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Back To Normal? Some Context....

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Ok. So House Prices are on the rise again. Is this temporary? Is this the bottom? And does it herald a return to the heady days of rampant HPI growth? To be honest, no one knows for sure.

We haven't had 50-80% falls, and cashflow ensures that we won't. House prices did rise in nominal terms in the last crash, but never in real terms. How do prices compare now with the past? Are they still expensive? Do lower interest rates make them cheaper? Is cheap credit the magic bullet? Is it all about the property ladder?

The way forward really isn't clear, but we can sensibly talk about the context.

I've been writing a couple of articles to dispel some financial/housing "myths", mainly as a (likely futile) attempt to educate people who don't know anything about housing & economics and buy into some of the inaccuracies (to be polite) that find their way into the press and the national psyche....

Take a look at the first three working pieces in the pdf scribd link (<2mb (has graphs)). It's not overly sophisticated, but it might partly illustrate why we can't simply go back to "normal" without consequences.

Comments very welcome.

http://www.scribd.com/doc/17827322/View-From-the-Mountain

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Had a quick scan and stopped at the "affordability" section.

clearly, falling interest rates have increased the loans available on affordability criteria, a common bull argument.

if you carry on the logic that house prices have been sustained by ever lowering interest rates, then that same logic leads to the conclusion that the recent IR drops are in fact the LAST throw of the dice...they cant go lower.

I notice that very recently, Actual interest rates for borrowers have taken off, in spite of assurances that BoE rates are to remain low.

this to me indicates that we are at the end of the "last throw" effect and are about to head back down again....towards normality.

anyone who beleives the crisis at the banks is over is either a liar or just blind.

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Had a quick scan and stopped at the "affordability" section.

clearly, falling interest rates have increased the loans available on affordability criteria, a common bull argument.

if you carry on the logic that house prices have been sustained by ever lowering interest rates, then that same logic leads to the conclusion that the recent IR drops are in fact the LAST throw of the dice...they cant go lower.

I notice that very recently, Actual interest rates for borrowers have taken off, in spite of assurances that BoE rates are to remain low.

this to me indicates that we are at the end of the "last throw" effect and are about to head back down again....towards normality.

anyone who beleives the crisis at the banks is over is either a liar or just blind.

The affordability bit is the most important. I know the document is a bit long, but the key graph is the one that shows that affordability is a scam. What's described in most articles and posts is cash flow, not affordability.

Low nominal interest rates tease people into buying as people have been encouraged to compare the initial payments (which is really cash flow) and not consider the longer term. Most people don't even know that real interest rates haven't changed much in the last decade or so.

Nor do people know that, crucially, for a given real interest rate low nominal rates simply decrease the initial payments but push the bulk of the payments into the future - for the same debt & real IR you pay the same over the lifetime of a loan regardless of the nominal rate. Increasing your willingness to take on more debt as it's more "affordable" means that you will pay MUCH, MUCH more in the end. Hard to explain, but the graph on page 23 shows it clearly, I hope.

This is the most important graph for the modern economy. It means that those buying today CANNOT replicate previous buyers "success" without some serious inflation... but everybody thinks affordability is the amount you pay in the 1st month vs a mortgage. This is not true. It also shows that consumption must slow in the future, without massive wage increases. What are the chances of that?

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Guest The Relaxation Suite
Ok. So House Prices are on the rise again. Is this temporary? Is this the bottom? Comments very welcome.

http://www.scribd.com/doc/17827322/View-From-the-Mountain

It doesn't really exist, so it's not even temporary. Given that about 14 houses sold this month, and that the figures are based on those 14 houses, we can infer nothing from these figures.

Look through the hysteria and propaganda and remember the fundamentals:

1. Unemployment rising

2. Wages down

3. Welfare being cut

4. Banks lending to hardly anyone because they are all insolvent

5. No more money, pretend or real, is in the system, only debt

6. Economy shrank by 5% despite unprecedented pumping of printed money into it

Now ask yourself: can a housing market recover in that environment? (No) Or, when in history has a housing crash recovered in a year and immediately starting booming again? (Never).

By the end of this year the wheels will have come off QE, the average house will be another 5% to 10% cheaper than it is today and no one will believe in the Recovery Fairy any more.

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It doesn't really exist, so it's not even temporary. Given that about 14 houses sold this month, and that the figures are based on those 14 houses, we can infer nothing from these figures.

Look through the hysteria and propaganda and remember the fundamentals:

1. Unemployment rising

2. Wages down

3. Welfare being cut

4. Banks lending to hardly anyone because they are all insolvent

5. No more money, pretend or real, is in the system, only debt

6. Economy shrank by 5% despite unprecedented pumping of printed money into it

Now ask yourself: can a housing market recover in that environment? (No) Or, when in history has a housing crash recovered in a year and immediately starting booming again? (Never).

By the end of this year the wheels will have come off QE, the average house will be another 5% to 10% cheaper than it is today and no one will believe in the Recovery Fairy any more.

Let's hope so. Unemployment is clearly an issue, but if most of the market is rich & connected FTBs and investors than some of this won't matter. Plus when wages are disconnected from house prices (like now) it is about credit, not wage increases. I agree (and the article states) that this will cause more pain in the future, but no one knows this, right?

Welfare being cut is irrelevant, banks are lending to more every month and are under increasing pressure. Money = debt is an issue, and the economy has been in a big bloody hole. I struggle to see how it can come out of it easily, but they're gonna try to inflate via house prices...

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Guest KingCharles1st

With a large section of the public, there is a general lack of analysis and understanding with regard to certain statements like- "My friend had it all/made a fortune/etc" that has turned very sour into "My friend had it all, and now lost it all in the recession."

Thing is, although in many cases appearing to "have it all" was merely someone who started a speciality candle shop and expanded through leveraged debt, and a total lack of Lending responsibility from the Financial sector. I think the electorate are fast coming round to the thinking that they "Have been had- Large."

It's taken a long time and VI spin can spin all it wants, but I have a strong sense that just as the electorate have deserted labour, they are also deserting "The Dream" and are starting to realise "The Debt Is Real."

I think one will find that real money, hard cash not housing, is going to be the next desirable commodity for the majority, and this time, when they eventually get to the point they can move forward and "upwards," people will be making sure the City, Banks, Government, VI's et al will be getting precious little of it. Before, money was a plastic card, and a bit of paper through the letterbox once a month, now its real, hard, tangible cash, that goes from the wallet/purse very quickly.

Edited by KingCharles1st

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Ok. So House Prices are on the rise again. Is this temporary? Is this the bottom? And does it herald a return to the heady days of rampant HPI growth? To be honest, no one knows for sure.

stopped reading here - we do know some of these things for sure. you're bargaining now, and it's quite transparent.

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stopped reading here - we do know some of these things for sure. you're bargaining now, and it's quite transparent.

Yawn, wind your neck in. Ok, so I wanted to grab people's attention, but the article linked isn't bullish in the sense that prices should go up. I genuinely don't know if they will or not, but know if they do it is an unqualified bad thing.

What the article addresses is some of the misconceptions people use to justify rising house prices. That should fit with your agenda.

It's about being rational.

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Had a quick scan and stopped at the "affordability" section.

clearly, falling interest rates have increased the loans available on affordability criteria, a common bull argument.

if you carry on the logic that house prices have been sustained by ever lowering interest rates, then that same logic leads to the conclusion that the recent IR drops are in fact the LAST throw of the dice...they cant go lower.

I notice that very recently, Actual interest rates for borrowers have taken off, in spite of assurances that BoE rates are to remain low.

this to me indicates that we are at the end of the "last throw" effect and are about to head back down again....towards normality.

anyone who beleives the crisis at the banks is over is either a liar or just blind.

The retail banks are NOT in crisis, they are doing very very well out of this... ignore the govt stakes for a second and consider that with so little competition they are simply getting away with charging margins that have probably in recent memeory not be seen before... their product profitability has gone sky high, and whilst partially offset by increasing bad debts they are also playing that game well... banks with Govt support are looking to maintain that support, over egging the bad debts and maxing incomes, when the state finally releases them through a stock sale we'll see that they miraculously rework the overstated allowances for bad debts into their profits etc ... the only one with a genuine gripe is Lloyds which I suspect will be forced into a messy disposal.

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BTL are the new FTB so plenty holding up the market at the bottom end. I know lots of people who have been quietly adding to their portfolios while the stubborn bears have been renting and will continue to rent!

If you are not on the ladder now then forget it.

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Of course, I have to approach the market with a "smart-traders attitude", which

is: believe "anything can happen" while awaiting the evidence. The evidence will

be which side is pushing the market hardest with the most trading volume.

I am still very watchful

Speaking of which...

Despite the strong number from Nationwide, we are seeing:

BDEV: 183.25p Change: -0.50 / Percent Change: -0.27%

Barratt's stock has shrugged its shoulders, yawned hard, and said:

"So what. That's Old News, Sheeple!"

Interesting that the BDEV was down on the news. I've been following your comments and trading notes, but couldn't call it either way myself. Time will tell. For me this should be a bull trap bounce, but the market doesn't care what I think. There's a chance this thing could have legs. And the longer it plays out, the more credit is eased, the more psychology is massaged, the more likely a recovery becomes.

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Interesting that the BDEV was down on the news. I've been following your comments and trading notes, but couldn't call it either way myself. Time will tell. For me this should be a bull trap bounce, but the market doesn't care what I think. There's a chance this thing could have legs. And the longer it plays out, the more credit is eased, the more psychology is massaged, the more likely a recovery becomes.

I found that small phrase most refreshing. A pleasant contrast to the "the market isn't doing what I think so it must change" sort of post.

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House prices rise (1.3% this month). Back to normal? Where does it lead? Well it's not shaping up as a sustained healthy recovery - see:

http://www.introducertoday.co.uk/News/Stor...e=news_features

UK housing market has 'virtually ground to halt'

Wednesday 29th July 2009

Despite the latest land registry figures showing the first positive housing market growth for over a year of 0.1 per cent, Property Portfolio Rescue said the UK market is still going nowhere.

“House sales volumes are down 75 percent on the summer average sales over the last decade and are even 50 per cent down on last summer,†said Nick Hopkinson, director of PPR.

“If current sales trends continue most people will only be moving house once every 30 years. Behind the data, we are seeing a market divide between prime location sellers who are attracting offers due to lack of selling competition and prices continuing to fall for all other types of property,†he added.

This makes looking at monthly price trends almost meaningless,

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Yawn, wind your neck in. Ok, so I wanted to grab people's attention, but the article linked isn't bullish in the sense that prices should go up. I genuinely don't know if they will or not, but know if they do it is an unqualified bad thing.

What the article addresses is some of the misconceptions people use to justify rising house prices. That should fit with your agenda.

It's about being rational.

well I admire your chutzpah, but I also know that in real terms they are highly likely to be lower beyond the medium term - umming and aaring about the short-medium term noise bears little fruit. If this thing ends up having legs then it's just another bubble.

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The retail banks are NOT in crisis, they are doing very very well out of this... ignore the govt stakes for a second and consider that with so little competition they are simply getting away with charging margins that have probably in recent memeory not be seen before... their product profitability has gone sky high, and whilst partially offset by increasing bad debts they are also playing that game well... banks with Govt support are looking to maintain that support, over egging the bad debts and maxing incomes, when the state finally releases them through a stock sale we'll see that they miraculously rework the overstated allowances for bad debts into their profits etc ... the only one with a genuine gripe is Lloyds which I suspect will be forced into a messy disposal.

the retail banks are still in credit crunch mode.

many have huge piles of impaired financial assets that are only being propped up by a change in accountancy practice, ie, they can value them at whatever level they think.

without this change, they would be deep in the dodo.

The BoE and governments have allowed this aspect of the crisis to be partially alleviated with guarantees and bailouts.

However, the problem is still there.

The bond market may hold the key to how banks can cope in the near future....OK, what I mean is, if the UK FAILS to make a bond sale anytime soon, then how are bankers looking at UK lenders going to feel about those government guarantees??

I guess they will start to look warily at requests for overnight and 3 month loans again.

these banks....they are on a knife edge. trading through is what they need and what they are doing....the bill lands on Joe Sixpacks wallet just the same.

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the retail banks are still in credit crunch mode.

many have huge piles of impaired financial assets that are only being propped up by a change in accountancy practice, ie, they can value them at whatever level they think.

without this change, they would be deep in the dodo.

The BoE and governments have allowed this aspect of the crisis to be partially alleviated with guarantees and bailouts.

However, the problem is still there.

The bond market may hold the key to how banks can cope in the near future....OK, what I mean is, if the UK FAILS to make a bond sale anytime soon, then how are bankers looking at UK lenders going to feel about those government guarantees??

I guess they will start to look warily at requests for overnight and 3 month loans again.

these banks....they are on a knife edge. trading through is what they need and what they are doing....the bill lands on Joe Sixpacks wallet just the same.

As I said, I disagree for all sorts of reasons and would argue that the UK retail banks face very few problems and are through the worst.... yes there will be huge credit losses to come, but these are largely offset by their near monopoly position and the absolutely huge margins they are charging vs cost of funds...... i hear what you are saying vs govt guarantee etc but theres a run on one for that reason there will be a run on them all whether the govt is involved in them or not..... you'd then see another institution step in as that would be the precursor to a system wide collapse...I'm afraid while I can see the possibility I have never sat on the doomsday side of the argument .. especially not now... so that theory is out for me.

I am actually buying banks.. I think they'll be fine, in fact I think most will come out of this in super rude health with near monopoly positions massive margins and huge over accruals to work back in to boost performance... once the govt of course has sold its share out for much less than they will be worth of course and the board can ride the wave of share appreciation through their new rewards packages.

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well I admire your chutzpah, but I also know that in real terms they are highly likely to be lower beyond the medium term - umming and aaring about the short-medium term noise bears little fruit. If this thing ends up having legs then it's just another bubble.

Completely agree. I struggle to see how prices can rise in real term over a longer timeframe. It certainly isn't sustainable as business-as-usual. A pick up here with long enough legs will lead to the mother of all falls later down the road, at which time the BOE and government will find they've shot all their ammunition. Then we're all in a world of pain.

The document I had linked to tries to show that HPI beyond wages can be in no way sustainable in the long term.. It also shows that affordability is bunk and that deflation is likely in the longer term at these debt levels. I was just after feedback.

Although, I do seriously worry that I'm actually missing a major social turning point. Something has to give, but it might not have to be prices. Is it possible that the current property "rich" can keep the market going trading between themselves, with handouts to family members and the creation of a rentier society? I think it's possible, after all, the post WWII society is an aberation, not the norm. No one likes meritocracy. Dissapointingly. A class ridden rentier society is the long-term norm... only when the masses have the upper hand, like after WWII, is there a requirment for "homes fit for heroes".

The average FTB deposit in London today is ~70k, or ~120% of the 60k annual salary of the buyers. Do they save this? For all buyers the average income is ~100,000. Can these familes trade between themselves, using cash handouts to buy, paying off what they can, and then relying on inheritance for further trading up and pensions? I wonder if it is about families rather than individuals. It could become about who you're related to rather than what you earn (inevitable at a large price-earning ratio). I bet inheritance tax becomes a major political issue.

None of this means that it has to correct now, here. I hope it does (it will better for all in the end) but I don't know that it will. People love property. It dominates our culture. It is the bubble everyone is forced to join. They love pretending they're rich. Buyers today think they can replicate their parent's success of the 70s, or even the 80s, and they can't. There will be little trading up. It's just impossible. But that won't stop them loading up on debt to give it a whirl. Another mini boom could grow for 3-5 years from here if credit was loose enough and the psychology fearful (bullish, in this sense of missing the boat) enough.

That sort of timeframe is too late for many. What we might be witnessing is social change.

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the retail banks are still in credit crunch mode.

many have huge piles of impaired financial assets that are only being propped up by a change in accountancy practice, ie, they can value them at whatever level they think.

without this change, they would be deep in the dodo.

The BoE and governments have allowed this aspect of the crisis to be partially alleviated with guarantees and bailouts.

However, the problem is still there.

The bond market may hold the key to how banks can cope in the near future....OK, what I mean is, if the UK FAILS to make a bond sale anytime soon, then how are bankers looking at UK lenders going to feel about those government guarantees??

I guess they will start to look warily at requests for overnight and 3 month loans again.

these banks....they are on a knife edge. trading through is what they need and what they are doing....the bill lands on Joe Sixpacks wallet just the same.

+1

Amazing how sheeple don't ask how these banks magically recovered and starting making record profits while doing no lending and existing loans were going bad all over the place. :blink:

I think we may avert a bond collapse, just so long as the US, UK & EU collude on buying each others debt they could probably get away with it for quite a while.

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If hpi continues here, the country in serious trouble. Eventually there will be a currency collapse because it will simply be too expensive for any business to locate here. With the combination of housing and transport costs out of control it will be impossible to profiteer. To add to that, quality of life for a large percentage of the population will be so bad that we'll see social upheval on a wide scale. Unfortunatley peoples own vested interests in short term gain prevents them from seeing the larger picture in terms of the damage this does to society. Already we have experienced and are experiencing economic turmoil brought about by the previous boom, to think of hpi as a positive thing when it's causes these types of problems is simply myopic.

Where now? If this is sustained I'll be out of this country in a heartbeat. Having said that, I'm as sure as can be that it won't be sustained.

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If hpi continues here, the country in serious trouble. Eventually there will be a currency collapse because it will simply be too expensive for any business to locate here. With the combination of housing and transport costs out of control it will be impossible to profiteer. To add to that, quality of life for a large percentage of the population will be so bad that we'll see social upheval on a wide scale. Unfortunatley peoples own vested interests in short term gain prevents them from seeing the larger picture in terms of the damage this does to society. Already we have experienced and are experiencing economic turmoil brought about by the previous boom, to think of hpi as a positive thing when it's causes these types of problems is simply myopic.

Where now? If this is sustained I'll be out of this country in a heartbeat. Having said that, I'm as sure as can be that it won't be sustained.

Left already

Mind you, i's pretty much the same everywhere else. This, if nothing else, illustrates that all the harping on about the UK being special with high house prices is rot - it's credit, pure and simple. The same globalisation, lax credit, hungry borrowers regime is everywhere.

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