Why Were 2007 Prices The 'correct' Market Prices

[the end is a bit nigher]

Since bears see a different side of it, the result will be standoff until large numbers of owners are forced to sell by job loss or not keeping up with reset mortgage rates. I fear we are now in the long, boring phase of slow declines in a dead market.

VMR.

Good post. Strange that it takes a bear to put forward a good counter argument.

I can also see prices stagnating at the moment, both real and nominal. Where I think there may be a difference is that I whilst I don't expect to see significant wage inflation for some time, I can see stealth inflation. So on the face of it, things won't look as if they are getting worse, yet in reality, people will become poorer and their buying power will diminish.

[VeryMeanReversion]

I`ll ask again, why is HPI a good thing ?

The main reason is that it is a taxfree savings scheme where ownership is well protected under law, as opposed to pension schemes and other financial products that are subject to sticky fingers, fraud, theft etc. If yoiur wealth can be stored in a house, you dont have to worry about fiat currency, stock markets etc. that few understand.

Imagine if HPI=0. Eventually, anybody could buy lots of houses, it would then be subject to government allocation.

However, excessive HPI is a bad thing (excessive meaning more than wage inflation). This just moves wealth to the moneylenders.

VMR.

[Sybil13]

Has anyone any idea how many people are renting a property waiting until next year to sell when they believe property prices will be back up to 2007 levels?

What did Property Watch say, was it a 50% or 100% increase in rented property since ??? was it last year?

I am just thinking that that is probably quite a few properties that by next year the potential sellers are going to have to seriously Q if they want to keep renting whilst the property devalues at every level or simply accept 40% off . Couple that with people whose mortgage holidays have finished......

[allfiredup]

Looks like some bears have answered the question pefectly.

[the end is a bit nigher]

The main reason is that it is a taxfree savings scheme where ownership is well protected under law, as opposed to pension schemes and other financial products that are subject to sticky fingers, fraud, theft etc. If yoiur wealth can be stored in a house, you dont have to worry about fiat currency, stock markets etc. that few understand.

Agree about it being a good tax free saving scheme, although I would argue that pension schemes are there to serve a different purpose i.e. to proviode cash flow in retirement as opposed to storing wealth that cannot be spent without selling it.

[profitofdoom]

I think the likely answer to this is that markets "lag". In 2007 people saw house selling for,say,£200k and then put theirs up for £210k.Of course they had a pretty good chance of getting it then.But when reality hit the sales dried up.Very few people choose to buy on a falling market,then when HIPS came in there was a further disincentive to even put your house up for sale,so market stagnation set in,which is where we are now.

I think that some houses are selling for as little as 15% off the peak,but these are the desirable ones.Others,such as these tower blocks of flats are so difficult to value that it really is impossible to say what they are worth.I think that if many of them came to market at auction they might be down as much as 60&.

[jborg]

That is more due to your myopia than the bulls' reticence.

The first two questions have been answered on the thread where posed. The OP is talking rubbish, presumably why he posted a separate thread, to avoid the answers.

If he wants an answer to his third question he should respond to where the suggestion that 2007 prices were the "correct" prices was made rather than having it look like he just made that up as well.

So to pose another 'tricky' question (which i have asked often and got little reply), if the 2007 prices were the 'correct' prices, why aren't all the bulls on this forum out there snapping up all these property bargains that are out there and will be a great investment as we are 'obviously' at the bottom of the market.

Now's the time to buy guys, hey you keep saying it often enough!!

I think it's called putting your money where your mouth is.

[Old_Traveller]

Since bears see a different side of it, the result will be standoff until large numbers of owners are forced to sell by job loss or not keeping up with reset mortgage rates. I fear we are now in the long, boring phase of slow declines in a dead market.

Unless a key ingredient changes in the equation, i.e. interest rates. If these continue crawling up that can have both a strong phsicological and real effect on price perception from the seller side. All of a sudden the bull expectation that lending will free up gets killed.

[the end is a bit nigher]

So to pose another 'tricky' question (which i have asked often and got little reply), if the 2007 prices were the 'correct' prices, why aren't all the bulls on this forum out there snapping up all these property bargains that are out there and will be a great investment as we are 'obviously' at the bottom of the market.

Now's the time to buy guys, hey you keep saying it often enough!!

I think it's called putting your money where your mouth is.

Tasteful

[VeryMeanReversion]

So what is a bears answer to Q 2? I have been asking this Q over and over here for instance:

The funding gap will not be covered unless it is provided by government e.g. in the form of MBS guarantees although they would give it a new name. I think one UK council (Dundee?) is now doing somthing like this, although in very small numbers.

How do approvals double without prices coming down when lending is down nearly 2/3rds?

- Make accounting changes at financial instutions to make them appear more profitable than they really are. This improves investor confidence, allowing fundraising for new mortgage money.

- BoE is the lender of last resort with unlimited funds available confidentially at the penalty rate (only 1.5%). How much money do you want if you can then lend it out at 5%?

- Unlimited mortgage interest rate relief at marginal income tax rates

- Stop taxing profits on MBS income

I believe the first two of these are already in progress.

And to highlight a flaw in your question, lending would automatically increase if approvals doubled

I think you are really asking "Are house price drops inevitable, given the MBS market is currently dead". If the MBS stays dead then yes.

However, I expect there will be a new MBS market (with a new name) where the investors expect the originators to take part of the losses. That is a fundamentally sensible financial product. It won't take them long to figure it out and mortgage lending will return, not at peak levels but certainly higher than traditional levels.

So I expect house prices to keep dropping but the floor will be higher than we are used to. There is no reason why we have to go back to mortgages being funded by only domestic deposits.

VMR.

[VeryMeanReversion]

So to pose another 'tricky' question (which i have asked often and got little reply), if the 2007 prices were the 'correct' prices, why aren't all the bulls on this forum out there snapping up all these property bargains that are out there and will be a great investment as we are 'obviously' at the bottom of the market.

Anchors dont work like that.

When you buy, you have put a financial stake in the ground and only consider information that backs that up as a good decision, just as STRs only consider bear arguments once they have sold. [mixing my anchor/stake metaphors but you get the point]

Anyone that still thinks 2007 prices were correct will just say that they don't need another house at the moment.

Humans are strange creatures, us lizard people just worry about where the next flies are coming from

VMR.

[VeryMeanReversion]

Has anyone any idea how many people are renting a property waiting until next year to sell when they believe property prices will be back up to 2007 levels?

I know a couple of families in this situation. They are waiting for a normal market (volume-wise) rather than particular price levels. The want to be able to sell at the same time as they can find a house to buy.

They aren't bulls or bears and don't particular care about house prices, they just want to move and are prepared to increase their mortgage a bit (not a lot) to achieve it.

VMR.

[andykn]

So to pose another 'tricky' question (which i have asked often and got little reply), if the 2007 prices were the 'correct' prices, why aren't all the bulls on this forum out there snapping up all these property bargains that are out there and will be a great investment as we are 'obviously' at the bottom of the market.

Now's the time to buy guys, hey you keep saying it often enough!!

I think it's called putting your money where your mouth is.

But who has said 2007 prices were "correct" and in what context?

[Old_Traveller]

I know a couple of families in this situation. They are waiting for a normal market (volume-wise) rather than particular price levels. The want to be able to sell at the same time as they can find a house to buy.

They aren't bulls or bears and don't particular care about house prices, they just want to move and are prepared to increase their mortgage a bit (not a lot) to achieve it.

VMR.

That is the paradox innit? if they do not contribute to volumes, who will? the pump needs to be primed somehow... and if volumes/stock go up, prices will go down.

Edited June 1, 2009 by Old_Traveller

[VeryMeanReversion]

QS 5...Who owns all the land in the UK ?

The Queen,

Next question please.

VMR.

[andykn]

Unless a key ingredient changes in the equation, i.e. interest rates. If these continue crawling up that can have both a strong phsicological and real effect on price perception from the seller side. All of a sudden the bull expectation that lending will free up gets killed.

But surely interest rates will only rise if inflation rises?

[VeryMeanReversion]

But surely interest rates will only rise if inflation rises?

Market interest rates will rise when the market says so. I think the rises have already begun.

BoE interest rates will stay lower far longer. That will only be relevent for those people on long-term BoE trackers.

VMR.

[Old_Traveller]

But surely interest rates will only rise if inflation rises?

That hit home did it not? market lending rates are the "precious" of bulls, the mother of all clearcut indicators.

One view of the issue here, other similar views available freely around.

Telegraph

Answering your question, by the looks of it it may not be necessary to have HPI for the lending rates to increase, inflation encompasses more. See precisely previous house price bubble bursts, last time around there was no QE to influence market lending IR.

Edited June 1, 2009 by Old_Traveller

[andykn]

That hit home did it not? rates are the "precious" of bulls, the mother of all clearcut indicators.

One view of the issue here, other similar views available freely around.

Telegraph

Answering your question, by the looks of it it may not be necessary to have HPI for the rates to increase, inflation encompasses more. See precisely previous house price bubble bursts, last time around there was no QE to influence IR.

But in the last temporary house price lull, there was a Govt whose tax giveaway had fuelled inflation and who considered unemployment driven by high interest rates an "acceptable price to pay". Although Cameron was Lamont's apprentice at the time, he has ruled out such an approach today.

So either inflation brings 2007 prices back or interest rates stay low.

[Old_Traveller]

So either inflation brings 2007 prices back or interest rates stay low.

The lending market seems to be disagreeing with that and the view shown above suggests lending markets may have started already pricing in those views of future inflation, now, basically.

[andykn]

The lending market seems to be disagreeing with that and the view shown above suggests lending markets may have started already pricing in those views of future inflation, now, basically.

Can't see any evidence of that myself:

http://www.thisismoney.co.uk/markets/artic...mp;in_page_id=3

[Moo]

I think you are really asking "Are house price drops inevitable, given the MBS market is currently dead". If the MBS stays dead then yes.

However, I expect there will be a new MBS market (with a new name) where the investors expect the originators to take part of the losses. That is a fundamentally sensible financial product. It won't take them long to figure it out and mortgage lending will return, not at peak levels but certainly higher than traditional levels.

So I expect house prices to keep dropping but the floor will be higher than we are used to. There is no reason why we have to go back to mortgages being funded by only domestic deposits.

(Amateur time coming up...)

The above strikes me as spot on, but with one addition. Unless I've missed something obvious, the whole MBS thing blew up because it turned out (unsurprisingly) that you can't replace the pate in a beef Wellington with shit without buggering up the dish as a whole. Consequently, in order to make a comeback, MBSs will need to be devoid of shite - a pretty self-evident statement really, as if that wasn't the case then the whole thing would probably still be going. The way I see it, such a market cannot return until originators are in a position to issue large quantities of "not shite" mortgages, with "not shite" being defined by "sensible LTV, sensible income multiple, good ol' fashioned boring mortgage".

Okay, the above may be ******, but working on the assumption that it's not, it would seem that there are two ways in which this can come about. First off, the originators could decide to keep the shite on their own books, and sell the better stuff. Secondly, they've got to wait for prices to fall \ incomes to rise \ the existing debt burdens to be paid down to such a level as to make the issuing of large quantities of saleable mortgages becomes viable. Okay, I'm a bear, so you can probably guess the next bit... but I fail to see how anything other than the second option is viable, given that half the point of the things in the first place was to act as a highly lucrative toilet.

[the end is a bit nigher]

But who has said 2007 prices were "correct" and in what context?

The Bulls on this forum, hence the whole point of the thread. I wanted to know why they though the peak prices quoted were correct as opposed to today's prices being correct.

So either inflation brings 2007 prices back or interest rates stay low.

Not at all. 2007 prices were fuelled by a credit bubble that far outweighed general inflation. MBss had a lot to answer for, especially the ability for a lender to off load the loans they made, with no come back to themselves. This led to the massive risk taking and disaster for those organisations that bought the end products. As a reminder, these loans originated themselves as:

BTL (over 1m during the lovely Labour government, including god knows how many politicians)

Self-certification (or Liar Loans as someone on here will tell you)

Affordability loans (you can borrow more as IRs are low and your payments are affordable)

As MBSs in particular have proved a disaster, they currently don't exist, hence the massive funding gap between 2007 and now. VMR said in an earlier post that MBSs are likely to re-appear, although with some responsibility on the lender. This will restrict lending to genuinely sensible amounts. Unless there is dramatic wage inflation, these new MBSs will not provide high enough loans to get back to 2007 prices for years.

I also notice that you haven't answered any of the 3 questions so far. You still have a platform to do so.

[Old_Traveller]

Can't see any evidence of that myself:

http://www.thisismoney.co.uk/markets/artic...mp;in_page_id=3

Remember the article I referred above is about the US, usually ahead of us 6-12 months in these kind of developments. A bit of a scary view into a possible future for bulls though you would have to admit. If and how it happens in the UK, time will tell.

Edited June 1, 2009 by Old_Traveller

[MississippiJohnHurt]

But in the last temporary house price lull, there was a Govt whose tax giveaway had fuelled inflation and who considered unemployment driven by high interest rates an "acceptable price to pay". Although Cameron was Lamont's apprentice at the time, he has ruled out such an approach today.

So either inflation brings 2007 prices back or interest rates stay low.

Ha, what a brilliant phrase "last temporary house price lull". You don't work somewhere in the government do you?

You also seem to have the view that interest rates will be set by the government/central bank over the next few years. They won't. Ultimately, they'll be set solely by the market deciding what risk premium it wants on the very large amount of debt to be issued by the UK.