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the_austrian

Why The Housing Market Has Picked Up Again

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A few days ago I tried to explain why the crash in house prices appears to have temporarily bottomed out. You can find the post here but I don't think I did a very good job so I thought I would expand on the reasoning:

We can reduce this question to one of preferences between owning a house and cash. The reason a person might want a house is clear and I won't question that, but why value cash? Only for its purchasing power. Unless you are going to buy another house with the proceeds of your sale why would you want cash?

The answer is that you would only want cash if you expect it to accrue in value, namely deflation (or you expect cash to get more expensive, in other words).

But under what conditions would cash gain value? In spite of people, and banks, apparently being reluctant to lend, there remains the same quantity of cash and demand deposits in the economy that there was two (plus) years ago, or perhaps even more.

Unless there is a decoupling between bank credit and cash, there will never be serious deflation in prices.

But how many people in the market genuinely expect such a decoupling, which would suggest a run on the banks? The only winners in this scenario are those that get out early enough and the people keeping their money under the mattress.

In conclusion: Unless you are sufficiently concerned about the economy to be keeping your money under your mattress, or at least seriously considering it, there is no rational reason for you to think that house prices will fall in a meaningful way. Those people (the "pessimists") will be staying out of the market but for everyone else there is no reason not to buy.

Further, many people might calculate that, even if there is a collapse of the banking system, the consequences will be so widespread that it is likely that they will be better off with a house and mortgage (rather than holding the cash) even if there is deflation since there will be no appetite to collect the imagined debts, and the future value of their cash might not be as they imagine.

http://en.wikipedia.org/wiki/Game_theory

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When you're saying all this, are you talking about people. i.e. sheeple?

You talk of having cash instead of a house. Most sheeple buy them on credit.

The housing market has picked up again because of low supply (the wave of repossesions nears but has been slowed by government intervention), and a reasonable demand from people wanting a bargain who are "savvy cash buyers", getting in while the market is 'low' and are now fighting over what they see as 'bargains'.

The government has said it will do all it can to get "things back to normal" and hey, they've nearly done it. Pile in while there are still some bargains around.

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When you're saying all this, are you talking about people. i.e. sheeple?

You talk of having cash instead of a house. Most sheeple buy them on credit.

The housing market has picked up again because of low supply (the wave of repossesions nears but has been slowed by government intervention), and a reasonable demand from people wanting a bargain who are "savvy cash buyers", getting in while the market is 'low' and are now fighting over what they see as 'bargains'.

The government has said it will do all it can to get "things back to normal" and hey, they've nearly done it. Pile in while there are still some bargains around.

Housing hasn't got more expensive, cash has got cheaper. It is the price of cash that is more important because it is more volatile and uncertain. The supply of houses is roughly static, growing slightly, the supply of cash (or money) has been growing at more than 10% per annum for many years. If there is a collapse of the banking system there would be a contraction of the money supply by approaching 99%.

The price of cash (and consequently credit) is a much more important variable than the price of housing as far as the housing market is concerned because it is liable to vary more.

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houses sold in August are the result of deals started May and June.

July, interest rates on the street started to rise.

its going to get worse after the holidays....and rates always rise in the winter.

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A few days ago I tried to explain why the crash in house prices appears to have temporarily bottomed out. You can find the post here but I don't think I did a very good job so I thought I would expand on the reasoning:

We can reduce this question to one of preferences between owning a house and cash. The reason a person might want a house is clear and I won't question that, but why value cash? Only for its purchasing power. Unless you are going to buy another house with the proceeds of your sale why would you want cash?

The answer is that you would only want cash if you expect it to accrue in value, namely deflation (or you expect cash to get more expensive, in other words).

But under what conditions would cash gain value? In spite of people, and banks, apparently being reluctant to lend, there remains the same quantity of cash and demand deposits in the economy that there was two (plus) years ago, or perhaps even more.

Unless there is a decoupling between bank credit and cash, there will never be serious deflation in prices.

But how many people in the market genuinely expect such a decoupling, which would suggest a run on the banks? The only winners in this scenario are those that get out early enough and the people keeping their money under the mattress.

In conclusion: Unless you are sufficiently concerned about the economy to be keeping your money under your mattress, or at least seriously considering it, there is no rational reason for you to think that house prices will fall in a meaningful way. Those people (the "pessimists") will be staying out of the market but for everyone else there is no reason not to buy.

Further, many people might calculate that, even if there is a collapse of the banking system, the consequences will be so widespread that it is likely that they will be better off with a house and mortgage (rather than holding the cash) even if there is deflation since there will be no appetite to collect the imagined debts, and the future value of their cash might not be as they imagine.

http://en.wikipedia.org/wiki/Game_theory

My conclusion : I will never be convinced of house prices rising while unemployment is rising.

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Essentially, when you are selling a house for cash you are hoping for a decoupling of bank credit and cash (a collapse of the banking system) but necessarily without the hyperinflation that follows from currency failure.

It doesn't make sense to sell a house and to keep the cash proceeds in a bank, ie to exchange the cash for bank credit.

Unless, of course, you expect the loans to be paid down and the bank credit to be extinguished.

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My conclusion : I will never be convinced of house prices rising while unemployment is rising.

What if the Bank of England repealed its copyright on the banknotes which constitute legal tender, so that anyone could legally print them, would house prices rise then, even if unemployment is rising?

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It wouldnt be suprised if alot of the buying we are currently seeing are 'sold to renters' buying back into the market.

Wasnt there a HPC.co.uk moderator who bought back into the market a few months ago?

People who sold to rent are not only paying the landlords mortgage out of their earnings. But the cash they have stockpiled is now also paying the interest on other peoples mortgages too.

Edited by Mammon

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What if the Bank of England repealed its copyright on the banknotes which constitute legal tender, so that anyone could legally print them, would house prices rise then, even if unemployment is rising?

A group got sent down at the Old Bailey recently for doing a bit of DIY QE. :lol:

Is it logical for house prices to go up and up in a new boom with rising unemployment heading for 4 million, low or stagnant wage inflation in the midst of the biggest financial train crash ever?

If everyone printed as much money as they desired it would be absolutely worthless and property transactions would have to be conducted with something else of value.

Edited by Take Me Back To London!

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We are now 2 years from peak, that is a lot of trackers coming to the end of their 2 year cheap rate and going onto svr's.

Little room for remortgaging, lots of neg equity about and still rising unemployment along with falling wages.

Hardly a formula for recovery or continued house price increases. I think prices go south again from here, probably in a big way over the winter.

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Guest KingCharles1st

How about this little gem.

"Average person" is forced into a four day week (other option is company folds)

Take home salary for many people in this situation drops by roughly 20%.

"Average person's" mortgage has just in effect been made 25% more expensive.

Example 2- "Average person" loses job....

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"Average person" is forced into a four day week (other option is company folds)

Take home salary for many people in this situation drops by roughly 20%.

S/he gets more tax credits then.

Example 2- "Average person" loses job....

S/he gets SMI paid by govt.

This is bound to continue until bond market dislocation or GE whichever occurs first.

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A group got sent down at the Old Bailey recently for doing a bit of DIY QE. :lol:

Is it logical for house prices to go up and up in a new boom with rising unemployment heading for 4 million, low or stagnant wage inflation in the midst of the biggest financial train crash ever?

If everyone printed as much money as they desired it would be absolutely worthless and property transactions would have to be conducted with something else of value.

I was doing it for the economy your honour.

Over the last decade or so, house prices have remained roughly flat. It is money that has changed price. Unemployment or stagnant wage inflation won't affect the price of either a great deal, but cash could still get cheaper.

What, besides money, would you be willing to trade (sell) your house for? If you need some cash, isn't it simpler to rent it out than sell the house given that living costs are so low?

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Guest KingCharles1st

I think we are starting to see the U.K. enter it's "End Game."

There was a suit on Breakfast Tv this morning saying it wasn't so important we don't make and export anything, and gave an example of building large machine tools. Basically he was optimistic because although he realised that maybe the machine would no longer be made in the UK, the SOFTWARE would be- and so status quo is retained.

I mean WTF :blink:

To quote one of our regulars- SBN?

"We is fu_cked innit"

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We are now 2 years from peak, that is a lot of trackers coming to the end of their 2 year cheap rate and going onto svr's.

Little room for remortgaging, lots of neg equity about and still rising unemployment along with falling wages.

Hardly a formula for recovery or continued house price increases. I think prices go south again from here, probably in a big way over the winter.

Why though, what has unemployment and wages got to do with it? Aren't there unemployed people in Zimbabwe, all the money is still out there and people are printing new mortgages every day. Is inflation a sign of a healthy economy?

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Over the last decade or so, house prices have remained roughly flat.

Yes if you measure HP in MP monthly paypackets. HP increased in relation to UK average salaries, decreased in relation to gold price.

Unemployment or stagnant wage inflation won't affect the price of either a great deal, but cash could still get cheaper.

Unemployment affects the price of any deal, ask any dole seeker in Jobcentre Plus if they got something to sell.

What, besides money, would you be willing to trade (sell) your house for? If you need some cash, isn't it simpler to rent it out than sell the house given that living costs are so low?

Check out the current legislation, you will be surprised thru how many hoops the landlord has to jump thru to stay legit (Deposit Protection Scheme, tax, maintenance, etc)

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How about this little gem.

"Average person" is forced into a four day week (other option is company folds)

Take home salary for many people in this situation drops by roughly 20%.

"Average person's" mortgage has just in effect been made 25% more expensive.

Example 2- "Average person" loses job....

Why would they be forced into a four day week? Surely they would be working harder?

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Guest KingCharles1st

If you guys seriously believe some o f the stuff you are typing on this thread- they you are obviously looking forward to the two tier housing system our economy has in store for us.

And guess what- it's going to be housing associations that play THE key role in getting destitute unemployed workforce off the street and into Government aided discount housing.

This IS happening, and will increase, and will drag down the value of anything and everything in the same town- except for "Solicitor Street" "Doctor's Drive" and "Teacher's Terrace."

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Guest KingCharles1st
Why would they be forced into a four day week? Surely they would be working harder?

This is a piss take post- right? :unsure:

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I think we are starting to see the U.K. enter it's "End Game."

There was a suit on Breakfast Tv this morning saying it wasn't so important we don't make and export anything, and gave an example of building large machine tools. Basically he was optimistic because although he realised that maybe the machine would no longer be made in the UK, the SOFTWARE would be- and so status quo is retained.

I mean WTF :blink:

To quote one of our regulars- SBN?

"We is fu_cked innit"

I don't see what's wrong with this; nothing more than division of labour, or Ricardo's comparative advantage as it is known on the National scale.

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Guest KingCharles1st
I don't see what's wrong with this; nothing more than division of labour, or Ricardo's comparative advantage as it is known on the National scale.

Good thing the Chinese and Indians will never be able to write software then innit- sigh..

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If you guys seriously believe some o f the stuff you are typing on this thread- they you are obviously looking forward to the two tier housing system our economy has in store for us.

And guess what- it's going to be housing associations that play THE key role in getting destitute unemployed workforce off the street and into Government aided discount housing.

This IS happening, and will increase, and will drag down the value of anything and everything in the same town- except for "Solicitor Street" "Doctor's Drive" and "Teacher's Terrace."

It's that I necessarily want this to happen, only that to deny the situation is complacent, when something could be done to remedy the situation and personally costly.

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Why though, what has unemployment and wages got to do with it? Aren't there unemployed people in Zimbabwe, all the money is still out there and people are printing new mortgages every day. Is inflation a sign of a healthy economy?

Alright you have convinced me. When unemployment reaches 10 million you can be assured that house prices will also have gone up and likewise when unemployment reaches 25 million they will have increased even further. It all makes sense now.

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