Magpie

Hopelessly pedantic of me, but it's actually more like 56 years if you allow for compound interest. Or 30 years at 4%. Still a long time.

Yes, I agree with that. The boom's had longer and pretty much everywhere has been affected, unlike last time. Interesting, about -30%. I wonder if the increases shown in the postcode map partly reflect the top end of the local market holding up. I remember flats in general suffering badly last time. Anyway, regardless of the details, I still believe there will be variations. While I agree anyone who thinks they will be unaffected is probably deluding themselves, I do think some will be luckier than others. There's no total immunity, but some areas and property types are better bets than others in a downturn.

The 4* confusion comes from a bad way of dealing with the percentages. They say wages have risen 43%, house prices 180%. 180 is more than four times bigger than 43 so they conclude the ratio is 4 times worse. Bad maths. In fact the way to make the comparison is to say that from a base of 100/100 in 1997, house prices/wages have grown to 280/143 - which means that the ratio between them has doubled, not quadrupled. Of course various innumerate journos have simply parroted what they have been told, just as tomorrow they will parrot some completely contradictory report. The other thing to bear in mind with regard to genuine affordability is that interest rates are currently lower, but I think people overstate this as an affordability criterion for two reasons. Firstly (short of a 25 year fix) the crucial thing is interest rates over the long term, which one should assume may be higher than recent rates. Secondly even though rates were double current rates in the 1970s, you need to make the comparison for a repayment mortgage, which would only have been maybe 25-30% higher than currently. So lower interest rates help a little with affordability but not as much as some might distort the maths to show. I still think this is the worst point for affordability in 50 years.

I'm not saying there will be an exponential increase forever, only pointing out that such an exponential increase is not impossible, because it does not involve tending towards infinity. In fact the scenario The Austrian decribes would involve some money getting destroyed. That might reduce the money supply, or simply reduce its rate of increase.

Agreed, I think this kind of thing is always valuable, even when it is theory based. The points below were meant as the examples. All true, and no need to worry about money velocity too much here. There is an imbalance. So, there are various things that might happen to correct this. The two main options: 1)The inflationary pressure that has built up and been reflected in asset prices may spread to goods and wages leading to much higher inflation, which would do nothing to reduce the nominal money supply (although it would reduce the value of a unit of money). 2) Alternatively, a huge amount of money may be destroyed through insolvency, in which case it is possible for nominal money supply to fall (in a deflationary scenario). Scenario 1) might lead to hyperinflation, or not, depending. There is no logical necessity for inflation to lead to hyperinflation but it can happen. So these mechanisms (and various intermediate options) do 'snap back' the imbalance, but not necessarily by reducing the money supply. One thing we have seen in the last fifty years is that banks and central governments seem to prefer inflation to risking deflation, so it may be that 1) is the more likely scenario.

Velocity of money is important in other respects (because it affects how direct and immediate the link between money supply and inflation is) but it complicates this discussion needlessly. My original point is just that there is nothing at all to stop the nominal amount of money increasing indefinitely, in an exponential way. And that exponential does not mean 'tending to infinity' at all.

Well, I've seen a crash before and last time different areas were hit very disproportionately. There was a slow market everywhere for sure, but the effects on prices were terribly variable. The London postcodes map posted earlier in this thread is good evidence of how wide that variation was, and there were huge variations across the country. If you believe in house price cycles, I would expect you to take evidence from the last crash seriously as a guide as to what may happen this time. So why deny that last time the crash was very varied across areas? I can see an argument that the crash this time will be more uniform, which is simply that the boom has been more sustained and all areas have risen, whereas last time the boom was more erratic in its effect across the country and even across London to a degree (I could be wrong, but I think the better postcodes performed better in the crash last time because they hadn't risen by as much in the boom to start with - no-one could now say that of areas like Chelsea, Kensington, Hampstead etc).

Sorry, but this is just wrong, for a number of reasons. Please try to distinguish inflation from hyperinflation. Inflation can be a chronic (eg persistent) state, hyperinflation is basically currency collapse, and can't be sustained over long periods. You can have inflation without hyperinflation. So what happens if the economy doesn't expand but the money supply does - you get inflation, correct. But... This is where your argument goes wrong. You could have an absolutely static economy with constant inflation. What would the result be? Constantly growing money supply, rising prices, falling value of each unit of money. There is no mechanism that 'must' snap this back. As the Austrian points out, you could end up with two people left with a gazillion dollars each, and that would be technically more than the money supply now. Imagine a country with a million people, each of whom has one dollar. Overnight the government devalues the dollar and replaces all the old dollar bills with 2 new dollars. All prices and salaries also double. The money supply has 'doubled', nothing else has changed. Must the money supply now fall by 50% to suit your theory? In a sense this is just a theoretical discussion, but it is important because your failure to understand this is making you come up with all sorts of silly stuff about 'peak money supply'.

A couple of points. I think the house prices to wages ratio is of far more relevance to hosue price cycles than the 'real house prices adjusted to inflation' because wages are what constrains what people can afford in the long run. Thus the attached graph which shows the long term fluctuations. Now we are indeed at a long term high, so something has to give. I do nonetheless think it's slightly misleading to say 4* more unaffordable than 10 years ago for two reasons. Firstly if house prices are up 180%, wages 43%, then starting from a base of 100/100, we're now at 280/143 - meaning it is twice as unaffordable, not four times. Secondly, 1996-7 was the lowest point of this ratio in the last fifty years, so using that as the point of comparison is a bit of a distortion. Still, this ratio is unacceptably high at this stage of the cycle.

Exactly. ?..." is still making the mistake of confusing physical limits (which prevent economies from indefinite exponential growth) with mathematical limits (which do not similarly restrict money supply growth).

Yes, well put. Of course hyperinflation is possible for economic reasons, but I think it is also always worth being on your guard against people reading too much significance into an exponential curve. I have seen people make statements such as 'every inflation ends in hyperinflation' which is plain wrong. And yes, a hyperinflation, without being a singularity as such, is close enough to become such a sharp gradient that the currency collapses. The kinds of exponential curves I have posted wouldn't reach that stage, though economic factors may cause them to deviate into it. I don't see that money supply can have any kind of theoretical peak, for mathematical reasons. For whatever peak money supply you posit, there is no reason why all the money in the world couldn't be replaced by money worth less per unit, increasing that nominal money supply. Of course there may be a peak 'real value' to all that money, but that's a different issue.

One way to look at this is to split it into two questions: 1) Is the market at or close to its peak? (I think it is and I'm sure a lot here agree) 2) Does that mean it's smarter to rent your home than own it? To the second question I think the answer is much more complex. I'd be reluctant to FTB at these prices unless I was damn sure I could afford the payments long term, though for some it may still be an option. But just because it's not the ideal time to FTB, that doesn't guarantee that STRing is smart. In both cases the only way to make sensible predictions, as Harris points out, is to do a long term comparison - you could do this for someone buying (or keeping a property) now against someone waiting 5 or 10 years to buy, or against never buying. The results can be surprising and in some cases make the renting option look less attractive, regardless of whether renting or interest would be cheaper right now. That's a bit wordy, but all I'm saying that it is far too simplistic to assume that answering yes to question 1 above means that you must answer yes to question 2.

I don't think it affects her credibility at all. She made an honest prediction then and at the time I broadly agreed with her. I was wrong then, but nonetheless I think this time she may be right. In the end the housing market will certainly stagnate or fall. The point isn't to make fun of someone who makes an honest prediction and gets it wrong. It is only to point out the risks of taking an action (such as STRing or waiting to FTB) based on the assumption that your prediction will be true. STRing can make sense if you believe you can make more money by reinvesting elsewhere. But it's a major risk if it is simply an attempt to take advantage of a predicted drop in the market as mistiming that can be disastrous.

I often get called a closet bull for pointing out that nominal stagnation is a possibility for the market. Is a nominal stagnation a 'soft landing'? For a lot of people, no. For the overstretched counting on MEW, for idiot BTLs who lose their properties when interest rates rise, for people who get stuck because they can't shift their property it can be extremely painful. Prices didn't fall in the late seventies but a lot of people including my dad suffered through that crash. However it has to be said that up to this point, prices have slowed almost to a standstill in most of the country without yet falling significantly. So we are already in different territory from 1989 onwards. What happens next? Time will tell. But I still believe STR is a high risk strategy for most. And for FTBs who can afford to buy I think it is important to consider the ramifications of nominal stagnation in their own situation, rather than simply assuming that 'prices are bound to fall'.

For the sake of comparison, here's the lovely Merryn in March 2004. http://www.moneyweek.com/file/2059/uk-prop...-boom-over.html

Well she has been saying the same thing for as long as Cliff D'Arcy, and she does have a clearly labelled vested interest now she's STRing. Having said that she may well be right this time. She's bound to be right eventually, but the trouble with STRing your home is that you probably need to be pretty precise about timing for the decision to be profitable, as the last few years seem to indicate. I'm in a very different situation to her, but I don't think I'd take that particular risk. But if we have a Japan-style crash, she'll be right and I'll be wrong...

Plus I suspect a London only index would show prices troughing in 1993-4 and then edging up in the nicer areas - the rest of the country crashed a bit later and troughed in about 1995-6 - so the national index trundled along at a low. Outside of London I think people will have a fair idea - loads of city centre new-builds, too many idiots from down south ploughing into terraces in dodgy areas for BTL are both indicators that forced sales may be brewing. For London I think it's a harder call. I also think it may behave differently this time. The last boom was relatively short and sharp and one could argue that the gap between good and bad areas had closed up way too much, leading the bad areas to crash badly. This time, the good areas have had time to respond and move back up again, so maybe they won't be as insulated as last time. I'm just guessing there really though. My basic theory is nice areas are a better bet than crappy ones. Absolutely agree.

Ah, yes. It's enemy territory for me as I'm on the other side of the North London derby. As well as being a shithole. Know what you mean about Angel, I don't it like it these days for the same reason. You might as well be in some provincial town. I think it went to the dogs when the last few second hand book and clothes-shops closed. All the pubs are vile these days too, too full of idiots.

Bear in mind that map understates the severity of the crash, by going from 1988 (before the peak) to 1995 (when a few places had started to edge back up again). What else would you expect from the property ramping Evening Standard. I think you need to adjust all the results down as a result for the true peak to trough figures. Still interesting to see the varying results though isn't it. I personally think numbers of forced sales is a big factor - so for bad results look for lots of new-builds and (perhaps) BTLs, difficult local economic conditions and so forth. Also places that were seen as 'up and coming' purely on the basis that they are not very nice seem to have suffered worse (at least within London).

I suppose the interesting question is whether they are selling because they are short of cash, or because they think the market is showing signs of peaking and they might as well cash in and put the money elsewhere. The latter is a less drastic issue.

This Barnet EA you know must be the most pessimistic EA in North London. Either that or you asked a very leading question. I do agree that the market has slowed a bit here (I'm a couple of miles away so familiar with the local market) and it may get worse. But at this stage correctly priced property is still selling at close to the asking price. Kiteflyers aren't selling, but that's often the case. Stuff around me that goes on at a reasonable price is still going at around 95% of asking price, and all asking prices are still well up on previous years. Maybe the market will slump, certainly volumes will fall. It's probably always true that, if you have a dodgy property that is 20% overvalued, you need to drop the value by up to 30% for a 'quick sale' but that's not really saying anything interesting about the current state of the market IMO.

Would that be the same Foxtons who are known to overprice everything? The ones whose adverts on the radio basically boast to landlords about how they can charge rip-off rents for their shoddy properties... The figures might look slightly different if you try someone else.

If you pitch it right (and if it's somewhere you'd actually like to own and could live for a few years) it could be an opportunity as they would find it easier to sell to a tenant in situ, and might accept a low price on one of a portfolio. Offering the amount you'd be happy to pay is never a waste of time. All they can do is say no, in which case you've lost nothing. On the other hand following some of the advice you'll get here to offer 50% off or whatever probably is a waste of time as they clearly won't go for it. One thing to consider is how big you sincerely believe the eventual nominal falls in this market will be. If you believe they will be 30-50%, it's probably best to wait and see. But if you think the nominal falls might only be 15% or so, offering perhaps 85% of asking might be an interesting punt. Good luck either way.

Goldfinger, I agree that it is excessive short term money supply growth, the end of oil, consequences of possible asset deflation etc that are worth worrying about. But while my post maybe seems simplistic, there was a specific point: ?...! argued that Then this led on to a discussion where various posters were asserting (in opposition to this idea of exponential growth to infinity), that the money supply must reach a peak and fall. Now this is a false opposition. Money supply peaking and falling isn't the only alternative to 'growth to infinity. To me this shows that the idea of exponential growth is being seriously misunderstood. Exponential growth isn't growth 'towards infinity' that will therefore be forced to collapse and rebounce. I have consistently seen an elision between 'high inflation' and 'hyperinflation' which also tends to imply that posters are assuming from looking at these kinds of exponential curves that high inflation inevitably becomes hyperinflation as the curve increases in gradient. It is not an argument in favour of inflation to point out that steady inflation is sustainable over periods of time and does not inevitably turn into hyperinflation. Hyperinflation is of course one of the current dangers we face but it's silly to assume it is inevitable.

Here is a diagram that may help to explain the point I want to make about exponential growth. Exponential growth is not growth tending to infinity and should not be mistaken for 'hyperinflation', which is a very different thing (or to be more precise it is the same thing but at a much higher level). These graphs show a hundred years of inflation at 5% with a notional 2007 in the middle (so say 1957-2057). The first shows the full hundred years. 2007 is in the middle, just before it all "accelerates away". The second shows the first fifty years. Now 2007 is at the end "Oh my god, look at how terrible things have become." Whereas in the third, 2007 is at the start, when the curve is very benign. Things now don't look so bad... The point is that any graph of exponential growth is scary if you put 'now' at the end of it - it looks as though it is accelerating towards infinity. The only way that the graph of money supply growth wouldn't look like this is if money supply growth was zero. Is that the only solution? Of course not. The alternative is just not to get you knickers in a twist about the appearance of exponential growth when it is about numbers, only when it is about real things like population growth and use of resources.