How will house maket top out effect larger economy?

The Bank of England publish the figures.

I'm no finacial expert, but what happenned last time house prices topped out? It won't be the first time it's happened in the past 20 years, IIRC. What were the effects in the past?

JK

They crashed and then stagnated for five years.

I can't remember the exact dates but in the last boom I bought a flat for 89K, after a couple of years the top price reached was 115K. Then the market crashed and one of the owner's died. The inheritors had no interest in 'best price' and put it on the market but even at 75K they got no takers (so they rented it). I moved on 6 years later and sold for 113K.

IMHO much the same will happen this time, there is no magic carpet keeping prices at the current level and once people stop buying the prices are bound to go down

tim

Before they crashed what was the mood of the nation regarding house prices.

I ask because I am wanting them to crash so I can pick up what I would consider cheap houses. The problem I have is that I get the feeling I am not alone in this thought and every man and his dog are thinking like me. If this is true then house prices are never going to really crash, only correct a little maybe.

What I am looking for is parallels from previous crashes where optimism was high that people were hoping for a crash enabling them to snap up bargains, only to loose confidence when they did crash and then stagnate.

Newspapers were extrapolating 20% pa increases so that a normal house was going to cost a million in 2010 (or whenever) Everbody without a house was running around trying to get on the ladder so as not to miss out on this nest-egg. This was the era of double tax relief for sharers and if you couldn't buy on your own, you bought half a house with a sharer.

I think that there was more belief then that the boom would never end than there is now. Today there are people (like me) who saw the last crash and are expecting the same again (perhaps there were some bears last time, but they lacked a communications channel so no-one noticed) and there is certainly less of a bullish attitude in the press today than there was 15 years ago.

so they say.

Every boom in history has been followed by a bust (there are basic economic reasons why this happens), except this one wont be - because it really *is* different, we will see.

If what we have now is a boom, I'd wager my house on there being a bust.

tim

IIRC there was a date in Aug 1993 (I can't be arsed to check any of this as usual) on which Mrs T had decreed mortgage relief would be restricted. In the months preceding this date there was a mad panic to buy which would in any case have led to a correction in Sept but instead started a crash.

Mind you looking back the "crash" wasn't very severe and if you could survive three years you were back where you started.

Every-boom-in-history also seems to be identified as being unique in some way.

What is your reasoning on this one?

True, I think that people with access to funding will certainly slow the descent of property prices, but it will keep falling nevertheless.

This phenomenon is much like when people buy into a falling stock where we see a bumpy decline in the price. As the stock continues to fall you start to realise a gradual erosion of investor confidence until after such time that it is no longer recognised as an investment of merit. By this time people have discarded it en-mass and are investing elsewhere.

I see this scenario for the housing market but fear that it could take five years before people generally lose faith in the sector as an investment opportunity. Only then will prices to return to historic norms. i.e. Prices that can be afforded without leading to penury by families that have numerous other financial obligations.

My other key concern is that with the enlarged rental sector is that the government is likely to impose new legislation to protect the tenant which could make life for the new army of landlords sufficiently unattractive that they would choose to liquidate. The state pays a huge amount of welfare in the form of housing subsidy and it has every reason to try and decrease these costs.

Much the same as now. The papers were full of "experts" saying they couldn't crash because the economy was good/unemployment was low/interest rates weren't high/they were affordable/house prices never fall but just plateau etc. I filed quite a few of those articles (on paper unfortunately) to compare them to what I thought then would be the

1998 house price crash (based on the idea of the disinflationary crash of the K-wave preceding the deflationary crash by around 9 years).

Which means we haven't reached bottom. At the bottom, every man and his dog will be thinking that they'll never be so stupid as to borrow in their lives again and that buying more than one house in one's life is only to be done when it cannot possibly be avoided. Read Kindleberger, he's very good at outlining what he calls the "revulsion" period of a crash.

If it's true, it's precisely what happens at the top prior to every crash.

The Tulip Bubble (and almost certainly the four flower bulbs bubbles that followed it) The Mississippi Bubble. The South Seas Bubble. The Canal Stocks bubble. The Railway stocks Bubble. The Wall Street Bubble The Japanese shares bubble in the 1980's The Japanese Housing bubble in the 1980's (still crashing) The Internet Stocks bubble.

Kindleberger is a good place to start snce he specifically looks for patterns common to bubbles. He doesn't cover the Internet Bubble in the copy I have, but he's since put comment on the web. He also said before his death a couple of years back that housing was in a classic bubble.

FoFP

Au contraire mon cheri. I was on usenet predicting housing doom in late '87. I'd though it was in a bubble before that, as were shares, and the October '87 shares crash convinced me housing would follow sooner or later. I guess I'd have been mostly posting locally in Edinburgh though.

Heh, so what's changed?

I'm not so sure. Certainly there are a lot more housing shows on TV than there were then.

Was it Warren Buffett that said "Whe most dangerous words for your finances are "This time it's different"?

Absolutely every bubble bar none has been accompanied by the description "New Era", "New Paradigm" or words to that effect. They are a signal of a coming top.

FoFP

Indeed. The date was August 1989 and it was decreed by Nigel Lawson that multiple mortgage-relief for co-owners of property would dissappear. As this decree was in the Budget speech, it was followed by loads of twenty-somethings all getting together with their 30K of mortgage relief to buy 90K flats in the South before prices put them out of the market. That was the last hurrah of the disinflationary housing boom. The K-cycle said this would inevitably be followed by a bust and then a deflationary housing boom and bust.

Economists look at things in real rather than nominal terms. Ther crash was close to 50% of value, but sufficient inflation remained over the period that half of that was soaked up by inflation and so nominal prices fell by only a querter. The flipside of low nominal interest rates this time (real interest rates are around the same as in the last bust) is that there will be no inflation and real falls will be matched by nominal ones. Also, there are those amongst us who believe that the larger bubble, the credit bubble, will also burst and drive affected economies into deflation. Thus a 50% fall in housing will be compounded by deflation and nominal falls will thus be larger than real falls this time.

In such circumstances in previous asset/credit bubbles, prices have been driven back to levels at the start of the whole disinflationary part of the credit cycle. That would be 1982 here. It sounds outrageous, but the same was true when I said in 1990 that Japanese house prices would return to 1982 values. They're now down 90% and at 1983 values.

Until human nature changes, this pattern will keep repeating.

FoFP

Yup. My bet is that when it gets bad enough, the government will revent BtLers from getting out of the sector, both to protect tenants in a period when homelessess will be grim and to pevent yet more houses being sold onto a falling market. It'd be the equivalent of the Argentinian banks locking up everyone's savings for 3 years and forcibly converting Dollar accounts to Pesos ones at government rates.

I also suspect that the homes foreclosed by the banks will be forced to take in at mandated rents, those who have been made homeless because they reneged on their mortgages.

In essence, the country is going to say "Ta very much" to the landlords and speculators who've stretched themselves to the limit who have bravely put their own finances between the country and the crash, and then shaft them. Since it's a given that the goverment won't be keen to tak the blame, look for articles in the press blaming BtLers and "speculators" for driving the market too high. I'll bet that some estate agents and punters who can be proved to have lied on income self-declaration forms will also be marched off to jail as scapegoats. This will presage them being blamed fr the crash and then finiancially shafted to clear up the mess.

There won't be many volunteers after that.

FoFP

Multiple MIRAS was removed by Lawson in his Budget of March 1988, at the same time as reducing the top rate of Income Tax from 60% to 40%. However, Lawson left a 4 month window of opportunity by delaying implementation until August 1988.

I remember the time very well as I was an IFA specialising in mortgages at the time. :)

Still in doubt that the prices have topped out. Apparently the recent figures and the fall of the dollar are rallying confidence in sterling and house prices had shown signs of continuing to grow albeit slowly.

You are of course correct. I was a year out and the bubble started to burst in 1989.

FoFP

I think it was the 1977 Rent Act that gave tenants right of tenure and it would take a minor change to reintroduce this rule. The landlord may then sell the property but only with the tenant in-place. This clearly has a marked effect on the property sale value.

yes they have been haven't they?

My reasoning for what; why I've heard that this one is going to be different (apparently it's because there really is a shortage of houses), or why I don't don't believe it (becaue I don't see tens of thousands of people living in the streets, so there seems to be enough houses to me)?

tim

>

You may have been predicting it on usenet, but there were a fraction of the people listening, how many people had internet access in 1987

200?

But they are noticing, whether they believed it or not is another matter.

tim

how will they do this?

tim