Monday, Jul 14, 2008
Bootle called the top too early, but he was right in the end
Telegraph: House prices could fall back a long way after their excessive rises
Roger Bootle writes: "Many British people seem to believe that it is somehow inevitable that house prices rise by 10pc, 15pc or 20pc every year, thereby squirting money around for all who have been lucky or canny enough to position themselves under the shower. You cannot shake off this sort of collective delusion without a painful adjustment. I saw a bubble blowing up in housing a few years ago but I seriously underestimated how much longer it would inflate. I therefore gave my warnings of the market's demise too early. In my defence, if you are a forecaster, being early ought to be a forgivable fault. It is certainly much better than being late - like all those postcasters who are now jumping up and down and telling us the housing market is weak."
42 Comments
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1. beartil2010 said...
Interesting - there aren't enough commentators who have a sound grip on the economic fundamentals like Mr. Bootle.
Unfortunately it seems that it is those who don't have a grip who always bang on about 'the fundamentals', which is another problem.
2. Orwell said...
Agreed. Apart from David Smith I suppose?
3. Orwell said...
"...so the adjustment is taking place in almost purely nominal terms, the fall is very large, the rate of fall very fast, so it is destroying bank collateral, and more important threatens to destroy it even faster in the near future, which drastically reduces credit availability, which feeds further severe price falls...."
This is buried away in the article and should be the most worrying part of this article. What he is saying is that with interest rates so low this is a unique kind of meltdown and will cause a Keynsian reverse multiplier affect ...
Worrying indeed...
4. techieman said...
not a fan of roger because yes its fine to be early if you are an amateur "guesser" but when its your job then 3 years and another 20% + wrong is really - in my view not acceptable.
Having said that i like " In fact, if house prices were to fall by 35pc over three years, then the house price to earnings ratio would only return to its long run average.
In the recession of the early 1990s, by contrast, the ratio fell 25pc below its long run average. Accordingly, it is readily possible to imagine falls bigger than 35pc. Indeed, it is likely that just as the boom overdid things on the upside, so prices will fall too far on the downside."
To me its a bit like a car travelling faster and faster but it needs to stop at a particular point - say a wall . If you apply the brakes slowly then the car comes to a gentle stop and it can easily go round the wall and start the journey again. If however you decide to just keep going ever faster you just crash into the wall and you go through the windscreen and the car is wrecked and cant go anywhere. Brakes have not been applied, the car has gone faster and faster and now we have hit the wall.
5. uncle tom said...
Hold on guys, isn't this guy learning tricks from Anatole ('wise after the event') Kaletsky...??
He should realise that the only reason we have real growth of 2-3% for the last decade or so, is because we have been building debt levels and balance of payments deficits.
Once we have pulled ourselves out of the coming depression, the ability of technological advances to create real sustainable growth is unlikely to exceed 1% p.a.
6. mark wadsworth said...
I called the top at around the same time as Roger Bootle. Techieman makes good points. Uncle Tom, if our wealth grows at even only 1% then great, we are (Nulab to the contrary) relatively rich in this country.
7. str 2007 said...
techieman
I think Roger Bootles mistake was actually predicting the fall and percentage.
I feel alot of other commontators at the time were refering to things being overcooked but without lining themselves up for being wrong.
Listening to politicians, they have it down to a fine art of either non-commitment or an obvious and worked out route of escape before making a prediction
But you're right as a professional he should be more accurate than us amateurs. Truth is the majority of professionals get it wrong, it's how they present things that gets them off the hook.
Reference our conversation the other day and your predictions of falls, followed by a steadying or rise followed by further falls.
I got the impression that you were talking about further bad news leading to the further falls (as yet undisclosed).
I've pondered it a while and decided you could be right. But what, I was wondering could be the further bad news to lead to further falls.
We didn't discuss time scales exactly, but I wondered if in actual fact it wouldn't be further bad news that would lead to secondary falls rather the good news of the Olympics that would lead to a period of levelling if not rising prices.
If this is correct it would suggest the levelling/possible rises to be in the later half of 2011 and 1st half of 2012.
This of course assumes banks are lending again by then. I'm not sure us STR's could effect a recovery by ourselves.
And the truth is (situation allowing) I'm not sure I could go past 2011 still renting if prices by that point had fallen the 35% or so alot now seem to be predicting.
What say you ?
8. str 2007 said...
mark w
It surprises me that that we seem to be ever able to grow the economy (clearly it's largely been on the back of borrowed money)
Which reminds me there was a televion clip, from about a year ago of Gordon Brown saying to camera that there's nothing wrong with borrowing money - has anyone seen this again since - could end up being his epitaph. Sorry I digress.
On a smaller scale if a small company turned over say £2m and then the following year did £1.8m (all margins and overheads being equal) whilst in the £2m year alot more profit would have been made (as it's the last bit of turnover (with consistant margin) that generates the bulk of profit once overheads have been covered. You wouldn't say the £1.8m year was a didaster despite the fact turnover was down 10%. Alot of work would still have been done.
9. icarus said...
Maybe he called the top too early because he underestimated the ability and willingness of central banks and financial alchemists to keep the bubble inflated. Given that a lot of new stuff was going on in this sphere maybe it was forgivable to call the top early.
On the other hand you could say it's his job to be more informed about what's going on in the financial world instead of concentrating on UK earnings, inflation, interest rates and affordability of UK residential property. You could say also that most people with any savvy know that after a boom comes a bust, so to say during a boom that there will be a bust sometime in the future isn't particularly clever, so all that's left for an 'expert' is to get the timing right.
10. beartil2010 said...
yes I agree professionals should be able to predict things more accurately - unfortunately you can predict things based on how they should operate, but you can never foresee special events into the future, like the low central bank interest rates after 9/11 or the government never doing anything about lending multiples despite enough people (a minority to be fair) pointing out it was just credit, not real wealth growth.
I think houses will fall now to at least standard income multiples, or perhaps overshoot.The only thing that could change that - ie. allow a stabilisation and upswing and then another downswing - is a major event, and you cannot predict when an event of a size big enough to cause a bear market rally in housing would occur. So it seems like getting the crystal ball out to me. Or perhaps the mayan calendar.
I am just going to buy when houses reach standard multiples and the month-on-month fall rate slows, I am thinking about 35%, which with inflation added is a real-terms fall of 40-45%. In about 2yrs, what do you think?
11. mark wadsworth said...
Beartil2010 I am just going to buy when houses reach standard multiples and the month-on-month fall rate slows, I am thinking about 35%, which with inflation added is a real-terms fall of 40-45%. In about 2yrs, what do you think?
Totally agreed on that. But as I have said before, the peaks are over very quickly, timing that sale at the peak is nigh impossible (except through sheer blind luck). The troughs are long and flat, so timing a purchase at the bottom is not that difficult - there's usually a three or five year window where there's not much to be gained or lost by getting in earlier or later. And heck knows what the fall will be - 30%? 50%? It doesn't matter, as long as you buy in the trough.
12. str 2007 said...
beartil2010
Inclined to agree as my comments above suggest.
My current predictions are 20-25% (maybe due to be increased) but I am looking at a last house for the young family to grow up in. I fear these houses may not be hit as hard as the 'average' and by 2010/2011 may only be 20-25% off. But I look forward to being corrected on that one.
I must admit I'd hate to miss the the actual bottom in the hope of secondary falls that Techieman is talking of (which I'm discussing with him at the moment on this thread).
The decision will have to be based on observation of the facts nearer the time and of course git feeling combined with personal circumstances.
I think the majority of people would consider buying at 30% off peak a reasonable judgment ( I couldn't critisise anyone for buying in 2003).
13. str 2007 said...
I meant gut feeling. A git I'll be if I get the bottom right !
14. wage slave said...
At least RB was saying that housing was overvalued when the other experts were not.
15. pelethar said...
Bootle gave an accurate analysis of the situation and like most people on here called the top of the market in '05. As others have said, his mistake was probably that he said this unambiguously and so set himself up for criticism.
I am getting a bit sick of all the "of course we all knew housing was overvalued" type of comments coming from economic/financial journalists in the UK. Very very few of them said so before last summer.
16. str 2007 said...
Pelethar
Alot of the 'new' anaysis seemed to move from the 'old fashioned' income multiple to the monthly affordability criteria.
We've run with that since 2004/2005 on an interest only and self cert basis to the point of bust.
Using that same model (which all previous users of which seem to have gone quiet), monthly repayments have increased roughly 40% (5% to 7%).
In addition 'real' inflation to the consumer (fuel, food, gas, oil, electric etc.) must be up about 15-20%.
These items do then point (on a monthly affordable basis) to 40-50% falls.
Pity there aren't any bulls left to challenge that !
Haven't heard from Greenbay in a while - perhaps he's had his laptop taken by the bailiffs.
17. icarus said...
It's worth looking at a paragraph from yesterday's 7.59pm post on this site.
When credit bubbles burst the primary asset, this time housing, tends to fall in value by between 50% and 90%. Japan began its own descent into the bust in 1989, and despite interest rates of zero, low unemployment, little room to build and a population of inveterate savers, it has fallen well into that range of price drops in both shares and housing.
18. techieman said...
STR and beartil2010 - this depends on your own psychology. Normally there will be lots of false dawns in a housing correction. People will think its over too soon, bulls will raise their heads, people will celebrate a monthly rise or a monthly non fall . The (by then) desperate VIs will put forward the bullish case. STR no-one can predict the future with accuracy and you have to go with what you feel comfortable with. As i think others have said a 35% fall for example masks regional / type of property variations.
If you feel comfortable with going in -10% or -20% or -35% then thats your call. Personally i am prepared for a bear market rally, before further falls - also if the maret does tank i am expecting not much time for it to be bobbing along the bottom (i mean i expect more of a V shape to the chart) . Now i dont know if i am right and if we get to say -50% then many would say whats would be the point of throwing the dice and "suffering" a +5 to 10% rise before (possibly) going finally to a -60 to -70%. Even then some places might not go any lower, and those places might include the one you want to live in. Also i will say i am talking about nominal falls, if you want to include inflation then fine but im not.
Just in my experience of markets there are no rises without occassional punctuations and no falls without rallies. I would consider a rally (and this depends on form and when along the downside it kicks in) as a trap. Basically i think someone does something to occassion the rally but much like the 2005 falls being confirmation of the top then, this will prove to be too early. My other point is that because of the application of the "rule of alternation" this fall will not be the same form as that of the late 80s. Undoubtedlty some of that alternation could be caused by sites like this. Fundamentally the falls go where they go in the first move and then it depends on the state of the broader economy. So essentially the unwinding of the bubble causes a fall of "x%" and then the state of the economy induced by that (at least in part) COULD create another "y%". Now i dont know and nor does anybody else really probably until after the event what that will be.
All i can say is that in the late 80s in my view it was the scrapping of double MIRAS that caused the final boom and sowed the seeds of the bust. This time History may very well paint the NR as the seminal event. At the end of the day i am not 100% sure and no-one is its just your own personal relationship with debt and asset values which is the point and thats dictated by the level of risk you personally are willing to take and other factors such as not getting in at -35% and losing out on a potential bottom may be more risky to you then holding on, or your level of cash or how much your partner "nags" etc. :-). in short you pays your money and takes your choice.
19. str 2007 said...
Could Japanese Uncle (or anyone else that knows) give us a brief summary as to why the Nation of Japan (despite the above, posted by icarus and superior manufacturing design and techniques) has failed to recover.
Is it simply that their bubble was sooo enourmous - ie bigger than ours is now ?
20. str 2007 said...
Techieman
Do you have an opinion on the Olympics Effect creating a false bottom and the loss of all equity in BTL portfolios (ie -33% from peak) marking the catalyst for further falls ?
21. techieman said...
Icarus i think the saving thing is important we like the US have a very low savings rate (i have no hard facts but i think the savings rate in the US went negative). Now if people see prices falling they may very well start to build up their savings, at what point will they risk these new savings on what will then be perceived as a depreciating asset? BTW STR my comment 18 crossed with all those after comment 10.
STR just to let you know last week i bought some calls in the DAX - on the basis of the falls had gone past my targets and i was looking for a short sharp counter trend move. Looks like i was a bit previous and it has cost me a fair lump. Now why am i telling you this? Well not or sympathy! just to show that my opinion is exactly that an opinion. What i would say in defence though is that its actually easier trading long term trends then getting in and out around a trend. If we had better charts we could see where support and resistance are but im not sure i trust the ones we have to that extent.
22. nooneo said...
Techieman...
"just to show that my opinion is exactly that an opinion"
How honest. Now if only all the idiots who ramped up the property bubble had and sort of integrity the market would simply not have had so far to fall.
23. techieman said...
str re Olympics - I actually think the bullishness of the olympics is the housing of people during constuction. I think therefore this is already reflected. Stratford has held up quite well i believe. Having said that i think thats on low grade rental places because the houses around the victoria park area have suffered a fair bit, ancdotal - i know a coupl of BTLrs who have places there. RE the BTLrs i question how many will be left if there equity has gone and their yield is non sensical. If anything the prices fall but banks start to lend again at some point , BTLrs get back in but the economy dictates there is no more renters. I think what is really going to become an issue for tzhe BTLrs is IF the homebuilders turn into home renters, now that would really exert downward pressure on price.
24. mark wadsworth said...
STR, re Japanese 1990s bubble, Ed Harrison has a nice summary of the four ways that a gummint can deal with a bursting credit/asset price bubble. The Japanese way is the second-least-worst, but unfortunately it drags things out for decades.
25. mark wadsworth said...
Oops. Link to Ed H's article here.
26. icarus said...
str 2007 @19 - Wikipedia's 'Deflation' (last section is on Japan) isn't a bad place to start.
27. str 2007 said...
Yes you could be right there Techieman.
To extrapolate max return froma piece of land one must create the planning permission, build the house (inexpensively) and then sell/rent it. If the sales market dries up, then renting that asset becomes the obvious choice.
If the rental numbers don't add up for large scale builders then they can't add up for anyone else. Unless of course a whole estate of rental properties pushes the return down below that originally forecast (at todays figures). Which I guess it would.
To that end could we see finance of this type being made available to the large builders to continue building (which is probably better than the government buying up for social housing). Only to find this has extended the 'overpriced land' problem further down the road only to manifest itself again when rental rates fail to materialise due to excessive supply of rental property.
I've always been surprised in the past that builders have been willing to sell large parts of a development 'off plan' at a discount to BTL investors, only to see them then make an easy profit.
Surprising when you think of it that the likes of Barratt etc. don't have their own rental departments that effectively buy their own sites 'off plan' realising equity to finish the rest of the development.
28. str 2007 said...
Thanks Mark W and Icarus, I'll have a read later.
29. techieman said...
Mark what he says to me seems spot on . We are overly (governments) concerned with inflation which looks to me to be a temporary blip (incidentially MSW said as much in the FT this weekend). While we have our eye on the ball of that though the medicine will increase the propensity for us to suffer recession and potentially depression. Once rates are reversed by then it may be too late with decreasing rates "pushing on a string". Now thats controversial and as we all basically agree we shouldnt be in this position for us to have to make such a decision ....but we are! Maybe you could post your link as a different topic.
30. sold 2 rent 1 said...
TM,
"We are overly (governments) concerned with inflation which looks to me to be a temporary blip "
Agreed. Oil at 140 and forecasts of 250 is the key item behind the inflation fears.
Once this oil bubble bursts, the path is cleared for a deflationary depression.
The big question is, when will the oil bubble burst?
31. Tokyocalling said...
Japanese superior manufacturing design and techniques relied on export to make money, and that was why we were vulnerable to international market instability.
If we concentrate on a few major facts contribute to the prolonged recession in Japan. Yes, you are right the Japanese bubble scale was bigger, at least on face value. But also:
1. Ever changing government policies. Japanese people lost faith in the government, so they vote for the opposition in panic and hatred, and it turned out the opposition was no better. Repeat this half dozen times, you only get things worse.
2. Central Bank too slow to react. Always miss the right timing, if not hitting the wrong timing.
3. 1998 Asian Financial Crisis
4. 2001 dotcom bubble
It really feels like a deja vu.
32. shipbuilder said...
29. techieman said...
Mark what he says to me seems spot on . We are overly (governments) concerned with inflation which looks to me to be a temporary blip (incidentially MSW said as much in the FT this weekend).
Techieman - why do you see inflation as a temporary blip? Driven by what?
I'm not stirring here, but your response looks interesting in light of your post below, from a few days ago -
http://www.housepricecrash.co.uk/newsblog/2008/07/blog-the-response-to-the-premise-that-speculation-and-short-selling-in-particular-is-evil-15244.php
What would be driving a temporary blip in commodity price driven inflation? I ask because i'm still not convinced one way or another of what is driving commodity prices.
33. techieman said...
Shipbuilder
basically the dollar is weak which means importing things into the US gets more expensive. People therefore stop importing stuff from China and so their economies demand less raw materials. In the meantime (now) production is already responding to prior demand, and extrapolating it. At a point that will reverse and the fact there is a deflationary clmate in the biggest consumer led economy in the world as well as here will impact on the chinese and their production and economy while still growing will not grow as rapidly as before. As consumption falls prices of goods fall.
That is a simple explanation - which can easily get alot more complex and one that can be shot down. As for my post of the other day, i dont think speculation accounts for the movements to the extent speculators are blamed. I can understand why they are blamed but its really lazy and far too easy in my view to do that.
34. techieman said...
shipbuilder take a look at "Merryn Somerset Webb: It’s time to form an orderly queue at Northern Rock" in the weekend FT. Also i would make the point about speculators even if i wasnt one! Icarus in particular made the point re short-selling of BS, and i can understand that point although that was one specific (albeit if he was right - and i have no need to dispute him) dramatic example.
I have a problem with people who make a statement because they dont like the premise it but cant articulate why they are. That adds nothing to a debate and pepertuates ignorance. If someone reverts to me with something i consider what they say and may even change my views accordingly. Actually thats not why i originally came on this forum but it is why i remain active.
35. techieman said...
I have a problem with people who make a statement because they dont like the premise it but cant articulate why they are - hardly articulate there. should be :
I have a problem with people who make a statement because they dont like the premise but cant articulate why they believe the premise to be wrong, or even why they dont like it
36. letthemfall said...
techieman:
I think you're being a bit hard on RB. I don't think professionals are any better at timing such events than the rest of us. One would have to be able to predict events that are dependent on herd psychology. No one even knows when a particular market has turned until some time after the event. But Bootle did consistently point out the overvaluation where others were predicting ludicrous stuff like average prices in the millions. I was amazed when prices kicked up again in 2005; no doubt RB was too. Still, all's well that ends well. Looking forward to the 35% plus drops.
37. icarus said...
techieman @21 - sorry to leave this so late (busy spell) but in reference to your point about savings, there's savings and savings. The Wikipedia piece I referred to @26 has this to say:
Japanese people (given their experience with banks since the early90s) are afraid that banks will collapse so they prefer to buy gold or (US or Japanese) T bonds instead of saving their money in a bank account. This...means that money is not available for lending and therefore economic growth....the savings rate depresses consumption but does not appear in the economy in an efficient form to spur new investment. People also save by owning real estate, further slowing growth since it inflates land prices. (I'm not sure how the last point fits in with the general deflation in asset prices.)
38. shipbuilder said...
33. techieman said...
"Shipbuilder
basically the dollar is weak which means importing things into the US gets more expensive. People therefore stop importing stuff from China and so their economies demand less raw materials. In the meantime (now) production is already responding to prior demand, and extrapolating it. At a point that will reverse and the fact there is a deflationary clmate in the biggest consumer led economy in the world as well as here will impact on the chinese and their production and economy while still growing will not grow as rapidly as before. As consumption falls prices of goods fall."
Fair enough. Thanks for the explanation. I have been wondering recently in a number of posts why inflation seems to be seen as inevitable, particularly in relation to increase in the price of gold.
"As for my post of the other day, i dont think speculation accounts for the movements to the extent speculators are blamed. I can understand why they are blamed but its really lazy and far too easy in my view to do that."
Unfortunately I missed that debate, which is why I refer back to it. I know i'm not comparing apples with apples, but isn't it generally acknowledged (esp. on here) that a great deal of the supposed rise in the housing market due to 'supply and demand' was in fact due to speculation? Why would other markets be different?
39. str 2007 said...
As an addition to the above, will the cost of essentials fall ?
Will oil, fuel and food fall in price - there seems to be no option but to buy these products.
Where as, contrary to popular belief it is actually possible to survive without a 50" flat screen tv.
It seems to me that the rubbish we buy that drives the economy may drop in value due to demand, but will the necessities fall in price.
The only exception maybe house purchase, but depending on interest levels the monthly cost may not come down much.
40. techieman said...
shipbilder - good point re speculation in property. Yes there have been speculative manias in commodities previously but they start off as fundamental responses which go too far under the weight of some speculative demand. Now it could be that the weight of speculative money has found its way into such rises now but where is that money coming from? The banks arent lending it and if you look at prices in non dollar terms the values dont look so extreme. As for gold i dont buy into the reason it is going up is as an inflationary hedge. I think it goes up for 2 reasons at the moment : 1 is because its denominated in $ and 2. because its a safe haven in times of BIG economic turmoil. Although i have some gold (and will hold on to it) im not convinced it goes through the roof. In any case - as has been seen many many times when a speculative bubble ends the result is an overshoot the other way, so if it is currently speculators that are responsible thats probably an even better bet that when the tide reverses it goes out pretty quick. Remember also that commodity cycles are much shorter than property cycles.
STR i think both will fall but as you say discretionary spending gets hit first and hardest.
41. techieman said...
Icarus - yes as you say it depends on how the savings are applied. I thought that japanese (and hi Tokyo calling p perhaps you can contribute) savings ratios were always high and therefore they had a cushion that we dont. Having said that the size of their bubble was much more pronounced than ours, so perhaps that savings ratio is cancelled out, whether its available for industy or consumption or isnt used at all (i.e. remains a last resort for a rainy day). after i wrote this i saw this on wiki http://en.wikipedia.org/wiki/Golden_Rule_savings_rate
42. it_is_going_with_a_bang said...
Discretionary spending.
Just look around you.
Saturday night in town. Usually thousands of people wlaking about getting pi**ed.
Was like a ghost town. We are not even in a recession yet. Just imagine what it will be like when someone says we are.