Why This Crash Will Be Truly Horrific - P S Y C H O L O G Y, The view of an old hand

Readers contribution:

This article is about the psychology of the crash. As many on here recognise, what really is driving this mess is psychology. Put simply, it's fear and greed. Fear about not getting "on the ladder" and greed for wanting to ride the property wave, drives house prices up. Fear about not getting trapped in negative equity or losing your home and greed for cashing in on capital gains, drives house prices down.

So why the bold title? Well, I am not an economist. But then economics doesn't really come into this, not really - the hundreds of thousands of house sales over the past five or six years didn't involve an in-depth economic analysis by each party. A simple deference to some crude investment rule of thumb, encouraged by the media, has been to enough to encourage the view that property is the investment class.

We have good fun on here trying to spot the trigger for the HPC. The list is endless. Obviously IRs are at the top of the list, then there's soaring unemployment, oil prices, a credit crunch, terrorism, a change in the rules (housing, banking, etc), other enticing investments, a simple "running out of steam". But as it so often turns out, the real punisher, the thing that will really screw up the housing market, won't be the trigger (whatever that might end up being) - it will be the ensuing panic.

Don't believe me? Well, I honestly think that when it happens, when house prices are obviously falling nationwide for a few months, when newspaper headlines are screaming "house price gloom continues" and the rest, I will be shocked. And yet, I will have been expecting it for several years when it finally happens, fully aware for some time that the madness would have to stop eventually. So just how shocked is some poor FTBer/BTLer/"mover-upper", mortgaged up to the eyeballs, going to be when when they realise that the market is screwed and they are already in negative equity?

I have referred before to "shattered assumptions" theory. Basically this is a part of social-cognitive psychology, where it's argued that an individual's response to a traumatic event is related to the discrepancy between their pre-existing beliefs and the present horror. The greater the discrepancy, the greater the ensuing emotional distress. While a poor theory when applied to certain specific mental health problems, this theory is, I believe, going to be a huge factor in the coming crash.

Not only has this boom on for such a long time, encouraging the view that this is the norm and allowing the memory of the last crash to fade out of our collective consciousness. On a mass scale, across parts of continental Europe, Ireland, the UK, Australia, and the US, we have also ditched the mental life-rafts, the psychological strategies that once kept people going through the peaks and troughs. No "it's good to have more than one kind of investment", no "debt is bad", no "just be patient", no "it's sensible to understand something properly before you invest a lot of money in it". All we have left is a buy-at-all-costs mentality attached to an exaggerated trust in the ability of our beloved chancellor and the BoE to keep IRs under 4.75% for the next twenty years or so.

When people wake up and realise how badly they've been duped, do we think they will suddenly start acting rationally? Or will they panic in their millions?

Think of it this way - one day I was sat in my office looking at the screen, when someone says that there's been a major incident in New York. We spend the rest of the day glued to the internet, listening to the radio, scarcely believing what we were hearing and seeing as "9/11" unfolded. Now, whenever I go online, I check the e-newspapers - you just never know what might be happening. It was a complete change of mindset for me. I really started to appreciate how the world is uncertain and changing, not necessarily in ways that are very nice. Perhaps we'll never get anything so shocking happening again in our lifetimes. But I doubt it.

Quite apocalyptic really. It does sort of assume that we will a clear turning point as well, which some would argue will never happen...

hints of the Old Testament there, old bean!

hints of the Old Testament there, old bean!

My line would probably be "when it comes it will be really bad, there's no grey area, no middle ground, no 'correction', it will be boom or crash".

...

The present situation is boringly predictable, there's just nothing left to do but wait for it to unravel. Oh, and sell up if you haven't already.

Im locked into a nice low interest mortgage so I know that place is mine at a nicely affordable rate (just over 20% monthly expenditure).

I'm a total newbie so please bear with me.
I thought that mortgages had a fixed rate for a short duration (e.g: 2 years), and that after that it was variable.
How can you be "locked" in a low interest mortgage? Couldn't it change dramatically in 2 years time?

Isi

That's more or less it. Let me know if you agree/disagree with this. I think that the DotCom boom and our current HPB are very similar and are connected to eachother.

You could get fixed rate mortgages for 10 yeas I believe, but obviously they wouldn't want to offer this sort of deal to any tom dick or harry, only rock-solid bets, e.g. those with very small mortgages compared to the equity they have.

I'm reading a book at the minute called "Market Panic" by Stephen Vines.
I thought that it would make interesting reading. And it certainly does.

Basically it says that if there is a change in an asset (e.g. a poor coffee bean barvest, change in interest rates, technological change) this changes the underlying value of an investment. Prices rise as people identify this change and the boom is unleashed. Then euphoria takes hold ('overtrading'), people become envious of their friends and relatives who are making loads on Starbuck's shares, Bulgarian villas or DotCom something. People who had previously never about (buying stocks) suddenly start to enter the market.
When the boom news moves from the property/business section to the front pages it's a danger sign.

At this point the market in inundated with inexperienced buyers (FTBers, BTLers) driven by the greed of repeating past performance or driven by the fear of missing out on the biggest thing ever.
Their very presence pushes up demand and leads to the opening of new equity issues (e.g. derivatives, or luxery apartments in Vladivostok)

At this point the price is detached from the underlying assets that they are supposed to represent (e.g. my friend has a BTL with a rental yield of 3.5% his mortgage is at ~5%, but thinks he's making the right move)

Savvy investors move out of this asset class - newer players are unsure of what to do and tend to stay put but the outward trend continues putting a brake to rapid upward movements of prices (sounds like now)

Next thing is panic - prices reduce, new supply comes online which isn't wanted (like 1 bed exec. flats)

Prices continue to fall in real terms, people are emotionally adverse.
When prices are sufficiently low enough people begin to see the value and begin to move back in again.
That is basically what he says - the book is mainly about stocks and shares but the principle is the same.
The biggest difference is perhaps that property is illiquid and is harder to get or get rid of. Shares can be traded quickly and cheaply - houses need months to sell and the transaction costs are significant.

That's more or less it. Let me know if you agree/disagree with this. I think that the DotCom boom and our current HPB are very similar and are connected to eachother.

I think the mistake you make is to think people, the majority that is, buy property for any other reason than just wanting somewhere to live. When I bought, earlier this year, the word investment just wasnt an issue, the words that were important were family, home, stability.

I think the mistake you make is to think people, the majority that is, buy property for any other reason than just wanting somewhere to live.

What is important is that I have a roof over my head.

But most of us, as hard for this for you to believe as it may be, are just interested in buying homes and providing a stable environment for our little Timmys to grow up in.