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| The UK housing market: a bubble about to burst? |
Musical chairs
by MutzNutz
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#1001011
of 3278
 23 Nov 2002
02:33 PM |
Jack Straw
Its like at a childrens party - when you play musical chairs the one left without a chair has a tantrum and know the game is fixed. But when they win its fair! LOL good luck
This anology could well be used from the other side. Only time (6-12 months) will tell |
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doom mongers
by Jack Straw
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#1001009
of 3278
23 Nov 2002
12:08 PM |
kip
Isnt it funny the board is split between
1. people who believe the market will drop
2. people who think it wont
as a rule of thumb the two opinions above can be corealted to the following camps
1. people who do not own but wish to enter. therefore they want property prices to drop until they buy and then rise again.
2. people who own
how amusing that camp 1 all wish to enter, and then make capital appreciation!
Its like at a childrens party - when you play musical chairs the one left without a chair has a tantrum and know the game is fixed. But when they win its fair! LOL good luck
[Inappropriate name-calling removed]
[This message was edited by Monitor_CS on 23 Nov 2002 at 01:47 PM.] |
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What is the pin to burst the bubble?
by AHP
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#1001008
of 3278
23 Nov 2002
09:33 AM |
To Lulu,
I think you are missing my point. I know that people in the last crash
experienced a devaluation in their property without selling it. This was
because a large number of people were forced to sell due to unemployment or
interest rate rises and thus brought the value of houses down as they
desperately tried to undercut each other.
My point is that this was due to a large number of people being forced to
sell, there must be a critical mass of sellers that would cause the prices
to drop. For example if in one area Mr A puts his house on the market for
20% less then all the others around him (for what whatever reason) that
doesn't mean all the other houses all around him are suddenly worth 20%
less! It just means he's an isolated case. But if X number of people
suddenly do the same (probably because they are having to) then that changes
the picture its no longer an isolated case and the perceived value shifts
downwards.
The question is how large is X? I don't think the people being made
redundant currently will create enough critical mass to turn the market.
Singapore D,
You may be right and the current numbers of redundancies maybe enough to
trigger a substantial downturn but I don't think so. I think that if we had
got to a point where these people were being forced to sell their houses we
would have seen other signs first, such as a substantial drop in the
purchase of luxury goods and Porsche 911s going cheap just like the end of
the eighties. But this is not happening.
I don't believe there will be an crash very soon just a period of time when
prices don't go up by much more then inflation, until such time as interest
rates or unemployment makes a significant shift in the opposite direction. |
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Prices are too high
by Richard
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#1001007
of 3278
22 Nov 2002
11:20 PM |
I have read quite a lot of posts here and I was quite confused why the statistics put forward by Andy B would have such a big effect on house prices suddenly. The post by Engineer is much more logical. I agree with the three main reasons for the boom and I think the other things have had a much smaller effect.
I am not an expert in economics but I think that there will be a drop in prices because the redundancies in high-paid jobs will make people sell houses in the areas where there have been big price increases and nobody will have enough money to pay the prices as they are now. It is not affordable now for most people.
Why do people think that interest rates will stay low? The Bank of England has to try and keep inflation low, 2.5% but if other things that are happening around us start to make inflation go up then the bank will have to increase the interest rates to make the inflation figures meet the target. There are lots of things like the firefighters pay demand which could make inflation start to go up and this is just the start?
So I think that inflation will stay low because the bank has to keep it low but interest rates might go up. This will make big mortgages very expensive and houses will be even more unaffordable. But if inflation is low then big mortgages will not seem to become smaller with time as quickly as when inflation was high. So people with big debts will suffer. People are making a big mistake borrowing too much money right now. I think prices could drop quite a lot when people have problems paying debts. |
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over- and under- compenstion to investment risk
by Si
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#1001006
of 3278
22 Nov 2002
05:43 PM |
Before going to sleep last night, I thought about this interesting debate that I've been mostly just observing.
Anyway, it struck me that, clearly, short-term, a great deal of so-called 'inflated' prices are justifiable along basic investment criteria, and over long-term trends are fair enough assuming demographic and economic plenty. Counter-argument against house-prices is being made saying that these long-term trends aren't very certain (deflation or just plain emigration.).
Even with things staying more-or-less the same (the inflationists’ view), there is a caveat to the fair-value: investors are not expecting any strong price-falls, neither that it may ever become difficult to sell. That is, the extra percent or two that they get on top of what they'd get in a good alternative investment, is very small compared to even quite modest losses or gains in house prices. A great number of investors are amateurishly over-exposed to property and this FEELS like a big issue, irrespective of long-term value, but mostly positively (price-rises being the icing on the cake).
As long as this big issue shows itself as gains and houses are easy to sell then confidence will remain high and even very small margins above alternative investments will be justifiable.
Now (big IF) if we do see some modest falls across the board then this confidence may waver in many over-exposed investors, who would instead require much bigger returns in property to justify investing, esp. when houses may prove harder to sell at a capital profit. Thus perceived value in the property market may take a big hit, and a new equilibrium level, taking into account perceptions of much greater downside risk requiring greater income as justification against the risk, may establish itself. If it did, then it may undershoot. I’d still guess at long-term value, I have to admit, but people will be sheep.
This variability in perceptions of property as investment may somehow contribute to the 3.6 times income multiplier that many 'old-school'* commentators in the UK broadsheet press, as well as some of the commentators from Nationwide, Halifax, et al, rely on. Empirically discovered relationships in the realms of natural sciences often end up with derived proofs explaining why they have specific numbers to describe specific phenomena. I wonder if the same could be said of the 3.6 number in economics, in the UK property market? Has there been a fundamental shift, up or down? I am unqualified to comment on, but fascinated all the same by, deflation, labour-mobility, etc. Or maybe sensibly invested fair-value income/price defines the top of the property-cycle, and doom-laden financial mismanagement (govt and individual) may define the lower end.
* I say 'old school'; this is entirely my description based on these people sounding like they think they've seen it all! |
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Statistics etc
by Engineer
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#1001005
of 3278
22 Nov 2002
04:54 PM |
Andy B, you have provided some interesting statistics, but I would provide a quotation from Winston Churchill warning about statistics if I didn't think that there had been more than enough quotations posted on this forum recently! I suspect you can guess what it is.
One of the problems as I see it is that the housing market is affected by a great many factors, and it's hard to judge the relative importance of these different factors. Without this information we can't really judge the significance of the statistics for the particular factors that you have presented. I had hoped that you might be able to list a wider range of factors used in your economic model that you mentioned last Friday, but I haven't seen that information in any of your postings yet.
Another problem is that the same set of statistics can be interpreted in different ways by people trying to justify different positions. For example, you provide statistics illustrating that the average age of first time buyers has increased, and suggest that this justifies higher prices. But surely married FTBs in their 30's would be looking to buy a different type of property to singles in their 20's? Who has then been buying the low-end small properties that might have previously been bought by people in their 20's? I would guess it must be the new breed of buy-to-let investor. How does this affect your conclusions?
One could also argue that the reduced number of young (20's) FTBs indicates a shift in the utility curve away from house-buying by the younger members of society, which is the opposite to what you have suggested. As others have pointed out, the last census revealed that there were significantly less young males in the country than the statisticians had expected. Young people can and do spend much more time abroad than was previously the case. Perhaps some of them will simply stay away if they are unable to afford a realistic place to live when they consider returning. With increasing globalisation, I fail to see why young educated professionals would choose to live in a country where they have to overstretch themselves to buy anywhere to live, when this is not the case in a number of other perfectly civilised countries. These people now know about the alternatives open to them, as they are generally well-travelled.
The statistic illustrating the gap between households and dwellings is also interesting. I'm not convinced that it can be used to draw your conclusions, however. As you say, many people remain single for longer now, resulting in an increased number of households. However, I know of many young single people who share houses, and actually enjoy living in this manner with their friends. In these cases there are simply more households per dwelling. Hence it is difficult to judge whether the impact of this statistic will have as great an effect as you suggest on the demand for houses.
Personally, I suspect that these demographic changes (along with a gradual increase in overall wealth) may result in gradual long-term increases in prices, but I don't believe they can be used to justify the massive short-term increases in recent years. I suspect the recent boom has been largely driven by:
(1) A rapid in increase in well-paid jobs and general wealth due to the general economic and stock market boom etc and the resultant feel-good factor.
(2) Increased demand from the buy-to-let sector, partly as a mechanism to try and guarantee a decent pension due to the problems in that area, and partly just to get in on the band-wagon once the trend had been noticed.
(3) Then lower interest rates as a consequence of the worsening general economic conditions have sustained the boom by making high borrowing appear to be affordable. Some people are afraid of missing out forever if they don't buy, and others believe the story that prices can only keep going up.
Now the reality is that cause number (1) has either disappeared, or is in the process of disappearing. Cause number (2) is looking much less viable in some significant parts of the country, with rents declining etc (and I have heard this first-hand from people). The bank wisely doesn't appear to want to take interest rates any lower due to a fear of distorting the housing market even further, and there is a limit to what they can do here anyway, so point (3) is probably reaching the end of the line too. Thus it appears to me that the boom is now resting on very shaky foundations. If a general decline starts to be noticed (and it has started in London already), then the remaining feel-good factor will go, and there will be no good reason for most people to buy... A correction then seems inevitable.
This is not to criticise your input to the debate, simply to point out that there are alternative ways of looking at the situation. |
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London Top End
by my only point
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#1001004
of 3278
22 Nov 2002
04:38 PM |
Anyone watch Hot Property last week? A lady moving to london wants a 2-bed flat in london, her budget is £500k. She looks at properties in Maida Vale and similar areas. She does not like any of the flats (and neither did I and I live in Stratford!). She finally finds one that she does kinda like and the host turns to her and says, "there is one catch, its 250k over your budget".
250k!!, thats more then my house is worth. I think the situation is that the very rich (and there will always be very rich people) currently do tend to come to London, though I don't know why, afraid I'm not a financially educated man. |
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London
by The Dark Lord
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#1001003
of 3278
22 Nov 2002
04:13 PM |
Rob G :
1) I can give you an example of a 1 bdrm for £1.5m, £600k is nothing
2) Property prices are also driven up by the rich who don't need to work, ppl who live overseas, overseas investors, trustafarians etc ... all of whom push up prices in London.
As I've already said - all the money is in London, the rest of the UK in comparison is irrelevant.
Lifestyle is a completely seperate issue.
Just because you don't like something, it doesn't make it any less true.
*Bubbles* |
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London Lads
by Rob G
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#1001002
of 3278
22 Nov 2002
03:30 PM |
DarkLord:
Don't give me all that about 2 bed flats in London costing £600k.
So how come if London is 'all that' that the average earnings are only 15% higher than the rest of the S/E?
The fact is that there are just as many high paying jobs (particularly in IT, my area) outside Big Smoke as there are in the depressing, black-lung inducing, flying rat infested yuppie and tramp magnet that is London.
Unfortunately I do have to go there on business occasionally and find it utterly awful. Most office workers are crammed together like battery hens.
It's a trendy bar/pub/club-fest for single people in their 20s, but after that grown-ups with children should run screaming. |
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In line with Andy
by Knowledge is Power
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#1001001
of 3278
22 Nov 2002
03:02 PM |
Rev H.K
Many thanks, I have enjoyed your comment and debate & your opinions and advice will be sorely missed.
Best of luck for the future & have fun on your travels.
You never know, we might still all be here when you get back!
ps: the LOTR film set might be worth a look when you get to NZ? |
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Rev.HK - Good Luck
by Andy B
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#1001000
of 3278
22 Nov 2002
02:45 PM |
Thanks for the exchanges it has driven the forum towards a sensible equalibrium of debate and increased our knowledge of the world of economics.
Good Luck.
Regards,
Andy B. |
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The Dark Lord - and there you have it!
by Knowledge is Power
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#1000999
of 3278
22 Nov 2002
02:43 PM |
I don't underestimate the importance or value of London. It is a vital and fundamental aspect to the UK's success both internally and externally in the global market. But you shouldn't underestimate the importance and value of the UK as a whole contributing to the Society at large.
You say:
"You must dispense with your narrow minded nationalist view ... London is part of a global market ... the rest of the UK is a collection of quaint little hamlets you drive through for amusement."
Yes, we are a part of the global market, & guess what, the rest of world ain't doing too well.
If the US doesn't pick up, in a big way, we will feel the effects in the UK as will the rest of the world.
Please do not patronise non-Londoners. It is completly unjustified.
With regard to the earlier comments on the South East (Andy B?). I agree, the rest of the UK is equally as important & technology & industry should be distributed accordingly. I understand and agree with you. |
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Some final musings on deflation.
Some final musings on deflation.
Some final musings on deflation
by rev.hk
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#1000998
of 3278
22 Nov 2002
02:24 PM |
Andy B.
Like most outsiders, I was primarily thinking of London, although there are other parts of the UK housing market that have experienced much froth too. Which region pops first is hard to say, but my spies in London (mostly i-bankers) tell me the sell off in the top-to-mid-tiers of the London market has already begun.
A while ago I advised Horsefly to watch transactions volume since this will explode, peak and then die just before the collapse of the bubble - as it does in most other asset markets. Since UK housing stats are hopeless, I can only rely on anecdotal evidence which suggests that this has already happened. I have no way of knowing if this is right since I live 10000kms away.
Anyway, this is probably my last posting. (You aren't the only one to have noticed the rather bubble-esque and time wasting froth in this forum). I resigned today since the opportunity cost of not working in the current misery of investment banking is about as low as it has been in ten years and will tomorrow embark on a tour of New Zealand and ‘Great Game’ India for the next six months, sans laptop. Deflation is a great cleanser and focuses the mind on what is important in life. This forum clearly isn't worth the bother.
I recommend you look at www.freeman-co.com for a view on what is about to happen to head counts in the financial services industry, particularly in London. That the buy-side is now starting to fire is a sign of things to come for UK unemployment.
Keep up with the Singapore angle. It was a ghastly real economy splash and the MAS hasn't been able to do much to effectively combat it - despite having a pretty tightly closed capital account and an unlimited ability to flood the FX markets with SGD.
Even statist attempts to rig the supply side haven’t worked and prices have fallen by over a half since 1997.
Try looking at the websites of the Monetary Authority of Singapore, the National University of Singapore and www.sg.gov & you should find all you need.
Best of luck
Rev.hk |
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by The Dark Lord
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#1000997
of 3278
22 Nov 2002
02:14 PM |
Knowledge is Power :
Let me lighten the intellectual load for you.
Where in the UK are the bulk of the FTSE100's revenues generated ?
How much tax revenue does London generate for the economy as a proportion of the whole ?
How much of the GDP does London account for ?
Indeed what does the FTSE100 matter at all in comparison to the vast number of conglomorates in London ... Global100 anyone.
As you state, London has the government, financial services and banks - ie. all the money. A vast amount of revenue for the latter two is generated from offshore ... secretaries in Leeds are of no consequence.
You must dispense with your narrow minded nationalist view ... London is part of a global market ... the rest of the UK is a collection of quaint little hamlets you drive through for amusement.
Average income in the city is £60k per year ... again I ask, what does the secretary in Leeds on £8k a year matter ?
In do not disagree that originally the cash came from everywhere, but now London has it.
The trade flows to other parts of UK, in particular the anemic, grossly inefficient, and backward manufacturing sector are irrelevant.
You may be happy to accept magic beans for your property, but I prefer cash ... last time I looked, there weren't many £600k two bedroom apartments for sale in Manchester ... do I need to explain why, or do you think you can handle it on your own ?
Love and kisses,
*Bubbles* |
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Knowledge is Power - we understand your views
by Andy B
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#1000995
of 3278
22 Nov 2002
01:53 PM |
I have just read your posting and though your final comments and some conclusions make little sense - ie a major crash in prices is good - I do think that most on the 'no crash' side agree with some of your views on the social-economic position in the South East.
But where the no crash side appears to differ with you the most is the underlying reasons & solutions. The solution of a major crash is like suggesting we brake our bats and take our balls home.
What does need to happen is for the market drivers to be properly addressed. More new homes and proper re-generation of areas which has lost industry. This needs to be done without major government interference - it is the state that stops house building - so to change this role would be a help.
Stability in house prices and general economic conditions is established through decent long term policy aimed at encouraging the the free market and addressing any structural distortions to the economic systems and factors.
I have identified three major structural economic factors which have lead to real house price inflation.
1. Demand side - Affordability re-alignments - we for many years lived in a high inflation environment - this reduces the ability to afford house purchases - the correction of this to a lower level as see in most well managed economies has led to a movement in the demand curve for house purchases upwards and also flattens the curve. This process which I will not repeat the economic explanation of will move the real price of housing up.
2. Demand side - Utility preferences - Over a period of say 35 years the utility curve has shifted towards house purchase - people are prepared to pay a premium for owning their own house compared to renting. This change in habits pushes the demand cuvre up and therefore price. Also social economic factors such as better careers and more women workings lead to not only higher incomes but an increasing age of marriage and having a family. Also people live longer. These factors, as I have shown before, puts long term pressure on the the real price.
3. Supply side restrictions. Land is limited and new builds are restricted. I have shown the incredible closing of the gap between Households and houseing numbers (5% gap in 1980 to 0.7% 2001).
These three factors mean without a boom or bust - the general price should have risen and is supported by these factors.
Even if we are above the equalibrium price at present we are heading for that price in the future.
A crash would reduce the returns to house builders and reduce government focus on the structural issues above. Hence the 'real' price (meaured in average household incomes) - in the long term will rise further.
Solutions?:
Factor 1 - is life - in my view a correction to the natural equalibrium.
Factor 2 - can be countered by a good quality rental market - taking heat out of the FTB market and also educating people so they understand and accept that buying is not everything in life - renting is rational in the short - medium term.
Factor 3 - Let the market build move houses. But also why does everyone have to set up a business in the SE when the rest of the country have good resources too? Yes some jobs will move North - but a good spread of incomes across an economy helps ensure the free market can operate robustly and resources are used efficently.
My lunch time is over so I will have to stop here.
Regards,
Andy B. |
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