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| The UK housing market: a bubble about to burst? |
Sculling Singapore Slings
by Hoogstraten
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#1001153
of 3278
 29 Nov 2002
04:04 PM |
Singapore D (Dismal or Deranged?)
Congratulations. Another masterpiece contribution – concise, inspired and riveting. The next step is to learn to count.
Si – I don’t necessarily agree with you when you say:
“It clearly points out that a good location survives a downturn better, and will recover from negative equity better”
Slum property has fixed rentals (being DSS rent); so capital values tend to be a more a reflection of interest rates levels. This type of property (being income based) would have a good chance of surviving relatively unscathed from a downturn (in fact, there would be more tenants).
Secondly, the mild “recession” that we are apparently experiencing, is a full-blown recession in investment banking (and probably telecoms and a couple of other industries). The rest of the economy is doing okay. Since investment bankers are generally higher income bracket individuals, it is expensive property that is taking the hits in this slowdown. How permanent the cuts are in city bonuses, only time will tell. This would probably help to explain the shrill, hysterical predictions of 70% price falls that one contributor has generously given us.
Suffice to say, that this issue means that expensive property in the best locations have in my view the highest price risk in the short-run. In the long run property values will be strong, as history shows.
I was proud of Rob G how he finally grasped that prices are set at the margin –I imagine he is feeling quite chuffed right now...
I can’t help thinking that the psychological effect of winter, with its short daylight hours and grey skies is affecting the meek doom mongers contributions. Maybe if they took a few days off in a sunny country, the cup that was half empty would suddenly appear half full?
Finally, there have been a few mails as to why the BOE and OECD are concerned with property price rises, if it is not an issue. I think the simple reason they are concerned is because indirectly this is their job to be concerned. Enough said. |
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Forecast - the tail wags the dog
by Jeff Morgan
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#1001152
of 3278
29 Nov 2002
03:55 PM |
Si - I'd love to invoke a long explanation of my 10% - 20% fall forecast but it would be better to admit it is a Wild-Arse Guess (WAG). A case of the 'price' WAG tailing the 'value' dog perhaps?
Seriously, more than one post has warned against first-time buyers punting the market just now. I would agree with that - not completely because there may be parts of the country where there won't be a fall in prices, or where the FTB actually wants to live (and dosen't intend to move, and so on...).
I also agree with you about areas changing, some coming up and some going down. That makes some of the decisions for first-time buyers even harder.
I think that, in general, it makes sense to consider the market 'as a whole' when making the initial decisions about buying, as long as one also takes ones' future ability to pay into account. But when it comes to buying a house and striking a price, loads of other factors come into play, far too many to list. It's the myriad factors that make the act of buying often one of the most difficult judgements we ever have to make, whether being a first-time buyer, trading up, trading across or cashing in. |
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I'm With Singapore
by Rob G
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#1001151
of 3278
29 Nov 2002
03:48 PM |
Singapore D,
I think you struck the nail on the head with the economists jibe.
People who bury their heads in numbers and stats and ignore the human factor do so at their peril.
There's no computer in the World that can predict the crash. Computers don't have a way of measuring fear... |
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response to Hoogy
by Singapore D
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#1001150
of 3278
29 Nov 2002
02:49 PM |
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"Perhaps it could be that you do not understand economics, hence your reference to it being “dismal”, and preferring your opinion based on tea leaves or whatever else?"
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Actually, the term 'Dismal Science' was coined in the late 19th century, specifically to describe the rather obvious failure of economists to predict, prevent or remedy such events as the South Sea Bubble.
If you don't know that, then you aren't a trained economist.
A room full of chimps could do a better job of predicting the future direction of house prices than a room full of economists.
Give me the tea leaves any day. |
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Jeff - this is further illustration of the importnace of location...
by Si
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#1001149
of 3278
29 Nov 2002
01:57 PM |
Fair enough, Jeff. It clearly points out that a good location survives a downturn better, and will recover from negative equity better.
I suppose this could be described as patchiness, but I admit that I overlooked this as an interpretation!
And of course poor locations can, in the long-run, through various geo-economic facors, become good ones, but I wouldn't hazard an 'up-and-coming' area right now though, as they can equally never recover their losses in a correction, ie become much worse for the social/economic shock.
When you say 10-20% falls, are you ascribing this to the market as a whole? I have to take issue as I don't understand why.
Cheers, Si |
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Correction, yes
by Jeff Morgan
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#1001148
of 3278
29 Nov 2002
01:42 PM |
Si, no offence meant, no offence taken.
There clearly was a correction, in the price of houses transacted and in the assessed value of houses not transacted. I think I can clarify my posting, by reference to our property.
We bought in 1986 for £105,000. By 1988 the value (ascertained from local papers) was somewhere about the £210,000 - £230,000 mark. Through 1990 - 1995 we took the value as centering on £230,000, though these figures were much less reliable because there were few transactions. Recent valuations (one from an estate agent of our area, also from local papers) put the value at around £750,000.
But, we never sold, in fact we never put the house on the market. Therefore we have no idea what the price of the house would have been through the late '80s early '90s. And, it's nearly impossible to link the value with the price because so many factors come into play that are unique to that sale alone.
We have been thinking about selling, to trade 'across' from one area to another, but we are under no pressure to sell so we probably won't bother and so we will still have no idea of the price we could get right now.
My main reason for looking at the figures is to try and grasp the scale of the market. In the end the market can only work on actual transactions and it seems that they are quite a small part of the whole. It doen't make the market any less real but we need to understand the scale of the effects to see how big the knock-ons are.
It's clear that for people who want to buy or sell the only number that matters is the price. The value is of interest to many because it informs their decision about whether to seriously consider selling, or to extend or to remortgage. House values are important to the economy; but house prices are the only 'real' figure when it comes to deciding whether or not there was a boom or a bust.
Si, forgive me if I still haven't clarified my thoughts properly and I'll have further goes if needs be. |
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Turnover is Irrelevant
by Rob G
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#1001147
of 3278
29 Nov 2002
01:41 PM |
Guys,
The number of houses sold during a crash is pretty irrelevant. It is likely to be lower rather than higher.
All that is required is sufficient sales (or offers) to indicate what the general fall in prices has been.
Let me explain with an extreme example:
If houses were considered to be such a bad bet that nobody at all was buying, you could effectively assume that the value of your house was nil, without achieving any sales at all. You might reduce the advertised price of your house to £1 and still have no takers.
This is obviously not realistic, but perhaps you can understand how sale prices can fall without any turnover at all.
In actuality what will happen is that as buying confidence drops sharply, say after prices finally peak, turnover will temporarily fall to a very low percentage.
It will take some time before estate agents begin persuading people wishing to sell (of which there will always be some) that they need to reduce the asking price in order to generate interest.
At the point where you start getting prospective buyers making offers again, the current point of the market is now determined.
You will maybe only have turnover of 1% of the housing stock on the downward slope of the price fall, but as it begins to slow then buyers will return to the market and as turnover and confidence increases, prices will gradually begin to rise again over the course of a number of years.
In the mean time, there are likely to be a lot of failed chains where somebody loses confidence during the sales process and drops out at the last minute.
Of course, this then starts the whole bubble scenario again, but some people will never learn...
The idea that for prices to fall you must have a certain level of turnover is completely false. |
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so what happened 89-93 then?
by Si
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#1001146
of 3278
29 Nov 2002
01:08 PM |
...but does this mean there wasn't a correction then just because 93% of people didn't sell in any one given year? And that correction also clearly followed the general London ripple-effect reversed, not a patchy (as far as I know) pattern. Would the market be that different another time around? Just because nobody in a nice neighbourhood transacts doesn't mean the price they WOULD get wouldn't be effected by the bigger market, as all areas compete with each other in an open market, and there has to be a cost-saving in a poorer area that buyers are prepared to save on in preference to a huge price difference in an 'uncorrected' nice area, so implicitly all areas will be effected?
I'm not trying to upset you, just interested to clarify.
Thanks for your reply,
Si. |
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Applicability
by Jeff Morgan
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#1001145
of 3278
29 Nov 2002
12:36 PM |
SI, for the houses that were sold an average price would have been 40% (or whatever, adjusted for inflation).
For the 93% not sold there was no price, in fact there could not have been a price. |
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Jeff
by Si
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#1001144
of 3278
29 Nov 2002
12:28 PM |
Aren't these figures merely illustrating that only 7%ish turnover was required for a 40% correction in house prices, once inflation was taken into account?
Regards, si |
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Loaded words
by Jeff Morgan
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#1001143
of 3278
29 Nov 2002
11:24 AM |
Knowledge is Power #1121, more good points but I wish you wouldn't use loaded words like 'massive' as in '...if there is a massive increase on the number of flats on the market'.
Using Grand Inquisitors figures from #1103 plus my admittely unreliable 'long and stringy' calculation of a previous posting, I get:
1986 - 1989 (sales '000s) 1801, 1937, 2148, 1580. Assuming a housing stock of 16.5 Million (worked back from my 18 million now) that's an average of 11.3% of housing stock traded annually over this period [end of hous price boom].
1991 - 1995 (sales '000) 1306, 1136, 1196, 1274, 1135. Assuming a housing stock of 17 Million (worked back again) that's an average of 7.1% of housing stock traded annually over the period [house price 'crash'].
1997 - 2001 (sales '000) 1440, 1347, 1469, 1433, 1458. Assuming the 18 Million stock that's an average of 7.9% of housing stock traded over the period [house prices accelerating].
I don't see 'massive' changes in the 90's and I don't see 'massive' changes over the whole period of GIs figures, from 1970. Is some fundamental going to change to make more than 8-9% of the stock available?
[For those who don't remember my previous forecast - no reason for you to - it is for a 10% - 20% drop, but patchy, and then to stay flat for a while. So far I have seen nothing in the figures or the discussion that would cause me to alter that forecast]. |
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Read This
by Rob G
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#1001142
of 3278
29 Nov 2002
10:32 AM |
http://news.ft.com/servlet/ContentServer?pagename=FT.com/StoryFT/FullStory&c
=StoryFT&cid=1037872409686&p=1012571727085
Here you are; pretty much everything I've been talking about for the last few weeks in an FT article written by a tutor in economics at Oxford.
You can't get much more independent than that.
(Edited by FT to break long URL)
[This message was edited by Monitor_JL on 29 Nov 2002 at 02:12 PM.] |
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Singapore D (for drunk?)
by Hoogstraten
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#1001141
of 3278
29 Nov 2002
10:19 AM |
Singapore D – this is one of the most extraordinary contributions ever made on this site. I wonder whether it is the work of a cruel prankster?
Are you a genius? I think you should publish. You say:
“I feel the need to point out that markets are not driven by economics alone. “
I think by this you mean sentiment also plays a part in economic decision-making. It is amazing that some of the greatest minds in history (Smith, Ricardo, Friedman, Keynes etc) never thought of the concept of sentiment when writing economic theories! Then again, confidence and sentiment may be one of the centrepieces of some of their theories, and you may just lack the requisite economic knowledge to understand what these economists said…
You add:
“Economics (the 'Dismal Science') has little to say about the tech stock bubble of the late 90's or the house price bubble of the late 80's. These events are largely technical events, driven by fear, greed and all the other un-scientific emotions that cause investors to make decisions.”
How unusual are these events? Ever heard of the South Sea Bubble of the 1700s? Or the share market run-up before the Great Depression? Isn’t it strange that all economists missed them? Or maybe some of the great economists actually spent their entire lives studying these events, to come up with policies to alleviate the problems that result from these “bubbles”.
Are you saying that the alleged “bubble” is like an act of god, and there is nothing that policy-makers can do? Perhaps, then, we should make sacrifices to the gods, and this will ensure we don’t have this “bubble” problem you speak of? My preference would be to use economic theories to make predictions, based on thousands of years of empirical evidence. I see a place for logically argued economic theories developed by geniuses to guide us, rather than policies based on witchcraft and voodoo.
Perhaps it could be that you do not understand economics, hence your reference to it being “dismal”, and preferring your opinion based on tea leaves or whatever else?
In this world, there is a difference between having an educated, well-informed view to having a view based on absolutely nothing. I think to be logical it would help if before you dismiss economics you first gain at least a basic understanding of it. |
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Great Depression
by Andy B
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#1001140
of 3278
29 Nov 2002
09:42 AM |
Just to add to Hoodstraten's views:
The Great Depression was probably made at lot worst by the US Government's 'Dash for Growth' policy. This government plan, increased AS quicker than stimulating AD so the gap between the two widden. Creating greater deflationary pressures.
You will note that such a policy is not being used in modern times by monetarist state run economies.
I would be interested in Extra Dry replying to my posting on his credit crunch theory and banking regulation.
Regards,
Andy. |
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response to Hoogstraten
by Singapore D
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#1001139
of 3278
29 Nov 2002
09:03 AM |
Hoogstraten says:
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"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."
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Apart from the rather snotty tone of this comment, I feel the need to point out that markets are not driven by economics alone.
Economics (the 'Dismal Science') has little to say about the tech stock bubble of the late 90's or the house price bubble of the late 80's. These events are largely technical events, driven by fear, greed and all the other un-scientific emotions that cause investors to make decisions.
Economics also cannot predict the outcome of the current house price bubble, but judging by the outcome of the previous one is isn't going to be pretty. |
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