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Nozza

An Analysts's View And Prediction Of The Market

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A friend of mine is a financial analyst. This is what he thinks of the market. I'd be interested to hear others opinions of this opinion:

"I believe what we are seeing is a classic 'bull trap'. Have a look at the linked diagram below and it will help explain what I'm getting at:

http://www.marketoracle.co.uk/images/2009/...ip_image001.jpg

There has been a speculative asset bubble in housing over the last six years, and all asset bubbles follow a very similar path to each other, be it stock markets, oil prices, tulips (in the 17th century - look it up) or houses. Following very, very strong price rises, there is an initial correction period in which prices come back a little. Then, investors generally want to believe that the fall is over. People regain confidence, both believe and want prices to go up, because it is in all owners interests that they do, and investors get sucked back into the market. After that, the market collapses properly.

I think we are at the point before the market falls again - the 'bull trap' on the diagram. My reasons for thinking this are as follows:

i) mortgage books are contracting. In 2007, half of all mortgages were funded via the securitisation market. This market has collapsed and will not return. Mortgage books are contracting in size and overseas lenders have withdrawn from the market. When liquidity is withdrawn from markets, asset prices fall. There is no replacement liquidity to push prices any higher going forward.

ii) structural rise in unemployment - the economic shock from a 8% fall in GDP in this country will take its toll on unemployment. Unemployment probably won't peak for another 18 months. High unemployment leads to increased supply of property (people sell as they lose their jobs) and reduced demand (household incomes collapse).

iii) higher taxation - after the election there will be very, very large tax rises on everyone in this country to pay for the budget deficit. The budget deficit is the largest it has been since WW2. If basic rate of income tax goes up to 30%, VAT goes up to 25%, CGT allowance is scrapped and 20p extra duty goes on litre of petrol, even then every hospital and primary school in the country will have to close between Wednesdays and Sundays in order to balance the books over a ten year period. We are about to enter a period of shockingly high taxation and this reduces disposable incomes. House prices are positively correlated to movements in disposable (after tax) income and it this that partly drove the market higher over the last 10 years (along with the securitisation market).

iv) rising interest rates - over the next 2-3 years it is likely that base rates will rise to 6, 7, maybe 8%. This will choke off any housing recovery by reducing disposable incomes. Long term mortgage rates have already started to rise. Property prices are negatively correlated to interest rates - they are a quasi financial asset.

The Government is storing up additional trouble by schemes such as the Mortgage Protection Scheme which runs for from June 2009. This defers repossessions for 2 years meaning that the supply of property is lower than it would normally be at this stage of the economic cycle. This is helping to create a shortage of property at the moment, and it is exacerbated by people believing that the market will go up again so they will be able to sell at higher prices. This is helping to drive prices up in the short term, but the rise will be capped because there will be increased supply of property if it continues.

All these factors will come to bear very heavily on the property market over the next 2-3 years"

Crikey - not very positive really.

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I agree with the OP, but think tax rises will be limited.

Rather than raising the money through taxes, they will will save the money by savage cuts in services.

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iii) higher taxation - after the election there will be very, very large tax rises on everyone in this country to pay for the budget deficit. The budget deficit is the largest it has been since WW2. If basic rate of income tax goes up to 30%, VAT goes up to 25%, CGT allowance is scrapped and 20p extra duty goes on litre of petrol, even then every hospital and primary school in the country will have to close between Wednesdays and Sundays in order to balance the books over a ten year period. We are about to enter a period of shockingly high taxation and this reduces disposable incomes. House prices are positively correlated to movements in disposable (after tax) income and it this that partly drove the market higher over the last 10 years (along with the securitisation market).

All these factors will come to bear very heavily on the property market over the next 2-3 years"[/i]

Crikey - not very positive really.

Understatement of the month-absolutely terrifying I would say!

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I agree with the OP, but think tax rises will be limited.

Rather than raising the money through taxes, they will will save the money by savage cuts in services.

Yeh I think the Tories will go for swinging increases in VAT and try and minimize income tax rises. Like the first Howe budget, which was a shocker at the time (clearing up again after Labour had wrecked the economy).

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I think very few people deny that house prices will fall again or that this is a bull trap

The questions are, how much further will they fall and how big a bull trap is it.

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I agree as well. We are seeing a classic trap now, it will get much worse later in the year. I expect to see big falls over the next year. And normally you'd expect to see some kind of recover after that, but given the debt situation and the cuts that will be needed in public spending, the market may not recover for years and years.

What amazes me is that you have respected economists and people in various fields who do really think we are near bottom now. I just can't understand what world they are living in.

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I agree with the OP, but think tax rises will be limited.

Rather than raising the money through taxes, they will will save the money by savage cuts in services.

Won’t there be a bunch of stealth tax increases / additions though? That's what this government have proved to be good at: promise that income tax will remain the same and tax everything else until the pips squeak? And stealth tax happens to take a disproportionate amount from the poor (fuel, food, council tax, beer, ciggies etc) so that’s good (sic)

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Yeh I think the Tories will go for swinging increases in VAT and try and minimize income tax rises. Like the first Howe budget, which was a shocker at the time (clearing up again after Labour had wrecked the economy).

I know, why do people vote labour in when the result appears to be financial ruin each time?

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iv) rising interest rates - over the next 2-3 years it is likely that base rates will rise to 6, 7, maybe 8%. This will choke off any housing recovery by reducing disposable incomes. Long term mortgage rates have already started to rise. Property prices are negatively correlated to interest rates - they are a quasi financial asset.

i][/i]

I would have thought that any govt. that finally displays the correct fiscally responsible approach and begins to tackle the deficits would be what bond markets would be looking for - and so rates will not rise apocalyptically as many here claim/expect.

But I certainly concede that, in the larger historical picture, rates are at abnormally low levels - and therefore can obly really move upwards.

Finally, IF rates rise, this would put something of a floor under Sterling? Play its part in controlling imported inflation? AND....... would keep the gold price down?

The markets would not respond favourably IF they interpret the measures as not strong enough. In any case it resonable to assume that the incoming Tory goverment will see relatively calm markets? by virtue of the usual honeymoon period new governments often get?

Edited by anonguest

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Hello.

Well, yes, add a few remarks about gold, global warming and Anthea Turner and you have pretty much summed up this forum.

You obviously have not visited the 'tw*t in Subway' thread over on the off-topic forum :blink:

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I don't have the precise figures to hand but in 2008 prices fell by something like 18% , this year they may well end up falling at half that level ... eg falls recommence after the summer break. There is some risk that this year falls may not even get much beyond 8% in total.

So while there may be something in the bull trap I also think theres something in the concept that once the rate of fall slows appreciably it won't pick up..... so if the fall takes 2.5 years to reach something like 28%.... its going to take , what another year to reach 35% and then something like another year to reach 40% and then another year and half to reach 45% etc etc.......

Personally I just can't see falls accelerating to a faster trend than 2008, I would reckon if 2008 was an average of 1.5% then the most we can expect when falls return is a run rate of something like 0.9%..... and the declines will just weaker and weaker in my humble opinion.

For those thinking the market will come off 45% I really do think you're going to be looking perhaps at 2012/2013 to get there...... personally I just can't see the downturn in the economy or housing dragging on that long........ that'd be getting on for a 7 year downturn. I can see houses not returning to 2007 prices until 2017 or 2018, but I simply cannot see year on year falls continuing for seven long years.

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. I can see houses not returning to 2007 prices until 2017 or 2018, but I simply cannot see year on year falls continuing for seven long years.

Why not?

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I agree with the OP, but think tax rises will be limited.

Rather than raising the money through taxes, they will will save the money by savage cuts in services.

You seem to be confusing David Cameron with someone who has a pair of balls. He'll fudge it and make it worse. Savage cuts in services my rear. Who the hell do you think votes? True, I don't really know David Cameron I've only met him once and that was briefly but you can see the Telegraph in recent weeks is absolutely sh1tting itself because they know they aren't going to get what they want.

Edited by Cogs

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