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| The UK housing market: a bubble about to burst? |
Extra \Dry
by john
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#1001108
of 3278
 27 Nov 2002
10:59 AM |
you identify the dilema. Reducing rates would be like trying to put out a fire with petrol. The "boom" is debt led which is dangerous to say the least. Agree business needs help, but interest rates are too crude an instrument.
don't think anyone really knows what the answer is.
there is a problem in the housing market, and note the recent comments from the BoE spokeswoman trying to dampen this without the need to raise rates. if the boom does not recede, and reducing rates would worsen it then the eventual tail off will be all the worse. |
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The Bank should cut - NOW!
by Extraxdry Martini
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#1001107
of 3278
27 Nov 2002
10:17 AM |
The UK GDP numbers for the 3rd quarter have just been released. Lets compare to the US:
Year on Year GDP rise:
UK 1.8%
US 4.0%
Central bank reference interest rate:
UK 4.00%
US 1.25%
See anything wrong?
Interest rates are far too high in the UK. Why? Because the BoE is worried by the bubble in the property market. This is dangerously misguided. British industry desperately needs lower rates, and the Bank should be giving them to it. If the Bank is worried by the property market (which is not its remit anyway), it should introduce some sort of reserve or increased collateral requirement, not keep rates high at the expense of business. After all, the trigger for the collapse in the property market has been/will be redundancies – the surest way to do that right now is by keeping interest rates higher than they should be.
Jeff Morgan:
Thanks for the post.
You have identified what is in my view the main point of difference between those that believe that the UK real estate market is at fair value and those that do not. The fair value people say that as long as the monthly affordability of a mortgage is as low or lower in terms of percentage of income then there is no problem. This has an element of truth on a simplistic level – as long as any given householder can keep up the payments then there is no immediate problem for him. Correct. But what happens when the householder loses his job? You may say that most will not, and again you would be correct, but the people being made redundant as businesses try to downsize capacity will bring down average earnings and increase forced sales.
So you are right to say that on an individual basis, the ability to pay interest is the same whether there is a recession or not, as long as that individual income remains unchanged. But to determine market prices, it is the whole of the market that we look at. If people lose their jobs and are unable to pay interest, they will have to sell their properties. Those people that are in work will not be compensating by buying real estate, so the only change in the market is increased pressure on the sell side, which means lower prices.
I’m not sure I understand what you say about people borrowing more on credit cards during a credit crunch. Credit card borrowing is already even more expensive than anything that could be imagined during a credit crunch – if people had to pay credit card rates to finance their mortgages, no one would be able to afford a mortgage at all!
The credit crunch that is affecting businesses right now is represented by a hugely increased “credit spread”. This is the difference between benchmarked interest rates (known as “risk free” rates – normally interest rate swap rates) and the rates at which companies and banks borrow term funds. These have increased dramatically owing to inability to generate the forecast revenues to repay the debt, a huge fall in the value of stock collateral, a bleak economic outlook, and increased credit spreads for the lenders themselves. This last point is important as it shows how the credit crunch can be contagious on a system-wide level – all lending needs to be financed and if the costs increase then they eventually have to be passed on. In my view it is only a matter of time before the credit crunch spreads to the mortgage market. I think this could also be where the inflationists in this forum are going wrong – they take a limitless availability of capital to finance mortgages for granted. This is a correct assumption when asset prices and profitability expectations are rising, but the world isn’t like that any more.
Niggle and Zorro:
Welcome to the forum. You have both mentioned a lack of new land as a possible bullish force in the UK real estate market. I fear this is very much a false argument that only serves to help disguise the irrationality of the bubble. As a former poster in this forum pointed out, house prices in Hong Kong have fallen 75% in the last 5 years. Hong Kong is probably the most space-limited place on the planet and has a growing population. This argument, like the “affordability” argument above, presupposes that people so want to own their own house that they are willing to pay any price to do so, while ignoring the fact that there is a cheaper alternative – renting.
It is interesting that this is an argument currently in vogue in Spain of all places. Spain has 2/3 the population of the UK and nearly 3 times the land, so, on the face of it, it is surprising that the lack of land availability argument is being used here. However, in a recent survey it was shown that 85% of town and district mayors in Spain have significant holdings in construction/development companies. These same mayors restrict the land available for construction, thereby pushing up prices. This is all true and incontrovertible. The problem comes when people start believing that this can go on forever, despite no corresponding increase in average income. Bubbles are all about how much the mass can delude itself, so this idea coupled with the fact that, because of historically high inflation, there has never been a fall in nominal real estate prices in Spain, mean that the bubble is even more extreme than the UK market. Average property prices in Madrid are now 80% of average London prices, but the average gross salary is 1/3 that of the average London salary (with higher taxes to boot!). In the meantime, the rental market has collapsed – in any decent area of Madrid you can rent at less than ½ of monthly mortgage payments. |
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Investment Drops - Wonder Why?
by Rob G
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#1001106
of 3278
26 Nov 2002
11:41 PM |
http://news.ft.com/servlet/ContentServer?pagename=FT.com/StoryFT
/FullStory&c=StoryFT&cid=1037872328645&p=1012571727085
So not only is the housing market landing us all in mountains of debt, it's starving industry (remember, those people who actually create wealth) of vital investment.
How long can this go on before our international competitiveness is permanently damaged?
I'd be interested to see the R&D spending of the FTSE 100 compared to 5 years ago.
Anyone have the stats on that?
Of course, when the stock market does finally start to rise again, how many people are going to have all their assets still tied up in property?
[URL edited by FT]
[This message was edited by Monitor_CS on 27 Nov 2002 at 01:47 PM.] |
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Still hedging my bets - but ups & downs magnify
by zorro
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#1001105
of 3278
26 Nov 2002
08:41 PM |
I have followed this forum with interest, but had no time to reply. But good to see many old and new bods with valid points (jeff morgan - voice of common sense, also si, knowledge is power, drymartini., knowledge is power, andy, niggle - NB,niggle - optimism is no crime and your approach is realistic).
From where I stand I see both the down and the up pulls on the house prices magnifying, although of course gov. policy can induce some stability by manipulating those forces.
Where do I stand? I will elaborate, since I have nothing to be ashamed of, and as this will no doubt affect how you view my pronouncements. Here goes: most of my income now comes from property although I used to work in the public sector. I am a SW London property developer, and have enabled my children to invest in property via donation of deposit. Now I am looking to move to Spain when I am done and have already invested there.
Down sides to the UK house market that I see:
the obvious: 1. above trend price increases. 2. The pyramid effect: have you thought of where those ever-increasing first-tme buyer's deposits come from ( on average approx. £30,000 in London?) I know my kids'came from my remortgaging my house (since re-couped through prudent investment, but will this be true for everybody?). If many other parents do that (and I agree that the housing market IS emotive rather than rational, the parental instict being one of the strongest survival insticts affecting the actions of our species) that - by projecting in geometric progression in your imagination - how long until all those suburban over-priced properties have already re-purchased themselves at grossly over-stated prices elsewhere, in the form of 'deposits for children'? You underestimate this factor at your peril. 3. the inevitable increase in unemployment which will reduce the population's ability to service their debts. 4. the unpredictable geo-physical factor: which parts of the planet will be affected by the imminent wars/global warming/terrorism etc?
The 'up' factors: 1. 'they don't make land any more', and indeed - in the case of SE England, they even get rid of it by giving it back to Neptun (crazy stuff - WHAT would the Dutch make of that?!!!)2. a large number of UK property affected by floods (bad luck and sorry), but - puts more pressure on the prices of remaining property, 3. geo/demographics: a lot of the planet becoming uninhabitable, so our green and pleasant land still a haven, for those legal and illegal immigrants (who either by the virtue of being able to afford the unspeakably-high prices for being smuggled in, or by the virtue of uspeakably-high returns from their crimes, inject much extra finance into our economy -cif. the speak-easy culture of the '30s USA) 4. where to invest your money when stock market/cash returns are no good? In dodgy 3rd world economies - maybe, but not all of it, obciously.
Also: at the top of the London market, there is no pressure to sell at all as most of the property is held with no mortgage outstanding by individuals and cos. who can weather many market upheavals. This property is not held so much for the income it generates as for the pleasure/convenience of the mega-rich owners. (I don't know where you live, geoff martin, but the same parameters apply). So - if indeed the market in London is softening from the top - as I agree it is - this fact is not reflecting the economic as much as the socio-psychological factors (yes, niggle & al: the house market is not entirely rational), ie think in terms of Joan Collins saying she has had enough of the crime and grime in our beateous capital. In other words: if Tony Blair stops having a pathetic and puerile stand-off with Ken Livingstone and tries to relieve the London transport crisis, much of this problem could disappear.
However, at the bottom of the London market, as I have pointed out earlier, it is still possible to make a decent return on a buy-to-let, which if anything, will soon increase if rob g.' gloom and despondency take over. In other words, it is still sensible to buy a buy-to-let in London for profit, in the absence of any othe investment in the world to offer a similar return.
The future of interest rates? With the world deflation - down. But with the firefighters's and teachers' strikes - a much-needed inflationary push will just nudge those house prices up (if easy does it). So: on balance:
yet again: I am hedging my bets. As a first-time buyer, and even in London, I would still buy. As an investor, unless very rich and not in need of a mortgage, I would not. And if I needed a mortgage, I would go for a decent cap of not less than 3 years, rather than a fix ( just in case the imminent war with Iraq does wreak havoc).
Feel free to shoot me down in flames. |
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Low Interest Rates Are Not Necessrily Good
by Rob G
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#1001104
of 3278
26 Nov 2002
07:34 PM |
I am of the opinion that low interest rates are not necessarily good for the economy in the medium term.
Low wage inflation leads to poor morale in the workforce and reduced productivity.
Low borrowing rates lead to dangerous debt levels.
While the housing market is 'adjusting to a low interest environment' by increasing prices, it is not taking into account the damping effect this will have in the longer because of the implicit low debt depreciation this also brings. This may lead to price stagnation for years, and may even be a good thing, acting as a damper on the market. It will act too slowly to prevent the impending downturn however.
In the '70s, exactly the opposite was happening. High interest rates were being touted as the reason why property was increasing in value rapidly. Buying property was seen as a hedge against inflation.
What this tells us is that exceptional economic conditions, such as we now have, will lead to exceptional swings in the market, such as the current property and personal borrowing bubble.
It will come and it will go. No sharp rise can logically be followed by a gentle fall. The psychology of the market will not allow it.
As I have said many times, buyer psychology is the key. |
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Lies... lies
by The Grand Inquisitor
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#1001103
of 3278
26 Nov 2002
07:13 PM |
Here are some related to stimulate debate annual sales volume (000s)from 1970-2002. Do these equal quantity supplied and demanded?
1970 1095
1971 1201
1972 1343
1973 1244
1974 968
1975 1174
1976 1190
1977 1239
1978 1365
1979 1306
1980 1267
1981 1351
1982 1542
1983 1669
1984 1760
1985 1743
1986 1801
1987 1937
1988 2148
1989 1580
1990 1398
1991 1306
1992 1136
1993 1196
1994 1274
1995 1135
1996 1242
1997 1440
1998 1347
1999 1469
2000 1433
2001 1458 |
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Niggles maffs: a sense of proportion and perspective
by The Grand Inquisitor
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#1001102
of 3278
26 Nov 2002
06:52 PM |
Niggle while you say that charts, i.e. graphical representations of data are unreliable you then suggest that this uptrend has a away to go because the the swings in the chart are increasing in size.
In proportion the swings are almost equal in size i.e. at the two large peaks of 70s an 80s the peak price is circa 40% above the trend line.
Perhaps you need to adjust your perspective |
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Complacency
by Engineer
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#1001101
of 3278
26 Nov 2002
06:44 PM |
Niggle, you may be correct that there is still scope for prices to rise further in this current upswing. I would not like to try and call the top of any market. However, I believe that you are being dangerously complacent when you suggest that all the fundamentals point to further growth.
In fact, the current situation looks extremely precarious. Very few of the respondents to the FT poll on this site believe that the market has much room for further growth, and a clear majority believe that "the bubble is about to burst". I have argued that the third scenario of the market gently leveling out is the most unlikely, and nobody has yet provided a single example of any previous market where rapid growth has conveniently changed to a gentle plateau. This is because there are positive feedback loops at work that always cause markets to overshoot the fair value level making a correction necessary.
Furthermore, I cannot see why any specific trigger would be required to cause a correction. It could simply come about through a combination of many factors starting to assert more and more "pull" in the opposite direction, until the upward momentum stalls. Then these factors that have been "pulling" downwards will cause the market to retreat, and this will feed on itself in a similar manner to which the boom has fed on itself.
Please don't say "but I won't sell and there will be plenty like me, so the market will remain stable". This is an irrelevant point, as there are plenty that are not currrently in a strong position, and equity withdrawal is increasing. Why should the property boom escape the consequences of the general economic downturn? |
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Just one niggle
by Andy B
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#1001100
of 3278
26 Nov 2002
06:34 PM |
Niggle,
Having read your postings and not surprisingly agreeing with them (given they mirror my own over previous weeks) I have one Niggle:
What happens if we have too many people like say Rob G? Then we do risk a boom and bust. Rob G's argument is simple - buy at the bottom of the market and not at the top - if you can identify these points.
The answer in my view is if this did happen (a bust I mean) then the long term real price in housing will increase - since over the next few years there will less housing built due to less profits to make in this industry and lower short term demand.
In the long term I believe all Rob Gs (as an example of a FTB) will buy dwellings - or try to if they do not leave it too late!
Regards,
Andy
PS Keep Niggling away. |
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an addition:
by Si
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#1001099
of 3278
26 Nov 2002
06:20 PM |
| Sorry, Niggle, I didn't mean to pointlessly contradict 'Prices are not however disproportionately above the trend line to any great degree'. I'd say that, in the absence of a clear trigger, it's hard to say just how close we are to any correction. But the thing with a trigger is that, once you've identified it, it's already happened, discounting into the market pretty quickly. |
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a quick reply
by Si
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#1001098
of 3278
26 Nov 2002
06:16 PM |
Niggle,
The lack of alternatives doesn't make property a fundamentally better investment, does it? Surely that's just bubble-economics? And if, as I guess must be the case in some parts of London where rentals have fallen dramatically, even a cash (no mortgage) buyer in property would be worse off than even the low-interest alternatives of savings accounts, or bonds or whatever, then this would hardly encourage rational investment (input on this invited as is an educated guess). Looking at prices around me in North Leeds (a regional hotspot, for those that are interested), I can see valuations that cannot justify buy-to-let mortgages except if relying on value-appreciation. If your longer-term view is correct then this would be justified, but otherwise, transactional costs and inherent risks would rule it out as a good investment over the 2 years or so still left in this cycle where I am(?).
Another thing on the downside, I would guess, is that further deregulation merely allows bubble-economics greater magnitude. As I said I think over the long-term fundamentals, which you have re-iterated, notwithstanding disaster, justify longer-term growth, but things like actual demographic influences and personal wealth are quite debatable. I don't think recent price rises are consistent with this though, being far above the positive long-term trend.
Thanks again,
Si |
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perspective
by niggle
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#1001097
of 3278
26 Nov 2002
05:58 PM |
Knowledge is Power & Rob
I agree that house prices seem to be above trend, - the Nationwide chart shows this. I’m glad to see a longer term perspective. Prices are not however disproportionately above the trend line to any great degree. The swings in the chart are increasing in size, and that is why I feel there is still room for some further growth in this current upward swing. Add to this some shifts in fundamentals such as the move towards the private rented sector from public, changes in population demographics, more single households etc. More personal wealth. Add in all the current economic pressures for people to invest in property, whether it be their own home or as a BTL investment. Add the exposure to market forces of interest rates following the new B of E rules for inflation control. Add the deregulation and subsequent new competition in the mortgage market place. Add the Housing Act ’88 which made Buy to Let a realistic and viable investment option. These are long term changes to the ground rules in valuing property.
The longer term political pressure is for us to become compatible with Europes historically lower interest rates. Rates will continue to fluctuate as they have always done, but the pressures are for lower rates over the longer term, and this is reflected in the reductions in the rates applicable to fixed rate mortgage deals around now. The market has already adjusted to this to some degree, but there is still room for more.
Many people still hear the talk of “negative equity” from 10 years ago, and I’m sure this is still putting some people off from buying property. They should look at the fundamentals – the property “crash” of the early 90’s was in fact a mere cooling or market correction representing less than one (current) years’ growth in the property market.
In the US, more of the population own stocks and shares. Whilst this form of wealth is increasing in this country, our culture is still biased towards the Englishman’s Home = Castle philosophy. We also have less land to build upon and generally much stricter building controls. Those already in their Castle do not want a block of flats next door, so they will oppose the governments proposed massive building programme. Compromises will be reached, but they will not address the whole of the country’s housing needs – it will only reduce the pressure to some degree.
Knowledge is power:
I don’t see that earnings ever need to catch up with property prices – at least I don’t see a need for them to revert to any historic norm (if this can be defined)
As long as people can still buy homes, they will. Help from parents, local FTB initiatives, the demographic shift towards smaller households, lower interest rates over the longer term, and deregulation of the mortgage market are just some of the new factors having long term supportive effects on house prices. These are the things that seem to have caught market commentators unaware during the recent “boom”
Sentiment will always affect markets, but keep it in perspective and look at the basic fundamentals.
To all the “chartists”
Charts only work when comparing like with like.
The housing market today is fundamentally different to what it was 10, 20, 30, 40 or 50 years ago. Factor the changes in to your charts and then they are worth studying.
Take a short term view, and a worst case scenario in my opinion may be a small correction – say 10%
Take a medium or longer term view, and you cant lose in property.
Si
Hi
Just read your post – as stated above the pressure is in fact for sustainable longer term lower interest rates – this is just what the government needs if we are to enter ERM
BTL investors are now buying less (but still buying!) because rental yields are falling. There is little evidence of them selling to any great degree.
If people don’t have cash they stay put.
Those that do have some cash need to put it somewhere other than under their mattress. Where do you suggest, if not into property?
Keep the perspective! |
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Niggle, the medium term, low interest rates do not mean that the sun is shining
by Si
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#1001096
of 3278
26 Nov 2002
05:25 PM |
Niggle,
Hello,
In times of crisis (are we referring to lost capital from the recent stock-market collapse, war, a bit of both?) there is ultimately less capital floating around. Witness the downsizing of Royal and sun Alliance, the near collapse of Equitable Life, and the increased cost of insurance, and impending need to increase taxation.
People will HAVE less money available, through various roundabout routes (oh, and increased unemployment is likely because industry, too, is in debt, although there aren't a great deal of signs of this, granted, perhaps until consumer spending slows...). People are more likely to downshift than upshift if they start to have less cash for one reason or another, whether the property they rent or own. If people are WITHDRAWING money from the market, either thru' lower rentals or downshifting the home they own, well that cannot lead to upwards pressure - I thought the point of price rises is that cheap/plentiful money has allowed people to inject more and more money INTO property. Sure, long-term demographics points towards rising property values, notwithstanding a really massive recession or even a fundamental shift in the geo-economical nature of labour-mobility - neither of which I am qualified to elaborate on. Medium-term, low interest rates only reflect a desire from central bankers to compensate for a lack of capital, I think, and therefore don't imply sustainability in private borrowing to prop up the market.
Regards, Si |
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Appologies Niggle
by Knowledge is Power
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#1001095
of 3278
26 Nov 2002
04:47 PM |
Niggle,
sorry for mis-quoting you. It was infact post #1081 by Jeff Morgan I quoted from.
I agree with your affordability argument (i.e. as interest rates are cheap, so too is lending), however, the prices themselves are IMHO very high (in the historical relationship to houseprices to income). Yes, I am aware that monthly repayments represent a fraction of the take home pay, but the bottom line (as we all know is that this is subject to change).
Eddie George feels that interest rates won't fall further, and with the prospect of above target inflation for 2003-4, I think a rate rise will be on the cards at some point. How this effects affordability will be interesting & is really dependent on how far FTB have streached themselves.
I still can't see how the market will stagnate indefinately whilst earnings catch up. I'd of thought that FTB will wait if there is the opportunity of a dip in prices, and this will cool the market in itself & encourage people to reduce the advertised price of their property to encourage the sale. If this starts a trend, then I can see a snowball effect & a major slide.
I don't however think that a war or other pin is needed to reduce prices. The US economy looks pretty screwed & I can see things deteriorating from here on. with global trade down, we can't rely on the UK economy picking up to realise the wage rises need to sustain the housing market. With out fuel it will burn out, but the chance of more fuel is running thin.
From your comments niggle, It seems to me that you don't think the housing market is a bubble? I'm not sure if I agree with this. |
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Bounce-Back?!!
by Rob G
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#1001094
of 3278
26 Nov 2002
04:41 PM |
The general perception or presumption appears to be that we are in or have
just seen the crest of a "boom" in the market. I question this view on the grounds
stated in my previous post. I explained that we had a correction or bounce back
from the stagnation in the early nineties. That accounts for a fair chunk of
the gains we have seen in recent years. What is left is not that extraordinary
when set against historic growth over and above inflation during the last century.
All the fundamentals point to further growth.
Does this look like a bounce-back to you, Niggle?
Nationwide house prices chart
[Picture changed to URL. Rob, paragraph breaks are inserted where there are carriage returns in your postings - no need to put them in specifically. CS]
[This message was edited by Monitor_CS on 26 Nov 2002 at 04:55 PM.] |
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