1. denzil said...

Some points I found of note about Smith's piece:
"The Centre for Economics and Business Research says consumer-price inflation, now 2.8%, will be down to 1.9% by July. With some of the Iran-related froth gone out of oil prices, that forecast looks quite secure."

"There are two things one should bear in mind about the housing market. One is that mere mention of a slowdown brings the “crash” obsessives out in force, their latest ammunition being the problems in the American sub-prime market. That has as much relevance to Britain’s housing market as the baseball world series has to whether Chelsea or Manchester United will win the Premiership."

As for point 1. I would be very surprised if CPI is anywhere as low as 1.9% by July. It may be true but which year are they talking about!

As for the sub-prime I don't entirely agree with him that it is has as much relevance as his example but I do think there is a little bit too much made of the argument that the US sub-prime problems will cause a crash here.

I remain in the stagnation camp and there's a number of things that will make me call a crash; HPI not slowing YoY to within a 1% of CPI by close of 2007 and interest rates rising to at least 6.5%. The latter looks unlikely but the gluttony of the former may cause the internal organs of the housing market to shut down due to seriously over-indulgance.

I think there would be some serious fall-out in the BTL sector if rates increase to 6%, but fall-out does not necessarily equal crash.

I know it would be rare for stagnation to ensue but I find it even more bizarre that the market would crash "at present" due simply to houses being rediculously over-priced which of course I wouldn't deny that they are. Houses don't become affordable one day and then crash the next unless there is some major force which has changed. Would that "force" be sentiment? I can see a shift in sentiment leading to stagnation but not a crash.

BTW I'm not a bear-baiter, those who have read my comments over time know I've been fairly consistent with my call of stagnation.

3. taffee said...

There are many forces which will cause a crash.There is no fundamental reason for a house being worth £300,000 or £100,000.Bubbles exist (like the tech bubble) because assets seem to be only going in one direction.Oil and gold peaked in 1980.A barrel of oil was worth the equivilant to $100.....why did it fall to $10 over a 20 year period?Why was it 'worth' $100 in the first place?

1/buy-to-let rents don't pay the costs and there is no capital growth causing dumping.

2/fraudulent mortgages that people cannot afford to pay.

3/massively stretched mortgages that people cannot afford to pay.

4/huge personal debt

5/sentiment

6/rising interest rates

5. Madders said...

Smithey's comment on sub prime debt has probably not taken into account the longer effect throughout US the economey. The USA must increase GDP year on year to create sufficient wealth to pay the ever increasing interest on the debt burden. Every dollar in circulation is bearing interest to infinity(thats a big statement and bears a lot of consideration). The bubble in the housing market has increased their own combined economy debt burden to over $50 trillion. It is not so much the Fanny and Freddie Mays losses that are the immediate default infector, it is the sheer weight of interest to be paid by the debt holders at large. The sub prime burst is probably a symptom of a bigger worry. Our own debt burden reached £1 trillion around eighteen months ago which took nearly three hundred years to create. It now stands at over £1.3 trillion. That is one hell of a growth rate in credit or debt and bearing in mind that every $ or £ is loaned into infinity that is a phenominal growth rate that is probably unsustainable. Wave breaking?
The sub prime contageon from the USA is an issue for us to look beyond the headlines and into the the sustainability of the lending structure and even where the insureances for the packaged loan portfolios have been laid off! Until we have a Nobel Prize Winner on a par with Einstein who re invents boom and bust cycles or controlling free market bubbles, there is an inevitable consequence of excess.

Sorry about the spelling, no spell check here

7. sold 2 rent 1 said...

Madders,
Why don't you post your comments on his website www.economicsuk.com
You have a quality argument.

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