THE RISE AND FALL OF PROPERTY PRICES - By 'RJG18'
29th November 2004
I’ve decided to write up my entire and definitive explanation of the Property Market boom. It’s fairly lengthy, but please take the time to read it.
Over the past few years there has been an explosion of (until recently) ever cheaper money lending, at ever less-restricted levels and in ever-higher volumes. Most of this was in the form of lower interest rates and was to prop up the economy after the stock market collapse of 2000 (on the back of the tech/comms/dot-com boom). With business confidence, consumer confidence and stock market (and investment) confidence low, cheap/free money was needed to assist business and stimulate the economy. This came both as direct assistance, in the form of very cheap/free capital, and in the form of increasing the money supply to the general population (cheap loans, credit cards, etc), who could then spend the extra money on consumer products and services, creating high product demand in almost all sectors, stimulating businesses across nearly all industries. This created growing levels of employment, which in turn generated more consumer spending. Let me elaborate on this last point:
If a car maker is selling, say, 100 cars a year. This might be because only 100 people are willing or able to afford to buy his cars. If you increase the supply of money available to the general public, maybe 200 people will now be willing or able to afford to buy these cars. So the car maker is able to build and sell more cars. To build and sell more he needs to increase his number of employees, maybe double them, which he can now afford to do because demand for his cars has doubled. All of these new Car Making Employees now has paid employment, and more spending power, increasing consumer spending across all areas of the economy. Not only does the car maker directly increase employment, but every other business involved at some point in the production chain also now has increased demand, and can (and has to) increase employment: the people who make the bolts, cables, switches, and other pre-assembled components of the car also see increased demand and can increase their staff… and the people who serve them and their business now see more demand… the people who clean their premises, sell them sandwiches, carry out QA audits, maintain their computers and write software, audit their accounts… there is now higher demand for all of these products and services throughout the whole chain. The knock-on employment repercussions a enormous. And the combination of more people earning money, and people earning more money, through this increased demand filters into all aspects of these peoples lives. They have more money to spend on luxuries, eating out, holidays. And more to spend on cars.
Not only that, but everyone involved now is more eligible to borrow money, and more able to make the repayments on such loans, fuelling the base of this pyramid (sorry, mixed metaphor) with yet more cheap/free money, creating more demand, creating more employment, and creating more capability to borrow more money.
So is this the key to a miracle economy? Simply light the blue touch paper, then stand back and watch it inflate and grow? Unfortunately not. You see, genuine growth has not really occurred. Real value has not been added anywhere, genuine efficiency improvements have not been made, and genuine demand has not been created. What has actually been created is a self-fuelling, self-growing bubble that requires ever increasing amounts of debt to be taken on and an ever increasing rate in order not only to keep it growing, but just to keep it stable. As soon as the supply of new money runs dry, people willingness or ability to borrow more slows, or people ability to service this debt diminishes, then this whole economic miracle collapses.
If only 20 of the 200 people who would have been buying these new cars from the Car Maker become unwilling or unable to purchase cars, then demand for cars has fallen by 10% (to 180). The car maker’s demand has fallen 10% and he is making less money, and also no-longer requires as many workers to meet the new level of demand. So he has to reduce his number of employees. Not only that but everyone else in the production chain (people making the switches, wires, bolt, cleaning the toilets, selling the employees their lunch, doing QA audits, fixing the PCs) see demand fall as a result of this, and through lower demand and lower income has to reduce staff. The people whose industries would have been services through the luxury spending of all these employees (travel agents, restaurants, etc) all see lower demand and lower income too, and have to reduce staff levels. Some of all these employee affected, lets say 20 of them, are now unable to or unwilling to purchase new cars which they otherwise would have been able to afford if their own industry still saw it’s previous levels of demand… so demand for new cars has fallen further, down another 20 to 160 per year. So more employees have to be laid off at the car factory… as do people in all other sectors of the economy. There would now be an a decreasing spiral of falling demand for products and services, which would continue to reduce employment, which in turn would continue to reduce spending. But it would also reduce borrowing, through a combination of people having less employment hence less ability to service their debts, combined with a lack of confidence in the economy (“heck, I could be made redundant tomorrow, better not take out that loan for than new Audi TT”). And so we have a recession. It is inevitable on the back of any boom.
But can the boom/growth be sustained? Can we just not keep printing more money at ever cheaper rates and keep fuelling the growth of the economy with it?
No.
Producing an increasing supply of money has two side effects:
1. It devalues the money. If everyone has £10, and then someone prints more bank notes, and gives each person a further £10, we all have now £20. Are we all twice as wealthy? No. All that actually happens is that the value of that money halves. Things that would have cost us £10 would now cost £20. This is because money (a currency) is simply a representation of wealth. A method of transferring wealth between people, and storing wealth for use at a future time. It is a representation of peoples labours, of commodities (metals, oil, etc), and of finished products. If we double the supply of money does the number of man-hours it takes to build a Ford Mondeo halve? No. Does the amount of metal and plastics used in the construction of the Mondeo halve? No. Therefore the amount of wealth available through increasing money supply does not increase, you are simply reducing the value of each unit of currency. It’s like taking a cake with 8 slices, then deciding to slice it again into 16 pieces. You now have twice as many pieces of cake, but you have no more cake than you had when you started. This whole process is called inflation, and is an automatic (but often delayed) consequence in all situations where the money supply is increased (for example, though higher amounts of lending or through cheaper lending).
2. As well as inflation, increasing the supply of money has another consequence. Inflation is caused, as mentioned above, by more money chasing a limited supply of consumer good and services, pushing up the price of those good and services, devaluing the currency and causing peoples labour to be worth a higher nominal amount in order to be able t continue to afford good and services. However, not all of the additional money goes into consumer spending. Some of it naturally finds its way into assets (for example Property). This creates an interesting effect. There is suddenly more demand for that asset, creating an upwards movement in its price. For example:
If previously there were 20 houses and 20 people wishes to buy them then there would be relative price equilibrium. However if demand increased to 30 people wanting to buy the houses, then only the 20 wealthiest (or most fortuitous) people could now afford to buy them, pushing the average amount someone is able to spend on each house up, increasing the price, (and leaving the remaining 10 people to start, and become addicted to a web forum).
Prices of the asset (property) are now seen to be rising. And as such are seen to be a good investment. Luckily the supply of cheap/free money is higher than it had previously been, so more people are able to borrow more money to pay higher prices for property, which itself creates more demand for property, pushing prices up still further.
Property is now seen as a solid investment, and has been showing solid returns through the capital gains of rising prices. More investors pile in to property, pushing the prices still high. The property people buy (or try to buy) the more demand they create, the high prices go, the more money they make! It appears to be a “can’t lose” situation. Not only that, but the supply of borrowed money is ever growing, as the investor can now borrow money secured against the ever growing capital value of his earlier property purchases to raise the fund to purchase more property, creating more demand, pushing prices up further, and creating even more equity in which to borrow against to secure more property purchases. People who already own property become, as far as they can tell, wealthy beyond their wildest dreams, while people who do not yet own property will find that prices are far to high to be able to afford property, or will take ever more desperate measure to “get onto the ladder” before rising prices leave them behind.
Several delusions occur at this point:
Firstly people will believe we are in a “New Paradigm”. That prices are sustainably higher, that price rises can continue (or at least present prices can be maintained, locking in their profits), simply because prices have risen so far for so long. They will also believe a new paradigm exists in interest rates, and that borrowed money will be cheap for ever. Neither of these beliefs is actually true.
Secondly, people will see that demand for property has grown massively. This, as explained above, means that the demand will be far higher than supply, continually pushing prices up to astronomical levels. However, most people will misinterpret this excess of demand as a lack of supply. They will become convinced that there is a very acute shortage of property, and that there is nowhere near enough to go around. Strangely they will no have concern about the consequence of, or look for or see evidence of, the consequences of their perceived lack of supply (e.g. Large numbers of people forced to camp out on the streets). Instead they will simply use it to justify to themselves that a lack of supply justifies and protects the inflated value of their property. This is of course a delusion.
So, as you can see, the three most common arguments for sustainably high property prices are not founded, those being: “A new paradigm of low interest rates”, “A new paradigm of high employment” and “a severe shortage of property supply”.
What you actually have in the above scenario is what is termed a “Bubble”. Prices have risen because of an increased demand caused largely by the belief that prices will rise further. When this extra demand actually causes prices to rise, people take this as justification for the rises (attributing it to the three “reasons” above) causing more people to invest in property, pushing the prices up further. The increased supply of cheaper borrowed money facilitates the desire of people to put more money into property. However, the price rises cannot be attributed to any underlying fundamentals, they have only occurred because of the belief that prices will rise further. This is why it is called a bubble, because inflates but contains no substance… the value of the property has not risen, only the price; the pricing levels are completely hollow and unfounded. This is also known as “The Greater Fool Principle”, i.e. a fool buys something not because it’s price reflects it’s value, but because he believes that someone even more foolish than he will buy it off him at a higher price at a later time (and so you get a whole chain of greater fools).
However, eventually you get a “Greatest Fool”. Eventually the economics will not support the ever higher levels of money lending required to buy the property, and/or sentiment will change and there will not be enough new fools to take the baton. This will cause a sudden drop in demand. And a drop in demand will lead to price rises grinding to a halt. As soon as price rises grind to a halt then, as people do not see prices rising any more they see there is no reason to buy property as an investment as you cannot make profit from it. Buyer who wish to buy a property to occupy for themselves also reduce their level of demand as suddenly, with no more price rises, there is no perceived to “buy now at any cost, through any means, or be priced out forever”.
This drop off in demand is relatively sudden and brutal, and estate agents are suddenly left with an increasing supply of property and almost no buyers (most are at this point priced out, and those that are no are still no-longer willing to purchase because prices are not rising).
As supply increases, through lack of buyers the level of supply will begin to be higher than demand. This, in all markets causes prices to fall. This is because if, say, you have 10 identical properties for sale, but only one buyer, it will be the seller who prices his property the lowest who will achieve the sale. This will set a “below average”, or “below market value” price for that property, and set a new market level. Anyone now wishing to sell a similar property will need to reduce their price accordingly to meet this new market level in order to attract the scarce buyers.
Now prices are seen to be falling, and at an ever increasing rate, investors try to offload their investments to realise their profits, which simply create more supply, and reduces prices further.
On top of all this, lenders now see falling house prices, which means that the value of the asset they are securing lending on is falling, creating higher risk, so they reign in their lending, lending less money and on stricter criteria. This reduced the supply of new money to the market, reducing demand (at all price levels) reducing prices further.
Prices will then continue to fall until they have fallen below the pint at which the boom started. Once prices have bottomed at this level, only then are enough buyers will or able to afford to buy property in sufficient numbers to bring demand levels back in line with supply levels and allow prices to be gin to stabilise.
Based on this, the average property should be expected to fall in excess of 50% from it’s current pricing levels over the next two to three years.
Full Version: My Complete House Price Theory
Nice explanation.
Your point about increased money supply leading to higher inflation though doesn't seem to be holding true. Either that or the government lie to us, but they wouldn't do that would they?
Your point about increased money supply leading to higher inflation though doesn't seem to be holding true. Either that or the government lie to us, but they wouldn't do that would they?
A masterly exposition which describes our present situation - probably the biggest property bubble ever experienced, which will lead to the biggest crash ever.
Money programme - are you listening?
Money programme - are you listening?
Thanks for your efforts RJG18 
. It certainly adds to my understanding of asset bubbles.
. It certainly adds to my understanding of asset bubbles.
Thanks,rjg18.I found your post thoughtful and well argued.You ought to have expanded on this bit though
I would have liked more meat on the bones,as this is a very bearish claim. (Though I do hope you're right!!)
Maybe you were just knackered after such a long post. Hope you can add a little more once you have recovered.
QUOTE
Based on this, the average property should be expected to fall in excess of 50% from it’s current pricing levels over the next two to three years.
I would have liked more meat on the bones,as this is a very bearish claim. (Though I do hope you're right!!)
Maybe you were just knackered after such a long post. Hope you can add a little more once you have recovered.
RJG probably workd it out along the lines of:
Prices need to fall 40% to bring them back in line with long-run PE ratios.
Markets usually over-correct after an asset bubble(cf. early 90s)
Say 10% over-correction=50%.
Prices need to fall 40% to bring them back in line with long-run PE ratios.
Markets usually over-correct after an asset bubble(cf. early 90s)
Say 10% over-correction=50%.
Spot on. You are totally correct about the money supply issue. It's actually fiendishly clever, in the 70's goverments became heavily indebted borrowing money to try to stimulate the economy ( Keynesian Ecomomics ) eventually the credit lines ran out, UK being refused a loan by the IMF, winter of discontent, stagflation etc.
This time it's different, by loosening money supply, but not housing supply, the UK public have been persuaded/corralled into funding the economy by taking on ever greater debts, the great thing is even as people borrow more and more and save less and less they actually think they are getting wealthy. And yes, they are funding the economy by buying cars, computers, furniture etc with the 'free' money.
One paradox that I would add is the divergence of the UK stock market versus housing market. When someone takes out a mortgage they are essentially issuing a bond based on there future expected life earnings, much as a company does, it's known as securitisation. Basis recent increases in mortgage borrowing the UK population are massively bullish about there future wage prospects, I mean massively. In order to fund this the UK corporate sector will have to be doing very very well in order to dish out bumper pay rises year on year. If you take a look at the UK market you will see company shares treading water having recovered from a very low ebb, but there is little confidence in a sustained rally.
Now someone is wrong, either the stock market professionals are far too pessimistic about the prospects for UK companies in an increasingly competative world, or the UK public are irrationally optimistic about there future earning potential. Time will tell.
This time it's different, by loosening money supply, but not housing supply, the UK public have been persuaded/corralled into funding the economy by taking on ever greater debts, the great thing is even as people borrow more and more and save less and less they actually think they are getting wealthy. And yes, they are funding the economy by buying cars, computers, furniture etc with the 'free' money.
One paradox that I would add is the divergence of the UK stock market versus housing market. When someone takes out a mortgage they are essentially issuing a bond based on there future expected life earnings, much as a company does, it's known as securitisation. Basis recent increases in mortgage borrowing the UK population are massively bullish about there future wage prospects, I mean massively. In order to fund this the UK corporate sector will have to be doing very very well in order to dish out bumper pay rises year on year. If you take a look at the UK market you will see company shares treading water having recovered from a very low ebb, but there is little confidence in a sustained rally.
Now someone is wrong, either the stock market professionals are far too pessimistic about the prospects for UK companies in an increasingly competative world, or the UK public are irrationally optimistic about there future earning potential. Time will tell.
QUOTE(Timmy Manson @ Nov 30 2004, 12:03 PM)
Spot on. You are totally correct about the money supply issue. It's actually fiendishly clever, in the 70's goverments became heavily indebted borrowing money to try to stimulate the economy ( Keynesian Ecomomics ) eventually the credit lines ran out, UK being refused a loan by the IMF, winter of discontent, stagflation etc.
This time it's different, by loosening money supply, but not housing supply, the UK public have been persuaded/corralled into funding the economy by taking on ever greater debts, the great thing is even as people borrow more and more and save less and less they actually think they are getting wealthy. And yes, they are funding the economy by buying cars, computers, furniture etc with the 'free' money.
One paradox that I would add is the divergence of the UK stock market versus housing market. When someone takes out a mortgage they are essentially issuing a bond based on there future expected life earnings, much as a company does, it's known as securitisation. Basis recent increases in mortgage borrowing the UK population are massively bullish about there future wage prospects, I mean massively. In order to fund this the UK corporate sector will have to be doing very very well in order to dish out bumper pay rises year on year. If you take a look at the UK market you will see company shares treading water having recovered from a very low ebb, but there is little confidence in a sustained rally.
Now someone is wrong, either the stock market professionals are far too pessimistic about the prospects for UK companies in an increasingly competative world, or the UK public are irrationally optimistic about there future earning potential. Time will tell.
This time it's different, by loosening money supply, but not housing supply, the UK public have been persuaded/corralled into funding the economy by taking on ever greater debts, the great thing is even as people borrow more and more and save less and less they actually think they are getting wealthy. And yes, they are funding the economy by buying cars, computers, furniture etc with the 'free' money.
One paradox that I would add is the divergence of the UK stock market versus housing market. When someone takes out a mortgage they are essentially issuing a bond based on there future expected life earnings, much as a company does, it's known as securitisation. Basis recent increases in mortgage borrowing the UK population are massively bullish about there future wage prospects, I mean massively. In order to fund this the UK corporate sector will have to be doing very very well in order to dish out bumper pay rises year on year. If you take a look at the UK market you will see company shares treading water having recovered from a very low ebb, but there is little confidence in a sustained rally.
Now someone is wrong, either the stock market professionals are far too pessimistic about the prospects for UK companies in an increasingly competative world, or the UK public are irrationally optimistic about there future earning potential. Time will tell.
Or the UK public is stupid..... and just jumped on the bandwagon because they could get a silly morgage.
Very much in agreement but I dont think consumer demand from credit has helped the UK manufacturing industry much at all.
In fact the UK manufacturing industry is going to the wall and manufactures such as Jag are quiting the country,UK credit is chiefly buying manufactured goods that are imported,the growth in employment is chiefly in the services industry.
In fact the UK manufacturing industry is going to the wall and manufactures such as Jag are quiting the country,UK credit is chiefly buying manufactured goods that are imported,the growth in employment is chiefly in the services industry.
REFLATION.
The BOE has lent out (printed) a great supply of money.
(1) On all things of inelastic (contrained) supply. Not only houses, Land (argicultural land has more than doubled per acre), Industrial commodities (Oil, Steel, Copper etc...). Normally also on the Labour pool.
"Nationally, (arable) land prices for the second quarter of 2004 rose by 16pc on the same period last year. According to rural property chartered surveyors, farmland prices averaged £8,630 per hectare(£3,492 per acre) nationally in the 12 months to the second quarter of this year, the highest level ever recorded."
http://www.uklanddirectory.org.uk/lack-of-land-for-sale.htm
(2) Fixed inelastic Labour? - No chance : Immigration and the importance of low wages.
In anything you buy, the price is made up from just 3 factors ; Land, Labor and Capital. In buying a cup of coffee, the actual coffee costs next to nothing, but the labour and capital costs make up nearly all of the price.
Normally, printing a lot of money, leading to increased demand on things of fixed supply, always runs into the buffers when there is full employment, and a fixed pool of workers and fixed pool of skills. (Skills are of inelastic supply and take a lot of investment and so command a higher price)
If the cafe owner wants to expand, because of more demand, he has to recruit more workers, but in a full employment enviroment, wages go up. This raises inflationary spending.
I think this boom has been so prolonged, because if there is any indication of a skills shortage, then a very large wave of immigration visas fills it. In a normal enviroment wages rise a while behind houses, as they are inelastic. However, with mass immigration the expansion can continue and skills are still low priced.
For most people who work and hold savings, there has been a transfer of wealth, to the extent of the money printing transferring wealth to debtors who hold assets.
The banks massive money printing has in REALITY; diluted the value of savings, and inflated the value of assets of fixed supply (land houses etc...)
Who can argue otherwise?
So now we have this situation - People look at this low inflation rate, in goods and services, with static wages, at the same time seeing the rise and rise of prices of things of inelastic supply, and addtional workers are simple added to the labour pool to continue the 'boom'. We see rising energy prices, souring house prices and commodity prices, but the inflation rate drops to 1%!
This leads to a massively divided society the longer it goes on.
This is why the people tracking database and police state being planned is so worrying.
The BOE has lent out (printed) a great supply of money.
(1) On all things of inelastic (contrained) supply. Not only houses, Land (argicultural land has more than doubled per acre), Industrial commodities (Oil, Steel, Copper etc...). Normally also on the Labour pool.
"Nationally, (arable) land prices for the second quarter of 2004 rose by 16pc on the same period last year. According to rural property chartered surveyors, farmland prices averaged £8,630 per hectare(£3,492 per acre) nationally in the 12 months to the second quarter of this year, the highest level ever recorded."
http://www.uklanddirectory.org.uk/lack-of-land-for-sale.htm
(2) Fixed inelastic Labour? - No chance : Immigration and the importance of low wages.
In anything you buy, the price is made up from just 3 factors ; Land, Labor and Capital. In buying a cup of coffee, the actual coffee costs next to nothing, but the labour and capital costs make up nearly all of the price.
Normally, printing a lot of money, leading to increased demand on things of fixed supply, always runs into the buffers when there is full employment, and a fixed pool of workers and fixed pool of skills. (Skills are of inelastic supply and take a lot of investment and so command a higher price)
If the cafe owner wants to expand, because of more demand, he has to recruit more workers, but in a full employment enviroment, wages go up. This raises inflationary spending.
I think this boom has been so prolonged, because if there is any indication of a skills shortage, then a very large wave of immigration visas fills it. In a normal enviroment wages rise a while behind houses, as they are inelastic. However, with mass immigration the expansion can continue and skills are still low priced.
For most people who work and hold savings, there has been a transfer of wealth, to the extent of the money printing transferring wealth to debtors who hold assets.
The banks massive money printing has in REALITY; diluted the value of savings, and inflated the value of assets of fixed supply (land houses etc...)
Who can argue otherwise?
So now we have this situation - People look at this low inflation rate, in goods and services, with static wages, at the same time seeing the rise and rise of prices of things of inelastic supply, and addtional workers are simple added to the labour pool to continue the 'boom'. We see rising energy prices, souring house prices and commodity prices, but the inflation rate drops to 1%!
This leads to a massively divided society the longer it goes on.
This is why the people tracking database and police state being planned is so worrying.
it's all about the state taking our money and spending it on left wing quangos. the more you borrow then the more your need to earn and the more tax they get to spend on looking after there own.
Revolution
is whats needed and it just may come sooner than you think
Great no more Mr Blair and goodbye the other tossers who force us to act as slaves
Food and housing are basic human needs remember
Revolution
is whats needed and it just may come sooner than you thinkGreat no more Mr Blair and goodbye the other tossers who force us to act as slaves
Food and housing are basic human needs remember
The last boom - the Lawson boom, similar conditions but :
(a) No mass immigration - inelastic supply of workers.
(
Current account imbalance over 4.2% of GDP.
What followed was inflation and the BUST. Do these differences matter?
Houseprices grew at a enormous pace from 1985 - and we had full employment by 1988.
We all know what followed in 1989. Bust and recession, from necessary tough higher interest rates held above accelerating RPI inflation.
Most of the bust is be explained by people realising that they could not count on housing equity, and they have over consumed, having to rebuild thier savings rate.
These factors caused the pervesity of a tight job market to transform overnight to a large scale unemployment!
Such is the boom-bust cycle through reflation - the question is - with a bust this time around the millions of new workers imported from 1995 to keep inflation low will have a devistating effect on unemployment if demand slumps.
The BOE is saying that their is no need to worry about any bust phase - additional debt from ultra loose credit has been only from people borrowing to purchase more houses, in a sort of housing musical chairs - and crucially is not worsening our balance of payments deficit.
However, This presents a misleading picture.
I am going to show that in the Lawson boom, the whopping huge trade deficit was really caused by the massive dollar devaluation from 1985.
If we had not been shadowing/pegged to the Euro/DM the currency would have normally devalued from 1987/8 along with the USD and not reached the 2.00 high.
UK current account imbalance -
% age of GDP
1985 2.8 - Dollar devalued (Plaza accord)
1986 4.6
1987 4.2
1988 4.2
1989 4.8 **** Higher interest rates ****
From 1985 to 1989 sterling appreciated from 1.05 to 1.85 against the USD – The US had twin deficits and a trade gap of 5% of GDP just like today.
The ever devaluing USD/GBP was very obvoiusly responsible for the jump in the trade deficit.. Our rate with Euroland was the same throughout - it was pegged!
So the dollar devaluation is key to understanding the imbalances that led the UK to recession after the Lawson boom. The dollar devaluation ;
- resulted in higher interest rates in the US, and higher interest rates worldwide and a drop in demand.
- It put pressure on the pound with our own worsing trade deficit, and (eventual) higher UK interest rates to control growing inflationary pressure leading to a drop in demand.
We have about 7 months to see higher and higher current account deficits from the US in our numbers, along with higher pipeline inflation.
As consumption in the US drops, consumption here will drop and we will have worsening budget deficits and unemployment will rise.
My next trip abroad is going to be to the US, and I would encourage every bear on this board to think about the dollar current exchange rates in relation to the goods prices here and be aware that the current account situation could change rapidly as in the Lawson boom, except this time we have floating rates.
(a) No mass immigration - inelastic supply of workers.
(
Current account imbalance over 4.2% of GDP.What followed was inflation and the BUST. Do these differences matter?
Houseprices grew at a enormous pace from 1985 - and we had full employment by 1988.
We all know what followed in 1989. Bust and recession, from necessary tough higher interest rates held above accelerating RPI inflation.
Most of the bust is be explained by people realising that they could not count on housing equity, and they have over consumed, having to rebuild thier savings rate.
These factors caused the pervesity of a tight job market to transform overnight to a large scale unemployment!
Such is the boom-bust cycle through reflation - the question is - with a bust this time around the millions of new workers imported from 1995 to keep inflation low will have a devistating effect on unemployment if demand slumps.
The BOE is saying that their is no need to worry about any bust phase - additional debt from ultra loose credit has been only from people borrowing to purchase more houses, in a sort of housing musical chairs - and crucially is not worsening our balance of payments deficit.
However, This presents a misleading picture.
I am going to show that in the Lawson boom, the whopping huge trade deficit was really caused by the massive dollar devaluation from 1985.
If we had not been shadowing/pegged to the Euro/DM the currency would have normally devalued from 1987/8 along with the USD and not reached the 2.00 high.
UK current account imbalance -
% age of GDP
1985 2.8 - Dollar devalued (Plaza accord)
1986 4.6
1987 4.2
1988 4.2
1989 4.8 **** Higher interest rates ****
From 1985 to 1989 sterling appreciated from 1.05 to 1.85 against the USD – The US had twin deficits and a trade gap of 5% of GDP just like today.
The ever devaluing USD/GBP was very obvoiusly responsible for the jump in the trade deficit.. Our rate with Euroland was the same throughout - it was pegged!
So the dollar devaluation is key to understanding the imbalances that led the UK to recession after the Lawson boom. The dollar devaluation ;
- resulted in higher interest rates in the US, and higher interest rates worldwide and a drop in demand.
- It put pressure on the pound with our own worsing trade deficit, and (eventual) higher UK interest rates to control growing inflationary pressure leading to a drop in demand.
We have about 7 months to see higher and higher current account deficits from the US in our numbers, along with higher pipeline inflation.
As consumption in the US drops, consumption here will drop and we will have worsening budget deficits and unemployment will rise.
My next trip abroad is going to be to the US, and I would encourage every bear on this board to think about the dollar current exchange rates in relation to the goods prices here and be aware that the current account situation could change rapidly as in the Lawson boom, except this time we have floating rates.
Good post!
You are an Austrian economist and I claim my five Pounds.
You are an Austrian economist and I claim my five Pounds.
QUOTE(Rushian @ Nov 30 2004, 01:06 AM)
Nice explanation.
Your point about increased money supply leading to higher inflation though doesn't seem to be holding true. Either that or the government lie to us, but they wouldn't do that would they?
Your point about increased money supply leading to higher inflation though doesn't seem to be holding true. Either that or the government lie to us, but they wouldn't do that would they?
At different points in the 70 year credit cycle, additional money supply inflates different things. In the 1970's it led to general consumer price inflation. At the current point it has led to inflation in the prices of those assets (it's not just housing) which people believe will go on rising in price. That it's not reflected in the CPI makes it even more dangerous because there's less impetus to worry about it.
A+ marks for RJG.
The textbook definition of a bubble - positive sentiment from all concerned - buyer, sellers and lenders - cheap credit, ludicrous "new paradigm" theories which attempt to discard fundamentals as outdated and irrelevant, and the "greater fool" principle all lay the foundation for the sheep to flock in huge numbers and for speculators to build their castles in the air.
The textbook definition of a bubble - positive sentiment from all concerned - buyer, sellers and lenders - cheap credit, ludicrous "new paradigm" theories which attempt to discard fundamentals as outdated and irrelevant, and the "greater fool" principle all lay the foundation for the sheep to flock in huge numbers and for speculators to build their castles in the air.
QUOTE(Timmy Manson @ Nov 30 2004, 11:03 AM)
Spot on. You are totally correct about the money supply issue. It's actually fiendishly clever, in the 70's goverments became heavily indebted borrowing money to try to stimulate the economy ( Keynesian Ecomomics ) eventually the credit lines ran out, UK being refused a loan by the IMF, winter of discontent, stagflation etc.
This time it's different, by loosening money supply, but not housing supply, the UK public have been persuaded/corralled into funding the economy by taking on ever greater debts, the great thing is even as people borrow more and more and save less and less they actually think they are getting wealthy. And yes, they are funding the economy by buying cars, computers, furniture etc with the 'free' money.
One paradox that I would add is the divergence of the UK stock market versus housing market. When someone takes out a mortgage they are essentially issuing a bond based on there future expected life earnings, much as a company does, it's known as securitisation. Basis recent increases in mortgage borrowing the UK population are massively bullish about there future wage prospects, I mean massively. In order to fund this the UK corporate sector will have to be doing very very well in order to dish out bumper pay rises year on year. If you take a look at the UK market you will see company shares treading water having recovered from a very low ebb, but there is little confidence in a sustained rally.
Now someone is wrong, either the stock market professionals are far too pessimistic about the prospects for UK companies in an increasingly competative world, or the UK public are irrationally optimistic about there future earning potential. Time will tell.
This time it's different, by loosening money supply, but not housing supply, the UK public have been persuaded/corralled into funding the economy by taking on ever greater debts, the great thing is even as people borrow more and more and save less and less they actually think they are getting wealthy. And yes, they are funding the economy by buying cars, computers, furniture etc with the 'free' money.
One paradox that I would add is the divergence of the UK stock market versus housing market. When someone takes out a mortgage they are essentially issuing a bond based on there future expected life earnings, much as a company does, it's known as securitisation. Basis recent increases in mortgage borrowing the UK population are massively bullish about there future wage prospects, I mean massively. In order to fund this the UK corporate sector will have to be doing very very well in order to dish out bumper pay rises year on year. If you take a look at the UK market you will see company shares treading water having recovered from a very low ebb, but there is little confidence in a sustained rally.
Now someone is wrong, either the stock market professionals are far too pessimistic about the prospects for UK companies in an increasingly competative world, or the UK public are irrationally optimistic about there future earning potential. Time will tell.
Yes, this is perhaps the greatest contributor to runaway house prices, in my opinion. Greater money supply in the economy as a whole will contribute to overall inflation, but if you distill this to mortgage lending in the housing market, the loosening of lending criteria is akin to doubling the money supply in a single sector of the economy. The result is spectacular hyperinflation.
QUOTE(Rushian @ Nov 29 2004, 12:06 PM)
Nice explanation.
Your point about increased money supply leading to higher inflation though doesn't seem to be holding true. Either that or the government lie to us, but they wouldn't do that would they?
Your point about increased money supply leading to higher inflation though doesn't seem to be holding true. Either that or the government lie to us, but they wouldn't do that would they?
I notice that the official inflation figures conveniently miss out all the things that are inflating, housing, fuel, rates etc - the things that we all have to pay for.
BTW Very well written and explained post RJG. Even the head in the sand bulls will be able to understand it
QUOTE
I’ve decided to write up my entire and definitive explanation of the Property Market boom. It’s fairly lengthy, but please take the time to read it.
Over the past few years there has been an explosion of (until recently) ever cheaper money lending, at ever less-restricted levels and in ever-higher volumes.
< snip>
Over the past few years there has been an explosion of (until recently) ever cheaper money lending, at ever less-restricted levels and in ever-higher volumes.
< snip>
Root cause analysys would have led to you to land, its availability, ownership and usage. Read my post on the Who Owns Britain thread, How Land affects the Average Person.
All points back to land, and only land.
QUOTE(John_99 @ Dec 3 2004, 11:17 PM)
Root cause analysys would have led to you to land, its availability, ownership and usage. Read my post on the Who Owns Britain thread, How Land affects the Average Person.
All points back to land, and only land.
All points back to land, and only land.
John, I partly agree with you. I agree that deliberate restriction in the supply of building land (through strict planning permission) are the root cause of houses costing so much that it takes most of your life time to pay for them. If land was less restricted then the price of the average house would amount to little more than it's true cost (a few hundred man-hours of semi-skilled labour and a few thousand pounds of materials).
However, land supply is NOT the root cause of the recent bubble in house prices (doubling/trebling over 3-4 years). The root cause of this is the money supply issues (cheaper borrowing) raised in my article.
As part of the boom land prices have risen massively along with the price of houses, however the recent rise in house prices has caused the recent risein land prices, not the other way round. If you can build on a plot of land then the price you can sell that land for (generally speaking):
[Land Price] = [Total Sale Price of houses you can build on it] - [cost of building materials and labour] - [acceptable profit margin]
As the price you can sell the finished houses for rises the price of the land rises. This is why land with planning permission granted can sell for 100x the same area of land that has no planning permission and can only be used for agriculture. It's not the land that's valuable, it's the price of the house that you can build on the land that gives the land it's price... and the root cause of the price of this house (recently) has been higher availability of cheap money supply combined with the whole "bubble sentiment" (greater fool) issue.
QUOTE(RJG18 @ Dec 4 2004, 12:53 AM)
John, I partly agree with you. I agree that deliberate restriction in the supply of building land (through strict planning permission) are the root cause of houses costing so much that it takes most of your life time to pay for them. If land was less restricted then the price of the average house would amount to little more than it's true cost (a few hundred man-hours of semi-skilled labour and a few thousand pounds of materials).
However, land supply is NOT the root cause of the recent bubble in house prices (doubling/trebling over 3-4 years). The root cause of this is the money supply issues (cheaper borrowing) raised in my article.
As part of the boom land prices have risen massively along with the price of houses, however the recent rise in house prices has caused the recent risein land prices, not the other way round. If you can build on a plot of land then the price you can sell that land for (generally speaking):
[Land Price] = [Total Sale Price of houses you can build on it] - [cost of building materials and labour] - [acceptable profit margin]
As the price you can sell the finished houses for rises the price of the land rises. This is why land with planning permission granted can sell for 100x the same area of land that has no planning permission and can only be used for agriculture. It's not the land that's valuable, it's the price of the house that you can build on the land that gives the land it's price... and the root cause of the price of this house (recently) has been higher availability of cheap money supply combined with the whole "bubble sentiment" (greater fool) issue.
However, land supply is NOT the root cause of the recent bubble in house prices (doubling/trebling over 3-4 years). The root cause of this is the money supply issues (cheaper borrowing) raised in my article.
As part of the boom land prices have risen massively along with the price of houses, however the recent rise in house prices has caused the recent risein land prices, not the other way round. If you can build on a plot of land then the price you can sell that land for (generally speaking):
[Land Price] = [Total Sale Price of houses you can build on it] - [cost of building materials and labour] - [acceptable profit margin]
As the price you can sell the finished houses for rises the price of the land rises. This is why land with planning permission granted can sell for 100x the same area of land that has no planning permission and can only be used for agriculture. It's not the land that's valuable, it's the price of the house that you can build on the land that gives the land it's price... and the root cause of the price of this house (recently) has been higher availability of cheap money supply combined with the whole "bubble sentiment" (greater fool) issue.
Of course there will be peaks and troughs geared to the economic situation in the country at any time. The problem is much more deep routed.
The UK (pop 60 million) in 2002 built only 3 times as many homes as Ireland (pop 3.4 million). The UK is about 18 times larger yet only builds 3 times as many homes in a country desparately short of decent homes. This rationing of new homes naturally has a great effect on price. Why are the homes rationed? The planning and land ownership system does not help one bit as the UK should have built 20 times as many homes as Ireland. The government instigated a study as to why the country is not providing enough new homes - which naturally concluded incorrectly.
There are currently three million people in the UK living in 1.5 million homes officially classified as unfit, and this situation is unlikely to improve in the foreseeable future. 2.5 million homes suffer from severe damp, and the cost of remedying these conditions is estimated between 46 and 70 billion pounds.
House conditions were found to contribute to "chronic chest disease", hypothermia and digestive condition.
The above was some of the findings of a report commissioned by the Joseph Rowntree Organisation published by the National Housing Forum in 1996. The situation has changed little since then. The UK has as many people living in substandard housing as the whole population of Ireland.
The situation is chronic, and the land and planning issue is at the base of all the ills. The UK is always in a permanent housing crisis. A crisis which need not be there. A significant percentage of the UK housing stock is ony fit for demolition. Saying we X amount of homes is meaningless. You have to look at the state of them. If we had the freedom to build on land, the free market would take care of the housing problem to the point we would not have one. House prices would not be through the roof.
Lange landowners love the situation. The population is obssesed with house prices. If freeing up land and relaxing planning brought down land and hence house prices, then those who are hocked up to their eyeballs in mortgages would cry foul, as they would only see negative equity. So, many people want the status quo as they are too narrow minded to see the big picture. Negative equity is easily tackled, and would be only a temporary transitional problem when changing one system to a superior one.
'self-growing bubble that requires ever increasing amounts of debt to be taken on and an ever increasing rate in order not only to keep it growing, but just to keep it stable.'
'the three most common arguments for sustainably high property prices are not founded, those being: “A new paradigm of low interest rates”, “A new paradigm of high employment” and “a severe shortage of property supply”.'
'Based on this, the average property should be expected to fall in excess of 50% from it’s current pricing levels over the next two to three years.'
Possibly the best post ever, difficult to cut out good bits as the whole thing is excellent!
I'm more convinced than ever that 40-50% fall is on the cards.
Thank you for this post , you have my vote for chancellor as the current ione hasn't got a financial clue!
'the three most common arguments for sustainably high property prices are not founded, those being: “A new paradigm of low interest rates”, “A new paradigm of high employment” and “a severe shortage of property supply”.'
'Based on this, the average property should be expected to fall in excess of 50% from it’s current pricing levels over the next two to three years.'
Possibly the best post ever, difficult to cut out good bits as the whole thing is excellent!
I'm more convinced than ever that 40-50% fall is on the cards.
Thank you for this post , you have my vote for chancellor as the current ione hasn't got a financial clue!
I have a problem with the its the house value not the land.
Land is the key factor here, it represents 75% of the value of the house.
Burn your house down and sell the land as a building plot with permission for a 4 bed house you will be on a good earner.
Land is the factor what sits on it has little value at all.
Release acres of Land for building and the prices would certainly crash to a real value reflecting the constructiona and material costs of a house.
I can still build for 50 quid a sqaure foot and a 4 bed is today 1100 sq ft.
Thats 55k yet the house is worth say 350k.
If I could get a plot on the south coast for 150k I would buy it trouble is you cant they are rarer than hens teeth.
Land is the key factor here, it represents 75% of the value of the house.
Burn your house down and sell the land as a building plot with permission for a 4 bed house you will be on a good earner.
Land is the factor what sits on it has little value at all.
Release acres of Land for building and the prices would certainly crash to a real value reflecting the constructiona and material costs of a house.
I can still build for 50 quid a sqaure foot and a 4 bed is today 1100 sq ft.
Thats 55k yet the house is worth say 350k.
If I could get a plot on the south coast for 150k I would buy it trouble is you cant they are rarer than hens teeth.
QUOTE
I have a problem with the its the house value not the land.
Land is the key factor here, it represents 75% of the value of the house.
Burn your house down and sell the land as a building plot with permission for a 4 bed house you will be on a good earner.
Land is the factor what sits on it has little value at all.
Release acres of Land for building and the prices would certainly crash to a real value reflecting the constructiona and material costs of a house.
Land is the key factor here, it represents 75% of the value of the house.
Burn your house down and sell the land as a building plot with permission for a 4 bed house you will be on a good earner.
Land is the factor what sits on it has little value at all.
Release acres of Land for building and the prices would certainly crash to a real value reflecting the constructiona and material costs of a house.
Releasing land to build houses will make house prices drop to sensible levels. However, the problem is maintaining sensible levels over the medium to long term. Prices that reflect more the build cost rather than the land under the bricks. A free market system must be in place to ensure that public money is involved in housing as little as possible and that house price bubbles don't occur again.
Governments are famous for quick fixes that fix at that point with the problem re-occuring in the future.
Having a free open market in land and planning is the only way - the country has a land surplus. For this to fully work, land has to be re-distributed or land value tax implemented. The town of Inverness has little available land around the town to build on, as most of it is owned by a few very large landowners, virtually right up to the borders. They never sell land. Having the freedom to build is meaningless unless land is availabe. It is no good seeing that land and you can't het your hands on it. If it is in thye hands of many peopel then obtaining land will be far, far easier.
QUOTE
I can still build for 50 quid a sqaure foot and a 4 bed is today 1100 sq ft.
Thats 55k yet the house is worth say 350k.
If I could get a plot on the south coast for 150k I would buy it trouble is you cant they are rarer than hens teeth.
Thats 55k yet the house is worth say 350k.
If I could get a plot on the south coast for 150k I would buy it trouble is you cant they are rarer than hens teeth.
That land again.
Hi all,
Mr Brainclamp is SPOT ON
Although being the wealthiest and most powerfull econmy on the planet the US are currently struggeling.
As we measure everything in real life by money they are not to happy with the value of the dollar.
OK we can debate for hours and hours who is right and who is wrong
Someone always know better.
Sheep follow sheep as they have always done.
Only the brave choose a different root.
I will not put a Ball and Chain around my childrens legs for the next 30 years.
veryfew people are willing to tell the truth about personal experience when that experience has not been so good.
My personal experience with house buying is at the bottom of this message
Here are some other facts. But one thing is a fact.
What goes up must come down.
The higher is goes and the heavier it is, the harder it will fall.
Some crasy scientist came up with that theory.
But do not believe him as you know much better.
Well if he had to look at something as simply as an apple, who wonders what theory he would attach to house prices.
Who will gain from rising house prices:
Builders, Mortgage lenders(the mortgage is insured), Estate Agents, Sellers.
Well. All of the above.
Who stands to lose most from a crash?
All of the above except sellers, because they do not have to sell, and mortgage lenders.
There is this age old tradition of supply and demand.
Through the clouds of house price smoke we sometimes forget that (Or ignore it)
Houses are no different from any other product (only bigger)
Why lenders? You have to take out insurance when you take out a mortgage
To protect you. NO to protect the lender. They will get their money back no matter waht happens. either YOU pay them, The peson you sell to, or the insurance company, incase your house is repossed.
Remember a mortgage lender is not in the business of owning houses.
They are in the money lending business
Reason why thwy sell of repossed houses so cheap. They do not want it.
Reason why lenders will lend so much. They will make more money?
Reason why builders build more houses at low interest rates.
They borrow 50k at 2% build a house, Sell it for 100K, pay of the bank at + 2%
Not very risky and massive profits in times of high house prices and low interest rates.
Reason why estate agents do not want a crash: They will make less money.
And they do not care who wins or loses as long as they make money thats is why they are called AGENTS (they are in between two parties)
One who will lose and one who will win.
My personal experience with houses buying and house prices in the UK
and in this case in London
Early 1992 I bought a flat in London after having looked around for about 6 months
I was totally inexperienced and as it ws my first home I ws vey exited.
I though that I had to be nice to mortgage lenders and be even more nice to house builders.
Bet they both some me coming a mile off.
However, I still though I was smarter then them (don't we all) and when offered a mortgage for well above what I though I could afford I said I better buy something
I know I will be able to afford long term.
My view was that even if I would lose my job in the city where I then earned 26.000 Sterling a year I still wanted to be ble to afford my mortgage payments.
That was about the only wise move I made.
Many of my friends who fell for the "borrow as much as you can method" paid the price dearly.
Almost all of them had their house repossed.
So I bought a flat near the city for 56.000 Sterling (1992)
I thought I had a bargain and even then had no clue if I had a bargain
I was delighted to have my own home.
I moved in and continued to work in the City where I told my collegues " Hold on to your money while you can" I left my job in September 1992 thinking I could do even better somewhere esle and was promptly unemployed during 1993
Having mortgage payment protection helped me a lot.
A few years later I found out that my neighbours above me, who lived in an identically appartment had known a little bit more about not taking builders and mortgage lenders to serious and had therefore paid only 38000 for their Flat
(Remember I paid 56000 for an identical flat.)
Ok on the ground floor but never 18000 more
My neighbours told me they had haggled and I was really XXXXX off.
Now about the Crash
I did not have sell my flat nor had I any plan to move for the next 5 years.
During that time and for the NEXT 8 YEARS my flats was worth LESS then what I paid for it. And apparantly I had bought what they said ws the high of recession
Well that recession lasted 8 years for me.
I moved to Ireland in 1997 and decided to rent out my flat.
Having to deal with Eastate agents, landlords(as fltas are never free hold), maintenance companies was never as easy as I had hoped.
I was even threatened with REPOSSION WHY?
I had not paid the half yearly ground rent of 45 FORTY FIVE POUND)
REMEMBER with leasehold the landlord effectively ownd the land and everything on it. So also your appartment. that's why you LEASE.
This is a nice term for RENTING. but over a much longer period of time. 99 years.
And you have the benefit that you can sell the property. and keep the profit.
As long as you pay your groundrent.
As soon as the market picked up in 2000 (remember I bought in 1992)
that is a good 8 years later I decide to wait and sold in 2001 with a profit of 20.000
Sterling. I was happy to be rid of my property and all the hassle and had a bit of cash in the bank.
Well that cash, as it always does is now gone.
The house prices continued to rise even tohugh I di not believe I could sell for much more and I had to drop price fro 90000 to 79000 to sell.
I do not are how much the prices hasve rissen since.
I hope the person who bought my flat can actually sell it for the current asking price of 135.000 .
Conclusion: Will the market fall again. You bet it will.
I will put my right arm on the table, or left or foot. if it doesn't.
Well, all good things must come to and end.
Unless god has decided not to include the house prices, but I doubt he has.
When? Well who cares when, as when these things happens they never give warning. Even though they do. But then no one listens ayway untill it's to late.
and then all hell breaks loose.
When your mind is clouded with GREED not even a college professor can convince you otherwise.
We all think we can drive better then Michael Schumacher.
There is this Dutch saying. The best captains never leave the shore.
So when the experts predict a crash soon, you'll say NO WAY.
If you borrow now above your means simply calculated if you will be able to pay your mortgage now matter what.
And what happens if interest rates jump by a large margin,even if it is just for 2 months, as they have done before. Rember 15% interest rates.
Now calculate your monthly mortgage repayment if it is 1000 now on 2, 3, 4, or 5% And recalculated them using lets say 10 % OOPS
No money well there goes your dream house.
And as I told my collegue then and tell you now
Hold on to your money while you can, you're gonna need it SOON
How that applies to you you know best.
Mr Brainclamp is SPOT ON
Although being the wealthiest and most powerfull econmy on the planet the US are currently struggeling.
As we measure everything in real life by money they are not to happy with the value of the dollar.
OK we can debate for hours and hours who is right and who is wrong
Someone always know better.
Sheep follow sheep as they have always done.
Only the brave choose a different root.
I will not put a Ball and Chain around my childrens legs for the next 30 years.
veryfew people are willing to tell the truth about personal experience when that experience has not been so good.
My personal experience with house buying is at the bottom of this message
Here are some other facts. But one thing is a fact.
What goes up must come down.
The higher is goes and the heavier it is, the harder it will fall.
Some crasy scientist came up with that theory.
But do not believe him as you know much better.
Well if he had to look at something as simply as an apple, who wonders what theory he would attach to house prices.
Who will gain from rising house prices:
Builders, Mortgage lenders(the mortgage is insured), Estate Agents, Sellers.
Well. All of the above.
Who stands to lose most from a crash?
All of the above except sellers, because they do not have to sell, and mortgage lenders.
There is this age old tradition of supply and demand.
Through the clouds of house price smoke we sometimes forget that (Or ignore it)
Houses are no different from any other product (only bigger)
Why lenders? You have to take out insurance when you take out a mortgage
To protect you. NO to protect the lender. They will get their money back no matter waht happens. either YOU pay them, The peson you sell to, or the insurance company, incase your house is repossed.
Remember a mortgage lender is not in the business of owning houses.
They are in the money lending business
Reason why thwy sell of repossed houses so cheap. They do not want it.
Reason why lenders will lend so much. They will make more money?
Reason why builders build more houses at low interest rates.
They borrow 50k at 2% build a house, Sell it for 100K, pay of the bank at + 2%
Not very risky and massive profits in times of high house prices and low interest rates.
Reason why estate agents do not want a crash: They will make less money.
And they do not care who wins or loses as long as they make money thats is why they are called AGENTS (they are in between two parties)
One who will lose and one who will win.
My personal experience with houses buying and house prices in the UK
and in this case in London
Early 1992 I bought a flat in London after having looked around for about 6 months
I was totally inexperienced and as it ws my first home I ws vey exited.
I though that I had to be nice to mortgage lenders and be even more nice to house builders.
Bet they both some me coming a mile off.
However, I still though I was smarter then them (don't we all) and when offered a mortgage for well above what I though I could afford I said I better buy something
I know I will be able to afford long term.
My view was that even if I would lose my job in the city where I then earned 26.000 Sterling a year I still wanted to be ble to afford my mortgage payments.
That was about the only wise move I made.
Many of my friends who fell for the "borrow as much as you can method" paid the price dearly.
Almost all of them had their house repossed.
So I bought a flat near the city for 56.000 Sterling (1992)
I thought I had a bargain and even then had no clue if I had a bargain
I was delighted to have my own home.
I moved in and continued to work in the City where I told my collegues " Hold on to your money while you can" I left my job in September 1992 thinking I could do even better somewhere esle and was promptly unemployed during 1993
Having mortgage payment protection helped me a lot.
A few years later I found out that my neighbours above me, who lived in an identically appartment had known a little bit more about not taking builders and mortgage lenders to serious and had therefore paid only 38000 for their Flat
(Remember I paid 56000 for an identical flat.)
Ok on the ground floor but never 18000 more
My neighbours told me they had haggled and I was really XXXXX off.
Now about the Crash
I did not have sell my flat nor had I any plan to move for the next 5 years.
During that time and for the NEXT 8 YEARS my flats was worth LESS then what I paid for it. And apparantly I had bought what they said ws the high of recession
Well that recession lasted 8 years for me.
I moved to Ireland in 1997 and decided to rent out my flat.
Having to deal with Eastate agents, landlords(as fltas are never free hold), maintenance companies was never as easy as I had hoped.
I was even threatened with REPOSSION WHY?
I had not paid the half yearly ground rent of 45 FORTY FIVE POUND)
REMEMBER with leasehold the landlord effectively ownd the land and everything on it. So also your appartment. that's why you LEASE.
This is a nice term for RENTING. but over a much longer period of time. 99 years.
And you have the benefit that you can sell the property. and keep the profit.
As long as you pay your groundrent.
As soon as the market picked up in 2000 (remember I bought in 1992)
that is a good 8 years later I decide to wait and sold in 2001 with a profit of 20.000
Sterling. I was happy to be rid of my property and all the hassle and had a bit of cash in the bank.
Well that cash, as it always does is now gone.
The house prices continued to rise even tohugh I di not believe I could sell for much more and I had to drop price fro 90000 to 79000 to sell.
I do not are how much the prices hasve rissen since.
I hope the person who bought my flat can actually sell it for the current asking price of 135.000 .
Conclusion: Will the market fall again. You bet it will.
I will put my right arm on the table, or left or foot. if it doesn't.
Well, all good things must come to and end.
Unless god has decided not to include the house prices, but I doubt he has.
When? Well who cares when, as when these things happens they never give warning. Even though they do. But then no one listens ayway untill it's to late.
and then all hell breaks loose.
When your mind is clouded with GREED not even a college professor can convince you otherwise.
We all think we can drive better then Michael Schumacher.
There is this Dutch saying. The best captains never leave the shore.
So when the experts predict a crash soon, you'll say NO WAY.
If you borrow now above your means simply calculated if you will be able to pay your mortgage now matter what.
And what happens if interest rates jump by a large margin,even if it is just for 2 months, as they have done before. Rember 15% interest rates.
Now calculate your monthly mortgage repayment if it is 1000 now on 2, 3, 4, or 5% And recalculated them using lets say 10 % OOPS
No money well there goes your dream house.
And as I told my collegue then and tell you now
Hold on to your money while you can, you're gonna need it SOON
How that applies to you you know best.
QUOTE(Aime @ Dec 8 2004, 12:49 AM)
Although being the wealthiest and most powerfull econmy on the planet the US are currently struggeling.
As we measure everything in real life by money they are not to happy with the value of the dollar.
As we measure everything in real life by money they are not to happy with the value of the dollar.
The Sunday Times had an excellent article on France. They work less hours than all of us, and yet economically do very well with a higher standard of living than the UK and far beter quality of life too. Yet can have the best road, public transport and health services in the world.
After WW2 the French went for social cohesion goals rather than economic goals - during WW2 France was deeply divided, Frenchmen fought Frenchmen, some collaborated with the Germans, other never, some were poverty stricken, others did well from WW2, ect, ect. This post WW2 policy binded the French and made the puvklic and private sectorr work together well.
The moral of the story: Bind and look after the people and the rest follows. Only go for money goals and you never acheive as a country.
Prices will not crash. Sure, if you want to sell right now you must accept a very low offer. This will all change early 2005. There is huge pent - up demand just waiting to buy a property.
Youre all missing the fact that the economic fundamentals are all in place.
Keep having wet dreams about a crash guys, because thats all they are - 'school boy wet dreams'.
PS - FTBs - you better buy right now if you want a bargain. Remember, to do well in life often means doing the opposite of what all the sheep are doing. Bahaaahh.
Youre all missing the fact that the economic fundamentals are all in place.
Keep having wet dreams about a crash guys, because thats all they are - 'school boy wet dreams'.
PS - FTBs - you better buy right now if you want a bargain. Remember, to do well in life often means doing the opposite of what all the sheep are doing. Bahaaahh.
QUOTE
This will all change early 2005.
Why?
QUOTE
There is huge pent - up demand just waiting to buy a property.
Then why are they not buying now?
QUOTE
the economic fundamentals are all in place.
you mean like record P/E ratios, £1 trillion consumer debt, plummeting mortgage approvals and a weakening US dollar?
QUOTE
Remember, to do well in life often means doing the opposite of what all the sheep are doing. Bahaaahh.
As far as I can tell, the sheep are people like you, dogbox, buying zero yield BTLs for illusory CG.
Then why are they not buying now?
you mean like record P/E ratios, £1 trillion consumer debt, plummeting mortgage approvals and a weakening US dollar?
As far as I can tell, the sheep are people like you, dogbox, buying zero yield BTLs for illusory CG.
--------------------------------------
They are not buying now due to general short - term poor market sentiment and
Xmas upon us.
There is always a shed - load of bad economic news whatever the year. After 9/11 and the Dotcom bubble burst, property still forged ahead.
Anyway, why do you constantly feed on the stream of economic bad news? Its irrelevant to personal sucess. There are always people getting rich quick even in 3rd world states - so the fact an economy is doing badly is not necessarily a reason not to invest and prosper. B2L is still a good investment and the buying opportunities right now are fantastic, however, if one takes your attitude the opportunities of life pass - by. So what if prices fall? Rents will rise and B2L is a long - term endeavour. Personally I think comercial property is now a better investment and again there are some great bargains due to sellers selling under pressure.
Zqq there are still plenty of good B2L yields to be had and rents are rising. People have bought property to let for centuries - despite the fact that during most of this period very few people bought for capital gain as price inflation was extremely low.
You just dont get it Im afraid.
you mean like record P/E ratios, £1 trillion consumer debt, plummeting mortgage approvals and a weakening US dollar?
As far as I can tell, the sheep are people like you, dogbox, buying zero yield BTLs for illusory CG.
--------------------------------------
They are not buying now due to general short - term poor market sentiment and
Xmas upon us.
There is always a shed - load of bad economic news whatever the year. After 9/11 and the Dotcom bubble burst, property still forged ahead.
Anyway, why do you constantly feed on the stream of economic bad news? Its irrelevant to personal sucess. There are always people getting rich quick even in 3rd world states - so the fact an economy is doing badly is not necessarily a reason not to invest and prosper. B2L is still a good investment and the buying opportunities right now are fantastic, however, if one takes your attitude the opportunities of life pass - by. So what if prices fall? Rents will rise and B2L is a long - term endeavour. Personally I think comercial property is now a better investment and again there are some great bargains due to sellers selling under pressure.
Zqq there are still plenty of good B2L yields to be had and rents are rising. People have bought property to let for centuries - despite the fact that during most of this period very few people bought for capital gain as price inflation was extremely low.
You just dont get it Im afraid.
QUOTE(dogbox @ Dec 8 2004, 01:18 PM)
Prices will not crash.
you hope
QUOTE
Sure, if you want to sell right now you must accept a very low offer. This will all change early 2005.
oh yes, you'll be inundated with offers, prices can be hiked to the max again
In another post you spoke of moderate price falls, now you think there won't be any. Make your mind up.
QUOTE
There is huge pent - up demand just waiting to buy a property.
at the right AFFORDABLE price
QUOTE
Youre all missing the fact that the economic fundamentals are all in place.
you're missing basic economic theory of markets. BUST follows BOOM, unless you have suddenly beaten all the experts of the centuries and discovered a way round this.
QUOTE
PS - FTBs - you better buy right now if you want a bargain. Remember, to do well in life often means doing the opposite of what all the sheep are doing. Bahaaahh.
you're either an EA or incredibly thick. Oh hang on, you could be both.
UK trade deficit grows
Press Association
Thursday December 9, 2004
The UK trade deficit widened to £5.3bn in October after imports hit their highest level since records began, official data showed today.
The figure was worse than the £4.7bn that had been expected in the City, and marked a sharp deterioration from the £4.4bn gap of the previous month.
Falling demand for UK goods among countries outside the EU also contributed to the deficit, according to the Office for National Statistics (ONS). Exports to non-EU nations declined by 7.5%, while the total value of goods imported to the UK rose by 2.5% to reach a record £21.5bn.
The trade gap in the first 10 months of this year totalled £34bn - £1.2bn worse than the deficit for the whole of last year.
David Page, an Investec economist, said the figures were "very disappointing" at a time when a pick up in global growth should have helped exporters. "It questions whether the UK is going to be able to close its trade gap any time soon," he said.
The HSBC economist John Butler said the trade deficit in goods now stood at around 5.5% of GDP, which was almost as big a figure as the US.
The underlying gap was even worse because the UK oil balance switched back into surplus after registering its first deficit for 13 years in September. Production recovered following maintenance work on North Sea oil rigs, and the UK exported oil worth £203m more than it bought in from overseas during October.
The breakdown of today's data puts the trade gap with nations in the enlarged EU at £2.4bn, compared with £2.1bn in the previous month.
At the same time, the deficit with countries outside the EU widened to £2.9bn from £2.4bn on the back of lower exports of manufactured goods. The surplus on trade in services was £1.5bn, meaning the total UK deficit was £3.8bn.
Press Association
Thursday December 9, 2004
The UK trade deficit widened to £5.3bn in October after imports hit their highest level since records began, official data showed today.
The figure was worse than the £4.7bn that had been expected in the City, and marked a sharp deterioration from the £4.4bn gap of the previous month.
Falling demand for UK goods among countries outside the EU also contributed to the deficit, according to the Office for National Statistics (ONS). Exports to non-EU nations declined by 7.5%, while the total value of goods imported to the UK rose by 2.5% to reach a record £21.5bn.
The trade gap in the first 10 months of this year totalled £34bn - £1.2bn worse than the deficit for the whole of last year.
David Page, an Investec economist, said the figures were "very disappointing" at a time when a pick up in global growth should have helped exporters. "It questions whether the UK is going to be able to close its trade gap any time soon," he said.
The HSBC economist John Butler said the trade deficit in goods now stood at around 5.5% of GDP, which was almost as big a figure as the US.
The underlying gap was even worse because the UK oil balance switched back into surplus after registering its first deficit for 13 years in September. Production recovered following maintenance work on North Sea oil rigs, and the UK exported oil worth £203m more than it bought in from overseas during October.
The breakdown of today's data puts the trade gap with nations in the enlarged EU at £2.4bn, compared with £2.1bn in the previous month.
At the same time, the deficit with countries outside the EU widened to £2.9bn from £2.4bn on the back of lower exports of manufactured goods. The surplus on trade in services was £1.5bn, meaning the total UK deficit was £3.8bn.
We are a mortgaging and trading our way into the sh*thouse - well done the BOE and govt who have done nothing but raise the cost of everything in relative terms in this country and hence suffocated first industry and now sthe service sector.
Top post RG18, probably the best roundup of the situation I have seen.
Top post RG18, probably the best roundup of the situation I have seen.
....
QUOTE(moosetea @ Nov 30 2004, 02:43 PM)
Or the UK public is stupid..... and just jumped on the bandwagon because they could get a silly morgage.
Excellent thread and one of the best reads in awhile.
Working for a uk based manufacturer we are having to make 200 dollars in the states to make a 100 pounds now, 18 months ago we only had to make 160 dollars. High interest rates not only hurt your on pocket they but British exporters in a considerable weaker position.
Doesn't seem to be coming true though does it?
With the rapid increase in population there is increased demand for property, demand for services and therefore a healthy economy so full employment. It does help that this government has been squandering money at an unprecedented rate creating a Keynsian boom.
If there was a downturn and the economic migrants left this country in search of somewhere else then there might be a reduction in demand for rental properties but, if the BTL parasites started selling (unlikely as most of them seem to think it is their pension), then house prices would be kept resilient by the pent up demand from tenants wanting to buy.
I think we can all agree that by any historical measure (what can a single person buy for 3.5 their salary) house prices are over valued by about 40% but the economics of supply and demand are keeping the bubble strong. Perhaps it is a new paradigm?
But don't take financial advice from me ~ I always buy at the top of a market :-(
With the rapid increase in population there is increased demand for property, demand for services and therefore a healthy economy so full employment. It does help that this government has been squandering money at an unprecedented rate creating a Keynsian boom.
If there was a downturn and the economic migrants left this country in search of somewhere else then there might be a reduction in demand for rental properties but, if the BTL parasites started selling (unlikely as most of them seem to think it is their pension), then house prices would be kept resilient by the pent up demand from tenants wanting to buy.
I think we can all agree that by any historical measure (what can a single person buy for 3.5 their salary) house prices are over valued by about 40% but the economics of supply and demand are keeping the bubble strong. Perhaps it is a new paradigm?
But don't take financial advice from me ~ I always buy at the top of a market :-(
QUOTE(Battery Chicken @ Sep 4 2007, 12:35 PM)
Doesn't seem to be coming true though does it?
With the rapid increase in population there is increased demand for property, demand for services and therefore a healthy economy so full employment. It does help that this government has been squandering money at an unprecedented rate creating a Keynsian boom.
If there was a downturn and the economic migrants left this country in search of somewhere else then there might be a reduction in demand for rental properties but, if the BTL parasites started selling (unlikely as most of them seem to think it is their pension), then house prices would be kept resilient by the pent up demand from tenants wanting to buy.
I think we can all agree that by any historical measure (what can a single person buy for 3.5 their salary) house prices are over valued by about 40% but the economics of supply and demand are keeping the bubble strong. Perhaps it is a new paradigm?
But don't take financial advice from me ~ I always buy at the top of a market :-(
With the rapid increase in population there is increased demand for property, demand for services and therefore a healthy economy so full employment. It does help that this government has been squandering money at an unprecedented rate creating a Keynsian boom.
If there was a downturn and the economic migrants left this country in search of somewhere else then there might be a reduction in demand for rental properties but, if the BTL parasites started selling (unlikely as most of them seem to think it is their pension), then house prices would be kept resilient by the pent up demand from tenants wanting to buy.
I think we can all agree that by any historical measure (what can a single person buy for 3.5 their salary) house prices are over valued by about 40% but the economics of supply and demand are keeping the bubble strong. Perhaps it is a new paradigm?
But don't take financial advice from me ~ I always buy at the top of a market :-(
Dont think I believe all this supply/demand hype anymore. As for migrants making a difference to rental market, dont think so either as usually two take on the rental contract and twenty move in.
If immigration (economic migrant workers) were having a significant effect on demand, then rents would be rocketing. Are they rocketing?
Moreover, to suggest that economic migrant workers will be rushing to buy over-priced former BTL properties on long-term mortgages at higher interest rates than they would have to pay at home for much bigger properties seems ludicrous.
Anecdotally, immigrants living 4/6/8/10 etc to one house are actually reducing demand relative to the numbers of emmigrants leaving are they not?
The OP seems to have got it spot on.
The main culprits of the house price boom are deliberately low interest rates, irresponsibly relaxed lending and credit criteria and speculative behaviour. It is a bubble. It will burst. It is bursting.
What interests me also is the knock-on effect where people have bought multiple properties by borrowing further using "equity" in the main home to buy multiple homes in the UK and abroad. They have sometimes incredibly large amounts of money leveraged up in the same asset class, which is very illiquid. As the value of their main home falls, and their interest payments go up it is hard to see how they won't need to sell their multiple homes to prevent their "investment" profits disappearing fast. They could quite easily end up in negative equity on their rental/holiday homes overseas at the same time.
Falling 2nd/3rd home values could result in the equity left in their main home falling at an even faster rate as a result of this additional leverage/margin investing (which is basically what it is).
Could get very messy indeed.
Moreover, to suggest that economic migrant workers will be rushing to buy over-priced former BTL properties on long-term mortgages at higher interest rates than they would have to pay at home for much bigger properties seems ludicrous.
Anecdotally, immigrants living 4/6/8/10 etc to one house are actually reducing demand relative to the numbers of emmigrants leaving are they not?
The OP seems to have got it spot on.
The main culprits of the house price boom are deliberately low interest rates, irresponsibly relaxed lending and credit criteria and speculative behaviour. It is a bubble. It will burst. It is bursting.
What interests me also is the knock-on effect where people have bought multiple properties by borrowing further using "equity" in the main home to buy multiple homes in the UK and abroad. They have sometimes incredibly large amounts of money leveraged up in the same asset class, which is very illiquid. As the value of their main home falls, and their interest payments go up it is hard to see how they won't need to sell their multiple homes to prevent their "investment" profits disappearing fast. They could quite easily end up in negative equity on their rental/holiday homes overseas at the same time.
Falling 2nd/3rd home values could result in the equity left in their main home falling at an even faster rate as a result of this additional leverage/margin investing (which is basically what it is).
Could get very messy indeed.
Correction on your theory - inflation is the increase in the money supply.
What most people think is inflation is the increase in the cost of goods.
For those who say that inflation of goods is not consistent with the theory that there has been a surge in the supply of money should look at where the money supply is being (mal)invested - property, high-end consumer goods etc...
What most people think is inflation is the increase in the cost of goods.
For those who say that inflation of goods is not consistent with the theory that there has been a surge in the supply of money should look at where the money supply is being (mal)invested - property, high-end consumer goods etc...
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