Housing market collapse.

"Jane T" wrote

A 90% collapse is impossible, short of a massive collapse in the economy (most unlikely).

But it can get quite bad.

I bought a house in 1987 for £105k; sold it in 1996 for £75k. Allowing for inflation in the meantime, that is a ~40% loss.

(the next one I bought for 300k and is now worth 1M, after just 10 years - that's the other side of the equation...)

A lot depends on how long people are in denial and the market remains stagnant, with sellers refusing the accept their houses are not worth what they thing they are worth. This is what happened in the period I refer to. There was little movement for years, so when things finally broke, the prices collapsed because by then a lot of people needed to move and simply had to sell.

A lot of estate agents shut up shop in those days - no business.

Currently, houses are changing hands at a decent rate, so I am not expecting a massive fall like 40%.

Reply to
nobody
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Never say never.

A collapse by 90% is far from impossible. It has happened in Japan, so why can't it happen here? Remember, it doesn't have to be a sudden collapse. In Japan it took 10 years for property values to fall gradually to a tenth of their peak.

We've seen prices shoot up by over 10% per year for many years, and by up to 20% in some years. Now imagine them falling by 20% in one year. Hardly unthinkable, is it? Now imagine them falling by 20% *each* year for several years in succession. If "several" equals ten, you're down to below 11% already.

Reply to
Ronald Raygun

But Japanese prices had rocketed by a similar amount before the collapse. We have not had a 90% growth in the last decade.

Reply to
Alan Ferris

Alan Ferris wrote

I think you mean a 10x growth.

Japan was a different situation to the UK. A load of sheep going berserk at the drop of a hat.

Reply to
nobody

I take it you mean 90% of current value, otherwise you would have said 900%. OK, so we might need to go back a bit more than a decade.

What do you think the natural long-term average residential property value ought to be, expressed as a multiple of annual household income?

How far above that average are we now?

If a slide is to start, you don't think it will coast to a halt as it approaches that natural average, do you? More likely the slide will overshoot that level. How far do you think the slide will go before prices bottom out and begin to climb again towards (and in due course beyond) the average?

Reply to
Ronald Raygun

Indeed, my apologies for the confusion. There are other factors which separate Japan from the UK, the lack of land to build on was a big factor. We currently have governments willing to build anywhere, even on green belt land and floodplain's.

How long is a piece of string. We could make as many guesses as you like and would probably never be able to predict if it will happen and what the results will be.

Reply to
Alan Ferris

We don't need to guess. We have historical data. Go look them up, because I'm too lazy to.

Reply to
Ronald Raygun

We have data of past problems with the housing market, but if you look, each had different results, why therefore do you think if it occurs again you can predict it anymore than they could predict it then?

Reply to
Alan Ferris

And how does this affect people who have to move because their employment has relocated, or because there are no jobs where they live, or the only way they can get professional development is by changing jobs?

Reply to
Amethyst Deceiver

There are ways CGT could be charged on a theoretical yearly basis. So that a house owner builds up a reserve account with which to pay the tax when they move.

At present stamp duty is charged on every move irrespective of how much money has been made on the house. This has to deter mobility.

It is a difficult problem

Reply to
Nick

"Amethyst Deceiver" wrote

Well, if they couldn't afford the CGT, then they'd either have to:- (a) not take that job; or (b) commute; or (c) trade down to a smaller house so that: (price of new house) + (CGT on old house) = (sale price of old house)

It's a choice: no job -OR- commute -OR- have a smaller house!

Reply to
Tim

You would have people put on side money for tax on a gain that they have not yet made? Where do they get that money from?

"Nick" wrote

A little, but SDLT is at most only a few %. But CGT is much more...

"Nick" wrote

Yep...

Reply to
Tim

Of course, if everyone did that, prices would fall 90% again and the economy would collapse...

Unless of course deflation reduces the amount of income.

A few people are doing this. However it's seems difficult for various reasons for people to sell and become renters again. I suspect that mostly their wives won't let them.

We do know that house prices in Japan have fallen by between 50% and 90% (depending on location). Have all the Japanese moved in with their parents in order to buy houses with cash? If so, why haven't house prices risen again du to the huge influx of cash buyers? Are the Japanese gifted with huge amounts of income at the end of the month? If so, why can't they get consumer spending to rise?

Economists generally think in real terms.

Governments often try to reflate their way out of debt deflation. However, if we had significant inflation at this point, inverstors would want compensation and raise interest rates to achieve it (they think in real terms too). Thus if we had inflation back at the 15% typical of the

1970 crises, we'd see mortgage rates of 17% to 20% per annum. It'd make a 90% drop in house prices a certainty as damn near everyone defaulted on their mortgages.

This is how things played out in Japan. They've had deflation of a bit less than 1% and small percentage falls in house prices. The thing is that it's lasted 19 years rather than 5. Nothing very dramatic happened in any single year though - just a long grinding slide down.

A question for us is whether we'd rather have that, or a quick 5 year crash.

That's what's happened in germany after a roughly 50% fall in prices there. I'm told they wait to buy when they settle down, a put down a very sizeable deposit.

I've thought about exactly this and suspect that just as getting out before the top is wise, perhaps getting in a bit before the bottom could be too. Trickier would be if we see false dawns on slight rises in generally falling prices. Each one could be the real dawn making the decision tricky.

The banks will be hit very hard in capital terms by this and there will bee legislation to make them play it much more safely. That in itself will constrict lending. Further, the securitisation model is completely broken. We won't see a quick return of hedge funds levered at 33 to 1 throwing credit freely around the globe. The banks are likely to be limited to the money of depositors. Even that will be reduced because many people are going to be hurt by what's coming and will need to draw down to get them through it. There's also the inevitable credit revulsion effects where people who have seen their lives destroyed by being too free with credit will refuse to borrow again.

Yes, we'll return to some sort of market, but it won't be like the one we've seen through the credit bubble.

Most people want a yacht too. It's not what people want that matters, it's what they can pay for. For some time and for most people it's likely to be what they can pay for without any credit. Most will neither move in with parents nor go without any social life eithere, so it'll be what they can save out of all that spare cash at the end of the month. As I understand things, the average deposit of a first-time buyer has been 3% recently. If that's all they can manage without access to credit, then prices will have to drop pretty handily for all those people to have the house they want.

We already know that: the hedge fund managers who were getting 20% of profits made on 33 to 1 leverage. Many are damn near billionaires now.

Every market is a means of transferring cash from winners to losers. Mortgage defaults in the US are now running at 2 million per year. Given that most houses have more than one person in them, it strikes me that they have a veritable factory for producing losers. Those are the folks moving back with parents. I agree that most people will muddle through somehow though.

Conversely, if we have a deflation?

I've heard land prices have begun to fall. The builders will be in heavy liquidation mode soon if that's so. They'll shift stock at any price they can get for it just to stay liquid.

FoFP

Reply to
M Holmes

yes, over the length of their somewhat shorter credit bubble, they rose that much.

The credit bubble has been running since we came out of the 1979-1982 recession. How much have prices risen over that period.

FoFP

Reply to
M Holmes

"It's Different This Time".

Who was it who said that those are the single most terrifying words in the financial lexicon?

FoFP

Reply to
M Holmes

That's an important question. I vaguely recall that Shiller attemps to attack it in his book using analyses of previous property bubbles. The conclusion seems to be that the undershoot is roughly equal in percentage terms to the overshoot. So if we're 30% overvalued as the IMF claims, we're talking about a 60% fall before things turn up again - easily within my range. If the ABN-Ambro analysts' conclusion that we're

50% overvalued is accurate, then the upper end of my predictions looks achievable.

FoFP

Reply to
M Holmes

I think that we realise this. Surely the issue is what effect does naking this choice it have on the economy? Experience from other countries that do charge CGT on main homes suggests that most punters chose option 1. Is that good for the economy?

tim

Reply to
tims next home

A lack of land to build on in the UK has for long been claimed a reason why prices cannot fall here. Yet someohow it's a reason why Japanese prices fell by so much?

Yup: in the end, credit bubbles are a lot more about human psychology than they are about fundamentals.

My one and only convert to the cause was in the pub last night. He saw the light early last year (and predicted bank collapse in the US a few weeks beefore Bear Stearns went down). He's now moved to the Peak Oil camp and thinks it will all go a lot worse than my over-optimistic predictions. His thesis is that it's already producing huge rises in fuel andd food prices and that this will only get worse as things go on. People are already starving in various places due to this.

He doesn't have me convinced yet that people will starve here, but it's not impossible. What does worry me is that credit bubble busts almost always produce wars. It's not hard to imagine wars over increasingly expensive food and oil. These are the sorts of things which produce the psychological factors which exacerbate a bust.

FoFP

Reply to
M Holmes

Skip them. This is a credit bubble and not a housing bubble. Credit bubbles follow certain patterns. Look at housing as simply the primary asset, and in principle no different to a South Seas Compant share, or a tulip bulb.

Timing is hard, but you can predict the general trends, issues, and crises.

FoFP

Reply to
M Holmes

It was you. :-)

Reply to
Ronald Raygun

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