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| The UK housing market: a bubble about to burst? |
Having to sell...?
by Jeff Morgan
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#1001041
of 3278
 25 Nov 2002
01:30 PM |
Rob G, writing, 'The main losers will be recent first time buyers (within the last 18 months or so), people with second properties held as investments, people planning to trade down and inheritors.'
They would be in a position of having less unrealised value but would not necessarily lose money. For each in turn:
First-time buyers: only those who reach a point where they can't service whatever borrowings they have are required to sell.
Second Property owners: the same, but with the potential rental income (and contrawise, service charges) taken into account.
People planning to trade down: not necessary to sell at all, most will have little or no borrowing against the asset.
Inheritors: depending on the IH tax position, may or may not have to sell, or choose to service the IH another way.
Nothing is straightforward. |
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Oh Dear
by Rob G
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#1001040
of 3278
25 Nov 2002
01:08 PM |
Dark Lord:
Excuse me for pointing it out, but who exactly are Joe and Susan Couple going to sell their property to?
Possibly a first time buyer?
Investors are effectively first time buyers BTW, did you think I was considering them otherwise? They will be even more reluctant than traditional FTBs to buy in a falling market.
The desire to upgrade (in contrast to your rather bizarre assumption) is one of the main reasons why prices will fall. People wishing to upgrade must (at the start of the chain) find a first time buyer. If there are none to be found at current prices then each price in the chain must be reduced accordingly. QED.
Once prices start to fall, many faint-hearted investors will descend on the market to sell ASAP, further driving prices down.
Rents may indeed not decrease, in fact I expect them to rise in the short term as many potential first time buyers retreat from the market as they wait for it to bottom-out before buying.
The main losers will be recent first time buyers (within the last 18 months or so), people with second properties held as investments, people planning to trade down and inheritors.
Since prices are already beginning to soften at the top end of the market (particularly in London), this is already happening and will force the market down from the top at the same time that the FTBs pull the rug out. |
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Time preference for money
by The Grand Inquisitor
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#1001039
of 3278
25 Nov 2002
12:56 PM |
I have read elsewhere that the interest rate is set/influenced by/a function of the time preference for money.
I am wondering if the forum might enlighten as to what kind of time preference is being displayed by users of 0% interest rates on credit cards (and the ability to roll these over), versus housing equity withdrawal at 4-6%. |
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Property matters
by The Dark Lord
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#1001038
of 3278
25 Nov 2002
12:45 PM |
Rob G:
Thank you as always for your reply. Your lack of conviction was expected.
For starters your argument seems to look only at first time buyers and confidence. Last time I looked, there were a lot of people already owning ... apparently you have chosen to ignore these.
Let us imagine Joe and Susan Couple, scrabbling through their meagre everyday lives trying to make ends meet. They have one child, and another on the way ... why would this couple not want to upgrade to a larger home if the opportunity presented itself ? (especially if borrowing costs fell). In fact I believe you would find that the concept of "overvalued" would come down more to affordability, than relative value issues ... they require space, they have a family, they are not investors, they do not behave in a way which necessarily maximises wealth, they behave in a way that maximises utility - namely they seek a larger home for them and their offspring ... they are more prepared to wait out a downturn in the value of their home as long as they can comfortably service the debt ... they have after all more space for themselves and their brood, and (having been able to afford to move) are probably near a nicer school, in a nicer area.
Now, take this example, and extrapolate.
If - as you suggest - the market is powered almost entirely by first time buyers, implicitly there must be no desire to upgrade. There must also be no investors. Obviously such assumptions are farcical.
Additionally exiting a market involves CGT issues for owners of more than one property, as such there is a large incentive not to exit a market unless CGT + transaction costs (exit and re-entry) is smaller than the perceived future fall in capital values. Implicit in this argument are also issues relating to relative yield.
To expand on this ... if base rates fall to 2%, the risk premium on rental property widens 2%, the opporunity cost of money falls, therefore logically investment flows to where the risk weighted returns are highest ... if you are saying property prices will not increase due to a fall in interest rates, you are saying that either rents will also fall by the same proportion (50%), or that the risk of holding the property has increased. Ceteris paribas, the risk is unchanged ... in fact with lower financing costs, rents relatively unchanged and the population increasing the risks are in fact falling.
Should I continue ?
*Bubbles*
PS As an aside, I believe prices are going to fall up to 25% - but for reasons grounded in economics, rather than some misguided view that first time buyers dictate how much my properties are worth, or that interest rates have a negligible effect on prices. |
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Dark Lord, Pray Do Tell?
by Rob G
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#1001037
of 3278
25 Nov 2002
12:19 PM |
Come on DD, don't be shy. Please feel free to point out all the holes in my argument.
I'm all ears.
The fact that you pour scorn on my opinion as being drawn from 'emotive' rather than a purely economic basis, as you seem to do, only acts to strengthen my point.
Individuals such as yourself who consider the market to be driven by simplistic notions of interest rates and monthly 'affordability', and who consider buyers as simple automatons who make their purchasing decisions according to these same economic laws in a vacuum are, I fear, sadly mistaken.
Only time will tell who is correct. I am already staking many thousands of pounds on my position however.
The difference is, because I have yet to buy a property, I am choosing to do this. If you are already a home owner you have no choice in the matter.
I sleep very well at night.
Do you? |
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Dark Lord - Big Boy??
by Slapper
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#1001036
of 3278
25 Nov 2002
12:15 PM |
Dark Lord, we bow down humbled by your wealth and importance.
Please, master, tell us what the property market is really going to do. Your posturing makes us wonder if you are trying to conceal certain deficiencies... |
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Dear boy
by The Dark Lord
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#1001035
of 3278
25 Nov 2002
11:45 AM |
Rob G:
"over-valued" ? ... "certainly lose money" ... ?  fabulous ... your omniscience, and ability to turn a subjective term into an absolute made me laugh so much I almost spilled veuve all over the interior of my gulfstream.
In the interests of seperating the wheat from the chaff, and before I point out a number of flaws in your carefully constructed (read emotive) argument ...
You are calling a drop of 40-50% ? I'd like to buy a CFD on your -50%, @ £500/bp, fixing as at 30 Nov 2002, maturity 31 Dec 2004 (2005 if you prefer). Priced off the average halifax/nationwide surveys.
Happy to go £1000/bp if you prefer ... let me know ...
*Bubbles* |
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Comments
by jeff morgan
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#1001034
of 3278
25 Nov 2002
11:26 AM |
To Rob G, #1029, you also need to consider 'Last Time Sellers' in the housing market. This group, people who have been in for years and are making a trade down (or out) are also part of the functioning market and are needed just as first-time buyers are. If fewer of this group sell the less trading up, the market will slow and not necessarily fall as much as might otherwise happen.
To City job cuts: my wife who worked in the City until about 3 years ago and still keeps in good touch, said that, in conversations with friends, there are fewer jobs but more work to do. That's similar to my experience of colleagues in my industry who left a couple of years ago and are working 4-5 days a week and happy to do so. Some people who have over-extended themselves should be concerned but many will still have an income to pay the bills.
What worries me is the trend to take equity out of property to fund other things. That is converting an 'unrealised' value into 'real' money and I fear it's not good. I'm not able to analyse the reasons, not being an economist, but it makes me very uneasy indeed.
Finally to Happy Mango, I follow anarchy rather than Communism; but if I were a communist I would not see Tax as an effective means of redistributing wealth. Tax has to go through a government, probably the most wasteful user of revenue there is. The 'trickle-down' theory of Capitalism as propounded in Regan's time didn't seem to work either and I'm sure you would not see Capitalism as a solution anyway. But giving Tax to a government reminds me of the 'Band aid' and 'Live aid' efforts that were supposed to forestall further famines in Ethiopia and don't appear to have done anything of the kind. Just like that money, it appears that Tax chases mirages and ends up falling into the desert sands. |
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I'm The Only Sane One
by Rob G
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#1001033
of 3278
25 Nov 2002
11:24 AM |
Dark Lord:
Excuse me, so let me make sure I understand you correctly here:
People will borrow money, providing interest rates are sufficiently low, to buy any asset no matter how over-valued?
And if the value of that asset is dropping, then they will still borrow to buy it regardless of the fact that they will certainly lose money from the time they buy?
Perhaps you have withdrawn equity from your house to purchase shares in Marconi or Worldcom recently. I mean interest rates are so low, you're bound to make a killing aren't you?
Your argument is so myopic and one dimensional it beggars belief.
Do you honestly think first time buyers are that stupid? |
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16 base rate = housing bonanza?
by Miss Scarlett
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#1001032
of 3278
25 Nov 2002
11:17 AM |
I presume from Mr Hoogstraten's comments that a 5-8% cut in the base lending rate would also be very benefitical for us home owners. But while I like his upbeat tone, I am worried because my husband tells me that if rates fell that far, we would already be in the toilet and that wouldn't be such good new for us landlords.
Would Mr hoogstraten please give us some wisdom.
Thank you
Miss Scarlett |
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Sides
by Extradry Martini
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#1001031
of 3278
25 Nov 2002
11:03 AM |
Hoogstraten, you said:
“About two weeks ago, the FT wrote a persuasive piece that argued that property prices were going to collapse. This was based on the view that there was a “credit crunch”, which shifts the supply of capital, thereby reducing prices. Note that according to this FT hack the imminent property crash was going to be a result of a collapse in the supply side.
Now, the FT is saying there will be a demand side collapse (as in the Great Depression or Japan now). This is a completely different argument to what the FT was arguing only 2 weeks ago!”
It is refreshing to see you having a go at macro economics. However, I think a few corrections are needed. Firstly, the credit crunch is merely a symptom of the problem (even though it in turn worsens it), and is not directly responsible for falling prices. Deflation is caused by attempts to reduce inventories and capacity, both of which were inflated by hugely over-optimistic future sales forecasts. The problem is that the capacity expansion was financed wholly by debt which needs to be paid back now it is realised that the income they will generate was imaginary, at the same time, the falling asset markets mean that the level of collateral in the system has dropped - hugely deteriorating the risk side of the credit equation. As everyone is trying to reduce capacity and inventory in the market at the same time, prices are being driven down and the sales of stock and business assets are yielding less money with which to repay debt and so on. As you say, a supply side recession – which are almost exclusively triggered by the bursting of asset bubbles (US in 1929, Japan in 1993).
The Great Depression and the recession in Japan were not “demand side” recessions, they worked exactly as in the paragraph above, so we call them “supply-side” recessions. A “demand-side” recession is when a shock is experienced on the demand side first. This has been the case in every recession since the war in the West: A shock to demand from either higher interest rates (often to combat inflation) or from higher taxes. Of course any recession leads to lower supply and demand eventually, it's just that we use the terminology to refer to which side collapses first as the nature of the recession is very different.
Keep looking at the macro economics Hoogstraten, I think that once you understand it all, you’ll see that there is only one possible outcome for the UK real estate market – and it is not pretty. |
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Low rates vs demand
by The Dark Lord
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#1001030
of 3278
25 Nov 2002
11:01 AM |
Rob G :
What economics degree did you do ?
You are attempting to imply - if I understand you correctly - that there is only a passing correlation between interest rates and demand.
Are you mad ?
"Low interest rates are simply an enabling factor which are allowing people to borrow more than they would otherwise be able to."
ie. creates demand.
If you are on a floating rate ... say 3.75% discounted ... base rates fall 2% ... you are paying 1.75% ... you are saying that the primary driver of demand is confidence, and the fact that your repayments have fallen 53% will not have a material impact on demand ?
Do I need to point out how ludicrous this is in step-by-step points, or can you see it yourself ?
*Bubbles* |
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Or Put More Simply...
by Rob G
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#1001029
of 3278
25 Nov 2002
09:57 AM |
In simple terms, the economic factors you say have a direct and apparently linear effect on buyer demand - i.e. low interest rates, are not linked as closely as you might imagine.
Low interest rates are simply an enabling factor which are allowing people to borrow more than they would otherwise be able to.
The real reason for the demand is based on the rate of increase in prices. This is very important.
When prices start to hit a ceiling (which has been falsely raised by lower interest rates but is still there nevertheless) and turn, demand then becomes proportional to the rate of increase in prices.
I ask you this very simple question which should make you consider my position very carefully:
Who will buy in a falling market?
Well everyone wants to buy in a rising market, that is obvious, but in a falling market (even a mildly falling one) where is the demand?
Then ask yourself the next question:
When will people begin to buy again?
Of course you may say 'but nobody will sell in a falling market'.
But why should this be be? Existing home owners can still buy and sell without penalty unless they are in negative equity. Indeed, as the spread between prices narrows this may even encourage trade-up transactions which now appear unaffordable (limited by the willingness to lend by lenders, of course). The critical difference is that this time it will be very difficult to draw in new business from FTBs as opposed to now, when they are hurling themselves into the market in blind panic.
In a rising market and in a falling market the only real importance is the confidence of first time buyers. They will make or break price levels. All other transactions are relatively incidental.
I would urge you to try to understand this concept, as it is fundamental and will be the prime factor in the coming months and the very reason why a fall in real terms of 40-50% is very far from unrealistic. |
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Base Rate Makes No Difference
by Rob G
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#1001028
of 3278
25 Nov 2002
09:36 AM |
Hoogstraaten,
I think you'll find that cutting the base rate would be ineffective as a way of propping up the housing market in the way you suppose.
I believe that regardless of further falls in base rates, the lenders will be so spooked by the prospect of a fall in the value of the asset they will be lending against that they will not in fact cut their lending rates further. They may even have to raise them to cover their risk. Also, they will be very much more conservative in their lending multiples and assessment of loan risk in a way they are currently not doing.
I believe that the current lending rates are about as low as they're going to get regardless.
I'm sorry, but once buyer confidence turns (as it is beginning to now, and the media will be helping this along) pretty much any action taken by the BoE will be fruitless.
FYI, I don't believe every article I read. I use these as further ammunition to illustrate my opinion of a demand-side collapse. This has always been my strong belief.
Bubbles are always rooted in psychology, not economics.
In 6 months, as with the .COM boom, we'll all be sitting around wondering how we ever believed that the housing market could continue as it had been doing in the face of a crumbling World economy. |
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Doom mongers - think for yourselves!
by Hoogstraten
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#1001027
of 3278
25 Nov 2002
06:00 AM |
Rob G,
You exhibit the unfortunate tendency to believe the last article you have read.
About two weeks ago, the FT wrote a persuasive piece that argued that property prices were going to collapse. This was based on the view that there was a “credit crunch”, which shifts the supply of capital, thereby reducing prices. Note that according to this FT hack the imminent property crash was going to be a result of a collapse in the supply side.
Now, the FT is saying there will be a demand side collapse (as in the Great Depression or Japan now). This is a completely different argument to what the FT was arguing only 2 weeks ago!
The FT does not argue with the concept of mortgages being currently affordable – their argument is that a lack of confidence will shift the demand curve to the left. This is quite possible in theory.
The problem with this argument is obvious. During the Great Depression and with Japan now, the economies concerned were caught in a liquidity trap. This limits what policy makers can do to alleviate the problem – it is impossible to cut rates, because they are already zero.
Base rates are not zero in the UK – they currently stand at 4%. This obviously means that the BOE could potentially cut rates by a 0.25% sixteen times if the property demand curve did start shifting to the left due to a collapse in buyers confidence.
Why don’t the BOE cut rates now? They do not cut rates because of the housing boom. What would they do if house prices started to fall of a cliff, like the FT hack believes they will (I think the hack concerned said a 40% real decline)? They would cut rates like madmen. Until the Central Bank has run out of bullets to fire, no liquidity trap has developed.
Do you believe that 16 quarter point rate cuts would not alleviate price falls? Yields for investors would be massive, if only say 8 quarter point cuts were made! Remember the hack is not arguing that the real economy has collapsed anything like 40% - he envisions (like you) purely a collapse in confidence. Do you not think the BOE would cut rates sharply, if real property price falls looked like being in the magnitude of a real 40% decline? There is absolutely no doubt in my mind that they would.
If real property prices were falling anywhere near 40%, there would be massive deflation and a collapse in Aggregate Demand in the UK. It is inconceivable that the BOE would not act immediately in these circumstances; otherwise another Great Depression would ensue.
Nor is it conceivable that there will be general inflation, in an economy like the UK, if property prices were collapsing by 40% in real terms. The collapse in Aggregate Demand would clearly induce deflation. The hacks attempt to bring the value of sterling into the equation is also incorrect – there is no way that a fall in sterling would offset the deflationary effects of property collapse.
I repeat again to you Rob G – capitalism is inherently stable. Great Depressions do not occur every day – there has only been one (caused in the main by incompetent Central Banks and Governments). The conditions for this type of crash do not presently exist.
I think you need to realise that FT staff are in the business of selling papers – they need to be sensationalist. If these hacks really knew that much about macroeconomics (or anything else) they would have a real job. Rob G – you need to think for yourself, rather than continually blindly copying the “experts”.
I see one of your socialist friends is quoting the bible, so I will have a go at this, in regards to your tendency to cut and paste the last tabloid headline:
"And many false prophets shall rise, and shall deceive many." [Matthew 24:11] |
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