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| The UK housing market: a bubble about to burst? |
Let them eat cake....
by Hoogstraten
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#1000962
of 3278
 21 Nov 2002
12:19 PM |
Stuthepooh,
There is no bread to feed the poor. Let them eat cake!
The “FTBs can't afford to buy due to ever increasing multiples of loan/salary”. Let them live on the streets!
Although I am completely comfortable with this conceptually, I do not think this vision will come to pass.
You say:
“Have we entered a new low inflationary environment? Let's assume we have, and medium and long term end of the yield curve are half historical norms and will stay that way.”
If this assumption is realised, the rest of your analysis will flow from this assumption. However, your assumption is a bold one that modern history in the UK does not vindicate. On what basis will the long-term end of the yield curve halve and stay that way? The UK has an Old Labour Government, whose policies are not consistent with this outcome.
“It all depends on the assumption of long term interest rates.” Indeed it does. I think that to “assume a return of long term interest rates to historic norms” is more realistic in the medium to long run; hence the other predictions would be irrelevant. Inflation will come again at some point (not soon by any means) – this will be when the housing market could crash, as the BOE will be forced to ramp up rates.
Until this occurs, there is no transmission mechanism to trigger the wholesale collapse of the property market. The financial markets have taken enormous hits in the last two years, yet the property market remains reasonably robust, although a sharp slowdown is perhaps overdue.
I think it is incorrect that “the ratio of renters/owners will rise (to something more like continental levels)”. The UK has different values from continental Europe – apart from some of the more lovable rogues who nuisance mail this forum, I think most people in the UK want to own their own property. This is an entrenched part of the culture.
The fact of the matter is that people in the UK will generally get on the property ladder by whatever means possible. Failure to do so would mean that your retirement is spent in poverty. The short-term prospects for property in the UK is arguable – in my view, all empirical data from UK history would indicate that the long-term prospects for property are for higher real prices (due to both population flows and increasing economic wealth over time). Keynes said, “In the long run, we are all dead.” He might have added that if by some fortune you are alive in the long run,
and you have never bought a property; you might as well be dead.
In this context, the many people on this forum express the view that property has “peaked”, are simply taking a short-term view, and should take a close look at longer-term considerations as well. I think this is the position taken by Mr X – but it does take a combination of courage and a hint of desperation. I could be wrong, of course, and the meek could inherit the earth....
To the doom mongers who believe in imminent and wholesale property crash. Often, the theories are based on stock market type scenarios and volatilities. This misunderstands that the price of all asset classes does not act in exactly the same way.
There is no doubt in my mind that property prices are “sticky” on the downward side. This is again a Keynesian idea, and I think it has some truth. More support levels exist with property, because the price of default of the mortgage is catastrophic to the individual concerned – they can be declared bankrupt, and the rest of there life destroyed. In these circumstances, they will work 2 jobs, or whatever it takes, to meet the mortgage payments. They will in most cases therefore not be forced sellers, as is the case with insurance companies on the share market have been in recent times.
Finally, I note that there is a lot of talk that the current conditions of the supposed “credit crunch” have not been experienced since the Great Depression. I could be wrong here, but I thought the Great Depression was caused by Andy.B point two, being a liquidity trap, rather than a credit crunch? |
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Question for Jeff
by Hermit
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#1000961
of 3278
21 Nov 2002
11:32 AM |
Do you have any more information on the houses in Wales for £100? Where are they, who is selling them? I am surprised by this figure!
I have been looking at house prices in Wales and in general prices have risen dramatically in the last year, along with the rest of the UK. |
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Agreed - Knowledge is Power
by Andy B
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#1000960
of 3278
21 Nov 2002
11:14 AM |
You make a fair point and it should be respected for the social issues it raises.
Maybe my theme in general is that on the demand side buying a house is driven by people making a life time decision. Using simple utility theory - we have a choice to live with or without owning our own house. To live with a house is at the cost of something else. There is nothing irrational in renting until you want to settle down or just buying something below your long term expectations.
If the majority of people chose to enter the housing market later rather than sooner there is no reason to assume prices will fall for good housing.
Using average wages of single people compared to house prices is in my view not matching the right components of the main house market demand curve with the (supply curve) pricing we can see in the market. If you go into an estate agent - Are there just lots of 25 years hanging around waiting for the right house? or can they not get in because of the baby buggies being pushes by the 30 somethings.
20 years ago those buggies were being pushed by 20 somethings - times change - we live longer - fixed resources like land don't change. And houses are not being built quick enough.
But if you take this out of context and say "hey I am 25 I should have a house like my cousin (15 years older than me)had at 25" - then you will be disappointed. |
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Don't mean to Pooh-Pooh you Stu, but...
by Rob G
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#1000959
of 3278
21 Nov 2002
10:51 AM |
Who cares if FTBs can't afford to buy due to ever increasing multiples of loan/salary?
Are you for real?
Tell that to your children. They'll probably still be living with you when they're 40.
So presumably as well as doubling house prices you'll also suggest doubling rents so that the ROI for these property investors can be realised more quickly in the new captive tenant market.
Oh sorry, but that would increase inflation though, right?
Whoops, not such a smart move.
Talk to the hand, mate. |
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To buy or not to buy
by Knowledge is Power
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#1000958
of 3278
21 Nov 2002
10:44 AM |
Andy B,
you said:
"SO - If you see a house, in a good area, with good schools, and you have kids (or planning to) and you can afford to pay, with a reasonable deposit and a buffer for a few points rise in base rates - then you should buy now. As I have pointed out before the average deposit is still 20%, the average of FTB is 34, they tend to be a working couple. If you are 25 in your first job and no partner, with plenty of uplift why expect to out bid the 34 year old couple? Is the greed in those that can not buy yet or those that can?"
I agree with your underlying comment, people should buy, but only if they can afford it. However in current circumstances there are many out there who aren't doing this. (e.g. 50 yr mortgages, high multiples, 100, 110, & 120% mortgages)
But, your point about FTB age is an interesting one. Hasn't the age of a FTB been risinf over the last 5 years, as prices have rised (something like 26 to 34 yrs?). So, 5 years ago, 20 yearolds looking at 25 year olds saw them buying houses. Now that they are 25, they cannot do the same. I think it's fair enough for people like this to feel left out & a bit bitter?
Just looking at it from the other side of the street. |
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Singapore
by Andy B
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#1000957
of 3278
21 Nov 2002
10:16 AM |
Rev.HK Thank you and H for your replies. I admit Rev.HK I am a bit short on time at the moment and missed out Singapore for no other reason. Though, it is hard to draw parallels with Singapore given, it, like Hong Kong, is very unique in nature.
I will have at look in a bit more detail to check there is nothing which worries be about my thinking on the UK housing market but due to some work pressures it will have to wait. You are welcome to provide some work here yourself if you have the time! Your instance do you have data on Singapore's main economic structural factors behind house prices - as I have presented on the UK. Please note the BOE (page 12-13) have working in the back-ground on comparing the UK to other US-European countries.
They have started to publish some warning about the longer position on UK housing but I guess an economist in the BOE pointing out such structural problems at present will probably - at best - be told to tune down his writing (in the BOE reports) and at worst be seen a trouble causer.
Maybe you can contribute to this debate through some detailed analysis of your own on the Singapore housing market and linkage with the UK house market drivers.
Warning to the Chart Watchers:
We are getting a high number of people focusing on the Halifax and other organisations short term inflation figures. The Rightmove analysis is highly flawed statistically - given they have started with one government source for historical inflation and then used there own for the hockey stick.
The BOE,in their latest report, have warned the market the following:
"But monthly house price inflation can be quite erratic. It declined, on the Halifax measure, from 1.8% in July to 0.2% in August, only to rise again to 4.4% in September...." & " Consquently, economic commentors tend to focus on annual measures"
Ironically they then go on to use the Halifax data to assume inflation of 25% to 30% - evidence of more than one person writing this report I think!
Jeff Morgan has a feeling that hosue prices will fall back 10% to 15%. If I said that house price increases would only be 10% to 15% this year - once we have all the data and can adjust it for house type mixed and region etc. Are we saying the opposite or the same, when comapred to a base of 2001?
Again, I see even more posting have been focussing on the structural economic drivers in the UK market - all these posting so far - seem to point in the same direction in terms of long term prices.
SO - If you see a house, in a good area, with good schools, and you have kids (or planning to) and you can afford to pay, with a reasonable deposit and a buffer for a few points rise in base rates - then you should buy now. As I have pointed out before the average deposit is still 20%, the average of FTB is 34, they tend to be a working couple. If you are 25 in your first job and no partner, with plenty of uplift why expect to out bid the 34 year old couple? Is the greed in those that can not buy yet or those that can? |
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Well done Jack Straw
by Knowledge is Power
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#1000956
of 3278
21 Nov 2002
09:11 AM |
Jack Straw,
Congratulations at discovering www.findafamousquote.com clearly you are making the most of it!
here's one from me "stop flogging a dead horse."
Andy B,
Right Move's latest data reveals 1) a cooling market, & 2)alarming salary to house price levels (it's worth a look)
http://www.rightmove.co.uk/p/pdf/hpi/RealTimePropertyReport20November2002.pdf |
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A lovely example of risk taking bearing fruit
by rev.hk
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#1000955
of 3278
21 Nov 2002
04:21 AM |
Dear Mr X.
Your story about using multiple renters to pay for a highly stretched mortgage is a great one. I was talking to a lady this morning who bought a house round the corner for me at the time when Maggie signed us away in 1984. The local economic outlook in those days was indeed very bad, but she went for it and did precisely what you did. Her multiple was pretty much like yours and she spent years paying the bank in much the same was as you. Now she has a cracking flat worth about 20 times what she paid for it and is very happy.
I, for one, believe that you deserve credit for taking risks and having the courage to see them through.
But, I was wondering about the UK as it is now, with a huge number of BTR properties and a massive shakeout occurring in the City and other financial services industries. Do you think that today's young people in the UK - after escaping Mummy's prying eye and getting a 'place of their own' - will be willing to take on tenants before they start to have financial difficulties?
I only ask this since I have read a number of public statements by financial institutions where they voiced concerns about the young and their attitude towards debt. I don't mean affordability, I mean do they have their heads screwed on?
Yours with much respect
rev.hk
PS. I own a house in the UK. And although I bought it with cash, I have nothing to gain from a collapse. |
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Deflation will strike when you least expect it.
by rev.hk
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#1000954
of 3278
21 Nov 2002
12:29 AM |
Dear Andy B,
Thank you for your response - although I note that you have tried to evade the more difficult parts.
Some time ago you asked me for examples for housing market deflations. I gave you three, not one. Of these, I think we'll all agree that Japan is a special case. Hong Kong, as we both noted, has a fixed exchange rate and no room to restart base money growth without a BOP surplus....although the price collapse had nothing to do with the currency board and everything to do with stretched prices. The currency board only made things worse.
The final example I gave you was Singapore which has a managed exchange rate....i.e the authorities manipulate the exchange rate to either lower or raise domestic inflation. In 1997, the Monetary Authority of Singapore (MAS) moved quickly to reduce its exchange rate once domestic inflation began to fall. Sadly, the Lion City still has deflation even though it doesn't have a large deflationary neighbour. Your notions therefore have a few holes that need patching.
Technically, the rest of your posting is otherwise correct - although I suggest you read up on the deflationary effects of bursting bubbles (this one is the biggest ever) and try to give us some practical examples of why you think the central banks in the G7 are moving swiftly enough to cut rates when there are growing signs that the US consumer is beginning to waver and benchmark equity indices are still a third higher than their historical norms.
The bursting of this bubble is putting tremendous downward pressure on prices around the world and central banks are still fighting inflation...which is dying. That UK house prices haven't fallen yet is not something to be celebrated. It is something to be feared since more people will, undoubtedly, be sucked in before the final plunge.
There are many good investments to be made in a difficult market. Property is certainly not one of them. |
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When to Buy
by Mr X
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#1000953
of 3278
20 Nov 2002
09:15 PM |
To all those who are waitung - very simply, you have to decide whether to go into the market now or not. When is the right time ? No ome knows for sure. You can speculate, conjugate etc but like the majority of FTB's who want to make a life for themselves and acquire long term gain, then anytime is a good time - provided that you ensure you are well protected. Many people believe that just because they are renting, somehow protects them from being thrown out of their homes. It does not. You do not pay the rent, then you are out anyway - period.
Its just unfortunate that FTB's (or a lot of them) are in a position similar to what a mojority of people were in when they first bought. In my personal circumstances, over 20 years ago, I re-call assessing my options to buy. During my training, my salary was low, and when I bought my very first property, found my earnings to price ratio in the region of 6.5. How did I protect myself ? I rented out 2 rooms [at a tad below mkt rate], ensured consistency of tenants, and this made a huge contribution to the mortgage payments.
FTB'. Long term, you will never get rich renting and thats a fact. |
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Interest rates
by stuthepooh
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#1000952
of 3278
20 Nov 2002
09:02 PM |
Have we entered a new low inflationary environment?
Let's assume we have, and medium and long term end of the yield curve are half historical norms and will stay that way.
Property is an income generating asset. Halve interest rates therefore double the justified price. As the price of property (rentals or purchase price) is closely linked to earnings, it follows that the price/earnings ratio, now at a historic high, should double. Prices are therefore at or below equilibrium.
Who cares if FTBs can't afford to buy due to ever increasing multiples of loan/salary? If there is a demand for housing at the lower end, it will be filled by investors, and the ratio of renters/owners will rise (to something more like continental levels)
Falling rental yields? Assuming long term 3% capital growth (in line with earnings, not unreasonable), most areas (including London) still represent economic investment projects.
It all depends on the assumption of long term interest rates.
Yes, assume a return of long term interest rates to historic norms (unlikely) and the p/e ratio must fall back to historic norms also. |
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Liars Poker
by Hoogstraten
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#1000951
of 3278
20 Nov 2002
08:47 PM |
Andy B., I find your comments in posting 911 very interesting. I think when people make forecasts; it helps if they have at least a basic understanding of economics and econometrics. Sadly, I imagine that not many people will read your mail, since most of the scribblers on this site would not know what an Aggregate Demand curve was if it hit them in the face (it is a very long time since I looked at this stuff myself).
Some contributors link the latest newspaper, with a shrill headline, and throw it on the site. On this subject, I note that one contributor demanded his say on this site, only to trot out the old affordability issues that I thought had been resolved a week ago. A mob of these clowns then turned up, showing that they have not understood any of the mails of the last 2 weeks, or had not bothered to read them.
Point one you make, that increased technology and growth are a rationale for deflation, is obviously correct in a trivial way. As you say this would be a deflation associated with increased GDP growth, and hence the deflations triviality. Any deflation could then easily be eliminated by the BOE. I think you have explained it better than my clumsy attempts. However, as you say, “Rev.HK can stand on his own here - I can not find any serious economic text book to really accept this is the reason for a Depression!”
Point 2, that people decide it is better to save than spend, is not particularly applicable to the UK. If we are to believe anything from the doom mongers continual mails, it is that people are prepared to borrow and spend.
DryMartini is clearly arguing point 3, bank credit deflation. I would say to his credit that this is the best argument of the 4 for deflation in the UK market (in fact, the other 3 are so remote as to be virtually impossible in the UK given present economic circumstances). DryMartini’s desire for quick rate cuts is also consistent with solving the problem, should it arise (of course, DryMartini is arguing that it already has).
I do not accept we have a credit crunch yet. I would accept that there is a tightening of credit spreads, with the result of slight erosion to the retail banks’ profitability.
I believe that a credit crunch will not develop because:
(a) The banks would have to have been very irrational in their lending practices in the past. My experience of the retail banks lending practices are that they are more robust than the doom mongers give them credit for. This lack of belief in the robustness of retail banking lending policies is possibly explained by the fact that most of these doom mongers do not have mortgages, and hence have no experience with the process.
(b) I believe the quality of the banks’ loan books would have to deteriorate considerably from the quality that exists at the moment, in order for a serious credit crunch to develop. Given present affordability ratios I do not expect widespread default on mortgages. There would need to be a massive shock to trigger a significant increase in default. This would have to take the form of higher base rates (the BOE is not going to do this in the foreseeable future) or huge redundancies (unlikely, as the fundamentals in the economy remain robust).
(c) Finally, as you say, there are clearly policy options to prevent there being a systemic problem. The money supply can be adjusted, and further rate cuts can be implemented, if the credit conditions were to deteriorate further.
Clearly, even with New Labour in power, point 4 is not relevant.
I think your poker hand is at least 4 of a kind – see if the doom mongers can beat that. Mind you, I think you should check the doom mongers credit ratings before you play them – not sure that they are too financially robust. Finally, care must be taken that that there current pair of twos doesn’t miraculously become a Royal Flush by fiddling the figures.
Cheers,
H. |
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Jack
by Rob G
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#1000950
of 3278
20 Nov 2002
07:28 PM |
Jack,
I don't eat in McDonalds as a rule, but assuming I did, I wouldn't pay £10 for a cheeseburger just because a friend was willing to loan me £10 till Monday.
Just because you *can* borrow to buy something doesn't mean you should do so.
People throwing caution to the wind and not looking beyond the next paycheque if the name of the game at the moment.
Those people will live to sorely regret that action.
I would even press for legislation forcing borrowers to undergo independent financial counselling before they were allowed any credit greater than 100% of their gross annual income.
When you accept a redundancy package you are made to seek legal advice, so why not for something arguably far more important. |
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"Everything should be made as simple as possible, but not simpler." - Einstein
by Jack Straw
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#1000949
of 3278
20 Nov 2002
06:38 PM |
Rob G, you are a darling! When you go to McDonalds do you purchase a Big Mac based on its affordability or by analysing its price in relation to your salary? I fear you follow the old dogma; in a fluid market we must be sensitive to changes in the shape of the market. One proverb I’m familiar with that has some relevance here is,
“He who cannot agree with his enemies is controlled by them.”
- Chinese proverb
The UK is heading towards unification with Europe, which will inevitably lead to lower interest rates than would be set by the BoE. Thus house prices will spiral higher, or in your terms the income multiples will rise from the prescribed 3.5 times salary. The market is not,
“ Like entertaining your lady friend. Even if you push the right buttons you do not always get the right result.”
Jack Straw
Markets are fluid and confound a dogmatic, prescribed approach. One must consider all variables influencing the market.
“To prophesy is extremely difficult - especially with regard to the future.”
- Chinese proverb
You make no reference to my figures and the increase in demand but follow the same doctrinaire approach. This inflexibility the US claim has led to our low productivity levels in the UK.
The reason we must look at payments in relation to salary is that we are looking at affordability.
“Your true value depends entirely on what you are compared with.”
- Bob Wells
Nothing creates a crash like peoples in ability to pay. That is why the relationship between the multiple of salaries to house prices to changes has some baring but is not fully relevant as the only figure.
The rigid approach that first time buyers won’t buy since income multiples to house prices is a fallacy. It fails to take into account the nation as a whole and price sensitivity between areas. I presume you believe all buyers nationally are aiming to buy in the same street in Clapham Common?
I’m a bull and remain so! You also appear rather irrationally to ignore the fact that mid to long term prices will be above levels they are at now, as I quoted in my previous message. But time will tell, but I will not be so presumptus as to force people to follow my doctrine as you do, after all,
“It is unbecoming for young men to utter maxims.”
Aristotle |
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Greenspan Genius v Rev.HK Deflation - a game of monetary poker
by Andy B
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#1000948
of 3278
20 Nov 2002
06:19 PM |
The Rev.HK has layed down the challenge of Deflation, a true ace of a Card, and it has to be address to move the debate forward.
Firstly I asked for an example of when in modern economic history the UK property market saw a 'bust' without a reasonable increase in interest rates. No one could think of one, but to his credit, Rev.HK had examples in Asia.
I came back with the reply that there is a very big difference between an 'Inflation Economy' like the UK and a 'Deflaion economy' like Japan or Hong Kong etc. So Rev.HK played the card of deflation in the UK and therefore house prices - in long term (as well as short/medium) could collapse!
Before I address anymore specifics and having read the latest raft of postings on the subject, I thought it best to clarify, my understanding of Deflation drawing from Salerno's work ' An Austrian Taxonomy of Deflation', (Sorry Schumpeter fans) and some more basic macroeconomics.
The key to delfation is its source - and there are four known possible sources:
1. Technology & Growth - The world advances (eg Internet, railways, etc...) and so goods are produced more cheaply or of higher quality. The theory then goes that the Aggregate Supply (AS in the text book) curve moves to the right - so we have more produced at any one general level of prices 'P'. Other things being equal, including the Aggregate Demand (AD) in the economy, then the general price must fall to a lower equalibrium. Then you think of lots of examles eg computers prices, cars - all either get cheaper or better at the same price. HK.Rev has used this one and met significant resistence from H.
But the examples are all at a micro level, not macro! At the macro level this technology improvement is represented by increased GDP and 'Real Growth' due more efficient use of our resources. Labour inputs earn a higher return due to greater productivity, a higher skill base, and in general there is greater reason to consume - more to consume etc. This process stimulates the AD curve to move right and maintain Aggregate Price Equalibrium and even push up the nominal price level in the short term. Rev.HK can stand on his own here - I can not find any serious economic text book to really accept this is the reason for a Depression!
If the AD curve does appear to not be moving quickly enough to the right then the monetarist reduces interest rates and this stimulates demand.
2. Cash Hoarding - eg Japan today. People decide it is better to save than spend. The bank accounts build up but banks have no-one to lend it to therefore Saving (s)outstrips Investment (I). In the monetarist text books we look at Pe being the expected future price. The theory goes that P (present price) and Pe (future price) are linked by the nominal interest rate 'i'. (P/Pe)*(1+i). If Prices (Pe) are rising then you can buy now or pay more in the future - an economy with inflation creates the rationale to buy enough now to keep the nominal price rising. If savings outweigh investment then you drop the interest rate and relax the money supply. This increases demand (AD curve up & to the right), you generate a little more demand and some inflation. If inflation gets a bit to high then you raise interest rates etc. But if 'i' is zero then you can not stimulate the economy any further through this 'Monetarist Poker Game' - you run out of cards.
This is sometimes also called the 'liquidity trap' (I have skipped the economics about AD curves gradient being derived from M/P). The theory goes on to conclude people want a real interest rate so P is pushed down below Pe and a cycle of grinding deflation can destroy the economy. The US Fed have studied this in Japan in great detail - because it appears to be the royal flush against in the Monetarist Poker game. Reading this forum a lot of people maybe getting worried about this, but in the Feds paper 'Preventing Deflation: Lessons from Japan's Experience in the 1990s'(June 2002), they conclude that Japan had amble time to avoid this. They failed to reduce interest rates in 1995 - infact the BOJ had a policy which ingored the monetarist theory above - In 1998 BOJ Governer said ' The BOJ's policy is to seek stable prices, not inflation nor deflation' - he was proud when the economy hit zero inflation (and ran out of cards to play) even then he could have saved the day - but instead grinding deflation was ALLOWED to happen! This is one reason why Greenspan keeps cutting rates quickly - he knowns you only have a limited number of cards to play, in a limited amount of time and you have to play the best cards early to bluff your way to victory!
3. Bank Credit Deflation - This is the near opposite of 2. Here we borrow to fund the AD curve and economic growth rallies ahead. But, as the theory goes, the banks lend too much, there is not enough savings, so they run out of cash to lend and we get the 'Credit Crunch'.
There is a run on the banks and the whole economy crashes. The AD curve shrinks and the AS is left hanging for a while before shrinking also. But do you really believe this? Salerno doesn't and neither do I. He believes that at worst you do get a crash in nominal prices but in the lomg term the real economy benefits from the correction to nominal prices - correcting quickly pricing errors of the past. I believe, like many others, that in the real world of the monetarist led Governments (& Central Banks) intervention occurs far too often to allow the Salerno solution to even be tested out - too easy to expand the money supply to bother with seeing if he is right.
4. State led factors - You can ofcourse create deflation. If you want any tips then ask Argentina. Here they stopped savers taking money out and created a deflation economy from scratch. Then there is Hong Kong.
This was one of the riches cities in the world, it had been seen as one the closes examples of true capitalism in the world, with a flexible labour market and open free trade markets. Yet it was a distaster waiting to happen, a small boat ,riding the rough seas of economic cycles.
I have looked closely at the report by the IMF Country Report No 02/99 May 2002 (available from their website - sorry for no url) -titled People's Republic of China (PRC) - Hong Kong Special Administrative Region: Selected Issues. HK was hit by several economic shocks in the mid nineties. These rocked the economy like 30m waves (reference to the BBC 2 programme last week) against a tug boat out at sea. Unemployment went from around 2% to 6% very quickly as HK was hit by the Asian crisis. Note: Hong Kong has a fixed exchange rate, unlike say in the US were the dollar has weaken in 2002. At the same time this small country was about to be absorbed by the Giant of PRC, a country with a lower cost of living, lower cost of labour and an amble resource of Land. Aggregate demand falls. Basic theory dictates that if demand falls (AD) then other things being equal, so will Prices, but applying monetarist theory you simple relax the money supply and AD rises back to maintain equalibrium - but there is no free lunch and infact the currency should weaken to the external currencies. But if you have a fixed exchange rate then you can not relax the money supply effectively. The equalibrium is still met - but via asset price falls rather than a fall in the nominal value of your currency.
In HK prices had to fall and so the risk of deflation arises. For deflation to take full effect though you need people to believe such an event as these price falls will continue! This is quite logically in HK since we saw a country about to be integrated into PRC with lower prices, hence Pe become lower than P.
Now how does this effect the UK housing market? Answer: you have guess it not at all!
PS I have noticed others have woken up to the fact you need to look at the structural factors in the UK housing market. Supply restricted, ageing population holding on to resources, household incomes not just average wages. My arguments are that this a reason for a 'Real Price' increase in the UK market - regardless of nominal prices. If we get hit by the 30m wave that will not change and infact if it slows down house building then it will get worst.
PPS - Not sure I agree with some of the so called BOE quotes posted today and I have read the report in detail. I'll say no more, except I suggest you all read pages 12 & 13 of their report.
Regards,
Andy B. |
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