"Worst housing market for 30 years" as estate agents admit to "overpricing". House price crash on the way ?

How so? Once he's sold his, it's off the market, as is the guy who bought it.

Assuming that the most willing buyer bought the cheapest one, the game continues.

When the second most willing buyer is prepared to pay what the second cheapest seller wants, then a sale occurs. It's an independent decision. Any connection between the two is purely emotional. Buyer two can hardly use seller one as a negociating tool, since he's already sold.

...

So let me get this right.

People prefer to hear good news, and estate agents are liars.

In other news, bear faeces found in forested area.

And comets, strange conjunctions of planets...?

It's not just the UK of course................

"Bank of Spain warns on house prices

By Kevin Barnett, 09 Jan 2006

The risk of a sharp fall in house prices is increasing and could halt Spain's economic growth, the governor of the Bank of Spain warned.

The bank's governor Jaime Caruana said: "The longer the current high rates of house price inflation are maintained, the higher the risk of a more abrupt or disorderly correction in the future." He repeated the European Central Bank's claim that Spanish house prices are between 24 and 35 percent overvalued.

He added that household debt as a ratio of gross disposable income had doubled to more than 100 percent since the mid-1990s. "The Spanish economy and, particularly, its households are now undeniably more vulnerable to adverse developments, especially to a potentially greater-than-expected hike in interest rates."

But the risk to banks of a sudden fall in house prices was minimal because default rates are now very low and banks' solvency position is comfortable. Spain's 12 consecutive years of economic growth have been largely fuelled by buoyant consumer spending and the construction industry"..................(not to mention billions of euros in handouts from the EU)

Yes, cheers Steve.

You don't understand how markets work Hognoxious.

The first sale has set the market price and only a fool would pay more for a similiar property in a falling market (granted there's still some fools about !)

No but plenty more earthly portents including this one from

Moneyweek.com morning e-mail 6.1.06

It's looking like a tough year for house price pessimists, if you believe the hype in the press over the festive period.

One of the most pessimistic forecasters, Capital Economics, revised their predictions for house price falls. They now expect a decline of

5% over the next two years, as opposed to a drop of 20% over three years - quite a pullback.

And Bank of England figures showed that in November, mortgage approvals for house purchase rose to 115,000, the highest level since April 2004, and above the long-term average.

So is it time for us at MoneyWeek to revise our bearish outlook on the UK housing market?

It's one thing to be dismissive of the upbeat rhetoric on house prices from estate agents and property pundits.

But when a respectable think tank like Capital Economics decides to revise its opinion, there's no harm in taking another look at our view that house prices are still headed for a fall.

Firstly, before the property bulls get too excited, you have to remember that prices rose by about 13% in 2004, according to Nationwide. That slowed to just 3% during 2005. That's a pretty steep fall in the growth rate. And that's using some of the more optimistic figures - other data shows that new builds saw prices fall by more than

5%, while the Hometrack survey reported that prices fell 2% during 2005.

Many observers seem to be falling into the trap of assuming that just because house prices haven't collapsed yet, they never will.

But despite all the upbeat noises from the newspapers, the people who actually build and sell houses are by no means optimistic on the year ahead.

Construction group and housebuilder Galliford Try said that the average selling price for its houses fell 11% to £203,000 in the six months to December 31st, from £228,000 the previous year. The value of sales currently reserved has risen by 21% to £158m - but that's due to growth in the number of sales outlets, which has also risen by 20%.

Meanwhile, fellow housebuilder Redrow said that sales in the last six months of 2005 were slightly down on 2004, while forward sales for 2006 were also down despite an increased number of sales outlets. Profits are also set to be lower than last year as its average selling price fell by 8% to £163,000 from £176,700. The group concluded: "Consumer confidence will be important in determining the strength of the housing market in Spring 2006". Its shares fell 4% to 515p.

We believe that housebuilders are right to be cautious. Our reasoning is pretty straightforward.

The UK economy is struggling at a time when the Chancellor has spent too much money. He will need to raise more money by increasing the tax burden even more rapidly than he already has for the past seven years or so. That will cut into the amount of money people have available to spend on other things, like consumer goods and housing.

At the same time, energy prices look set to keep rising this year. Already Russia and Ukraine's gas dispute has highlighted the fragile position of countries like the UK, which rely on foreign gas imports.

And oil prices don't look set to retreat to the $40 a barrel some analysts had hoped for this year. Crude is currently above $60 a barrel on both sides of the Atlantic. The market remains as vulnerable as it was in 2005 to shocks like hurricanes and terrorist attacks - and that's on top of the ever-growing demand from countries like China and India.

So consumers are already facing a squeeze on their pay packets from both taxation and energy costs. But that's not all.

Now consumers are also facing a big squeeze on their pensions. The move at the end of last year by FTSE 100 hygiene services group Rentokil to close its final salary scheme seems to have started a ball rolling.

Philip Green's Arcadia - which owns high street chains Top Shop, Dorothy Perkins, Wallis and Burton - has upped the retirement age on its final salary scheme from 60 to 65. Staff are also being asked to increase their contributions from 4% to 6% of pay. Meanwhile, the Co-operative Group now wants to shut its existing final salary pension scheme from April 5 and move to a new scheme whereby payouts will be based on the average salary over an employee's career.

So at a time when we're all being told that we're not saving enough for our retirement, employers in both the private sector, and (in theory) the public sector, are threatening the entitlements that do currently exist.

That's not good for consumer confidence.

And as Patience Wheatcroft points out in The Times, the gulf within companies between those who are still participating in final salary schemes and new entrants who are excluded is increasingly likely to become a flash point for industrial trouble.

"Some employees excluded from these schemes may soon notice that they are, effectively, being paid significantly less than those whom they work alongside but who are beneficiaries of the final-salary scheme," she says.

Public sector unions have already confronted the government over plans to change pension entitlements, and the same may well happen in the private sector. Ron Webb of the Transport & General Workers' union said of the Co-op's decision: "This is not a good way to start 2006. The Co-op can be assured that we do not accept the closure of the final salary schemes as a foregone conclusion."

If employees are seeing their pensions slashed at a time when they feel their cost of living - regardless of how low the official inflation figures are - is going up, that leads to people demanding more money. And when people ask for more money, inflation goes up. And when inflation goes up, interest rates need to rise.

And that spells bad news for house prices.

For more on how the UK economy has steadily gone off the rails under the stewardship of Gordon Brown, you can read this piece from MoneyWeek magazine on our website: Into the red with Brown

Here's an informative piece on economic cycles, peaks and troughs, inflation v deflation, credit crunches etc. The writer believes we are at or near the crucial "tipping point".

Well worth a read......................

Has the inflation monster really been captured?

05.01.2006

I am pleased to report that the inflation monster has been captured and placed in a jar.

This stunning announcement as well as an accompanying video detailing the highlights was made by the European Central Bank, in cooperation with the national central banks of the euro area. Along with the announcement, the ECB has produced an information kit on inflation entitled "Price stability: why is it important for you?" It is targeted at young teenagers and teachers in all the official languages of the European Union.

The ECB's eight minute video is actually somewhat entertaining so I recommend that everyone click on this link take a look:

Even though it is entertaining, it sure flops as an educational tool unless of course the goal is self-serving propaganda by the ECB, for the ECB.

Unfortunately the video does not explain that the real source of inflation is the printing of money by the central bank itself. Nor does it explain why 2% is such a good inflation target. Finally it does not explain how prices across the board can be contained by broad-brushed practices like setting of short-term interest rates.

Those things were not explained simply because they cannot be explained.

Why should inflation be targeted at 2%, not 1% or 3%? Why should any inflation be targeted at all? Even if it were for some reason smart to target prices, can prices really be measured accurately? What do central banks do to overcome lag effects of monetary tightening and loosening? Is this just blind faith that "we know neutral when we see it"?

The problem, of course, is targeting prices in the first place. Sometimes, money flows into houses and shares and bonds, instead of goods and services. Sometimes, productivity improvements mask inflation. Sometimes falling commodity prices mask inflation. Of course, I am talking about "real inflation" as measured by increases in money supply, as opposed to hedonically adjusted price inflation, as seen through the eyes of central bankers.

The last paragraph is exactly what made a fool out of Alan Greenspan. In the mid-to-late-1990s, "real inflation" (a rampant increase in money supply) was masked by productivity improvements, falling oil prices, and falling prices of goods from Asia. Greenspan called it a "productivity miracle". It was a "miracle" indeed.

Rampant increases in money supply fuelled the 2000 stock market bubble and spawned nonsensical talk about "new paradigms". Then, in the sheer "after-the-bubble-pops" panic adjustments that he likes to make, Greenspan refused to allow a recession to run its course. Instead, he slashed interest rates to 1%, fuelling the biggest housing bubble the world has ever seen.

Here we are three short years later, now facing a "new paradigm" in housing, with debt levels far worse at both consumer and governmental levels.

Greenspan will soon be gone. Bernanke is next to bat, waiting in the stands. Like the ECB - and also the Bank of England, which started this whole charade of course - Bernanke wants to set US price inflation targets of 2%.

I have some advice for him: It simply cannot work.

With all the hedonic adjustments, with all the nonsense about core versus noncore inflation, with all the imputed economics, with all the understating of medical costs, and with enormous discrepancies between rental costs and housing ownership costs, there is not a person on this earth who could possibly know 2% price increases if they hit them smack in the face.

Compounding the problem for these so called "inflation fighters" is energy costs. One reason energy costs are rising is Peak Oil. Another reason oil costs are high is geopolitical tensions. A third reason energy prices are high is supply disruptions. Finally, oil and natural gas demand are relatively inelastic. As prices go up, people more or less have to pay. To maintain a CPI price target of 2%, central banks might have to raise interest rates to unreasonably high levels if energy prices are included in their measurements. That clearly would be bad policy. The root problem, of course, is assuming it is wise to target prices, rather than money supply, in the first place.

I almost forgot to mention that the ECB claims to have "the deflation monster" bottled up as well. I guess we will see, but I think they are hopelessly wrong. The ECB points out "deflation monster" problems when, in fact, deflation is both a blessing as well as the natural state of affairs.

Rising productivity is "price deflationary". More goods are produced faster by fewer people. Prices naturally decline as a result. Look at how few farmers today produce more grain than 100 times as many farmers did not that long ago. Corn prices fell to 1943 levels a couple weeks ago. Is that a problem? For whom? It's only a problem because the United States' and Europe's central banks blow countless billions of dollars every year on price crop supports. It is a total waste of money.

Bear in mind that China is actually losing textile jobs. The enquiring mind might be asking to whom? The answer might be shocking: to no one. Fewer workers are needed to turn out the same amount of goods. That is one of the reasons this protectionist talk you hear right now out of Congress is total nonsense. Those jobs simply are not coming back, ever. Cranking up money supply in an attempt to create jobs lost by productivity improvements and outsourcing can only result in asset bubbles and/or increased overcapacity. Besides, who does not like lower prices on goods and services?

If deflation is such a good thing, why do central banks fear it? One answer is because deflation is debt's worst enemy. If asset prices and wages fall, people cannot possibly ever pay back what they owe. Banks and credit card companies don't seem to like that state of affairs.

Is that a problem with deflation? No, that is a problem created by reckless lending, easy credit, and the endless cheerleading on CNBC every time consumer spending rises and people sink heavier into debt.

The second answer is because inflation benefits those who receive money first. The government and banks are at the very top of the list. The former benefits via automatic tax increases not indexed to inflation (especially property taxes), the latter simply because banks are first in line to receive money from the Fed or the Bank of England or the ECB at rates no one else sees. By the time lending standards drop so that the masses have access to credit, the boom is well under way. By the time credit is granted to anyone that can fog a mirror, the boom is nearly over. Those buying assets late in the game will eventually be crushed by those selling assets who got in early. Simply put, inflation eventually becomes a moral hazard.

We are now at or close to the pivot point. The pivot point - or tipping point, if you prefer - is when consumers cannot or will not take on any more debt and/or corporations simply are unwilling or unable to extend more credit. I have been writing about various tipping points for some time now, and we seem to be hitting those tipping points simultaneously in many areas: jobs, housing, consumer spending, and credit expansion.

The mal-investments of the have-it-now, me-too ownership society are about to be unwound. We are where we are because central banks have printed ever-expanding amounts of money to prevent normal business cycles, to satisfy politicians wanting to waste more taxpayer money with silly projects, and to foolishly fight deflation.

The only thing the central banks have accomplished is putting off the inevitable deflationary credit crunch, while making it worse along the way.

There are many who think true deflation - meaning a decrease in the money supply - cannot happen under a fiat system. I disagree, but perhaps the point is moot.

Money supply itself actually never contracted in Japan. Instead, it grew very slowly for quite some time.

However, bank credit outstanding contracted for 60 months in a row. Clearly, there was a credit contraction. How did money supply still manage to grow?

Fiscal deficits were ramped up immensely, roads to nowhere were built, and the Bank of Japan monetised all of it.

In addition, money velocity plummeted. The net effect of the credit contraction on prices was clearly what one would nowadays call "deflationary". Prices across a broad range of assets and goods and services fell.

Indeed, practically everything fell but government bonds. People were amazed at the alleged "bond bubble" as well as the zero interest rate policy (ZIRP) of the BOJ. However, a 1% interest rate on a 10-year bond makes sense when prices fall 2.5% annually. The real yield is, obviously, far higher than 1%. Perhaps a practical way to think of deflation under a fiat system is the destruction of credit/debt that exceeds growth in money supply.

Regardless of social and economic differences, I fully expect the United States to follow in the footsteps of Japan. Although a central bank might be able to sustain a certain amount of inflation by resorting to extreme measures, it cannot stop a credit contraction in the private sector. Nor will a central bank bail out consumers at the expense of themselves and other creditors. The Fed, like the BOJ, will stop short of destroying itself and its power.

Life would be so much simpler if central banks everywhere would stop trying to micromanage both prices and economic cycles. Quite simply, they are trying to achieve nirvana when nirvana cannot possibly be measured, nor can nirvana be achieved in the first place with the policies they have in place.

Yes, we will still have economic cycles if central banks do those things, but the cyclical peaks and valleys would not be as exaggerated as they are now. It seems as if we have learned nothing from the Great Depression or the more recent experience of Japan. I fear we may get a second chance.

By Mike Shedlock for The Daily Reckoning

Michael "Mish" Shedlock worked in the US financial services industry for 20 years at some of the top institutions in the country including Harris Bank, the Bank of Montreal, Bank One, First National Bank of Chicago, and First Data Corp. Mish runs one of the more popular stock boards on the Motley Fool, Investment Analysis Clubs/Mishedlo and one of the more popular boards on Silicon Investor, Mish's Global Economic Trend Analysis. You can see more of Mish's writing on his blog also entitled Mish's Global Economic Trend Analysis, and he also writes regularly for the Whiskey & Gunpowder newsletter.

In message , Hognoxious writes

Estate agent looks around house and thinks its' value is £350,000, but knows that he wont get the business if he tells the client this, so he suggests an asking price around £400,000.

If he gets the business, he knows he wont sell it for £400,000, and his job is to get the client to accept less. This process, (if it works), will take some time.

Hence.... "the agent is hoping to wait a few months, or longer, to sell at a lower price"

Sure but that's now set the "street price" for that type and location of property. Just as when prices are rising, the going rate is what the last one sold at, the same happens when prices are falling.

If it weren't so, then we couldn't have stockmarkets because the price of each share sold would be independent of other sales. In fact we price them all at the value of the most recent sale.

The game continues and the price evolves. Each sale sets price and direction.

Correct. It's partly emotion that sets prices. Think about the emotion involved in "I have to get a house now or they rise so much I'll never be able o afford one."

he can use the price obtained as a negotiating tool: "Oh come on, your neighbour only got 10 grand less than that..."

FoFP

In message , john boyle writes

I didnt mean interest rates were 10% in 1995, but that the average was around 10% in 1995. I'm not sure what period I was considering, but it probably went back to the early 1970's.

I was also being a bit lazy and cavalier with the figures, (typical of an ex estate agent? ).

Big dirty snowballs.

Syzygys.

FoFP

The bust happens when the last bear surrenders.

FoFP

If he tries it, he can kiss goodbye to any chance of being elected Prime Minister.

Having passed the relevant exams, I could, but I wouldn't think of doing so unless it was a commercial necessity.

The advent of all these quasi-regulatory organisations that require complainants to jump through ever more hoops is disturbing. If there was an implied legal requirement for organisations to detect and punish rule infringements it would solve the problem.

Daytona

Yup, I'd seen that one already. I've been saying for a while that they should have just let the deflation that was coming in 2003 run, rather than foment another bubble to get them out of the downside of the tech bubble. The evidence is pretty consistent that when governments interfere to try to prevent the downside of the credit cycle, all we get is a later denoument involving even more debt, and therefore a worse cyclical trough. 1932 and 1720 are examples of this.

FoFP

Ah. Lower compared to the, umm, optimistic estimate. Pardon my lack of telepathy.

Not lower compared to what it could sell for today - that wouldn't make any sense.

...

And you clearly don't know how to read minds.

How? Explain to me how this is enforced? Why the first buyer's decision is binding on the next?

And as every house is unique, you don't know what the market price is till it's sold.

Why? He might think the downward movement is only temporary. He may want to buy for tax reasons. He might be sick of living with his parents...

And he can't buy the other one - because someone already did.

There wouldn't be bubbles without fools.

In that case, once prices go up they cannot go down, which seems to contradict the observed evidence.

One, stocks are homogenous (at least, any ICI share of a given class is the same as any other), houses aren't.

Secondly, the small number of transactions ocurring means that any demand curve tends to be discontinuous. What's the market price of an aircraft carrier? Alaska? ...

To which the answer is "Buy that one then", or "Why didn't you buy it then", or "The guy who sold it just got divorced, he's skint". You could try, but in the absence of an available house at that price, he can ignore you - if he's not too bothered to make a quick sale.