House Price Crash draws closer

"John Redman" wrote in message news:d5biub$jog$ snipped-for-privacy@newsg3.svr.pol.co.uk...

I agree about the risk, but people talking about a crash bandy figures of

All sales must be registered with the Land Registry. See

Daytona

"RaZe" wrote

So why don't you get a BTL mortgage *yourself* and buy the house with that??

LOL So you think that my suggesting you may be naive constitutes "personal abuse" do you ? :-) Well, well what a sensitive creature you are. ROTFL

As for the rest of your post : I refer you to my answers in two of my previous posts. If you still cant get it then thats not my fault. I dont intend to waste any more of my time by repeating myself for a third time. Thank you for your interest however and good luck.

Yes, from a very low base, which is what one would expect at the top of a credit bubble. The crash point though is not when the borrowers become distressed, but when the lenders do, deciding to reduce or stop lending. That's what brought 90% falls in Japan.

This time the lending essentially comes from global liquidity, hence the reason to watch the money globally, not what's happening to prices in Acacia Grove.

FoFP

I have popcorn! :-)

Not quite. The western economies have become quite dependent on the credit flow *through* the housing markets as people leverage up their borrowing through the inflating values of their houses. Even if prices simply stagnate, that comes to a stop, and has a knockon effect on spending and hence on jobs in retail, which have grown considerably with the credit bubble (I don't know the UK figured but I've read that the US now has nine times the retail area per capita that it did in 1989).

Any serious drop in house prices will cause people to pay back and save actual income (analysis on both sides of the Atlantic indicate that drops in housing values have around three times the depressive effect on household spending that equivalent drops in share values do). This would probably be exacerbated if a significant number of people were in negative equity which, given the spike in prices and the torrent of remortgaging, is likely. This has the effect of cutting the velocity of money, and if sufficient, will reduce the money supply. certainly any move from the current historically low savings rate to anything resembling a normal savings rate will involve a falling money supply. Given that inflation is already low, the likelihood of deflation after any significant fall in house prices, is high.

During the primary K-wave bust, house prices dropped on average, in real terms, close to 50%, with the remnant of inflation soaking up about half of that drop. This time not only will there be no inflation to cushion the blow, but deflation will most likely be extant. This means that if prices only fall as much as last time in real terms, nominal prices will drop by 50%. In reality the credit flow and participation per capita in this bubble are greater than last time and so we can expect commensurately larger real falls. Added to this will be the amount of deflation the economy experiences. Thus falls of between 75% and 90% become feasible, as indeed happened in Japan for precisely the same reasons.

Those who still believe that this is a housing bubble, and a normal cyclical housing bust, are in for a surprise. The dominoes are stacked, and someone is banging the table.

FoFP

I'd have thought it was obvious. In *every* single significant credit bubble, governments not only claim economic victory as the credit raises the whole economy, including tax intake (the peak of credit bubbles is the only time that governments *ever* run a positive budget balance since the fiat money system was invented), but they declare a "new paradigm" or some similar phrase. It's clear that governments simply cannot go against the flow where such periodic societal madnesses are concerned. Those predicting doom are shunned during the mania. Politicians cannot be shunned and remain politicians.

In this instance we have another factor: the dotcom collapse. Greenspan knows enough of the history of credit bubbles to know that deflations often follow quickly in their wake. Greenspan's father was also a fan of Irving Fisher's theories that the way to have avoided the

Greenspan's response to every crisis, from the 1987 primary crash, through LTCM, the Russian crisis, the Eastern Currency crisis, and the Y2K Worry, has been to flood the markets with liquidity. Indeed it was the attempt to soak up the Y2K liquidity, and the LTCM/Russian/Eastern Currency liquidity that had run into it, that finally popped the NASDAQ bubble in March 2000.

His response: the largest spike in global liquidity history has ever seen, and a drop of real US interest rates well into negative territory. The paper by Bernanke (Greenspan's then deputy) et al makes it very clear that this was an attempt to stop deflation hitting the US post-bubble, in the way that it did in Japan in 1991 (dropping stock prices by 80% and house prices by 90%). Japan is *still* in deflation.

The side-effect of course is that in effect, people are not only being offered free money, but are being paid to borrow. Thus the global "carry-trade" and ordinary folks with mediated access to wstern cash markets being able to borrow at pretty much the inflation rate or less.

With the stockmarkets being bust, they had to think of something else to spend that borrowed money on in a way that would produce return. The primary K-wave boom in the late 80's showed them which asset: houses. People understood (or at least imagined they did) housing finance and they believed that house prices would always rise. Mix that with free money and you have the secondary boom.

My belief is that Greenspan (and the other central bankers who went along with this plan) will go down in history as the man who saved a recession at the cost of a depression.

Exactly so. The Austrian economists have a technical name for it, but it amounts to the old farming phrase: eating the seedcorn.

FoFP

The flaw I see is that if prices fall by 50%, and you still need a mortgage to buy, the restrictions put on mortgages after the kind of event we're discussing, might well mean you can't get one.

It is *not* normal, and indeed is a sign of the sort of situation we've got ourselves into, for the majority of the population to have the sort of access to credit that we have just now. It is inevitable that after the credit bubble has burst, that sort of credit will no longer be available. Indeed it is highly probable that by the time ordinary folks have recovered from what's coming, they won't *want* credit, in their lives, ever again.

I can understand that this is hard to believe from in the middle of the current madness, but I assure you that if you check the history of any of the previous credit bubbles (and in that we've gone as far as selling debt as assets, this is as close to the South Seas Bubble as anything modern could be), you'll find that such a reaction is normal, and lasts about a generation and a half.

FoFP

So you have sold your house and are living in rented accommodation then?

tar

Yes, I'm living in rented accomodation and paying the rent with the interest on cash in the bank.

FoFP

Note that the primary driver of this was deflation and a land price collapse. Very few people had mortgages back then.

FoFP

Got to respect that, that makes you the first person I've read about (including an economic prof quoted in The Times) who has actually taken their own advice, everyone else seemingly has an excuse not to sell.

The bottom line, if you are right, is that we are all, (or most of us), f*(%$d!!.

Most of us therefore have to hope, and perhaps assume, that you are not right.

If the assumption is correct, (and it may, or may not, be), the housing market in England will continue to do what it has done over the past 35 years, i.e. boom and bust to varying degrees.

My own hope, if you are right, is that interest rates are dropped, and that many more people have to rent, rather than being able to own. If that were the case, I would all right Jack.

You too, would be all right because, IIRC, you dont have any loans/debts, and a chunk of cash.

Regds

Hasn't FoFP always rented, so never actually sold a house? And don't let's forget that when he was kicked out by his landlady a couple of years ago, he *was* tempted to buy, and only resisted because it would involve losing face. :-)

True to a varying extent in each individual case. However, if folks assess for themselves the warnings and look at history to guide them, there are actions that can be taken now, to ameliorate the effects on their own lives. Luckily for most, those actions are usually a sound idea even if it doesn't come to the worst.

That's a head-in-the-sand attitude. Do some research and *decide* for yourself whether I'm right. I've provided enough references over the past couple of years.

There will continue to be housing cycles irrespective of whether I'm right. What I'm saying is simply that the three-generational credit cycles will also continue and that we're at the turn of that cycle now.

I expect them to be dropped to zero, as in Japan. However, with deflation, zero will still be a punishing rate for those overextended in debt.

Be careful: rents will fall with deflation, but any debt on property will not. The value of that debt will increase as cash becomes more valuable. Right now, paying down debt is a matter of urgency. As I said, that's a good idea even if I'm utterly wrong.

Indeed and that's precisely how I've been planning to be since 1998 when I identified the secondary K-wave bubble. A great deal has happened since then to indicate the accuracy of that view.

If you doubt me though, please dig out my posts here from two years ago predicting how the turning point would look, and compare them to what you see today.

A lot of people are going to go the way of the middle class in Argentina. Right now we can still choose whether or not we'll be amongst them.

The points that have been made about the transaction costs of selling one's house are valid and that cost has to be balanced against the risks and potential gains. However it's not the owning of a house which is the problem in a deflation or housing crash. The house is still a house and still serves its purpose as a dwelling. The problems are:

A) Holding housing assets in such a way as to be financially dependent upon gain in price (I.E investing in these assets).

B) Holding debt against the assets. Holding debt at all is a liability when deflation beckons.

Clearly selling investment properties doesn't carry the same problems as selling one's own property. Equally clearly, paying down as much debt as possible is a positive good in its own right.

Thus there are actions people can take to protect themselves, without going as far as selling to rent.

Remember that in the South Seas Bubble, Isaac Newton lost his family fortune and a canny young bookseller named Thomas Guy got out with enough profit to endow a children's hospital. One of them looked at the evidence. The other simply looked at what everyone else was doing and blinded himself to the evidence.

As my Uncle Sherlock would say: the evidence is *all* that matters.

FoFP

Good god! Someone is paying attention. Yep, renting a better place and the landlady is retired and living in the garden on our rental. What's interesting is that a mortgage on the place would cost twice what we're paying in rent.

Still, we're sitting on more than enough to buy a good flat and expect afterwards to be sitting on more than enough to buy a comfortable house and garden.

So in fact we could buy, without a mortgage, but choose not to because we'll pick up more property for the money after the hiccup.

FoFP

Out of interest, what's the outlook for equities ?

Daytona