. |
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Caught up again
by jeff morgan
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#1000892
of 3278
18 Nov 2002
04:28 PM |
It's Monday afternoon and I've caught up with the weekend discussions which are without doubt interesting. I particularly await Andy B's contribution on deflation as it is something that bothers me also.
One thing the discussion goes to show is that it really is not sensible to call a single figure for percentage house price rises or falls - it's not that simple.
I also have one comment on an earlier posting - apologies but I can't remember the number and I don't have time to go back. Someone wrote that equity markets are in long-term decline.
That's just not backed up by the data. I can read a curve as well as the next man and even though I was trained to distrust them as sources I do note that the FTSE, on 4100 as we speak, has been at 4100 in 1997 (going up), in July 2002 (turning point), in September 2002 (going down) and in October-November 2002 (random fluctuations). In between was the great 'Internet Bubble' party.
This data does not support the contention of a long-term decline in equities. It does not contradict the idea either. On that hypothesis the data is neutral.
It is necessary to be clear about opinion vs. judgement based on data. It's not that one is worth more than the other, they are different ways of determining a forecast. I freely admit that my forecast of a 10% - 20% fall is based on opinion not on data and I'm very happy to be shown how the data will contradict it. But I'm not prepared to accept that other opinions are better than mine, no matter the vehemence of their expression.
The data that Andy B has presented are a sensible counterpart to my claim and others and, while I'm not forced to agree with the conclusion, I should not (and don't) conclude that the data are suspect because they point in another direction. |
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Counsel housing
by poor man
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#1000891
of 3278
18 Nov 2002
03:53 PM |
Correct me if I'm wrong, but isn't part of the problem of comparing statistics the distorting influence of the waning popularity of buying up one's counsel house? Generally these were houses at the bottom end of the market and caused a downward effect on the average house price. With its popularity declining, we see less input of artificially 'cheap' properties and are only now returning to a real market situation.
This is of course not intended to deny the real rise in property prices, but just that there has been some distortion going on. |
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medium term and buy to let - a few thoughts
by Si
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#1000890
of 3278
18 Nov 2002
03:49 PM |
Andy B - my goodness I think I agree with you! I await your and others' opinions on the BOE figures with interest.
It would also be interesting to see where buy-to-let stands in all of this. I agree with Clare that this has an effect. Just looking at the students/young profs areas that I know in Leeds and Manchester, there are clearly (anecdotaly mind you) falling rentals but rising property prices. For the savvy investor (in many cases now only ones with 100% cash, when everything is considered) there is still money to be made out of buy to let looking at short-term returns, but medium-term this may not stand up if other investments prove capable of bigger gains than the 3-5% net that buy-to-let looks like in the trendy hotspots of these cities. At least over the short-term renting is very cheap where I live now, in North Leeds, so I am saving my pennies and will see what things look like medium-term - I am clearly taking a risk but I'm not being ripped off for rent.
Further to this, Hoogstraten is clearly correct that if you get favourable enough returns then you are likely to profit in buy-to-let despite any asset-price losses, which will often be in more unpleasant neighbourhoods. One of the things about poorer areas where most of the population rents is that they can be quite scummy, and so the landlord needs to be, ahem, adept at dealing with his/her tennants. A friend of mine nearly bought some flats in a poorer area of leeds, with very faviourable looking returns, but chose against as it would involve dealing firmly with various unsulubrious types. If you can handle this lot then I dare say that there is serious money to be made. I think a ruthless touch would be necessary to maintain your investment though. |
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Daring to come back
by Clare
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#1000889
of 3278
18 Nov 2002
02:59 PM |
I've decided to take the plunge and risk putting my opinion again.
The debate seems to have shifted from "house prices are going to crash" to "house prices will stay high forever and there will be a new feudal system of rich owners and poor tenants"
I find either argument a bit much. I don't see a particular spark to cause house prices to fall by 40%, but I expect house prices to drift down over the next 5 years. Why? Well, with low inflation trading up is very difficult. In the past you could buy a cheap flat, have the debt eroded over time by inflation, gain equity and then trade up. Now the debt is eroded very slowly so trading up is hard. The effects of this may only be felt in 3-5 years (and perhaps mainly in the overpriced South East where buying a house is not a possibility for most FTBs) but it will mean that prices of second-time buyer homes will drift downwards as those who have bought in the last couple of years and who have not accumulated sufficient equity struggle to trade-up. This may be a SE phenomenon as in other parts of GB it is still possible for a FTB to afford a house - not a studio above a kebab shop and so there is less of a "property ladder" to climb.
Incidentally, I see all the info about no. of households etc but given that rental prices are continuing to fall and void periods rising (at least in London - the only area I know), then it still seems to be that the current "shortage of supply crisis" is at least in part explained by an imbalance between the rental and purchase sectors due to the Buy to Let boom. |
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Si - Medium term
by Andy B
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#1000888
of 3278
18 Nov 2002
01:19 PM |
Si: I respect the question of medium term more than any other.
Any economic shock will knock the economy away from long term equalibriums. I can be more certain of the long term or the short term than the medium term.
The short being now - so we should be able to guess todays price.
The long term being say X years - we ofcourse never get to the long term - but few believe house prices will be below todays price in say 15 years time? In the long term we see the shock/booms etc iron out to leave trends based on econonic fundamentals.
But I accept the medium term is often the most difficult - it means something to get it wrong - such as paying the wrong price for your house!
So the question I have to answer is do I believe the housing market could be seriously hit by some economic shocks - eg deflation such as Rev.HK suggests. This is a question I need more time to answer - what you (and I) want to know is will there be second chance to buy in (or buy up) in the next few years at a good price?
There is new data coming out now from the BOE etc and this deserves some attention! |
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Why immune from cycles?
by Si
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#1000887
of 3278
18 Nov 2002
11:30 AM |
Andy B,
Thanks again for your reply.
I agree that long-term a good location (of which much of the SE must count owing to pop. growth) will demonstrate long-term growth, and even limit the damage caused by a downturn. And currently, owing to interest rates, people CAN afford a higher debt burden.
But in the medium term I do not see how this debt burden, and hence the valuations it supports, should be immune to cyclical influences (I won't go into detail as these have been discussed before). I would suggest that you could get a better price on a house in a few years' time, but that if you bought wisely in a good area now then the long-term gains would outweigh cyclical medium-term losses. A possible example of this cyclical nature can be seen in the quite isolated example of city-bankers' properties of £1million+ having lost value in the last year...? I'm sure they'll regain it, but 2 years ago was not a great time to buy, especially if you don't get a bonus this january.
I would appreciate your opinion on this.
Thanks again for your previous comments. I hope the rest of the forum can continue in a more respectful manner. |
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Davo age issue
by Andy B
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#1000884
of 3278
18 Nov 2002
10:16 AM |
Davo, I note your points and will get back to you in more detail. Also Si. Just to clarify my findings I pointed out the under 25 bracket had reduced from 30% to 17%, for FTB. This loss of 13% has moved into the 25 -34 (up 8%)and 35-40 (up 5%). A subtle difference - the average age of a first time buyer is roughly 34. This person is in a stronger income position, is more responsible and is putting down a much bigger deposit - rather than gearing up. These people are being careful, they enter the market later and want high quality.
The consequence of my analysis is that you will get a dual house economy. This will be most obvious is areas like Liverpool or Manchester. Manchester has areas such as Hale which have the most expensive housing in the country - yet it has areas where you can buy a whole street for £12,000. But people will not live in those streets - they wait until they can get on the ladder in a better area. They achieve this not through wage inflation but career progression - and real wage increases.
I suspect if you want a house in the future you will have to give up more of your real income. If you like renting then that's fine - but consider this:
If renting is cheaper in a good area, with good schools, and the landlord is not getting the return on the rents, but you are renting because the market price (to buy) is to high - THEN what do you when the landlord sells to the chap who is prepare to buy. The Landlord wins, the chap buying is happy - his kids take your kids places in the good school!
They are the rational thinkers - and you move to the £12,000 street? I think not, you will out bid to keep your kids in a good school.
Then you get a ripple effect outside this area, but you are also left with the no-go zones. |
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Housing
by Mr X
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#1000882
of 3278
18 Nov 2002
07:04 AM |
To all the doom mongers - as I expected. I put forth a rationale to explain why property prices are still affordable and then wham, in come the DM's with cry's that the area must be wrong, jobs are not there etc, etc, blah, blah, etc. The case of a £12,000 house in Hull was cited was cited to mind by a previous posting. Please,open your minds - take a good look at the website previously cited - fish4 home. The key in the following few towns / cities in addition to Hull - Derby, Nottingham, manchester, Liverpool, Birmingham, Leicester, Newcastle, Sheffield, Scarborough etc etc etc to name a few [I can many, many more]. You will see that there are many under £50,000 and a vast majority well under £100,000. Apply the average wage in these areas [national Statistics] and work out for yourselves the affordabilty ratios.
I very much suspect that the reason we have such opposition is due to the fact that there is massive shortages of housing in certain parts of the UK primarily in the South East. And it is THEY, the opposition, that are struggling to buy - get upset and try to justify their position by banter. Regretably, that is the sad fact of life. Demand and Supply. They are the ones that are outside of this circle I refered to in a very earlier posting as they cannot raise deposits etc.
Also, there are far worse areas in the London area for example, where prices STILL remain high and with a high property tag.
Thanks Hoogstraten for your very eloquent explantion of your dual economic analysis of the likes of many on this forum, as an attemt for an explanation as to why property MUST come down.
Soory you guys !! |
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