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| The UK housing market: a bubble about to burst? |
Will the meek inherit the earth?
by Hoogstraten
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#1001138
of 3278
 29 Nov 2002
05:51 AM |
I note that of late the lunatics appear to have taken over the asylum on this forum. Contributors call hysterically for recounts of the latest tallies of how their fellow sheep have voted. The helps to keep the illusion of property crash alive – the illusion becomes real, and the more real it becomes, the more they want it.
Will there be a property collapse? Maybe. And will the meek inherit the earth? Maybe. Why the analogy? Because the doom mongers (hereafter referred to more correctly as the meek) have generally never made the plunge into property, so they cling to the concept of its collapse with almost religious zeal. They know they have missed the boat badly, and property collapse represents them with their only opportunity for redemption. Like crazed gamblers, they outbid one another with higher and higher estimates of the impending property Armageddon. They remain apparently plucky and unconcerned about the fact that their meekness prevented them from making a killing years ago. Why is this? In the words of one of the sickly liberal Kennedy’s, “You show me a good loser, and I’ll show you a loser.” The meek are encouraged to become full-blown doom mongers by the tabloid press (FT included), with their sensationalist headlines, designed to shift more papers.
The meek are arguing that there is going to be a 50-70% fall in property prices – another Great Depression.
Extradry Martini argues in posting #1001031 of 1087 that this supposedly imminent Great Depression will be based on a supply sided credit crunch. I am afraid that, yet again, I am going to have to correct your faulty economics on the nature and causes of the Great Depression. I am getting slightly embarrassed myself with the number of times I need to correct your faulty economics – I will therefore give you a reading list to help you get up to speed.
Extradry Martini says:
“As you say [Hoogstraten himself], 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… 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.”
I certainly never said that the Great Depression was triggered by a supply side crash, because it would have been patently idiotic and wrong to suggest it was.
The Great Depression was triggered by a collapse in Aggregate Demand. According to Classical economics and Say's Law, "supply creates its own demand." A glut of goods on the market was supposed to be impossible, because the public's demand is infinite; therefore, there can only be shortages of supply. Note that Says Law was abandoned by Classical economists after the Great Depression.
It is a fact of economics that most recessions are preceded by a glut of goods on the market, and this was especially true before the Great Depression of 1929 (and Japan in the 1990s). Supply was everywhere; demand was nowhere. Why? Because a growing number of people chose to hoard their money rather than spend it. This is a rational anti-poverty strategy for individuals, but it has unintended and damaging consequences for the group.
Consumer confidence collapsed in the economy before the Great Depression – not the supply of goods and services (although the collapse of Aggregate Demand did trigger a later collapse in Aggregate Supply as well). Worried consumers tried to weather the coming economic hardship by saving their money. This created a vicious circle: people hoard money in difficult times, but times become more difficult when people hoard money.
What this represents is a shift in the Aggregate Demand curve to the left, and this induced a shift in the Aggregate Supply curve to the left also. In a Great Depression, this induced further later shifts of Aggregate Demand and Aggregate Supply to the left.
Keynes believed that depressions were recessions that had fallen into a "liquidity trap." Clearly, the UK property is not currently caught in a liquidity trap, until interest rates have been cut to 0%. This is unlikely to happen, because we are not in a deep recession, let alone a Great Depression. The Great Depression was mainly a consequence of monetary and fiscal policy being inappropriately tightened at the outset. Monetary and fiscal policy options are available currently, which should ensure that there is no repeat of the early 1930s failings, should conditions even begin to deteriorate as you envision.
Finally, I am a monetarist economist, but it has been accepted by virtually everyone that the trigger for the Great Depression was a collapse in demand. Supply was plentiful at the beginning of the Great Depression, but demand collapsed. To back up your supply sided “credit crunch” theory, using the Great Depression or Japan in the 1990s as examples, is simply incorrect. I think even Rob G understands this. Start again.
Try reading:
The General Theory of Employment, Interest and Money (John Maynard Keynes, 1936)
The Great Crash 1929 (John Kenneth Galbraith 1954) |
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FT article TODAY!
by Singapore D
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#1001137
of 3278
29 Nov 2002
05:39 AM |
There is an excellent article in today's FT (at least in the Singapore edition, probably UK edition too) about house prices.
While the article does not say that prices will crash, it does say that the housing market is displaying many of the characteristics of the 1989 house price and subsequent crash. |
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To the moderator
by niggle
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#1001136
of 3278
28 Nov 2002
08:43 PM |
| I too would like to see a month by month breakdown of how the voting may have changed |
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Rentals
by Si
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#1001135
of 3278
28 Nov 2002
04:29 PM |
Zorro - fair enough.
Did this analysis say how it might be effected in the event of any kind of housing market downturn? |
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Again - rentals
by zorro
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#1001134
of 3278
28 Nov 2002
03:58 PM |
Latest analysis of the rental sector from FPD Savills shows tenant demand should increase in the second half of 2003.
"I think rents (in London and the South East) will be mostly flat next year after falling significantly in the last few months," said FPD's head of residential property research Richard Donnell. He thinks rents will start to rise towards the end of next year as more first-time buyers worry about property price falls and decide to keep renting.
"There's no evidence of investors rushing to sell their properties."
In the anecdotal evidence available to me, investors in London seem to be selling off flats but still buying houses mainly for conversion into flats. Extradry (I think it was you): yes, I too would be very interested to know where you got your very interesting statistics on the property market in Spain.
BP: where in Spain are you? |
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An excellent suggestion
by Knowledge is Power
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#1001133
of 3278
28 Nov 2002
01:39 PM |
Hoigby
An excellent suggestion.
Channel Monitor,
If you could include the number of votes per month, this would give an even greater level of detail to the plot. |
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Poll
by Nick S
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#1001132
of 3278
28 Nov 2002
01:29 PM |
| Just to say I second Hoigby's suggestion in the previous post. |
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Poll Results
by Hoigby
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#1001131
of 3278
28 Nov 2002
01:27 PM |
To the Channel Monitor:
Could we see the month-on-month split of the votes results as I suspect the incremental votes for the 'crash' scenario has been growing over time, and the results presented are no longer a reflection of current opinion.
The changes over time will give a reasonable picture of which way sentiment is moving which in turn would be a reasonable proxy for the future price direction. |
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Mr Brown - you are a narrowmided fool.
by Knowledge is Power
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#1001130
of 3278
28 Nov 2002
11:47 AM |
Mr Brown's latest comment on the housing market is pathetic! If he said anything less, he'd of said nothing at all. Does he actually care about the public? When are politicians going to realise that things are far from "hunky dory", there are real problems in the future, but the won't even acknowledge it. Labour, socialism, what a con!
taken from;
http://uk.biz.yahoo.com/021128/80/dfn8c.html
"LONDON, Nov 28 (Reuters) - Britain's Chancellor of the Exchequer Gordon Brown said on Thursday the Treasury expected the country's red-hot housing market to slow down.
"We expect the housing market to slow next year...and business investment to recover," Brown said in a radio interview, but would not elaborate on what he meant by "slow".
"You know that the housing market is a different series of markets. We see the problem in London and southeast as a problem of supply and demand. The market is uneven throughout the country."
The Bank of England, which sets the country's interest rates, said recently its central forecast was for inflation in the housing market to slow to zero from the current 30 percent over the next two years." |
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Hail the King!
by Knowledge is Power
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#1001129
of 3278
28 Nov 2002
10:41 AM |
Interesting article on Mervyn King & his future appointment to the BoE.
In my view he seems publicly more outspoken on the risks of our economy, particularly with the runaway housing market.
http://www.guardian.co.uk/business/story/0,3604,849357,00.html
Regards, K.I.P. |
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by BP
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#1001128
of 3278
28 Nov 2002
10:16 AM |
Extradry:
You say:
in a recent survey it was shown that 85% of town and district mayors in Spain have significant holdings in construction/development companies.
I live in Spain and am intrigued. Please, can you let me know the source of this survey?
You also say that there has never been a fall in nominal real estate prices in Spain.
Wrong, nominal house prices in Spain fell by 8.9% in 1992 and by 3.7% in 1993, and remained flat over the next three years.
In real terms, house prices fell by 34.3% between 1992 and 1996.
By the way, I otherwise agree with most of your analysis on the immminet collapse of property prices in London. I think the same is about to happen in Spain.
The collapse in Spain will be particulalry brutal in the market for holdiay homes, which is a huge industry here. In hard-times, people rush to sell their second homes. This is what happened in the last recession, when you could pick up a coastal property for peanuts. So if any readers are considering buying a property in Spain, wait for 2-3 years, and there'll be bargains gallore.
One reason why Spanish property prices are so high relative to income is that bank mortgage margins are very tight. Typical variable rates now available from the main Spanish banks are indexed to the euribor money market rate plus approx. 75 basis points. The standard mortgage rate in Spain currently stands at just under 4%, considerably lower than in the UK.
As for the low-interest rate and affordibility argument being used by many in this forum:
mortages entail a capital payment and an interest repayment: no matter how low interest rates go, the capital payment still has to be paid off. For this reason, if the Bank of England lowers interest rates to zero, it will not now have a great impact on the total mortage costs. A 100,000 pound 20-year mortage costs 666 pounds a month with interest rates at 5%, and 505 pounds a month at 2% (which is about as low as mortage rates can get if the the BoE base rate goes to zero). There is no margin for a further fall. |
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Housing and rent
by Mr X
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#1001127
of 3278
27 Nov 2002
05:30 PM |
| The great inquisitor 1122. Your comment about BTL with no margins anymore. What nonsense !! Look at my previous posts vis a viz house prices in other parts of the country eg East Midlands, etc and even FTB for BTL can still make substantial margins. Furthermore, consider those who have owned for many years [and indeed have little or next to no mortgage and low maintenance costs) and see how they can reap the rewards. |
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Rentals etc
by Engineer
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#1001126
of 3278
27 Nov 2002
05:25 PM |
Some interesting discussion here today.
Jeff, you are right that quite a lot of people will not really be affected by a bust in the market (e.g. well-established people who have managed their affairs in a responsible manner). But then, by the same argument, they haven't really been affected by the boom either. If you do believe that there will be a decline in prices, though, then surely it makes sense to sell any property that you do not need to live in to realise your gains, and then buy in again later when prices are lower, rather than just "sitting it out"? I suspect a fair number of investors may try to take this route, leading to greater supply of smaller properties.
With regard to the number of flats to let, this has probably come about as a consequence of both the popularity of buy-to-let and the general economic decline. I think that there are a reasonable number of "migrant" workers who move temporarily to where the work (and top money) is, but don't want to restrict their mobility by purchasing property there. During the technology/telecomms and financial booms, there was a lot of good money to be made in London and the SE, attracting a lot of these people, and either they or their employers were able and prepared to pay good rents for convenient flats. However, with the downturn in the technology and financial sectors, and the associated redundancies etc, the demand for flats is declining. Some previously well-paid people will simply return where they came from, or have a break/holiday somewhere cheaper until better times return. Many of the more ordinary workers can't really afford to pay the high rents (they share properties, live with family or commute long distances etc) - after all, if they could afford to rent, then they could probably have afforded to buy.
So my feeling is that the lower end of the market has been unrealistically inflated by BTL and the economic boom, pricing many of the more ordinary typical FTBs out of the market (seen in the statistics that show a significant reduction in FTBs in their 20s). Now there is this surplus of over-priced (relative to many ordinary wages) rental stock, and prices (either to rent or buy) will have to fall if it is to become accessible to a wider range of people.
Once could also argue that this buy-to-let activity has disrupted the normal operation of the property ladder, by buying up the flats etc that would be a typical entry point. There may well be a market for these flats for new entrants (provided the prices are realistic), but there will be a shortage of people with sufficient equity to pay the inflated prices being asked at the next rung of the ladder. So I feel that the whole ladder will have to move down due to the unaffordability of the lower rungs.
I will be surprised if rentals on flats etc increase in London and the SE anytime soon. Information suggests that there is an outflow of people, and redundancies etc are definitely reducing the numbers of well-paid people. A lot of people who are not already renting simply cannot afford to pay the inflated prices, so property will simply remain empty if prices go up, and many ordinary workers will simply have to continue living in undesirable circumstances or move elsewhere. Personally, I feel that rentals may come down further, and ultimately property prices will come down too. |
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Z for zigzag
by The Grand Inquisitor
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#1001125
of 3278
27 Nov 2002
05:23 PM |
Zorro,
On the rental issue I am not sure... since Si has a point on supply side, and perhaps the costs you need to cover may be lower.
But I do agree about the general atmosphere of sermon, lectern and trough.
From what does this spring? Multiple personality? Guilt complex? Self aggrandising/legitimising view of government's role?
Yes/No men? Business cycle management? Irresponsibility?
A good point for discussion. |
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correction
by Si
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#1001124
of 3278
27 Nov 2002
04:45 PM |
| Sorry, zorro, 'rocket' was a very poor and inaccurate choice of word. I meant 'go up'. The alliteration sounded good! |
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