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| The UK housing market: a bubble about to burst? |
Whinging poms
by madge
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#1001057
of 3278
 25 Nov 2002
03:16 PM |
TDL,
Expensive house in a miserable country equals wealth? Please explain.
Here in Oz, we have expensive houses and bonza climes.
Rather me than you, pommie boy. |
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Me, Poor?
by Rob G
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#1001056
of 3278
25 Nov 2002
03:15 PM |
Dark Lord:
Far from poor, I'm afraid. Not so rich however that I'm happy to pay 50% over the odds, especially for cash.
Buy when prices are low and sell when they are high.
Now is not the time to buy.
Ciao. |
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What to do?
by Extradrry Martini
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#1001055
of 3278
25 Nov 2002
03:14 PM |
Andy B,
I think the BoJ was slow to cut rates to zero, but I think to say that they should have foreseen the problems is a bit severe. After all, no one else did at the time and, more recently, even the Fed (with Japan’s example already in hand) did not start cutting rates until well after the crash in the US equity markets had begun. So, in my view, it’s more that monetary policy did not react enough in the early stages rather than it was slow to react given available information at the time. You are right to say that demand response to monetary stimulus stopped, and this is always what makes avoiding a supply-side recession to terribly difficult once the bubble in the stock market has already burst
However, I see the main reason for the durability of the Japanese recession comes down to accounting practices and the unwillingness or cultural/systemic inability to admit mistakes and reform. After all, most non-performing loans are still counted as assets on the books of Japanese lenders, a situation that makes Japan still a very scary place to invest (and makes the accounting practices in the US look saintly in comparison)
You asked whether I believe Japan has been “an example of a credit crunch”. There has certainly been one – i.e. a huge rise in the compensation required to take on credit risk and much lower lending levels there in the last 15 years, which is not surprising given the amount of capital destroyed in the collapse of the stock market and property bubbles. But I think you’re mixing cause and effect. A credit crunch is an effect of a supply-side recession, not the cause, even if it comes before the technical declaration of a state of recession and even if it makes the recession itself worse. It is a natural reaction to restrict lending when debts (both household and corporate) are at record, many of your existing debtors admit that the estimated revenues earmarked for repaying the debt are imaginary, and the costs of financing new loans to customers have gone up as well anyway. When you add in the fact that there is a huge shortage of collateral in the system (because it has fallen so much in value), then you can be forgiven for being surprised that the credit crunch is not worse.
Back to the “causal link” as you put it. Could recession have been avoided if interest rates were dropped to zero right away? Perhaps – it certainly wouldn’t have done any short-term harm – but in my view supply side recessions, although rare (because they are mostly preceded by, and become the necessary adjustment for, prolonged irrational market behaviour) can only be avoided if the bubble itself is moderated on the way up. This means intervention of some sort (in my view the best is some kind of reserve requirement), which is complicated by political considerations if you believe in small government, absolute economic freedom etc.
So, in my opinion, once enough capacity has been created (and enough debt taken out to finance it) in an investment bubble (i.e. capacity based on irrational expectations), then a recession is inevitable. After all, what is a recession but a negative growth in production? What can be adjusted, perhaps is the depth and duration of the succeeding recession, and Japan has not handled that well. That is why I see a crash in the property market as unavoidable.
I do indeed think that interest rates should keep coming down, but not for demand reasons – it is vitally important that as many businesses as possible can continue to repay their debts while they destroy capacity, even if the banks are raising the credit element of loan interest on them. In order for this to deter households and companies taking out more debt, a reserve requirement system should be introduced. This has the benefit of enhancing system-wide collateral while gradually deterring more borrowing while not explicitly targeting any asset price levels.
Looking forward to your comments… |
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Show me the money
by The Dark Lord
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#1001054
of 3278
25 Nov 2002
02:45 PM |
Rob G:
Talk is cheap ... if you believed it, you'd back it up with cash.
As it stands you have demonstrated not balls of steel, but delicate little balls of gossamer.
As for your points, as you have conveniently avoiding answering nearly everything, your claims of validity are absurd.
I have peace of mind by virtue of my grotesque wealth, unlike you I put my money where my mouth is - it seems I've called it correctly.
How exciting it must be to poor ... fortunately it is an excitement I do not have to endure.
Love,
*Bubbles* |
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Media drivers
by john
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#1001053
of 3278
25 Nov 2002
02:40 PM |
silly report misreported in media last week, in the torygraph of all places. something about property in london falling by 5% in October alone.
Yes some properties fell by this figure, but they were in the +£3m bracket. The real properties levelled.
The media will sell products papers, airtime etc, but jumping on the bandwaggon that the bubble is bursting. Dont be fooled, the market will still run on supply/demand issues, and I don't see these turning full circle |
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My Short Position
by Rob G
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#1001051
of 3278
25 Nov 2002
02:24 PM |
Dark Lord:
Anyone (like myself) who is a potential first time buyer effectively has a short position on property of several thousand pounds.
And yes, in answer to your question I do have great big clanking balls of steel.
I also have the peace of mind lent by a genuine confidence in the validity of my argument. |
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Please Listen
by Rob G
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#1001050
of 3278
25 Nov 2002
02:15 PM |
Dark Lord:
'Oh I see - so you're saying everyone who buys is a first time buyer ... what a fabulous luxury it is to change definitions after the event !! To a cynic such as myself it simply looks like someone trying to dig himself out of a hole.'
What I actually said was that I was considering anyone buying for cash to be effectively a first-time-buyer. Because the vast majority of cash purchases are by traditional FTBs this is a fair assumption.
My points still remain valid however you choose to read this particular assumption.
I'm not going to engage in petty nit-picking and semantics with you. If you don't have any valid arguments of substance, please don't bother responding to my postings. |
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Rob G
by The Dark Lord
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#1001049
of 3278
25 Nov 2002
02:07 PM |
Oh I see - so you're saying everyone who buys is a first time buyer ... what a fabulous luxury it is to change definitions after the event !! To a cynic such as myself it simply looks like someone trying to dig himself out of a hole.
Income multiples - fair point, but these are/have been increasing. Also consider that people trading up will often take a larger deposit.
Lenders are already tied into millions of loans where the terms dictate they must track base rates. Competition is such that I do not believe terms will tighten considerably until after there is a serious shock.
Again I continue to disagree that a drop in rates will have no effect. I would have thought that the enormous wealth of empirical evidence would be persuasive enough - apparently you and reality are at odds on this.
If you truely have a large short position on property prices (which I doubt) ... I'm betting you're going to take a large hit if rates fall ... unless you have a rather sizable margin and balls of steel (which I also doubt).
Knowledge is Power :
As for "asti" ... I don't know what it is, but it sounds like something that poor drink.
*Bubbles* |
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Well done for spotting it Dark Lord!
by Knowledge is Power
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#1001048
of 3278
25 Nov 2002
02:06 PM |
That is correct what I said. If I buy fair value, then I should be able to sell at fair value. (that's a reasonable asumption isn't it?)
If I buy at high value, I might have to sell at low/fair value, incurring a loss at the same time.
(again I hope you will be able to comprehend the depth of my concept here Dark Lord)
I'm interested in buying a house, AT A GOOD/FAIR PRICE. I am not interested in making huge profits (as I'm not investing, but buying a home). But I too am not stupid, and will want a potential re-sale not to loose me money.
I think this highlights the "buy an investment" as opposed to a "buy a house" difference. Sure, you will now argue that a home should be (or even only be and investment).
I don't want an investment I want a home.
Just because I want this, doesn't make me stupid or foolhardy!
I stick by what I say implicitly. If you can't tell the difference with this then perhaps you are blinded by money? |
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Knowledge is Power
by The Dark Lord
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#1001047
of 3278
25 Nov 2002
01:56 PM |
"... I am not interested in the potential re-sale value of a potential property I buy ..."
versus
"... I will buy when I believe that the bricks and mortar are fair value (thus shouldn’t really fall much in a serious downturn) ..."
Contradictory - which is it ? |
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Further Illumination
by Rob G
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#1001046
of 3278
25 Nov 2002
01:54 PM |
Dark Lord:
Oh, of course, how silly of me ... all buyers at the start of a chain must be first time buyers ... !?!?
They couldn't possibly be people (or entities) who already own property of course ??
I should point out that I am considering any cash purchase to be in effect a first-time buyer. This includes investors, people buying second homes and people traditionally considered to be FTBs. This makes no difference, as buyer sentiment will be identical for all of these groups. Investors and second home buyers if anything will be more affected.
A drop in interest rates will only have an effect up until the point at which prices begin to fall.
The upper ceiling of the market is dictated more by income multiples rather than interest rates at the present time. Someone earning £30,000 per year might be able to afford the repayments on a £300,000 mortgage, but no responsible lender will ever loan them that much regardless how low interest rates are.
At the point prices start to fall, interest rates no longer have any significance. This point is critical. Whether rates are high or low, in a falling market you will still lose if you buy.
Also remember we are talking about the interest rates offered by the lenders not the BoE set base rates. Even if the base rates are cut further this may not be reflected by cuts in rates by lenders. Especially if the market is falling. |
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Extra Dry & Japan
by Andy B
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#1001045
of 3278
25 Nov 2002
01:49 PM |
Extra Dry, can you clarify whether you believe Japan was an example of a 'credit crunch' ? Your postings appears to suggest this but I suspect given the complexity of the subject you have just over-simplified your arguments.
I thought it was fairly widely accepted that Japan's problems really started when they failed to apply main stream monetarists thinking to their interest rate policy, and failed to cut rates when their was a risk of deflation. The failure to act and the decision to act incorrectly deeply damaged a fairly robust economy.
You yourself has called for the BOE to cut rates to try and avoid a 'deflation risk' in the UK - yet BOJ held and even increased rates at critical points in the 1990s when they should have followed the path you had advocated for the UK.
Japan was then caught in a liquidity trap - which is reprsented by a vertical section in the Aggregate Demand Curve. At this point in the AD curve the movements in the money supply can have no impact on the equalibrium point 'on' the Supply curve.
Japan was caught in the liquidity trap through mis-management of the monetary policy - this in my view is the key causal link. ie The failure to act to the present and expect future economic circumstances.
Regards,
Andy B. |
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Excellent comment - Rob G.
by Knowledge is Power
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#1001044
of 3278
25 Nov 2002
01:43 PM |
Very much enjoyed your posts Rob G. I think you've highlighted a critical issue; that being demand will change in a stagnant or falling market. Let’s remember folks, ripples & snowballs happen on both bears and bulls eh!
With regard to “The Dark Lord”, I wouldn’t worry about his petty comments and derogatory sneers.
I’m in the same boat as you, waiting for a time to buy that is right (and at the moment it doesn’t take a genius to see that it isn't).
Finally, let me set some accusations to rest. I am not interested in the potential re-sale value of a potential property I buy, as;
a) I will buy when I believe that the bricks and mortar are fair value (thus shouldn’t really fall much in a serious downturn),
b) we will put down a serious deposit (at least 20%), and
c) we will calculate and factor in potential rises in interest rates into our affordability equation.
Unfortunately, none of theses 3 are being followed by FTB (well not any I know!). Which is one of the reasons that we're in this sticky mess in the first place!
Like Rob G, I too sleep very sound and deep, with a nice big smile on my face.
Ps: The Dark Lord – Try Asti instead, it’s much cheaper and is arguably fairer value than Vauve. (Why pay a premium on something not really worth as much as it should be eh!) |
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Quite So
by Rob G
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#1001043
of 3278
25 Nov 2002
01:37 PM |
Jeff, I find myself in agreement.
Anyone who can hold on for the forseeable future will not necessarily lose out, as is the case with equity investments.
Rob. |
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First time buyers
by The Dark Lord
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#1001042
of 3278
25 Nov 2002
01:35 PM |
Oh, of course, how silly of me ... all buyers at the start of a chain must be first time buyers ... !?!?
They couldn't possibly be people (or entities) who already own property of course ??
Point taken about investors ... but they are not the only ones that own more than one property. I disagree completely that they are the same as first time buyers. They usually buy for completely different reasons ... ie. return.
You are also relying on people being familiar with the market (a number of buyers are from overseas and don't know the market; short termist ... a number of buyers are quite prepared to buy 'expensive' property and hold for a long time (eg 7+ years); not everyone will buy for wealth maximisation reasons either (as previously stated) ... there may be other reasons - divorcees or children going to uni and being bought a property by their family - yes these two ARE first time buyers ... but they are still buying).
People upgrade for one of three reasons : property is cheaper, it is more affordable (lower rates or higher incomes), or non-monetary reasons.
You have also failed to produce a credible argument as to why a fall in rates has no effect ... if rates fall, property becomes more affordable ... the only barrier to entry is deposit.
You are effectively saying, "if property becomes more affordable, it will not increase demand" ? If everyones salary doubles, are you tell me demand will stay the same ? - there is no material difference between the two states in terms of purchasing. Please explain.
I do not disagree property prices are going to fall, because (ceteris paribas) prices cannot rise faster than income in the long term ... first time buyers are obviously a part of this.
I strongly disagree a movement in rates has little or not effect on price, and I think you'll find so does all empirical information.
I also disagree that property is powered by first time buyers ... they are a component, but contrary to your quaint (and poorly economically justified view) they are not the only component.
Finally, with regard to rentals ... if rents are increasing ... yields are increasing ... the value of rental property therefore increases ... thus does the the capitalist system maintain equilibrium.
Again, if you are so convinced by your beliefs, I'm quite willing to take a CFD on your -50%, its OTC, so no margin - if you truely believe -50% you have nothing to lose, and only a lot of money to make.
*Bubbles* |
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