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The Wishful Thinking About House Prices Smacks Of Dotcom Delusion

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The wishful thinking about house prices smacks of dotcom delusion

It is amazing what you can believe when you really want to. Take this, from property website Rightmove: "With growing confidence that we've passed the bottom, buyers are more active, although they may discover that many of the best buys have gone". Or this lyrical offering from the Bristol Evening Post: "The steals have been stolen. The snips have been snapped up. Property going for a song has sung. The tide has turned".

Yes, there are some grounds for optimism. The average asking price in England and Wales rose by 0.6pc in the month to July 12, the fifth monthly rise this year. Asking prices are now up 7pc this year. There are 20pc more sellers. Agents are shifting twice as many properties a month as they were last summer. More of them now expect prices to rise than fall, for the first time since 2007. We are back to the races, aren't we?

I don't think so. I don't believe this rose-tinted view of the housing market for at least four reasons. First, house prices are still above their historical trend. Perhaps six times average earnings or about 4.5 times average household income. Given that the housing market spends hardly any time at the average but instead over and undershoots, the odds are stacked in favour of further falls from here.

Second, unemployment is heading relentlessly towards three million and, as this paper reported on Monday, the official figures understate the real situation because many people are reluctant part-timers. BA's Willie Walsh may be relaxed about working a month for free but for most people the 20pc pay cut implied by a four-day week is a serious disincentive to take on a large financial commitment. If you are not out of work, on short time work or worried about your work, you are lucky.

Third, the lifeblood of the housing market, credit, has drained away. The base rate may be 0.5pc, but that means nothing to someone looking to take out a fixed-rate mortgage. It is currently priced around 10 times bank rate and getting dearer, even if you can pull together the deposit. Lenders do not want to lend and prudent borrowers, with an eye on inflation, do not want to borrow at rates which will surely rise.

Fourth, the downturn in the housing market since its peak in 2007 is short by historical standards. It took six years from the peak in house prices in 1989 to the bottom in 1995. It is inconceivable that a housing downturn triggered by an as-yet unresolved credit crunch should last barely a quarter as long. Is it any more likely that a 20pc price correction has done the job of unwinding a 12-year, debt-fuelled bubble that saw prices rise three-fold?

The wishful thinking that is driving the housing market today is familiar territory for equity investors who lived through the bursting of the dot.com bubble nine years ago. Then the optimism that had underpinned the bull market of the 1990s did not evaporate overnight. The belief that shares could only rise meant that investors saw only buying opportunities to begin with. As Robert Shiller and George Akerlof note in their excellent recent book Animal Spirits, this belief underpinned the US housing bubble that burst with calamitous consequences in 2006. And this despite clear evidence to the contrary.

The property market is full of false beliefs. It is, for example, widely argued that house prices will hold their value because, as Mark Twain noted, they don't make land anymore. But in Japan, where land is even scarcer than in Britain, house prices fell by 68pc in real terms between 1991 and 2006. Anyone who sees their home as their pension could be in for a rude shock.

Another myth is that property is the best hedge against inflation. But according to Robert Shiller, real US house prices rose by just 0.2pc a year between 1900 and 2000. The real return from the stock market, by contrast, has been about 7pc a year over the past century.

There is no rational reason to expect property to always be a good investment and, as with shares, what matters most is the starting point. The reason shares have been a disappointment over the past decade is that they started out very expensive. It has taken 10 years for a combination of earnings growth and price falls to make them now rather cheap. I expect a similar process to unfold with residential property, especially as the end of the buy-to-let game sees a steady drip-feed of unwanted property investments into the market. I will continue to take talk of turning tides and missed boats with a large pinch of salt.

This is absolutely correct. Houses have so very much further to fall because logic and economy says so.

It is also correct that Britain is full of delusional property chumps who take Rightmove pish as the gospel.

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...There is no rational reason to expect property to always be a good investment and, as with shares, what matters most is the starting point. The reason shares have been a disappointment over the past decade is that they started out very expensive.

nail.on.head.

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This is absolutely correct. Houses have so very much further to fall because logic and economy says so.

It is also correct that Britain is full of delusional property chumps who take Rightmove pish as the gospel.

Don't tell us c-i-m, tell that idiot Hamish :)

On second thoughts, in his case do it with a sharp wooden stake with a note pinned to it to avoid the pollution of his protesting drivel

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Don't tell us c-i-m, tell that idiot Hamish :)

On second thoughts, in his case do it with a sharp wooden stake with a note pinned to it to avoid the pollution of his protesting drivel

A bull argument:

www.landregistry.gov.uk Average property price in England and Wales.

Jan 04 £138,824

May 09 £152,497

see, prices are UP.

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Read carefully and you will see this is a VI article.

1. The author is Tom Stevenson of Fidelity Investments.

2. He is 'dissing' property in the hope people will put it in stock and shares.

I'm not saying he is wrong. I am just saying he is not impartial.

agreed, but i still happen to think he is right. the only real howler/bull**** in the article comes in the final paragraph that you outlined above, where he very dubiously claims that equities are "rather cheap", without applying any of the same rigour to equities that he does to pwoperdee.

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Guest X-QUORK

A dangerously analytical article. This is the age of reckoning i.e. "I reckon we've hit the bottom, crack open the Cava!"

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I remember, briefly after the dotcom bubble popped, how many investors were going on about stocks being cheap, only way is up etc. etc.

Then marconi went bust :lol:

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The wishful thinking about house prices smacks of dotcom delusion

This is absolutely correct. Houses have so very much further to fall because logic and economy says so.

It is also correct that Britain is full of delusional property chumps who take Rightmove pish as the gospel.

A country full of idiots and no mistake. A whole population if VI's, all desparate to keep their insecurities at bay.

A sad story, but there it is - the UK in 2009. The education system has well and trully failed.

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The wishful thinking about house prices smacks of dotcom delusion

This is absolutely correct. Houses have so very much further to fall because logic and economy says so.

It is also correct that Britain is full of delusional property chumps who take Rightmove pish as the gospel.

"Yes, there are some grounds for optimism. The average asking price in England and Wales rose by...."

And rising prices are grounds for optimism. Do these people never learn?

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i'm always interested in comparisons between the housing and stock markets.

although they're different in many respects, there are many similarities too, but what i just don't get is, a bit like the alchemists of 500 years ago, so many otherwise intelligent people end up believing in these markets as magical things that will consistently and sustainably transform a very small amount of wealth into a very large one, e.g. enabling you to put maybe a couple of tens of thousands of pounds in when you're working and get hundreds of thousands of pounds back for your retirement...

Edited by the flying pig

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A country full of idiots and no mistake. A whole population if VI's, all desparate to keep their insecurities at bay.

A sad story, but there it is - the UK in 2009. The education system has well and trully failed.

arf arf... :P

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The Wishful Thinking About House Prices Smacks

Ironically, of course, this site is as full of wishful thinking as Rightmove.

The reality is somewhere between the two. Prices are not going to drop 90%.

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A country full of idiots and no mistake. A whole population if VI's, all desparate to keep their insecurities at bay.

A sad story, but there it is - the UK in 2009. The education system has well and truly failed.

Or this is yet more evidence of its success in peasant mind control?

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Ironically, of course, this site is as full of wishful thinking as Rightmove.

The reality is somewhere between the two. Prices are not going to drop 90%.

Here we go again :rolleyes:.

Talk of 90% drops is often put about by the small army of stealth bulls and other suspect posters, in an attempt to marginalise this site as a refuge for end-of-the-world and "tin foil hat" types.

In reality, the majority of posters here are expecting more modest falls. Personally, I expect further fall in the region of 40%, which is hardly extreme considering the level of gains between 1997 and 2007.

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A fairly good article that...

I'm not sure its fair to compare us to Japan though. Despite circumstances not being unlike that of Japan in the 90's, we are a different nation of people. You cannot discount that and simply look at the economics.

I'll go on record and say a further 25% drop over the next 18 months... With a few ups and downs in the graph along the way.

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A fairly good article that...

I'm not sure its fair to compare us to Japan though. Despite circumstances not being unlike that of Japan in the 90's, we are a different nation of people. You cannot discount that and simply look at the economics.

I'll go on record and say a further 25% drop over the next 18 months... With a few ups and downs in the graph along the way.

Yes, we are different to the Japanese.

They had massive savings, huge amounts of research & development and multiple giant export industries.

We have...

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Yes, we are different to the Japanese.

They had massive savings, huge amounts of research & development and multiple giant export industries...

we don't need all that crap. our unique housing market is the engine room of our economy.

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we don't need all that crap. our unique housing market is the engine room of our economy.

And don't forget debt.

Our debt is the envy of the world!

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And don't forget debt.

Our debt is the envy of the world!

indeed.

those japs are wasting their time making all those cars and tellys and stuff, the beauty of our housing-led economic growth is that we don't have to make anything, all we need to do is sell the same old houses to each other - their value just keeps going up and up...

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indeed.

those japs are wasting their time making all those cars and tellys and stuff, the beauty of our housing-led economic growth is that we don't have to make anything, all we need to do is sell the same old houses to each other - their value just keeps going up and up...

They are. Who are they going to sell all the stuff to now?

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indeed.

those japs are wasting their time making all those cars and tellys and stuff, the beauty of our housing-led economic growth is that we don't have to make anything, all we need to do is sell the same old houses to each other - their value just keeps going up and up...

I look forward to the day when no one will gives us their food for worthless bits of paper. Sure, we don't need to produce anything. We'll just all die, that lifestype new build will become a tomb.

"Oh well, a price worth paying for eternal HPI", the crowds of imbeciles cry.

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Yes, we are different to the Japanese.

They had massive savings, huge amounts of research & development and multiple giant export industries.

We have...

OK, so where do you think we will be in say 18 months then? Lets have some figures...

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Psychology is a funny thing though isn't it. If people refuse to sell at the "real bid" then all that happens is the gulf between buyers and sellers stays wide.

I don't think an illiquid side-trending market is a major problem right now, especially since mortgage availability is so low. It used to be a seller's market, now it's a buyer's market. That said I don't think prices will fall off another cliff unless we get interest rate rises before unemployment is on the way down (which is possible given BoE paranoia of inflation).

Right now 0.5% base rates are allowing people who might otherwise be in a crap-ton of problems keep on paying, and every week more and more people roll off expensive fixed rate deals onto (relatively) cheap SVRs, keeping affordability reasonable even though employment is dropping off a cliff.

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