SIGNS OF A TURNING HOUSING MARKET

I'd go along with Noland's hypothesis that Freddie and Fannie may well be smack in the middle of a full blown financial crisis if the US housing market turns and their mortgage-back portfolios aren't quite as stress-tested as they think. They're playing in trillion Dollar derivatives markes with asset backing of 3%, so they don't have to get it very wrong for the roof to fall in. Whether there'd be a taxpayer bailout remains to be seen, as the US federal deficit is already in "borrowing the interest" territory.

Greenspan also hasn't left himself with many more bullets to reliquidate yet another burst bubble, should it happen before he gets rates back to neutral. If the mortgage traders were hung out to dry, the US housing markets, and to some extent other markets, would see at least a huge credit crunch. That's one way to get to the Japanese scenario.

That said, it could come almost from anywhere in the global derivatives markets. Everyone thinks they're insured through swaps and matching their liabilities. However someone has to have the other end of every contract and the whole system cannot possibly insure itself. Unfortunately transparency is so low that we'll find out who's holding the parcels only after the music has stopped.

What's interesting is the variation amongst the central banks on what's happening. All economic creeds are represented. Reading between the lines of what's been said lately we have:

Japan : We're still in deflation from a burst credit bubble. Still reflating after all these years - Keynesians.

America : Bubble? We still don't see no bubbles. Just keep bailing credit and smile - Fisherites.

Britain : It's a housing bubble, and we'll kill it if it upsets our inflation forecasts - Monetarists.

Europe : It's a credit bubble, but we're too deep in the shit to raise rates - Neo-Keynesians.

China : It's a speculative bubble. Rather than raise rates, we'll order the speculators to stop speculating and the banks to stop lending - Marxists.

BIS : It's a credit bubble. For Christ's sake kill it before it kills us - Austrians.

Needless to say, this surfeit of analysis, and the lack of agreement, should not be reassuring to anyone.

If you believe there's even a chance of a burst credit bubble, you should obviously have less than 30K in each bank, though what makes you so confident about the assurances of the FSA escapes me.

If it's a credit bubble, then those banks which have lent most in the primary assets of the speculation will clearly be at most risk of problems. Suppose it is property? Who's most exposed amongst the high street banks and mutuals? Which ones were recently lambasted in documentaries about overaggressive lending and ignoring standard benchmarks of loan to income? That's precisely the behaviour that always causes trouble in the aftermath of credit bubbles.

FoFP

You're making the mistake in thinking that the specific reason for a crash is important, it isn't.

The generic reason for a crash will be a loss of confidience in the market and history shows that in these circumstances the market always over-corrects. Thew reason for the loss of confidience is irrelevent.

tim

actually I'm making no assumptions either about causation or absence of rationale. I was merely picking up on the poster to whom I responded who seems to be a chartist.

It may be irrational but whether it is irrelevant or not is beyond conjecture.

yes, that is a little worrying but I would sooner have that 'assurance' than not.

chartists ! in this day and age ! have you taken leave of your senses van helsing. youll need to fill me in on the chartists. werent they just liberals ?

not just that C . I read a few books - mainly by galbraith - which convinced me of the nature of bubbles. a bubble is a bubble is a bubble.

A bubble is certainly a bubble... but is the property thing really a bubble or just a small fart waiting to be liberated? I've been 'predicting' a fall in the housing market since even before Eddie George was telling us in 2002 "it's unsustainable" (no wonder he retired!). And I remember in the early 80's, LBC (London's local radio station at that time) had a resident financial expert who, almost daily, would proclaim gloomy portents for property - he even announced his own house-sale. He was 'right' in the event but was about 6 years premature.

I don't disagree with you that the market is either at or close to a high, but I think there are far too many differences now - politically more than at any other time (and G.Brown who pinned his reputation to "no more boom and bust" has far too much at stake to let things take their course) - to be drawing comparisons with earlier patterns.

How high?

The thing is that the argument here is that the price/income ratio should be higher at lower rates. Perhaps that also applies in Japan. The central point is that with interest rates at zero, and relatively low unemployment, house prices fell by 90%

There's no doubt that in Japan in the 1980's, credit was advanced against rising house and share prices and the advanced credit was used to drive those prices to more than 5 times where they started from around the midpoint of the credit cycle. When the credit was pulled, the prices collapsed, by 90% and 80%.

The argument that a similar credit cycle has happened here seems very compelling to me. The end of the inflation was around 1982. How much higher are house prices since then, and is there any serious argument that credit advanced to buy houses hasn't been a driver in raising prices?

FoFP

Bob Beckman. He wrote a book on the Kondratieff Cycle and house and stock prices called "The Downwave" in 1983(?) Stocks bust in 1987 and housing in 1989. However, looking at the book now, it's arguable that these busts were the prelimnary disinflationary busts rather than the secondary deflationary busts that Beckman was predicting.

If we look at the 2000 stocks bust as the start of the deflationary bust and the housing bust follows, then Beckman will have been right, but 16 years too early.

I know of no previous credit bubble in which politicians and experts didn't declare that we were in some form of New Era (the language varies of course) and that busts were a thing of the past. If the credit cycle is 70 years long, it's what you'd expect. It takes the third generation to grow into lunatic borrowing and see it as normal fo a credit bubble to hapen at all. To them, the deflationary travails of their grandparents do seem like ancient history even should they have ever heard of them.

FoFP

that's him! - thanks, i'd forgotten his name.

He wrote a book on the Kondratieff Cycle and house and

So even less prophetic than I'd originally thought. I'm not familiar with the terms. Is the secondary deflationary bust then the apocalypse or can there be a tertiary phase?

Quite, a politician who isn't incessantly blowing his own trumpet has a short shelf-life. 70 years though must leave quite a bit of margin for error.

I kinda liked him. He seemed quite a colourful character. Anyone any idea what he's up to these days? Has he written anything else since "Into the Upwave"?

Perhaps, but prophecy is going to be pretty difficult in these things. If we all knew when the top was, we'd all quit the day before, making that the top. Anything that involves tipping points in mass psychology is going to be inherently unpredictable to a large extent.

Beckman did however produce a relatively accessible book for the layman explaining the arguent for a Kondratieff/Schumpeter longwave cycle.

Hardly an apocalypse, but often a time of deflation and credit revulsion at least.

Things usually get back to reflationary growth within a couple of decades. There's a strong argument that deflation is self-limiting if left to run. Basically that prices will return to some sort of cash-driven normal releasing income to supply new demand, and that malinvestments will be liquidated, releasing resources for other projects. The system flips to a different stable state which is less dependent on mass credit.

What can happen of course is that governmets interfere with this because they regard deflation as a Bad Thing rather than a cure. They prnt money to try to keep the game going and it all ends in a hyperinflation and repudiation of the currency. In general, that seems to go a lot worse than the alternative.

I don't think they start a stopwatch if that's what you're asking. Timing the turning points depends on what data you used. Beckman said that the cycles went from 54 to 72 years IIRC.

I've seen some recent argument that the down period from the peak of the disinflationary boom can be more precisely timed, as in 116 months down before the bounce, and then X months before the deflationary vortex. This was based on 5 previous cycles in Britain and the uS, but I've not ben over the data to see how well this holds up. I'd be very surprised if it were so exact though, again because we're dealing with human psychology.

See:

FoFP

Last July I was in Spain staying with some friends. They live on a nice private estate. There were some unfinished houses there, going for 150k pounds off-plan. I decided they were too expensive. They have just sold for 400k each!

At the same time, we see all the signs of a classic bubble: "spanish property" shops opening up in the UK high street, everybody and their dog being an agent for some developer, etc. So Spanish property can't go any higher; a bust must be just around the corner.

So, how come property out there is still rocketing?

The answer is that it is affordable, to the target market (which happens to be mostly retired people selling their 500k+ houses in the UK). The UK housing market is also affordable.

It will be very interesting to look back on this period, in say 5 years' time.

that's a bit depressing

It certainly seems to me that the Spanish property prices and some of the French (although there's a wider spread of foreign infiltration here) are directly determined by the UK market, in which case they will probably move in tandem. Mind you, someone told me the other day (highly unreliable source) that 30% of English want to leave the UK. If that happens then for the first time ever we could perhaps see UK prices falling below those of Spain/France/Italy - or at least approaching parity.

There's a poll on The Motley Fool website who's participants are probably better than average judges of these things. After 1,953 votes, 86% say prices will not increase during the next 2 years, 11% say they will.

Daytona

"Daytona" wrote

But only 23% think there will be a "crash" ...

No, 23% think there's going to be a very big crash. What defines a very big crash is subjective, which is why I quoted the figures the way I did, as it makes more sense.

Daytona

There must surely be a tendency for these figures - particularly when they're skewed way of evens - for them to become self-fulfilling.