house prices - always and forever upward?

"GSV Three Minds in a Can" wrote

That's why I deliberately didn't mention studies.

"GSV Three Minds in a Can" wrote

Agreed, but the sizes are not!

"GSV Three Minds in a Can" wrote

I wouldn't say it was 90%. Anyway, you need the extra rooms in the first place before you can knock them through into one, and Andy doesn't want to let the childless couple have very many rooms!

Hrm, the government will always honour their gilts etc, whether the freshly printed currency will still buy you sweet FA in the real economy is another matter.

As for the banks, that's exactly we have a central bank ready to reflate at any given moment, the central bank will buy any junk securities off the banks in order to re-liquify the system. I suspect the Fed are doing just that right now with subprime mortgage backed securities, I'd love to see how many they now have on their books.

Amazingly Japan has been desperately trying to do an Argentina for the past decade and half with their negative real interest rates and "quantitative easing" (printing money like no tomorrow) yet it hasn't worked, maybe the people are far too sensible and risk averse?

If anything, thanks to the carry trade all the cheap savings from Asia has propelled our bubble, they've driven down the yields on US and European debt in their desperate search for a decent yield. Nigerian sovereign debt now has a lower yield than British gilts from a decade ago, that brings a whole new meaning to priced to perfection!

There's nothing wrong with "savings" as a concept per se, but you need to be very careful when the system is loaded against you. Under the current set up it may actually be more rational to rush out and buy ten highly leveraged BTL "investments" than keep the deposit in a sterling denominated savings account, if they're hell bent on inflation you might as well be on the right side of the fence, the system rewards recklessness, such is the moral hazard.

What else is a decade of >10% house price inflation but targeted hyperinflation? With the absence of a countervailing wage-price spiral due to the price of goods and labour artificially depressed thanks to China and migrant labour. Commodities and hard assets have hyperinflated because the central banks haven't perfected printing barrels of oil ;)

Were you Nostradamus's script writer?

'in the coming years' ...not in the past then? Well, thats a start at specificity I suppose.

"Sometime in the future". Gosh, very informative. Must get on to my broker right away with that nugget. Even less useful than the people who were ranting on here how there would be an unprecedented crash within the next 12 months more than 12 months ago ..you know who you are....and BGB, your tar and feathers are ready.

I think the "problem" was that the Japs failed to realise they were supposed to spend the money and put it all in the bank.

It's worse than that, they put it in US/UK/European money market funds enabling us to spend like crazy! ;)

I wondered why you didnt take the bait....after at least 50 replies... thought you must have been on holiday!

it cuts both ways, what about all the people who would like to rent a room? Either because they could never buy, or want the flexibility, or domnt wanta mortgage at that time of life, or they are hanging on (ever more desperately) for the HPC and would much rather rent? If all the selfish buggers like you just bought houses, they'd have nowhere to go.

There`s a surplus of places for rent at the moment in most places, due to too many BTLers getting in on the act. Give it a few months of a slightly higher interest rate and they`ll be having to dispose of those properties quick-sharp, and there`ll be no sympathy from me for their losses.

Except that that will cause a drop in house prices, leading to all the people with recent huge mortgages and remortgages ending up in negative equity and unable to move. So they stop spending. Shops start laying people off. Ordinary people cannot afford their mortgages. Repossessions pick up. The economy stagnates. Even more people made redundant.

I let a house, and yet if the only effect on the market of interest rate increases is falling house prices and job security etc isn't affected then I stand to do extremely well out of it. While there are undoubtedly some BTLers who are borrowing to their limits and even a small change in their finances will put them in difficulty, this equally applies to many home owners.

AIUI, a significant proportion of the "BTLers" in London are people with huge city bonuses who are paying cash for the properties. Many are chosing not to let their purchases out - forgoing the 2-5% income in return for no hassle and just treating their house like any other commodity speculation. (I'm still waiting for these people to start trading options on these properties)

IMO, any "correction" sufficient to hurt a significant number of BTLers is also going to hurt a significant number of home owners. A few BTLers who are borrowed to their limit and depend on their rental income to stay afloat might get burned without a major correction[1] but there's enough other people thinking of getting into the BTL market who can provide a 30% deposit and can afford to make up any rental voids from other income. So I don't think the collapse of the BTL market will be the trigger for a house price crash (although a house price crash might be the trigger for the collapse of the BTL market)

I'd also guess that the first time buyers who cannot afford a property at all at the moment due to high prices (rather than cannot afford the property they would like) are likely to be amongst the first to be laid off in any recession.

[1] Go and look at any property auction and there's usually a few repossessed properties being sold with an existing shorthold tenant.

Tim.

Eh? Why would being unable to move stop them spending?

Anyway it'll only affect the small minority of home owners who bought recently

*and* bought with a high LTV.

This is all because the small minority who are now in negative equity suddenly decide, for some reason, that they should stop spending? I knew loads of people in negative equity in the early 90's. They didn't stop going out, on holiday, buying clothes etc. Why should it?

Hopefully they'll get squatters who'll trash the place.

Why do seem to think a return to, say, 2003 house prices would result in a recession?

because there will be sufficiently large numbers of people who are forced to move by circumstance and so cannot ride out a house price dip. If they're lucky they will be allowed to sell their house anyway and be left with a smaller (now unsecured) loan and then they can move into rented accomodation. If they're unlucky they won't be allowed to sell their house until eventually it is repossessed.

Once this starts hitting the headlines people will be scared it might happen to them so they will want to save.

Additionally, if house prices start falling then people will not be able to remortgage so that money will stop flowing into the economy.

I hope I'm wrong and we have a house price dip without any knock on to the rest of the economy but, I think the only way we're going to get a soft landing is if house prices stop rising (or at least rise slower than inflation).

Tim.

I'd go with layoffs in building and estate agencies first; banking second; and retailing next. The US is about a year ahead of us on the credit cycle and so we should be able to observe what happens there...

FoFP

I doubt it. The Fed prefers to operate through rumours of an implicit guarantee of the mortgage-backs underwritten by Fannie and Freddie.

FoFP

That's basically it. You can print all the money you want, but if people won't borrow it...

In the end it got borrowed abraod by the carry trade instead.

That's exactly it. China and Japan are the wellspring for the western credit bubble. House prices here depend more on what happens in China and Japan than anything much local.

Heh. One of the things I'm wondering is whether when the US and UK get their deflation, we'll propel the Euro area in the same way that Japan and China propelled us. If so, it'd be a bloody good time to buy property there.

Indeed. However any system which plays fast and loose with currency and moral hazard, sooner or later finds a new rock on which to founder. I've long thought that the failure mode of a bank operating under "Too Big to Fail" is reaching the point of something which is "Too Big to Bail".

Skene wrote a great book on precisely this kind of property/credit cycle, taking the analysis carefully through each stage and looking at how the authorities and banks are forced to react. The final stage is where so many people must spend so much of their lives to service debt just to have somewhere to live that the rest of the economy runs into trouble from lack of demand. After that comes monetary hell.

Interestinly the analysis is very similar to that of Marx when discussing the inevitable demise of capitalism. Of course it could look like that for a while, but the credit cycle will eventually reset itself.

FoFP

If I owed a mortgage on a house that had dropped 90% in value, I'd probably save as much as possible too.

FoFP

You may be right about the MBS, if Fannie and Freddie were real companies they'd make Enron look solvent. However, the Fed isn't very transparent about its open market operations, who really knows how much debt they are monetising.

Heh. I'm still waiting for the other shoe to drop with 'em.

Deliberate probably. If folks lose confidence in the Dollar, the fed will have to decide whether to let the currency go to hell, or crucify the housing markets with multiple interest rate hikes and let the economy go to hell.

They've been on that tightrope since 2002 of course. So far they haven't fallen off, but so far there's no sign of the other side of the gorge either.

FoFP

So far it looks like they've crucified the housing market with multiple interest rate hikes.