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| The UK housing market: a bubble about to burst? |
Did you see this article
by KIPPER
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#1001437
of 3278
 09 Dec 2002
09:29 PM |
Did you see this article?
http://society.guardian.co.uk/housing/story/0,7890,707666,00.html
Shortage of housing, due to lowest building levels since 1927.
With regards to 5% of GDP down to house equity witdrawal. Well the argument is simple, this is maintaining inflation. Without the said spending inflation drops and so do interest rates. Thus house prices increase further, or as Newton would state,
"action and reaction are equal and opposite" |
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One for the bulls ...
by The RealFakeElvis
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#1001436
of 3278
09 Dec 2002
09:14 PM |
Did you see the following story?
More than 5% of GDP due to mortgage equity withdrawal spending!
http://www.observer.co.uk/business/story/0,6903,855746,00.html
Go on. I dare you. Tell us why this is a good thing. |
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Dare to walk a different step
by KIPPER
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#1001435
of 3278
09 Dec 2002
09:02 PM |
Sparkey,
FYI
” Well, after last weeks government budget figures and the appointment of Mervyn King
as BoE chairman. Well, to provide a pithy quote - "That's all folk's" - Bugs Bunny.”
Our interest rate policy is decides by the economic zones US and Europe. Europe and the US has cut, only a baby woulod consider there is no possiblility of further cuts.
”Next, unemployment - this will be caused by the basic restructing/collapse of the financial
services industry. Look, the FS employ - directly and indirectly - most of the south! The example from my last post was AMP - I guess you all have seen last weeks news.
You want more? Dresdner, JP Morgan (look out Bournemouth!), and any small to middling life company. There are grim times ahead people.”
Look at bubbles’s previous posting, the dark lord, he identifies what he calls the “poor factor”. The truth is redundancy from the FS, with a 20 – 30k payoff – what’s the fear. These people are never in the unemployment figures, they’d never qualify for benefit.
”The only factor I do not have a good understanding of is BTL - I just cannot guess how the
new landlords will react. My own guestimmate would be extreme panic - My own emperical evidence - just by walking around the middling southern town I live in - is bad. There are a shocking number of 'To Let' boards going up, and staying up for months!”
I fail to see any link! 50% fails, good luck!
”One final point, observed from my death bed. Has anyone watched daytime TV, esp. early morning chatshows on ITV + Chan5? Guess what 2/3 of the ads are for - consolidating loans, secured on houses. Ouch.”
This has always been the case, as it is if you watch sky channels, again I fear this may be the “poor factor” bubbles refers to. |
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“ Oh, dog biscuit when you get happy don’t get snappy” - Dutch Schultz
by Jack Straw
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#1001434
of 3278
09 Dec 2002
08:46 PM |
The concept of 3.5 times salary is just an arbitrary, rough formula used to calculate mortgage levels. Below, on a quick google search on “uk salary mortgage 5 times” I got the following :-
“The latest new deal is from Newcastle Building Society. A week ago it announced that it will lend borrowers up to eight times their salary”
“Borrowing six times your salary…. some lenders argue that with interest rates so low, the mortgage is still affordable. And they argue that this is hardly irresponsible lending if they are only prepared to forward these sums to customers who will see steep salary increases over the next five years.”
Daily Telegraph 27/02/02 - Help at hand for first-time buyers
http://www.telegraph.co.uk/money/main.jhtml? xml=/money/2002/02/27/cmfirst27.xml
US business organisational analysts claim that productivity levels, in the US, are better than the UK because of rigid, industrial revolution style hierarchical structures. This lack of fluidity can, they claim, can lead to a problem being able to respond to an active market, backed by Tom Peters. Examples of such businesses are British Airways and IBM, I know it’s a Us company but I could help it! My theory, backed by economic fact, is that the term of 3.5 time salary is outdated. You see over the duration of a mortgage what is expensive at the inception of a mortgage is ridiculously cheap by the end,
“In times of high inflation, your salary will rise fast and start to look increasingly large compared with your debts. For instance, the average mortgage in 1992 of £34,000 now looks quite manageable compared with today's average salary of £23,600 and average London house price of more than £200,000.
The average mortgage advance of 1982 of £12,000 seems small in comparison, and the average 1972 mortgage of £3,500 looks tiny. Inflation in double figures helped eat away those debts. The average 1972 salary was £1,670 a year, so a £3,500 mortgage loomed large at the time. The average 1982 annual salary was £7,100 - rising to £15,800 in 1992.”
http://education.guardian.co.uk/staffroom/story/0,12150,811696,00.html
Using the guardian figures above, the average salary in 1982 was 7.1k. 5 times this salary would be 35.5k. For 1992 the figures are 15.8k and 79k. Neither of these figures looks large in today’s terms, therefore you see it is the affordability of the loan that is in question. Given a period of low interest rates, and low inflation it is hard to see a trigger to increase rates, in fact the ECB cut their rate today. How do we solve this risk question? Well in the US Freddie Mac, the mortgage-lending rate, is set for 15 or 30-year terms (see below). Thus the affordability question is settled, obviously you are exposed to decreases, but all increase risk is taken out of the system.
December 5, 2002 30-yr 15-yr 1-yrARM
Average Rates: 6.19% 5.60% 4.21%
Fees & Points: 0.5 0.6 0.6
http://www.freddiemac.com/learn/cgi-bin/dLink.cgi? jp=/PMMS/display/PMMSOutputYr.jsp&ENV=PROD#Historical
With regard to socio economic issues you ask,
“You accept the government figure of 50% of the population going to university”
Well why not? But the crux of my point is that there has been a relative increase from 20% of the population. If this figure is 35% or 45% or 55% is really immaterial, what we are seeing is a gradual improvement in the overall education of the population. If you do not agree with this I would point out that 50 years ago people left school at 15. 50 years before that people left schools for factories at 12 or 13. Infact, in Bourville, there were occasions where people were paid in tokens to use in the company shop. This was due to the fact that there was no alternative, today’s education system which is almost double in duration to 100 years ago clearly gives new options, now is that,
“Freedom to choose?”
Milton Friedman
I would question why the most liberal people promote the continance of the UK manufacturing industry. Since it is the manufacturing industry that has produced the most authoritarian approaches to labour management in the UK’s history – assembly lines, puch cards and tokens for payments rather than monies.
But back to housing. There must be a dynamic approach to housing funding; you now have my answer to the question of risk.
Further we look at labour speak -
“It is merely another example of New Labour newspeak where exactly the opposite is true, as in 'shortening admission queues in the NHS' actually means 'expect to die on a hospital trolley'. Similarly, Tony Blair is trying to divert attention from the fact that by trying to raise university fees he will actually dramatically curtail the numbers of those going university. “
I have a closer knowledge of govt policy than you think, and its not that my username is jack straw. I can confirm that Mr Blair truly is trying to make the UK a better place, I’m a Tory through and through but I do recognise that. The health services, in this country, are of a high standard, as is the provision of education. To criticize the system that gave you the words to do so, MA in English, makes me lament on Caliban’s quote to Prospero in “The Tempest”,
"You taught me language,
and my profit on't Is I know how to curse.
The red plague rid you For learning me your language!”
But, of course my quote is tongue in cheek, the advantage of a libertarian society is the ability to criticize. I always look on anarchists with a smile, since the main anarchists always tell you what they will do when they are leader of that revolution! The fundamental failure of socialism, communism and anarchism is that they ignore the approach of self interest. As an aside, Marx ironically idealised the replacement of the capitalist with the worker, i.e. all profits are filtered back to the worker. Again the communist structure, and a socialist one to, has only taken monies from the capitalist and reassigned these monies to the bureaucrat not the worker. This historically has been the failure of the labour party in this country.
“ Oh, dog biscuit when you get happy don’t get snappy”
Dutch Schultz
With regard to social housing, I feel a new market was actually produced by the release of council property. For most working class families this was the “leg up”, or opportunity to own and set there own future. This has been a definite success and the figures, in my previous mail, prove that there is still more than adequate provision for social housing. The main problem appears to be, I note from my own councils advertising, that all applicants want the largest home available.
With regards to immigration, and also the UK job market, most availability is within the low skilled level. Both markets match each other! Infact I would suggest that the manufacturing industry, you lament the loss of, would not exist without this cheap supply of labour. I previously worked in investment banking, along side south Africans, Italians, germans, French, yanks, kiwis and aussies and some more I guess, there’s never much trouble getting skilled staff when the money is there – that’s the advantage of the capitalist system over the communist.
I believe we are in a “Brave New World” , but one of progression and not regression, as you and Mr Britain suggest. The very media we are communicating on, the Internet is one example of a “great leap forward” (by Englishman I may add), but not one chairman Mao planned. I would lament that the irony of our society is that today’s activist is tomorrows conservative, look at Jack Straw – he used to be head of the NUS! |
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"something smells fishy"
by KIPPER
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#1001433
of 3278
09 Dec 2002
08:38 PM |
I fail to see your logic, please elaborate with real figures.
You may have a valid point, but provide no figures to quantify whether this is true or not. |
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an update
by sparkey
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#1001432
of 3278
09 Dec 2002
05:16 PM |
Not posted for a while, very busy at work. But Im poorly today, so here goes.
"Moral Hazard"
A wide subject. Basically, a set-up where the downside risks of any activity is not paid
for by the person taking the risk. Good moral hazards of a housing theme:
1) US Saving and loans crisis, early 90s. The US government provided deposit insurance to
the S+L institutions. The S+L institutions took huge risks - mainly with property development - safe in the knowledge that the government would bail them out.
They failed, massively! The state's body politic still contains some of the actors - step forward 'shrub' - or it could have been jeb - and the whole Silverado goon show.
2) Morgage payment protection in the UK.
You take on a morgage. You loose your job. The government pays the interest.
Remember the news programmes in the ealry 90s with people who where receiving
£1000s of pounds from the government?
OK, this scam has been been reduced. Morgage interest is only paid after 9 months on
benefits, and then is capped at(not sure the exact value) 90/100,000.
To go back to the points I made in my original point, I think the housing market will be undermined by unemployment and interest rates rising.
I also think house prices will fall by 50-60%.
I'll answer the second point first.
I do not think there is much point trying to derive an equation to prove that housing
is too expensive; or fairly valued. Housing involves people and leverage - an unpredicatable
mix!
My reason for 50/60% fall is simple. Markets - as a rule thumb - tend too lose the last
five years of growth in a correction. To say tbat house prices will not fall is a bit
like saying that equities will not fall to values seen sice 86/97 - they have!
No I cannot provide you any proof - it's just a rule of thumb!
Now the first point: rising interest rates + unemployment.
Well, after last weeks government budget figures and the appointment of Mervyn King
as BoE chairman. Well, to provide a pithy quote - "That's all folk's" - Bugs Bunny.
Next, unemployment - this will be caused by the basic restructing/collapse of the financial
services industry. Look, the FS employ - directly and indirectly - most of the south! The example from my last post was AMP - I guess you all have seen last weeks news.
You want more? Dresdner, JP Morgan (look out Bournemouth!), and any small to middling life company. There are grim times ahead people.
Incidently, the hosuing market does correlate with the misery index - Interest rates + taxes + unemplotment. All 3 components are on the way up.
The only factor I do not have a good understanding of is BTL - I just cannot guess how the
new landlords will react. My own guestimmate would be extreme panic - My own emperical evidence - just by walking around the middling southern town I live in - is bad. There are a shocking number of 'To Let' boards going up, and staying up for months!
One final point, observed from my death bed. Has anyone watched daytime TV, esp. early morning chatshows on ITV + Chan5? Guess what 2/3 of the ads are for - consolidating loans, secured on houses. Ouch. |
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Moral Hazard
by The Grand Inquisitor
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#1001431
of 3278
09 Dec 2002
01:27 PM |
| Can anyone here tell me what "moral hazard" is? |
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to sho_ryuken #1411
by jeff morgan
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#1001430
of 3278
09 Dec 2002
12:34 PM |
You are mixing apples and pears in this posting. I'm making a mathematical point about correlations in general. It's not a point about economics.
Correlation analysis is an important tool to guide researchers. It avoids them wasting time and effort by indicating where there may be causal connections between data sets. The researcher can then seek the causal connection, posit a hypothesis to explain it, then test the hypothesis.
Correlations without causal reasoning are not helpful in explaining relationships.
On economics. I'm not an economist so I don't put economic points. I read others and of those who do put economic points, those of ExtraDry, Hoogstraten and Andy B have been useful to me in understanding not just the housing market but also whether or not there might be deflation and a depression.
In connection with the housing market I made some observations. It seems that less than 10% of the housing stock is transacted in any one year - about 92% is not. So the discussion about the price of houses is related to the 8% transacted. If the people who buy can afford to service their debt (all other factors taken into account) then their options to keep or sell remain open. The percentage of that 8% who can keep paying is not decidable - that's where this debate stands or falls, because value is only pertinent when it is realised.
Finally (because not everyone can take time to read so many postings back) I believe the housing market - prices of hoses sold - will decline by 10% - 20% over the next year, but that won't be even across the UK. [To me the idea of a 'UK market' breaks down when analysis of prices is undertaken. It's a useful headline figure but shouldn't be taken too far] |
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to Kipper
by Knowledge is Power
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#1001429
of 3278
09 Dec 2002
12:25 PM |
Kipper you state:
"Interesting that you state that the UK stock market is linked to the US. Of course, with regard to property this is relationship can be seen as inversely proportional. A part of the money leaving the markets generally flows in property."
This is precisely what has kept the housing market booming in the US & the UK (particularly Buy-To-Let). Look at the rises in the HPI & the falling stock markets. Notice a correlation? This is moving money around nothing more nothing less. And what happens to any money/investment market over time? It busts – prove me wrong if you like, but that’s a fact.
To be honest Kipper, Jack's comment's may be fascinating, but I've not the time or inclination to read them.
I personally believe that the financial/investment/property markets are governed by greed and fear far more than people care to admit. It is precisely by adopting these fundamentals (and the principles that Joe Blogs has on the street), that the HPI is ripe for a fall. Throw in the economic downturn and we're in an undeniably fragile situation here! |
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unemotional
by jeff morgan
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#1001428
of 3278
09 Dec 2002
11:41 AM |
To The RealFake Elvis #1407.
I own my house. No mortgage. Not interested in moving. Therefore, house values is an interesting but not emotional subject to me.
In my area very few houses are sold. Why? People want to live here - good schools (some of the best in the country), close to crown parkland, best shopping in the South-East outside of central London, easy access to Heathrow and Gatwick (not by M25), desired by Japanese, South Koreans, Americans, Germans, French,.....
People don't want (nor need) to move away, most have been in the area for many years and have either no mortgages or 15 years of inflation has reduced their effective burden.
We own an apartment (bought by 'sort-of' accident) but our equity in it is currently 67% and by next July it will be about 80%. It's rented out at about 3.5% return. We don't need any more since we didn't buy it for investment. Ticking over is fine.
This means I am unemotional about house prices. My go at a forecast was for a 10% - 20% drop and I'll stick with that. Postings from contributors who think it will be greater seem to be coloured more by hope than anything else.
What might make me emotional in this debate is when contributors use loaded terms seemingly in order to goad their opponents into making exaggerated claims that they can then triumphantly rebut. It's an old, tired trick of argument that has in the past been practised by debaters whose intention is to 'win the debate' rather than to arrive at truth.
It's an unworthy trick that may waste valuable time. |
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answer to Mr Britain #1401
by jeff morgan
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#1001427
of 3278
09 Dec 2002
11:21 AM |
'Are you saying that you know of many IT Contractors that are self employed but have no work and that the ones that do have contracts are being flogged to death?'
No. |
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"I smell something fishy"
by KIPPER
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#1001426
of 3278
09 Dec 2002
11:20 AM |
KIP,
Interesting that you state that the UK stock market is linked to the US. Of course, with regard to property this is relationship can be seen as inversely proportional. A part of the money leaving the markets generally flows in property.
You need to re read Jack’s mails |
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Frost's chill pill
by Martin Wolf
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#1001425
of 3278
09 Dec 2002
11:12 AM |
Mr Frost, Jack makes some interesting points about the population figures you sneer at. These figures are confirmed by the source documentation, if you had cared to read it. The Joseph Rowntree Foundation link covers all your questions.
Managment Summary,
1. Read
2. Review
3. Understand |
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Mr X - My argument
by Knowledge is Power
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#1001424
of 3278
09 Dec 2002
11:00 AM |
Mr X.
I've been examining the global downturn very closely over the last 6-12 months. Reading up the good links sent by Martini Extradry, I've been looking into deflation & reading economic predictions from many leading economists.
So my rational for a crash is such.
1) The IMF et al have given strong warnings over the housing market in the UK, and public spending that could lead to a bust.
2) I think that the consumer spending boom is about to dry up post Christmas. And this in economic cycle terms will be very bad timing.
3) In the SE/London, the market is near flat. This suggest to me that the top of the market has been reached. Any further movement will be through economic fundamentals.
4) Bush has just sacked his chief economic advisor – why, because the USA is in a bad way, and tougher times are round the corner. Fact: the USA’s Interest Rate is 1.25%. Now that’s pretty low & you’d of thought that this kind of lending rate reduction would kick start the economy. I don’t think it will. The consumer boom is slowing down, unemployment is rising, and industry is really struggling. If as both economists & physicists alike are postulating, the USA’s economy will fall further – and that’s pretty damn close to deflation!
5) These falls, particularly in the DJIA, S&P will have a direct effect on the FTSE. & if the worst case scenario occurs, we’re looking at a 40% drop from today’s prices (4 - 4.1k). These kind of falls are gonna hurt. Let’s face it “fair value” has not materialised yet & the FTSE is a dead duck till people start investing in it.
6) All of this, plus looking at long term trends in prices, & average earnings & the fact that stagnant markets do not remain stagnant for very long before a downward shift (post boom), I believe the UK’s market will fall 40-50%
The UK’s financial/economic position rest squarely on the consumer boom. This boom is about to end.
Mr X. I hope this explains my reasons for a fall. I’ve just provided points to my comments here, but most of the topics I’ve discussed in further detail earlier in the forum. This is what I believe will occur – it is only a matter of time. & time I fear is upon us. |
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theres an awful lot of people on the streets
by jack frost
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#1001423
of 3278
09 Dec 2002
10:43 AM |
Jack Straw in his posting quotes the following figures which if true would be a pretty potent argument...
>>>>
1991 56,466,680
2001 58,789,194 http://www.bedfordshire.gov.uk/BedsCC/SDimr3.nsf/Web/ThePage/2001+Census
It is generally agreed the actual figure is nearer 60 million, but let us take these figures as an example, and allow for the same error on both census. We have a net population increase between 1991 and 2001 of 2,322,514. Now using the statistics of the same census we find the average occupancy per household is,
“The average household size in Great Britain stands at 2.4 people (2000-01). Trends towards smaller families, and more people living alone, have contributed to the increase in the number of households”
2 Office for National Statistics - Social Trends Report (32), 2002
Now let us match these two figures together to generate a housing stock requirement. Now 58.8 million divided by 2.4 gives us a housing stock requirement of 24,495,497. Now using the same Government figures, which Martin Summerskill quotes in the Guardian,
“Just 162,000 new homes were built in 2000-01. The figure is lower than in any year since 1927, except the war years, and takes Britain's housing stock to 21.1 million homes - a figure now exceeded by the number of households”
http://society.guardian.co.uk/housing/story/0,7890,707666,00.html
WE see we have a current shortfall of 3.4 million homes, using official government figures. This clearly backs up the points made in the Guardian we have supply pressures on our housing market.
>>>>>>
Now let me see we are short by 3.4 million homes each of those contain 2.4 people.
Wow 8.16 million homeless people --- getting on for 15% of the population roaming the streets. I don't think so.
I think that the sums must have gone wrong somewhere. It only seems logical that the figure of 2.4 people per household came from dividing the number of homes by the number of people and that therefore Jack Straw has argued himself round in a circle.
However there would be little point to this posting if it were just an anti-straw rant.
My point is simple that statistics at times can be so misleading as to be wrong. It is likely that the vast majority of people reading this have more than the average number of legs, since as noonne has three legs the average is always just under two.
The Halifax is fond of quoting an affordability measure that repayments are 15% of salaries. This is true but unhelpful since all they have done is take their standard loan multiple and multiplied it by their loan rate.
Some of you argue vehemently for a rise others for a fall. You are probably all right, prices are falling at the midde to top end in london but rising at the bottom end in Yor or Hull or wherever.
The Halifax and Nationwide are quoted as gospel but if you examine their top ten hotspots there isn't a single one in common... that is very strange.
According to Saturday's Times even the builder's are concerned that the figures are over inflated...that is very strange
Bristol is booming but Cherie Blair got more than a ten percent discount...that is very strange.
The CML keeps arguing for restraint...turkeys voting for christmas.
There are very few cetainties in this would but one is that 30% plus rises cannot persist. Therefore is nothing else we will over the next few months have a dramatic drop in the rate of rises.
Whether this precipitates a crash depends on the banks holding their nerve. Because finally I come to the point of this posting.
The rises are caused by supply and demand but is not lack of supply of houses it is a plentiful supply of money. This much is obvious by the record increases in borrowing.
Demand will always be there, there will never be quite enough houses and if there were there would always be competition for the best ones.
This is a credit fueled bubble and when it bursts it will be the banks who do it. If the supply of cheap deals begins to dry up if the loan to value ratios start to come down what willl start as a trickle will turn into a flood as the customer becomes a more and more risky prospect for the lender. It is a positive feedback process once it starts (and it already has) there is no way of stopping it....even zero base rates don't work ask the japanese... |
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