Discussion at work today (interesting huh?!)

Do you think the market is going to undergo a proper correction like the past bubbles or more of a long stagnation whilst salaries attempt to catch up?

Surely prices can’t keep going up and up?

I dont think there will be a significant drop in prices across the board, I suspect slow but steady increases.

Salaries dont need to catch up with prices, lenders will just lend over longer and longer periods to keep the monthly payments ‘affordable’, see Japan where its not uncommon to have a 100 year mortgage that gets passed through the generations.

here you go:-

http://homeguides.sfgate.com/longest-mortgage-7677.html

Markets always correct themselves; usually with a thump.

Also see Japan where property prices have been declining for twenty odd years.

There’s always a trigger to a crash. In 89 it was interest rates and the end of mortgage tax relief. Watch for the thing that will cut buyers ability to borrow.

There’s always a trigger to a crash. In 89 it was interest rates and the end of mortgage tax relief. Watch for the thing that will cut buyers ability to borrow.

what, like the credit crunch of 2008, followed by the largest recession since the great depression, and the removal of a huge percentage of products from the mortgage market ? and all that did was stagnate the market for a few years, now prices are back on the up again.

Just to qualify my original response, I dont think there will be a significant drop in prices in the next 10 years, just slow and steady increases when averaged over the 10 years, could be years with no growth, but averaged over 10 years, I reckon prices will slowly increase.

Beyond that , who knows.

Of course it will, as the present madness is completely unsustainable. The government have pursued short term policies for electoral gain in Help to Buy, but also Funding for Lending – which was meant to create cash for lending to small business, but the banks took the money and put it into mortgages instead.

They’re allowing, in fact encouraging, the still unregulated banking sector to perfectly recreate the conditions for the next ‘sub prime’ crash, which will happen In 2016. But this time the banks are on the hook for even less of the fallout, with the taxpayer taking the hit! Again!

When interest rates rise, which they must, all the people who’ve massively over stretched themselves to buy in the south east are right up shit creek! There’ll be an avalanche of repossessions as house prices collapse, trapping yet more in negative equity.

It’s the economics of the madhouse!

what, like the credit crunch of 2008, followed by the largest recession since the great depression, and the removal of a huge percentage of products from the mortgage market ? and all that did was stagnate the market for a few years, now prices are back on the up again.

When policy makers have desperately used every tool in the book to not burst the bubble. Realistically all they are doing is offsetting the burst, it just seems to remain how many governments we can go through before there is a realisation that affordable homes are a basic requirement in a strong economy.

Whilst the credit crunch hit the US, the UK government made sure it didn’t hit the UK consumer, Julian. Sub prime was the US issue that caused the housing market crash there, the minor dip in the UK was related to a minor recession.

You need to identify triggers that are housing market specific if you want to predict the next fall in house prices.

You have to stop thinking of the country as London. There are still large areas of the country where hose prices are nowhere near their 2007 peak. The media just choose not to report this. Another (inevitable) crash will be catastrophic for these areas

Whilst the credit crunch hit the US, the UK government made sure it didn’t hit the UK consumer

I agree that they tried (and maybe even succeeded ) to reduce the effects by dropping interest rates low and printing money, but The number of mortgage products and amount of money available to the UK consumer in the form of mortgages dropped dramatically, making it exceptionally difficult to get a loan, yet property prices dropped a little or stayed flat.

Its just my opinion that prices will rise slowly, I’d actually rather house prices dropped because then I could buy a bigger house and borrow less, but I just dont see it happening in the near/medium term (ie 10 years).

figures below from the council of mortgage lenders for gross mortgage lending 2003 – 2013 in millions – you can see the dramatic drop after 2008.

2003 – £277342m
2004 – £291249m
2005 – £288280m
2006 – £345355m
2007 – £362758m
2008 – £253980m
2009 – £143825m
2010 – £135342m
2011 – £141290m
2012 – £145315m
2013 – £176399m

A new paradigm related to low interest rates and higher salary multiple borrowing limits, or a low-interest-rate generated bubble? I don’t have a crystal ball but if I had a huge mortgage I’d be very nervous.

Do you think the market will be allowed to correct itself?

See quantitative easing and interest rate policies for an explanation!

low interest rates only occured post 2008, the majority of the price rises in that graph occured pre 2005 when interest rates were more ‘normal’

I’d say the rises from 95 – 2007 were caused by easy credit and lack of supply, and I think that future rises (but much more moderate than seen from 95-2008) will be sustained by borrowing over longer periods and lack of supply.

Well I Bought in the Eighties and with all that happened then,
and interest rates to hit 17.5% I just never would have thought property
would ever be at this price, complete with very low interest rate.

Now the Bank of England want to grind the wheels of Commerce and
fore warning that the interest rates are to increase.

Basically I really do not know. And I don’t think anyone actually does.

Japanese house prices:

US house prices:

Only thing is Edukator I believe the interest rate in America as been Zero % rate for some time now.

US mortgages have always been long bond funded through Fanny and Freddy (though 2007 caused resulted in the partial demise of the system). Long bond rates have been declining so mortgage rates have been falling:

this is where I say graphs are just crap and pointless and where does this relate to the United Kingdom

Someone’s been watching ‘Inside Job’ 😉

The key will be interest rates. Houses stsrting to become rel expensive v earnings but not against interest costs. Govs have to balance keeping IR artificially low to erode debt with not inflating asset bubbles. They normally get this wrong…

BOE prob trying to do Toires a favour by keeping rates fixed until after election but this is getting harder now. Large part if economy v vulnerable to higher rates.

Because all the graphs show links between house prices, the ability to borrow and interest rates which indicate that house prices depend as much on the availability of money to borrow as the supply of housing. There is underlying demand for housing and limited supply so prices will rise as high as monetary, fiscal, and lending policy allow.

In 82 the high oil price and high interest rates reduced people’s ability to borrow.

In 89 fiscal policy and interest rates limited people’s ability to borrow.

In 2007 in the US higher interest rates and tightened borrowing conditions significantly reduced people’s ability to borrow

In 2007 in the UK borrowing conditions were tightened but very few people had trouble servicing debt they already had, so there were far less repossessions than in the US or Spain and prices fell very little.

If/when large numbers of people struggle to pay then prices will fall in real terms, till then… .

Someone’s been watching ‘Inside Job

I had to Google DuckDuckGo that so not me. 8)

However, I did some appropriate and subsequently very useful economics at uni.

Edit: would this be a good time to bring in the oil price too? In 74, 82 and 07 the rising oil price resulted in inflation and job losses.

Whilst the credit crunch hit the US, the UK government made sure it didn’t hit the UK consumer, Julian. Sub prime was the US issue that caused the housing market crash there, the minor dip in the UK was related to a minor recession.

Not sure about your analysis there Edukator. Non-US banks were heavily exposed to the US sub-prime market including most of our majors. Not only did this lead to a massive liquidity crisis but also a hit to capital. All of which led to a significant reduction in the supply if credit to the UK market. Hence UK consumption was affected.

British banks were affected by sub prime but baled out. The British consumer had not been fed sub-prime cash though. The slow-start, rising-rate mortgages that fueled the US bubble and led to so many repossessions in the US were not matched in either volume or laxism by UK lenders. British banks had problems with US loans, not British ones; they lost money but weren’t allowed to go bankrupt so British borrowers weren’t impacted. Existing British borrowers were only impacted by the recession and new borrowers by slightly tighter borrowing conditions. Not enough to cause a house price crash on the scale seen in Spain and the US

The biggest issue seems to be huge increses in London. I was wondering what the prices would correct to. For example used to live in a rented 2 bed victorian semi in Kingston. At the time i was looking to buy. Pre boom arround 2000 ish these houses went for 150-175k when i left in 2003 it was 250k ish. Out of curiosity had a quick look on rightmove. Same style house in need of modernisation, same location 310k. There are others in the area. Fairly small 2 bed houses for 500k+ . Good location but thats a massive increase.

Edukator, sorry but they were affected, there has been a sharp correction in the supply of credit to UK households. The whole monetary cycle has been broken as a result with money multipliers collapsing. QE has not resulted in a rise in bank lending that is what all the fuss is about.

Go and compare trends in different UK monetary aggregates starting with narrow money and then working your way through broader monetary aggregates. The picture is clear.

Justify this:
3bed end of terrace sold for £280000 in Sep 2013. Now back on the market for £385000!!
Ok it has been done up but a little bit but how can they justify a almost 40% increase in 8 months?

The whole monetary cycle has been broken as a result with money multipliers collapsing.

Could you tell me when this monetary cycle that has been broken started, what overnight interest rates were at the start, how they have evolved during the cycle and where they are now.

QE has fueled a stock market bubble rather than further inflate the housing market bubble. We can thank the banks’ lending policy for that. Without tighter conditions the very low interest rates that have resulted from QE would have added so much fuel to the housing market another bubble would have been inevitable.

Nothing is broken, nothing is collapsing, and not much will go wrong until something triggers a significant change in people’s ability to repay and borrow.

Yes, with the rapid expansion of base money. This has not (in this cycle) been followed by an upturn in broader monetary aggregates eg M2, M3 and M4. Hence the collapse in the money multipliers globally – try explain a constant money multiplier in the Quantity Theory of Money now!!! The usual money supply cycle remains broken, this is a credit less recovery – so for sure the transmission mechanism is not working despite delays in implementing new bank regulation.

You can track this across most of Europe right now. bank lending has not created an stock market bubble either.

The banking system across Europe is still very much impaired.

I do not share your confidence that nothing can go wrong. The sensitivity of large parts of the UK population to a normalisation of rates is very high. The Tories are enjoying the joker card of a better than expected recovery, but they my get Black Maria when interest rates normalise. The UK recovery while stronger than expected is on weak foundations, not least because the monetary systems is still not working properly.

Sticking to M1, all that’s happened is that so much money has been printed and interest rates are so low that a lack of money is no longer a problem. The only restrictions on lending are now common sense ones about who to lend it to.

You yourself speak of a recovery. Looking from over the water in France where unemployment is higher (and rising) and interest rates even lower it appears that the UK’s policy of monetary easing has produced the desired results, though as the M1 multiplier shows, the government is getting less bang for each buck (pound) printed.

As for the stock market, high monetary supply results in low interest rates which inevitably lead to a stock market rise – this has happened. I call it a bubble because I doubt interest rates will remain as low as they are because so much money supply should lead to a rise in inflation and central banks will respond with higher interest rates. I have never taken so much risk to get so little reward.

Claims that systems are broken are false because the economy is behaving as economic theory predicts, but perhaps not as strongly or quickly as the doom mongers think it should. A 1929 scenario has so far been avoided. I’d talk about a “soft landing” but I think we’re still flying too high to even consider where we are now is a landing.

If we get back to the housing market then QE and low interest rate have done so much to support the market that the OP talks about a “correction” which suggests he thinks current house price levels are high or too high.

I don’t think so, banks are still de-leveraging and supply of credit remains restricted. This month’s BOE inflation report makes that very point in the final para of the section on money asset prices.

It is unusual for high money supply to led to low interest rates? We do not have high money supply in the UK nor in Europe. That is the key point. There was an expansion in the monetary base but this was not reflected in broad money aggregates.

The fact that the rise in base money has not lead to a rise in inflation is a v clear illustration of why things are not working as normal.

The economy has recovered in part sure to a combination of highly unorthodox policy measures – measures that people in Europe are calling for now. Obviously they are also constrained by he €.

The fact that you have never taken so much risk for so little rewArd is again a symptom of a highly distorted market. central banks are deliberately mispricing risk in order to shape our behaviour. This has worked in part.

http://www.telegraph.co.uk/finance/personalfinance/interest-rates/10842278/Borrowers-risk-unaffordable-payments-when-rates-rise-warns-think-tank.html

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Look at this graph of UK house prices since 1975 and tell me there’s no pattern of boom and bust.

What it looks like is the time period over which the market climbs is longer each time…
Transpose the current trend downwards following the same shape as the previous busts and you can expect the bottom of the market around 2016/17

Mortgage lending is already being limited, interest rates have to go up sometime soon… the people at the top know there’s a significant risk of a real problem which will feed into the wider economy as people’s confidence is shot to pieces.

The Nationwide commentary this week was to try and get people to stop making such stupid decisions. Expectations of deflation lead to a falling market as buyers hold off in the expectation of the goods being cheaper in a few months time – especially where debt is involved in the purchase. He’s deliberately trying to raise expectations of a correction in order to bring one about.

I’m not going to say there’s going to be a massive bust but the conditions for one are all in place.

I’ve come to the conclusion that UK house prices will crash once every 20 years as each new young generation makes the same mistake as the previous one but, having not lived through the previous bust, is unaware of the mistake they’re making

Surely prices can’t keep going up and up?

What about the concept of inflation ?

Yes the market will correct itself as it did after 2008. It is now going back up again which is perfectly justifiable given the period of stagnation and the simple supply and demand characteristics. We have a growing population, living longer and with more single person households given higher divorce rates.

What you consider “highly unorthodox” comes straight out of what what every economic text book says since Keynes. If things slow down then thrown money at the problem. Keynes said the answer to recession/depression is to make money available, reduce fiscal pressure and increase public spending to stimulate the circular flow of income.

Monetary stimulus is one tool that the governments have been using. They also have fiscal tools and the ability to spend directly on infrastructure, housing and public enterprise. They haven’t been using these tools, in Europe because deficit limits mean they are not allowed to and in the UK/US because it goes against the politics of the parties in office.

I’m all for monetarism but it has it’s limits and will only be effective as an economic management tool when used in conjunction with other tools. The effects of monetary easing are currently being dampened rather complimented by fiscal and public spending policy across much of Europe.

We are now getting into the general economy when the thread is just about the housing market so it is probably a good point to get to bed.

Sleep well but well know Keynesian economists would disagree with you. Why does Krugman and co criticise what is going on so much. He (JMK) was concerned about AD not money – look at keynes view of ISLM curves to see why. In a recession, the response was not though money at all, it was through government spending and or tax ie fiscal policy. The current policy mix is extraordinary monetary policy combined with relatively tight (but relaxed on the quiet) fiscal policy.

Artificial funding schemes and helps to buy have driven the housing market along side S&D imbalances.

Help to build rather than buy is Keynesian, thus creating jobs and demand in almost every sector of the economy through knock on effects. Money that is used to buy existing assets is “saving” or “withdrawal from the economy”.

An example is the house I live in. Built on a 1930s estate as a part of a government programme to help workers finance building their own homes.

Lack of supply has played a small part in the SE but the boom in house prices over the last 15yrs has been caused by cheap and easy credit, nothing more, nothing less. So if interest rates stay the same and banks keep lending as they have been, expect prices to increase slightly or stay the same. If interest rates rise, and new affordability checks limit what someone can borrow to sensible amounts then expect prices to fall, possibly a lot.

True agent, this is the BoEs take on the situation in summary (page eight) and the key chart is chart 1.10. Personally I feel their analysis is too confident on affordability largely due to their mindset which is that the output gap is still large enough for the economy to keep recovering without inflation pressure and hence a risk to interest rates. This mindset is now being tested both externally and within the BOE.

http://www.bankofengland.co.uk/publications/Documents/inflationreport/2014/ir14may1.pdf

I agree it’s the availability of credit that fuels the prices. Lack of demand is a red herring as I can’t realistically see it being satisfied, especially in the south east. In the North West we’re still bull dozing terraces yet prices have gone up. It’s not a lack of housing, it’s a lack of aspirational housing, the irony being if you satisfy demand the houses are no longer aspirational and people want 4 bedrooms, 5 bedrooms, double garage etc. It’s a spiral you won’t get out of.

Got some plans in a drawer for 24 houses in my garden, drawn up in 2005, unfortunatly the flaming torches and pitchforks brigade got wind.
Not being a money grabbing git i put it on the back burner.
Might be time to have a rethink.