House Prices to Plunge 40% (for Sam)

No need to apologise to me. I quite like them too. Just wish it would actually happen.

I see the Times picked up on it as well.

Patience boy, patience. I hate to try to call tops or bottoms, but with what's going on at Fannie and Freddie, I think the credit bubble may have been holed below the waterline. I'm optimistic that the end will come soon.

FoFP

I know you keep predicting this, (ad nauseum), and, by default, you will be correct one day, (to some degree).

However, I fail to understand why you are "optimistic"? Would you not rather see a soft landing, or do you really want to see a crash?

For a lot of people a large reduction in house prices will be a positive move.

The only people to lose from a property crash will be people who bought recently and property investors both of whom have been stupid in buying at over-inflated prices. Almost everyone else will win.

sPoNiX

Why?

In all likelyhood if it did happen, you'd probably not be able to buy one anway (unless you are a cash buyer).

Aris

Not for those of us who have no chance of buying at current prices.

cd

True of course. However, these sorts of crashes happen every third generation and I've been steadfastly predicting that it'll affect our one. If it takes another two generations then I'll happily admit I was wrong.

I think a crash would would cure the problem a lot faster than a generation of low growth and deflationary recession. See Japan for ongoing details.

It'd be much more interesting to see too. If we're to be witness to a train wreck, it might as well be a spectacular one.

FoFP

There are articles like this all the time about the housing market or the stock market. Sometimes they get it right, most of the time they don't.

Thinking about it: I said some time ago in this forum that there would be financial scandals at Freddie Mac and Fannie Mae, which are the centre of the global credit/property bubbles. Easy to check, definitely correct, and quite specific.

FoFP

Why would it become difficult to get a mortgage just because prices fall to where they were less than 2 years ago?

It's very hard to get credit at all after the bursting of a credit bubble. The main reason that assets fall 75% to 90% in such circumstances is that what previously traded for credit ends up trading for what was the cash deposit as lenders are more concerned with getting back credit already loaned out than lending, and buyers who've been bitten by such large losses on assets on which they still owe money borrowed, tend to credit revulsion for a generation, and teach their kids the same. This is what I suspect to be the reason that credit bubbles only happen every third generation.

I just finished an excellent book on the South Seas Bubble which demonstrates these effects in all their glory. In the aftermath prices had fallen by more than 90% and politicians (two thirds of whom had been bribed with shares in the South Seas Company) decided they had to fix the price to prevent the collapse of the whole country. They then wrote off a substantial fraction of the debts outstanding on shares in the company (they were sold in tranches with only a 10% deposit down). Of course this served to bankrupt the lenders as well as the borrowers.

Perhaps more relevant to our modern questions: land and property prices had also boomed, as folks who'd profited from South Seas shares bid prices up. In the end people bought mansions with South Seas shares, and then remortgaged them to raise cash for deposits on more shares.

There's nothing as strange as people who think that wealth can come about merely by borrowing money to bid on rising assets (it can't: wealth isn't created just by moving money around, far less by creating credit) and there's nothing new about what's happening now.

FoFP

And for the benefit of everyone else

House prices show renewed vigour

In message , sPoNiX writes

Not quite everyone. Only those who are considering buying a house, and how many will do that before they believe the market has bottomed.

Large house price falls will cause panic amongst property owners, they will batten down the hatches, stop spending money, and the whole economy will suffer.

Presumably it wouldnt have too much of an effect on you personally then?

ISTR that you rent your home and have your money invested in Gold, or something similar.

North West 3.0 - 3.5 x annual earnings

Plenty of room for them to rise a bit more here

But there's no way to get from the current state (house prices way overpriced - they're 6x my income here), to a sensible price without a crash or steady decline.

It would be fine if most people realised they're better off with lower house prices.

cd

What about prices remaining the same and waiting for salaries to catch up?

For a new generation, saddled with debt and left with little opportunity to buy a house, I can see only a very slow and painful decaying of property values with a corresponding long term erosion of confidence and value in the market.

And existing property owners sensing no investment value, or even a very real risk of loss, will lose any incentive to spend cash on their properties. Equity release will clearly be hit but what of all the fringe businesses? The high street DIY chains may get very heavily hit and the 'gentrification' that has characterised many areas could simply disappear.

Added to this will be the inevitable calls for tough amendments to the rent acts to protect a new and enlarged generation locked into the rental sector who will quite rightly demand security of tenure for themselves and their future families. This will lead accelerated falls in the property market caused by the tide of Landlords wanting to liquidate.

Yet another worrying long term issue I foresee is that if a new generation are unable to afford housing during their working life, and assuming they be required to pay full market rent, then on their retirement, with little by way of savings it will be the welfare state that will end up paying their rent for the period of their retirement.

Sorry if this seems a gloomy picture but I really can't see an easy way out of this mess.

Tim

The rise of global housing cost

To get that to even a 4x multiple would require wages to catch up by 50%.

Current wage rises seem to be about 2% +/- 0.5% . So something like 20 years even if house prices aren't forced up by increases in cost of raw materials etc. brought about by shortages for instance.

What happens when the Chinese decide it's time they started living in decent houses?

DG