According to , the average weekly earnings for all adults was 476GBP per week, or 24752GBP per year.
According to , earnings rose by 4.2% in the year to July 2004.
At 6x average income, that would put a house at 148512GBP (not an unreasonable price for a family home in the current market). Assuming a
10% deposit, that would require a mortgage of 133660GBP, which is 5.4x earnings. In order to get that down to the long term average of 3x earnings, that would require
(133660 - (3x24752))/3 = (133660 - 74256)/3 = 19801GBP increase in average earnings to 44553GBP.
At 4.2% pa, that will take about 14-15 years (i.e. the condition of 24752
(1.042 ^ 15) >= 44553) of sustained growth at the current rate. That would make the average age of first-time buyers who wait to buy with a
Which is why returns to average are usually followed by an overshoot to the downside.
Of coyurse if one believes that the economy is suffering from malinvestment and a credit binge due to the bubble, then the economic retrenchment that you call "suffering" will actually be a cure.
In a falling market they will lend only as much as they can be realistically confident of quickly recovering (and through an intermediary) should you default on the loan.
So there you are. Loans in a flat market are much less attractive and much worse still in a falling market.
The pensions mess almost inevitably requires that when the baby-boom generation starts retiring in 4 years time, they'll have to start relying on their houses as a means of supporting their old age. This means trading down and reversionary mortgages. In the medium term this will put properties onto the markets rather than passing down wealth through inheritance and driving up prices. This will almost certainly exacerbate falling markets.
Greenspan and Bernanke knew that the stocks bubble of the late 1990's (arguably the fault of Greenspan not raising rates in 1997 when he recognised it as a bubble) was the sort of mania that leads to debt-deflation when it bursts. To try to head this off (see Federal Reserve papers of 2001) they cut rates to the lowest since the last deflation and threatened to print "helicopter money". This vast flow of credit led to a new bubbles in housing, property, bonds and the Dollar as the Fed accepted that having Fannie Mae and Freddie Mac print mortgage-backed bonds like money had already gone out of fashion was the price they had to pay to avoid deflation.
Unfortunately due to the Chinese government's strategy of exporting their way to economic health before the populace chop off their heads, the Chinese decided to buy up US bonds (both Treasury and mortgage-backs) in order to keep their currency pegged to the Dollar (they can't float their currency since their banks are in even more deep shit than the Japanese ones). Not only has this greatly lessened the effectiveness of the US's last way out of its private and public debt morass (devaluing the Dollar), but it has led to excess credit and property speculation in China itself.
Effectively all the growth in the world for the last several years has been down to either the US consumer spending beyond their income by drawing credit against gains in house prices, or the Chinese government lending them the money to buy the excess goods produced in China, using the Fed, Freddie, and Fannie as intermediaries. Conveniently this route for the flow of credit guarantees further house price rises, and thus further credit for US consumers to draw against.
Naturally the old rule that says "if something can't go on forever it won't" applies here. The US has already passed the point at which its external deficits would produce a run on the curency of a country that didn't have a world reserve currency. Nobody really knows how much buffer that gives them, but it isn't infinite. Potentially a run on the Dollar could see the Chinese dumping their Dollar bonds to prevent massive losses. Such a scenario could in theory produce double-digit interest rates in a last-ditch attempt to protect the Dollar, and inevitably this would burst the credit/property bubbles as debtors who geared against rates at less than 2% were faced with mortgage payments based on rates of 12%. The odds on such a quick move producing a bust at Fannie and Freddie (assets to liabilities ratios around 3%) can't be discounted, however much they claim their derivatives portfolios are "crash-tested". Busts there would pretty much instantly halt the flow of mortgage cash and folks would be looking at the deposit becoming the price.
Other threats to this scenario are the Chinese raising rates or some sort of blowup in the derivatives market a la LTCM - the rouble with bailing out those who've screwed up is that it makes people take more giant risks based on the "Too Big To Fail" theory, pretty much guaranteeing that the game is played right through to "Too Big to Bail". After all, who faced with a bet that says "If you win, you keep the profit and if you lose, the taxpayers pay your losses" won't put all the money they can beg, steal, or even borrow, onto the table?
On the other hand, the whole game might be played through to the point that either the creditors chicken out and try to get back their money, or debtors can't service their loans any more. Any scenario that means malinvestment and overproduction (the Chinese side of the boat) running alongside malinvestment due to easy credit against an asset which is expected to continually rise in price, has deflationary recession written all over it. I can't think of any previous bubble which led to such a scenario which didn't include those elements. Besides which, it's what Austrian economics predicts will happen anyway.
The trouble with using more bubbles to prevent the deflationary results of a burst bubble is that when the new bubbles burst, there's even more debt to drive the deflation because folks have just had that much more time to incur it. Mathematically there's no way out: every percentage point of growth means even more credit than the last percentage point and eventually you get to the point where it can't be serviced, even if nothing else breaks first. Once it breaks, then every euro, cent or pence paid back is deflationary (and at an 8 to 1 ratio in a fractional reserve banking situation) and the same applies to every euro, cent, or penny defaulted upon.
IMHO, Greenspan could well go down in history as the man who prevented a recession at the cost of a depression.
As for the rest of us: while the Brtish property market has produced a bubble probably bigger in proportion than any since the Tokyo one burst in 1989 (down 90% and counting), we're still basically just along for the ride. What hapens in China and the US will decide the macro environment for house prices here. As for the rest, Richard is bang on when he says that the lesser effects will be very local.
As to the when of it all. I don't know for sure either. As I've said beore, the signs would be a slow in credit flow; fear amongst creditors and debtors; a pause in price rises, and the discovery of fraud at the centre of the credit flow. The investigations at Freddie and Fannie have fulfilled the last criterion. The others look to be undergoing some change, but nothing absolutely convincing yet. The Dollar has obviously slipped, but the Chinese are still buying US bonds hand over fist and have moved to discussing interest rate rises (but effectively are trying to control property speculation by fiat credit limits and threats to jail bankers and speculators). There's no sign at all that Americans intend to move towards living within their means.
Which assumes that they can find tenants in the first place.
I live in a town which I estimate has 30,000 houses. Within a 500 metre radius of where I live are 6 large developments of about 2000 new flats in total, to complete sometime next year. These properties have been pre-sold mostly to BTLs and are about 75% sold.
In the block that I live are 8 properties. 5 are on the lettings roundabout. In the current market these flats are vacant between lets for 3-4 months each year. In 1999 there were minimal voids and achievable rents today are about they same as they were then.
There is no way that there enough demand from tenants in the town for a doubling (or more) of the available rental sector for 2 bed properties unsuitable for families. Many of these new owners, or the current ones are going to find that they cannot get tenants at any price.
Increasing the money supply was always going to be inflationary. If you modify the figures so that investments (with benefit) don't count and the figures look just dandy I really think one deludes oneself.
Anyway, for what my opinion is worth I'm not sure that Greenspan should be singled out for blame, the game is still in play and all the developed world are players and they decided the rules amongst themselves. But I agree with you that the situation is looking untenable, the pyramid is very tall and the base very narrow. And yes, the banking FR has long been an issue that should be addressed, but it just exacerbates the problem.
My own view is that this era may be remembered as the time that pure economists should never have been allowed to take the controls.
Amongst all the detritus following the falling pack of cards some aces may fall face up in the form of real wealth generators in the ungeared manufacturing sector of Eastern Europe et al.
I think the ideal would be a levelling off, or a very slow rise, such that the rest of the economy can catch up.
From what I recall of economics, every pound in the economy multiplies as it gets spent by various parties, remove these pounds, and the economy falls by multiples, (or does it?).
Professional landlords should only want to liquidate if the rent isnt paid. They should quite happily agree to tenants remaining in my for a longer term - subject to a fairly regular inflation proofed rent increase being agreed and implemented.
Not sure about expertise In the recession of the 1990's, lenders lent on the basis of surveyors valuations, and these were generally based on selling prices at the particular time. They did not seem to include an allowance for the downward trend.
I dont think they will have learned their lesson, because they will be targeted to continue to lend as much as possible, as long as policy is followed.
Yes, it does. Slower spending would lower the velocity of money and would reduce the money supply. It's one of the driving forces of deflation. Of course the reverse is true in a bubble.
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