Thursday, May 17, 2007
Bubble watching
www.find.co.uk: House prices: UK still leads the pack for overvaluation
There's more than one potential bubble in the making. There's China, Spain, consumer electronics, the stock market, and oh yes, house prices.
This article summarises key arguments for and against a crash in the UK property market.
Against crash: land is scarce, demand rising, the economy is in great shape, unemployment low, and mortgage payments as a percentage of income is much lower than in 1990.
For crash: well, read the article
Follow links from article to see why our growing tendency to buy champagne could hit interest rates much harder that economists are saying. Or go to www.find.co.uk/news/155383027
Also follow links to read about other bubbles. Nowadays everything effects everything.
Posted by michael baxter @ 11:37 AM (191 views) Add Comment
3 Comments
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1. paul said...
This is an interesting article. The counterarguments against the typical VI spin are good. This is especially interesting:
"But, perhaps more crucially, it is forgotten that price cannot rise to a level that is unaffordable, no matter how short the supply."
This is so true. Prices in a rational market will always rise to meet demand, not exceed it - that's the realm of and irrational speculator market. Also:
"Firstly, in drawing a comparison with 1990, CML did not take into account that actually mortgages were cheaper in 1990, because borrowers received tax relief in the form of MIRAS on their mortgage."
Very true. In all of these comparisons saying "houses were more affordable in 1990 than now" are fundamentally flawed because there was tax relief (yes, kids, that's right in the olden days the government used to give you money back when you bought a house, not take more from you).
A good, erm ... find, Mr Baxter.
2. Night said...
I'm far too young to know anything about MIRAS so I had a look around and found out what they were from wikipedia:
"MIRAS... allowed borrowers tax relief for interest payments on their mortgage. This was available for the first £30,000 of a qualifying mortgage and up until 1988, those with joint mortgages were able to combine their allowances to £60,000. MIRAS was completely abolished in April 2000."
As the article refers to the CML drawing comparisons in 1990, I had a dig around for average house prices in 1990. For the UK, the figure I came across was £59,785. Depending on who you ask, the average UK house price NOW is £195000. That means that to draw sensible comparisons with 1990, we need to work out affordability figures as if we paid no tax on £97K (single) or £195K (married).
Does someone want to finish my thought please? Be great to see if we really are near that 28% figure or not...
3. Orwell said...
I like the bottom bit best:
"...It seems to us that a crash in UK house prices is inevitable. The timing is harder to predict, but if some of the worst fears over the course of interest rates for the next year or so prove correct, this crash could come a lot sooner than many previously thought..."
Now who would have thought it?