|
|
| The UK housing market: a bubble about to burst? |
Do some market research
by Pentecost
|
#1001498
of 3278
 12 Dec 2002
10:40 PM |
Consider that the price of a house is what a buyer will pay. Assume that the buyer, whatever his reasons for buying, is confident that his decision to buy at that price is sound. (Some may be nervous, but have gone ahead anyway).
Then an annual house price-rise on average of - say - 20% should be, and probably has been, in some way related to a rise in buyer confidence. Not necessarily in exact proportion, but related, nevertheless.
Buyer confidence will be a principal factor in these market conditions. That is the buyer's confidence in his ability to support his purchase financially in the long term. Especially the long term, including long-term confidence in his prospects for employment and interest rates.
Take a practical approach to this topic. Measure that confidence, on average, and you would have a good indicator of likely market direction, on average.
Good enough for us to make buy/sell/BTL decisions on, in fact. |
|
Sticky on the downside
by The RealFakeElvis
|
#1001497
of 3278
12 Dec 2002
10:00 PM |
As has been pointed out previously house prices have risen because a small minority of those holding this asset class have agreed to transact at a higher value. The idea that, if prices fall, homeowners will be able to stand firm, refuse to sell at the lower price and prevent a drop is just not credible. The fact that transaction volumes have been so much lower during this boom just illustrates that less people agreed to trade at these higher prices. This surely suggests that this time a far greater number of homeowners can afford to sell in the future at a lower price without losing out and certainly doesn’t support the optimist’s argument.
Mr Hoogstraten
If the money illusion can fool householders into believing that their house is worth less when values are falling, why does it not dupe buyers into thinking houses are cheaper when prices are rising?
Mr Straw
Are you arguing that high wage rises, high inflation and high interest rates provide a benign environment for mortgage holders? |
|
"Oh Brave new world to have such people in it"
by Jack Straw
|
#1001495
of 3278
12 Dec 2002
07:37 PM |
QED,
Here are 2 statements of yours,
“Why on earth do you think I was suggesting that interest rates would keep track with salary rises? Your example that the % of salary fell quickly in an environment with high inflation was illustrating exactly my point.”
“A buyer paying 30% of their salary in mortgage repayments in an environment with 10% inflation, would quickly see this amount (as a % of salary fall). A buyer paying 30% of salary now will probably still be paying the same % in 5 years time”
They make no sense, as they are contradictory. What are your points, please review and restate. The ones in your previous message are incorrect as stated by my last one. Please note I will align your new statements to the previous ones as my first analysis. |
|
General Theory of Interest and Inflation
by Hoogstraten
|
#1001494
of 3278
12 Dec 2002
07:20 PM |
Pooh, you say:
“I would never advocate an intentional increase in inflation. Indeed, I would argue that the stability of the currency is possibly the most important economic responsibility of a national government/central bank.”
In the 1970s, exchange rates were typically fixed, and inflation was typically high. An economist (I do not recall which one) showed that real fixed exchange rates were more volatile than floating exchange rates, because of differences in inflation. This lead to runs on central banks – they were concerned with nominal rather than real currency levels, so were suffering from money illusion.
“And I certainly don’t suffer money illusion – although I recognise that much of the population often does!”
Fair enough – I accept this, but I make exactly the opposite conclusion from this fact than you do.
“IF a crash occurred, it would be exacerbated by a larger number of distressed sales/repossessions due to individual nominal prices falling below individual debt levels.”
Neither of us believe there is going to be a crash – but the point can be evaluated anyway.
Point number 1 – if you believe that “individual nominal prices falling below individual debt levels” would “exacerbate the crash”, I do not understand why you would not want to eliminate this nominal imbalance by means of inflating the economy? I believe that the problem of a crash would be the real fall in prices, not the nominal differences that could occur with low inflation, so I do not of course favour this policy.
Point 2 is that like you I believe there is an element of money illusion in people’s decision making. However, I believe the effect of this money illusion would be to make prices stickier on the downwards side. Property owners would I believe be less willing to sell for a nominal loss, even if the real loss was less than was realised in many instances in the last crash. Thus, rather than exacerbating the problem, low inflation would provide a supporting floor or resistance level that would slow any price falls.
Finally regarding property prices in Australia/New Zealand. I own a couple of properties down under, so I have a pretty good idea of the state of the property markets. Sydney and Melbourne in Oz and Auckland and Wellington in NZ have had a sustained bull run in property prices for many years. Rev.hk’s mail that has now been deleted (FT Monitor – can you stop doing this please - it is getting irritating) said that prices are more affordable in New Zealand. He is incorrect as usual – if he were on a local wage, he would realise this is not the case!
Affordability ratio’s in the main cities of Australia and New Zealand are probably more stretched than in London, and certainly more stretched than the rest of the UK. Maybe property prices are going to collapse globally? The world’s borrowers and lenders are all irrational in their decision-making, according to the doom mongers.
Finally, to respond to QED:
“From a previous post the volume of property transactions in the years preceding the 1980s crash was much higher than that in the last couple of years.”
The issue is the proportion of transactions near current prices (including equity withdrawal). The bull market in the UK has been much longer this time – far more than 2 years. This means far more property buyers would be affected by a collapse in valuations – this is a fact. I am not underestimating the pain of the last collapse – merely pointing out that if the same real percentage falls were to occur this time, the pain would be many times worse.
Your arguments that you get a free lunch from inflation is something I have already gone through enough. I would repeat that if it is inflation that you want, if the Central Bank/Government agreed with you, they could create hyperinflation overnight. Perhaps they do not agree with your logic either? Thank you, QED, for proving my point that the doom mongers are generally inflationists.
Finally, you say that:
“It is real interest rates that matters and these are now higher than in the last boom.”
Inflation is approximately 2.5%, and you can get mortgage rates as low as 4.5%, so the real rate of interest is approximately 2%. I now understand why you say property is unaffordable – no I don’t. |
|
Bewitched, bothered and bewildered
by QED
|
#1001493
of 3278
12 Dec 2002
06:43 PM |
Yes Strawwie/Hoogie you are right I am completely lost. Why on earth do you think I was suggesting that interest rates would keep track with salary rises? Your example that the % of salary fell quickly in an environment with high inflation was illustrating exactly my point.
OH and Kipper the quote of What a Brave New World that has such creatures in it" is from Shakespeare's The Tempest |
|
KIP gets clipped
by KIPPER
|
#1001492
of 3278
12 Dec 2002
06:23 PM |
Dear “Widen week prolongs”,
I’m confused as to why you believe I am emotionally involved in this forum. You see I believe my strength is the ability to view both points of the forum, positive and negative, which is why in areas I have given ground. You see this is why your argument is flawed.
But thank you for the edited posting! |
|
Time for QED to do some QED
by Jack Straw
|
#1001491
of 3278
12 Dec 2002
06:18 PM |
QED, dear boy, you have completely missed the boat. Equity withdrawal in the 80’s is immaterial, and purely a personal choice. You tell me what is the difference between an equity withdrawal to 75% of house value, or a FTB on 95% mortgage. “The pain then should not be underestimated.” – to true, the pain of reading postings without a point. The person who buys at the ceiling of a fall loses more than a person who has 75% of value.
“inflation eroding the value of the debt was an illusion as interest rates adjusted”
If you don’t understand the economic theory of “money illusion” please don’t embarrass both of us by questioning it. Please research and return, oh and why aren’t you asking if Hoogie and I are the same person? I’m sensing this posting is a ruse, a joke to draw debate…
Lets look further at your points and see, you say….
“A buyer paying 30% of their salary in mortgage repayments in an environment with 10% inflation, would quickly see this amount (as a % of salary fall). A buyer paying 30% of salary now will probably still be paying the same % in 5 years time”
Wrong, start again! This makes no sense, what you are suggesting is that interest rates keep track with salary rises. Lets place the example mathematically on paper to see how far you are wrong: -
Salary Interest Payment Percentage Inflation/Interest Payrise
1000 300 30% 10% 12% Year 1
1120 300 26.7% 10% 12% Year 2
1254 300 23.9% 10% 12% Year 3
1404 300 21.4% 10% 12% Year 4
1573 300 19.1% 10% 12% Year 5
The mathematical example, above, is from the real world. What you are suggesting is that, the interest rate, which well say, was 10% at the inception. Will be:
Year 0 10%
Year 1 11%
Year 2 12%
Year 3 13%
Year 4 15%
Year 5 16%
16%, due to inflation, at the end of 5 years! Wrong, salaries rise due to inflation. Interest rates are an instrument of inflation management, they do not rise as a result inflation in the way you suggest. Further we see that in real terms percentage repayments drop from 30% to 19% in 5 years, this is the true symptum of a high inflation economy. Before you respond by stating that is what you suggest, it is not , and I will prove further. The point is that you crystalise you debt when you buy, using your suggestion is that all household expenses should be set as a proportion of household revenues, i.e. telephone bill is 10%, grouceries are 15% etc… This is communism comrade!!!!!
“That is a big difference and it is why the "affordability" argument seems like a joke to a FTB buyer. With high inflation it makes sense to borrow as much as possible as the value of the debt is soon eroded. Wiht low inflation it simply doesn't.”
Wrong again! Obviously the differential between house price rises and inflation is the key. Its like a basic P&L, consider that if house rises are sales and inflation expenses :-
Housing Increase 15% 10%
Inflation 10% 2.5%
Real Terms 5% 7.5%
Therefore in your view a 15% rise is better because its in a high inflation environment. Well this makes no sense, in the example above, the lower inflation figure is more desirable as the real terms rise is higher, and would result in a higher net reduction in the % of house prices paid as interest.
“To argue that low nomimal interest rates justify higher property prices is like arguing that a car is cheaper because you pay for it over 25 years rather than 10”
Oh dear, oh dear. You really have lost the plot here; I’m sensing that this posting was a joke? Are you playing with us, no one can believe these theories. I won’t go any further until you say you are not joking. |
|
I'm sorry cruel world, I prostate myself on the alter of evil!
by Knowledge is Power
|
#1001490
of 3278
12 Dec 2002
05:57 PM |
Kipper,
If I upset someone I apologise, and you'll find that most people in the real world abide by this principle.
[...]
This forum wouldn't be half as entertaining if you're logic wasn't applied here! Keep up the good work Kipper...
lol
[2 line edit - off-topic comments removed]
[This message was edited by Monitor_CS on 12 Dec 2002 at 06:17 PM.] |
|
KIP with your eyes open
by KIPPER
|
#1001489
of 3278
12 Dec 2002
05:42 PM |
”You may feel the need to apologise to the forum if your prediction is wrong”
Why house prices have risen the last 2 months. I am right you are wrong. Please apologise to the forum.
“Just because your or my prediction may not occur doesn't require us to apologise. I fail to understand you logic on that one, or perhaps you're the kind of person who goes round continually apologising for all the mistakes you make?”
I presume this is the result of society in general. There is no responsibility for ones own actions
"As for my parents, they bought in the S/E in '92."
Did they rent?
”With regard to biology, I wasn't aware ducks turned into swans, but are you suggesting that the market is ugly now (low growth) and will blossom into high growth (a swan)? I think the gains seen in the swan analogy have already come to pass, but hey I could be wrong.”
You must have had a sad childhood if you didn’t read that book.
”Kipper, you've not a clue about me, or what I do. But your misconceptions about my convictions are severely misplaced.”
Likewise Im sure
“ I want the UK to continue to do well, and to come out of this global downturn as unscathed as possible. I do however believe that we in the UK will experience further cut/set backs before things pick up once more.During this time (i.e. the next 24 months), many things will happen. One of which I believe will be a crash of the housing market (next 12 months).”
Freud had you dead to rights
[One line edit by FT]
[This message was edited by Monitor_CS on 12 Dec 2002 at 06:20 PM.] |
|
Illusion/delusion
by Stuthepooh
|
#1001488
of 3278
12 Dec 2002
01:36 PM |
Hoogie
A stunning display of putting words in my mouth!
I would never advocate an intentional increase in inflation. Indeed, I would argue that the stability of the currency is possibly the most important economic responsibility of a national government/central bank.
And I certainly don’t suffer money illusion – although I recognise that much of the population often does!
Furthermore, when did I suggest that there would be a property crash!?
To summarize the point of my last post:
IF a crash occurred, it would be excacerbated by a larger number of distressed sales/repossessions due to individual nominal prices falling below individual debt levels.
Stuthepooh
PS What are prices doing down under at the mo? |
|
Hoogie what are you on about?
by QED
|
#1001487
of 3278
12 Dec 2002
10:34 AM |
Hoogstraten
From a previous post the volume of property transactions in the years preceding the 1980s crash was much higher than that in the last couple of years. Also the 1980s saw the same equity withdrawal boom. The pain then should not be underestimated.
In your deleted post you claimed something along the lines that inflation eroding the value of the debt was an illusion as interest rates adjusted. However, property prices have now more than adjusted to the low inflation environment. A buyer paying 30% of their salary in mortgage repayments in an environment with 10% inflation, would quickly see this amount (as a % of salary fall). A buyer paying 30% of salary now will probably still be paying the same % in 5 years time. That is a big difference and it is why the "affordability" argument seems like a joke to a FTB buyer. With high inflation it makes sense to borrow as much as possible as the value of the debt is soon eroded. Wiht low inflation it simply doesn't. It is real interest rates that matters and these are now higher than in the last boom. To argue that low nomimal interest rates justify higher property prices is like arguing that a car is cheaper because you pay for it over 25 years rather than 10. |
|
Kipper you've the wrong man!
by Knowledge is Power
|
#1001486
of 3278
12 Dec 2002
10:17 AM |
Kipper,
You may feel the need to apologise to the forum if your prediction is wrong, but I don't. Just because your or my prediction may not occur doesn't require us to apologise. I fail to understand you logic on that one, or perhaps you're the kind of person who goes round continually apologising for all the mistakes you make?
If it makes you happy, I'll publicly declare that my predication was wrong - fair enough?
As for me living in HK, clearly you must know me better that I know myself. Other than a visit in '91 I've never been there.
As for my parents, they bought in the S/E in '92.
With regard to biology, I wasn't aware ducks turned into swans, but are you suggesting that the market is ugly now (low growth) and will blossom into high growth (a swan)? I think the gains seen in the swan analogy have already come to pass, but hey I could be wrong.
Kipper, you've not a clue about me, or what I do. But your misconceptions about my convictions are severely misplaced. I want the UK to continue to do well, and to come out of this global downturn as unscathed as possible. I do however believe that we in the UK will experience further cut/set backs before things pick up once more. During this time (i.e. the next 24 months), many things will happen. One of which I believe will be a crash of the housing market (next 12 months). |
|
FT Forum – Forlorn Findings are Flawed…
by Hoogstraten
|
#1001485
of 3278
12 Dec 2002
09:15 AM |
Previous correspondence always witters on about the last property crash in the early 1990s as being a 40% real fall. Why can’t history repeat itself, the doom mongers ask?
The answer is simple – property prices are set at the margin. The run-up in prices before the last crash was very fast, and the numbers of transactions were comparatively low to bring the exceptionally high valuations that preceded the crash. In the 1990s, although those unlucky enough to have bought in the couple of years directly before the last bust were thrown into negative equity, the total number of people this affected were comparatively low.
This can be contrasted with the situation now. If anything like the same real percentage fall occurred now, this would affect far more people, because the current valuations are far more indicative of average cost prices than they were in the 1990’s – especially once equity withdrawal is included in these average cost figures.
It is one thing to wipe 40% real value off property prices that have briefly and temporarily spiked (as was the case in the early 1990s). It is quite another to wipe off 40% real value off property prices that have had a sustained value above the projected doom monger figures for many, many years (it affects far more property transactions).
This latter situation (as is the case now) would obviously have a much more pervasive effect on the real economy.
This distinction explains why the doom mongers are actually Great Depression theorists. The distinction is also further evidence that the doom mongers specialise in comparing apples with oranges, to try to cobble together an argument... |
|
FT Fascism - Futile to Fight?
by Hoogstraten
|
#1001484
of 3278
12 Dec 2002
06:23 AM |
FT Monitor - I am surprised that you chose to delete my last mail – it was more relevant than most of the nonsense which hits this forum. Please restore it, or at least have the courtesy to explain why it was deleted. I suspect it was deleted because I criticised the FT columnist and inflationist Martin Woolf.
Pooh,
I simply do not agree with your arguments. You say:
“The early 90s saw a 40% drop in real house prices. Nominal price falls were far lower than this, thankfully producing more stability as a result. If a 40% drop in real prices occurred in a low inflation environment, nominal prices would also drop by a similar amount.”
A 40% real drop in property prices is the same as a 40% real drop in property prices, irrespective of what happens to nominal property prices. I fail to see why one drop would be worse than the other would be – you are suffering money illusion again. If general inflation is 100%, and nominal property prices remain unchanged, the real value of your property assets has halved! Nominal values are irrelevant – it is real asset prices that are important.
You are still arguing there is the free lunch with inflation. If you are correct that “there would follow a far greater number of people packing their bags and walking away from their properties as their loans far exceeded their assets“ because of a lack of general inflation, this could easily be solved.
The Government/BOE could easily create massive inflation like the 1970s. Under your construction, everyone would be better off, because our debts would be eroded! In real terms, this is not the case – at best the result would be neutral as regards to real property wealth.
In fact, high inflation has many negative economic effects regarding resource allocation, which indicate that we would actually be worse off in real terms with high inflation.
If property prices were to fall by 50% in real and nominal terms (assuming zero percent general inflation), I presume you are saying that the Government should simply double the money supply, causing 100% inflation. This should restore nominal parity in assets and liabilities of property, if property prices were to rise in line with general inflation. Interest rates would as a result be over 100%, but wage increases would also presumably be near 100%. Is this hyperinflation the dream solution to this problem of “their loans far exceeding their assets” in nominal terms? I do not see how anyone would be being bailed out using these prescriptions that follow logically from your arguments? I continue to find your (and Martin Wolfs) inflationist logic curious… |
|
S&P Downgrade
by The Scream
|
#1001483
of 3278
11 Dec 2002
10:38 PM |
UK Banks have been downgraded by Standard & Poors, showing they expect higher unemployment to leave the housing market in tears.
It is already recognised as a bubble and all the talk of a soft landing is indication that that's the last thing that will happen. |
|
