See other post on "needs". Economists have a different definition than "wish". People need a roof. That roof doesn't have to be on a 3 bedroom detached in a nice estate bought by gearing up by a factor of 60.
That would be demand driven by availability of unlimited credit. Cut the credit and I suspect the demand might be rather lower.
As do borrowers. Witness the numbers after each bubble who swore never to borrow a penny again. The problem it seems is that they could do this. They could even bring up their kids to learn this. However, by the time that the kids had kids, they began to think that borrowing was OK in moderation. Then when nothing bad happened, even in excess. As for their kids, well they grew up with it and stories of harm belong to old economies rather than the New Paradigm.
They have to generate sales to justify a job to generate their salaries so that they can pay their mortgages. It's not as if it's their money, now is it?
Mass ownership of property in the UK is new to this cycle. If you want to see the long term price cycles, look either at land prices, or the prices per unit of commercial property.
Really, UK domestic housing is not the first asset in history the price of which could only rise and rise. Nor will it transpire to be the first one for which that theory turns out to be true.
Predicting economics five years ahead is very much harder than predicting that human nature won't change over the next two generations and that people will continue to be more careless with other people's money than their own.
I even predict that some of them will be predicting the same for the generation of 2130.
Maybe one thing nobody considered: if we loose Sterling and join the Euro, then we may be forced to bring our interest rates in line with the rest of Europe - which means lowering them.
If this is the case, that would provide plenty of fuel for further house price inflation.
Yes, AIUI the growing demand isn't down to a growing population, rather than down to more people living on their own and fewer people per house than in the past. I know quite a few single people living in two/three bedroom houses/flats on their own, who bought a house bigger than they needed as an "investment", rather than simply a place to live.
So when have land or commercial property values remained low for two generations?
And your theories about effective demand [yes, I know the difference between need and demand] do not wash. The idea that people can stay with relatives or friends has weakened over the years as homes become smaller, families split, alternative social housing diminishes and job requirements take precedence.
In any case, people may not *need* to buy but they aspire to do so - at least in the UK. If affordable credit is available, they will use it. I am not persuaded by the argument that more will become aware that in a low-inflation environment debts are not eroded. No-one looks at the total cost of a mortgage - only the monthly outgoings and whether they can afford this.
Whether credit is available depends on weight of money. Savers continue to save [in fact the propensity to save has risen at a time many are warning about excessive household credit]. Institutions must channel that somewhere, and they get a nice return from home loans.
If lower interest rates were the cause of the large inrease in house prices then lower interest rates would have caused inreased demand for everything else which can be bought via loans. Of course this has happened to an extent in the credit spree, but something else must explain the large preference shift towards buying houses.
That's not to say that entering the euro wouldn't affect house prices, just that the syllogism that lower interest rates mean higher house prices doesn't pass muster.
My claim isn't that they'll remain low for two generations. It is that after the bust, people will shun debt and price increases will fall into line with increases in earnings rather than the kind of "crack up boom" we've been seeing.
You're making a Ceteris Paribus assumption that I see as unwarranted. Familes resist spliting when they figure they can't afford to run two homes. Singles resist leaving parents when they figure they can't afford a place of their own, or they share flats with other singles. The biggest change I expect though is in the behaviour of those in the BtL markets.
Indeed, but my argument is that we're in a credit bubble, and therefore that credit will be hard to get rather than easy to get after the bubble bursts.
Of course they will. After a few years they'll notice that they're not paying as much less of their earnings n the mortgage as they did after a few years in high inflation. How could someone avoid noticing that?
Exactly so.
Where there's no fractional reserve banking and curency is fully backed, yes. We now have a fiat currency and FRB and so credit can be created just by writing numbers in a ledger. If you were correct, then the money supply could never shrink and deflation would be impossible without someone doing a KLF and burning money. Who do you think is burning their cash in Japan?
The historical evidence is very consistent in that credit bubbles happe because credit is mistaken for money and the prces of particular assets are bid up and then used as collateral for the creation of more credit. After the bust, those prices fall, removing the collateral for the creation of further credit. Falling prices lead to leery lenders, who try to pull back their loans and refuse to make more. The tendency to hoard cash increases as people are more worried about it holding value than actually earning anything (the Japanese banks buy bonds yeilding close to zero rather than make property loans) on it. Once deflation starts, the cash increases in value even held under mattresses. Deflation causes debtors to either pay down debt, or default, both of which shrink the money supply (in the same way that credit creation increases it) and assist deflation.
In short, during a bubble, credit markets are very liquid. During a bust, preference for cash reigns and credit markets are illiquid and dislocated.
I'm glad you asked because it's rather key to my argument. I'm saying that this isn't a normal property cycle, though it may have a property cycle overlaying it. Do you really think that 50% increases in real terms in just over two years are typical of such a property cycle?
What I believe is that property has become a speculative token in a credit bubble. That there are credit cycles lasting two generations is a debate within economics, though not a particularly controversial one. See proponents such as Schumpeter and Kondratieff. Skene has a very excellent book "Cycles of Inflation and Deflation" in which he uses examples of modern banking practice in creating credit, and has a chapter devoted to the effects on property.
Such bubbles are a feature of British financial history and 4 previous major bubbles can be counted in the era of modern finance, starting with the largest, the South Seas Bubble. Obviously there have been many others abroad, most famously the ones prior to The Great Depression in the US, and the later one prior to the depression we now call The Great Depression. Later still, we have the deflationary bust in Japan, which despite holding interest rates at as near zero as makes no difference for years (and they're still there),saw shares fall 82% from their peak, and domestic property 87% from the peak in one of the most crowded cities on the planet. I hear that part of China also saw a new flower bulbs bubble in which, at the top, a bulb sold for 300 years of graduate salary. The idea that we've somehow outgrown such manias, or that central banks can always prevent deflation by cutting rates to zero and printing money, just doesn't seem to be a match for our lemming-like behaviour in the face of freely available debt.
So I believe that many people analysing this problem are missing the point by looking at it as a property price cycle. Since our mortgage mass markets are only half a credit cycle old, there's scant experience of what can happen to property caught in the down side of a credit cycle (though Japan does provide an easily accessible example). We've only seen property in the inflationary part of the cycle and so people will tend to make the mistakes of fighting the last war and predict more of the same, despite disinflation now being more than a decade old, and the deflationary part of the cycle beckoning. They tend to look for the things which have marked turning points of previous cycles, such as higher interest rates (Japan saw an 87% fall on zero rates), and higher unemployment (only around 5% in Japan).
Credit cycles are first and foremost about credit and have their own dynamics which tend to be quite similar in each cycle. What the speculative token happens to be may affect things at the margin, but such effects are swamped by the huge rises possible in such bubbles (anything from prices tripling to rising more than a hundredfold) and by the price collapses typical of the down cycle (usually falls of between
67% and 90%). Almost always, these assets have seen neither rises nor falls of such magnitude outside of previous credit bubbles. That it's property which happens to have been caught up is hardly surprising, since even in more careful banking regimes, borrowing ten times one's down payment has been fairly typical. Since the mass market introduction of motgages, property was ready to become such a speculative token. Even prior to the current bubble, in the boom that ended inflation in the 1980's, speculative behaviour was noted amongst property market particiants. Even the humble tulip bulb sold in humdrum markets prior to its elevation as the most famous speculative token in history.
Whether we're lucky or unlucky that it happens to be property this time depeds largely on where we are standing. Some will sell at great profit, as Thomas Guy did at the peak of the South Seas Bubble, enabling him to found a children's hospital. Some will lose their fortunes, as Isaac Newton did in the same bubble. What is true is that our prperty markets are a very much larger part of the economy in monetary terms than the SSB ever was, and has a higher ratio of the population participating. This makes it the biggest credit bubble in history, and even better, it's prevalent in all the anglo-saxon countries and a few more besides. Unfortunately housing's effect on the economy stretches further than its mere monetary value. Workers may be unable easily to move both in the bubble, and its denoument, causing inefficiencies typical of a late stage credit bubble.
Meanwhile, even those who might otherwise have the sense to stay out of it are brought in by the fear that prices will indeed rise forever and they'll never have their house, or share. Some are brought in by simply being uable to absent themselves from the market at a time they want to raise a family. Many though willingly join in the hope of monetary gain and many others enthusiastically join purely out of interest in such gains. All of the above are typical participants and typical reasons in any credit bubble. Most, once in, will argue to convince themselves and others that such extraordinary times can only continue forever, and will find plenty of support.
The denoument too will follow the same rough pattern. Pauses in price rises will be cheered as healthy breathing space before the boom continues. Naysayers will be drawn in or derided. In the fall, scapegoats will be found. Recompense will be demanded of government and quietly dismissed as the government has its hands full and coffers empty trying to cope with the deflationary bust. Usually those governments in charge at the turn, will fall by popular demand. Large shifts in politics are typical, and wars not untypical as the the bust grinds on. Financial scandals will be uncovered as the tide of credit falls to reveal the holes created. People will resolve never again to enter debt, and will teach their children likewise. Bankers who are not then unemployed will resolve to find other and safer markets to make their turn.
In the end though, economic growth, of a moderate sort, will return and people will again be happy to work and save fr what they want rather than borrow and bet and hope to earn more than they would by working. The wild times will be seen as a kind of madness, and people will wonder how those strange folks in the past could have been so foolish as to be taken in by such fantastic prices for a mere ....
Confidence in the market inspires people to "move up" the property ladder and increases demand here. In a bust period it's also the most volatile part of the market with larger houses split into flats etc.
If you're looking to trade up, certainly. If youi're selling a 200k house to buy a 300k one you are much better off if prices generally fall 10% than if they rise by the same amount - you're about 20k better off in fact.
This is such basic common sense, but I know many normally intelligent people who don't seem to apply the same logic to house prices as they would to anything else. People who are pleased about high house price inflation and yet are looking to move upmarket, without even a long term plan to cash in their equity.
It's like they've been brainwashed by messages of property ownership makes money, high house price inflation is good, it's the "optimists" who predict further rises, it's the "doom mongers" who talk about falls in house prices. Falls in house prices would be very good news to a lot of people, probably the majority, eg anyone who wants to buy but can't afford it, practically anyone who wants to move upmarket (unless they get into negative equity - but even a 30% fall will only affect those who bought in the last few years with a high LTV). Perhaps we should start referring to those who predict further rises as the "doom mongers".
Very true, except that falls probably do spell doom to those who have been spending all their "gain" - i.e. inflation - via mortgage equity withdrawal.
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