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Confounded

It Is Different This Time

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Unfortunately no one came forward to update the graph that I find central to my case of further and substantial falls to come for UK housing. You either believe affordability will reign supreme or as I do that the fundamentals of what you earn is the best measure of housing valuations.

I have added 8% to the graph to update where we are but with cratering earnings and varied rises across the country it is only an estimate of this return to normal/bull trap.

picture1ty.jpg

I thought it was worth posting because it is the first time a investment bull trap has be exhibited in modern housing history. this has thrown a lot of people, even ardent bears but it was to be expected.

Why was it different this time? If you strip out the governments and banks efforts to restrict supply of repossession and the cushion of low interest rates it was going to happen anyway in this cycle. This is the first time (sadly) that housing is exhibiting pure investment characteristic. The investment side of home ownership is entrenched and consequently it is the first time (again sadly) the UK housing market is behaving as a classical investment. Only time will tell if they will address the affordability with higher wages or nominal falls, my money is still on nominal falls.

Edited by Confounded

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Brown's housing bubble was never based on what you earn but on how much the banksters were willing to let you borrow. Irresponsible practices that included LIAR LOANS, insane multiples and "innovative" products* + Brown's "light touch" were the fuel that inflated the bubble.

Take away those factors and houses will return to their long term relationship to earnings (and rentable values).

_______________________

* "Never-never loans" (IO), balloon loans (start low end high), stated income loans (LIAR LOANS) etc.

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Very good graph, but IMHO your analysis is lacking.

I think that if you check, you will see that each of the previous booms was followed by a sharp rise in the base rate.

Presently, the opposite has happened, and this will effect your earnings vs price ratio approach.

On top of this, which you touched upon, are the measures that the government has taken to remove supply from the market, and increase the liquidity.

In short, the market is being completely manipulated.

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If you require any sort of mortgage to buy somewhere now then affordability is very constrained. The market can only stumble along so far on the bank of mum and dad.

In my current experience you need at least £50k a year and a £50k deposit to be able to afford a £225k house. Still - a lot of people would be wiped out by a 3% rise in interest rates purchasing on this metric.

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Very good graph, but IMHO your analysis is lacking.

I think that if you check, you will see that each of the previous booms was followed by a sharp rise in the base rate.

Presently, the opposite has happened, and this will effect your earnings vs price ratio approach.

On top of this, which you touched upon, are the measures that the government has taken to remove supply from the market, and increase the liquidity.

In short, the market is being completely manipulated.

"You either believe affordability will reign supreme or as I do that the fundamentals of what you earn is the best measure of housing valuations."

As in my opening sentence it is is very much a case of making a judgment call on what you personaly believe will come to the fore as the dust settles. I understand the affordability arguments but this is somthing that can not be relied upon going forward in my opinion.

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Personally I think valuing house prices vs earnings alone is overly simplistic. I wonder how the graph would look if you applied household income to it rather than average earnings... very different I suspect. I also suspect if you factored in the effect of what banks are willing to lend these days on an affordability measure again it will be a large influence.

Whether banks should be using affordability or not and whether their assessments should allow such high borrowing levels against household incomes levels is neither here nor there... for one I cannot see household incomes reducing massively, and secondly I can't see banks reverting away from affordability and thirdly I can't see them erring much below 4 times joint effectively on the affordability measure.... now thats a world away from the 80's and early 90's let alone the 60's and 70's.

of course its possible to argue that there will be some kind reversion to income measure but in doing you would be ignoring the fact that availability of credit is a much stronger factor ( as we saw through the recent boom) and of banks continue to assess on the basis of household income and affordability giving an effective 4 times vs household income then I'm afraid the reversion stats many use are going to way out .

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Personally I think valuing house prices vs earnings alone is overly simplistic. I wonder how the graph would look if you applied household income to it rather than average earnings... very different I suspect. I also suspect if you factored in the effect of what banks are willing to lend these days on an affordability measure again it will be a large influence.

Whether banks should be using affordability or not and whether their assessments should allow such high borrowing levels against household incomes levels is neither here nor there... for one I cannot see household incomes reducing massively, and secondly I can't see banks reverting away from affordability and thirdly I can't see them erring much below 4 times joint effectively on the affordability measure.... now thats a world away from the 80's and early 90's let alone the 60's and 70's.

of course its possible to argue that there will be some kind reversion to income measure but in doing you would be ignoring the fact that availability of credit is a much stronger factor ( as we saw through the recent boom) and of banks continue to assess on the basis of household income and affordability giving an effective 4 times vs household income then I'm afraid the reversion stats many use are going to way out .

maybe true today.

but with tax rises and unemployment rising, they will have to think again on affordability.

Taking so much out of the producing economy in interest payments is highly deflationary, despite rises in the supported asset values.

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I agree that eventually your case will prove correct. But a sharp rise in interest rates will be required to trigger this process.

This may occur sooner that we think.

BBC News just announced that foreign investment dropped last month by more than 50%, and is now the lowest of G20. This against the background of high borrowings (£16.1 billion) and a sharp drop in receipts. If the pound begins to drop sharply, and I think is should, then interest rates may be the only option. However, I believe that attempts will be made to put this off (at all costs) until the next election.

BNP just came out with a report that Sterling and Euro are heading for parity and Nomura has yesterday stated that the UK economy is "a clear and present danger".

The knife edge is getting shaper.

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Personally I think valuing house prices vs earnings alone is overly simplistic.

<snip>

I agree. I think the relevent variable is household surplus*.

In a classic panic, those in work cut back on marginal spending, thus increasing their income surplus. This creates (or adds to) a recession.

As job losses increase, the average surplus per household falls. Either the state fills this gap, or the cost of housing plummets.

This is one reason why falls in housing costs tend to lag recessions, and the panics that caused them. That is doubly ironic this time seeing as the panic was caused by a breach of the affordability ceiling in housing, and a further irony will come as the state finds it has to cut support just as job losses start to pull the rug from under.

*one day I might get round to crafting a graph as good as Confounded's to illustrate my point. In the meantime, if anyone else wants to: feel free.

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maybe true today.

but with tax rises and unemployment rising, they will have to think again on affordability.

Taking so much out of the producing economy in interest payments is highly deflationary, despite rises in the supported asset values.

Thats where we differ... I don't think the affordability model will revert back to an income multiple model , I don't think that they will move away from their current consideration of household income vs the old single income measures.

Of course unemployment will rise.... banks won't view this as affecting how they approach mortgage lending to the employed... as an example a doubling of unemployment is pretty much nailed on and they still haven't changed back as you suggest they will.

There is deflation already in this particular asset class... and banks haven't changed their approach.

There are two schools of thought here , you are clearly in one, I am in the other. I would back my own view any day as its bourne out not only by the facts as they currently are but also by the fact that the FSA have declared they won't legislate the for the lenders to take the steps that would mean the return of previous lending models... those days are long gone, things have changed.

it doesn't mean house prices don't have some way yet to fall I suspect, but it does perhaps mean that many may well cling on too long to the false belief that they will fall vs some sort of 3 times income historical measure.. its just not going to happen in my view.

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What about wage deflation?

How about people losing their jobs? that, in effect is a decrease in wage payments across the UK.

In fact its worse, because we also have a corresponding increase in Dole payments to make as well.

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Thats where we differ... I don't think the affordability model will revert back to an income multiple model , I don't think that they will move away from their current consideration of household income vs the old single income measures.

Of course unemployment will rise.... banks won't view this as affecting how they approach mortgage lending to the employed... as an example a doubling of unemployment is pretty much nailed on and they still haven't changed back as you suggest they will.

There is deflation already in this particular asset class... and banks haven't changed their approach.

There are two schools of thought here , you are clearly in one, I am in the other. I would back my own view any day as its bourne out not only by the facts as they currently are but also by the fact that the FSA have declared they won't legislate the for the lenders to take the steps that would mean the return of previous lending models... those days are long gone, things have changed.

it doesn't mean house prices don't have some way yet to fall I suspect, but it does perhaps mean that many may well cling on too long to the false belief that they will fall vs some sort of 3 times income historical measure.. its just not going to happen in my view.

I can see where the affordability argument comes from....its from people who see that max borrowing is good. Its not. Banks STILL declare they base lending on income multiples by the way.

Max borrowing at a time of low interest rates....a time of BUST....is obviously asking for trouble when the BOOM returns...interest rates will rise and bang goes your mortgage repayments.

In addition, this time...we have the call for a huge repayment of Public debt....and this isnt coming from unearned income...it is coming straight out of everyones disposable.....so whichever, criteria we think the banks are using, they are going to have to take this loss of disposable into account.

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Houses are starting again to be seen as a safer vehicle than say the stock market or keeping cash in the bank.

Simple.

over half of purchases involved a loan. the average loan was £139,000.

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You cannot put too much emphasis on the current statistics.

Selling volume is something like 35,000 units versus 120,000 at peak.

Additionally, the stats are all over the place, depending upon who you read.

As I mentioned, the following equation governs, and this is the first time in history it's been done:

QE == MANIPULATION.

Brown has total control of the assets, the banks and the printing presses, and isn't afraid to use them.

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If you require any sort of mortgage to buy somewhere now then affordability is very constrained. The market can only stumble along so far on the bank of mum and dad.

In my current experience you need at least £50k a year and a £50k deposit to be able to afford a £225k house. Still - a lot of people would be wiped out by a 3% rise in interest rates purchasing on this metric.

I've posted this graph on another thread but I think it illustrates your point re rate rises very well. It shows the costs of a repayment loan over 25 years at various interest rates

Amort.jpg

post-11344-1253265320_thumb.jpg

Edited by DaisyB

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How about people losing their jobs? that, in effect is a decrease in wage payments across the UK.

In fact its worse, because we also have a corresponding increase in Dole payments to make as well.

Its not really but it does lower the amount of buyers at current prices. At the moment I would say it balances out, but if many more places come on the market there wont be people to pay for them.

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The joint income argument is an interesting and common one for explaining the affordability of these current prices but the only data I have come across is as below. It is possible to argue given the disparity between male and female earnings that the current trend suggests a real drop in household joint income. :o

ukemploymentrates.png

Edited by Confounded

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The joint income argument is an interesting and common one for explaining the affordability of these current prices but the only data I have come across is as below. It is possible to argue given the disparity between male and female earnings that the current trend suggests a real drop in household joint income. :o

ukemploymentrates.png

Not sure the graph... for joint households ( man and woman .. sorry pc brigade)... it would be the upper line plus the bottom line rather than the average of the two... you'd then need to get to an average by looking at the number of single male households and single female households.

Remember though that I am far from convinced that its only relevant to look at people in employment... the retired buy homes too (normally for cash). I'd love to be able to suggest some different figures but I just don't have them.

Equally I think anyone would accept that the demographics have become far more complicated in this more mobile world we live in now ( than in say 1960) and that is likely to have a greater effect on some areas than others eg some effect in kensington and chelsea... less effect in romford.

So that leads me back to the point that I really don't feel an historical view of house prices vs income is really going to be of much help when assessing the degree to which the market is overvalued. I feel its overvalued but I suppose not the extent that those relying on the historical stats to provide an indication rely.... in this instance i do think the world really has changed.

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Only time will tell if they will address the affordability with higher wages or nominal falls, my money is still on nominal falls.

howabout combination of 2?

short-term - some more nominal falls

longer-term (until 2020ish) - wages catch-up

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those days are long gone, things have changed.

it doesn't mean house prices don't have some way yet to fall I suspect, but it does perhaps mean that many may well cling on too long to the false belief that they will fall vs some sort of 3 times income historical measure.. its just not going to happen in my view.

I see your point, but I've often wondered if affordability and salary multiples are very different. Isn't a multiple just a quick way of assessing affordability?

To argue that the future trend will be higher in terms of salary multiples is just a paradigm shift argument isn't it? Eg it's to argue that for some reason the "safe level" of lending now and into the future is higher than in the past? (Only valid reason I'd see is dual incomes, and it doesn't seem sensible to lend on this basis, unless we seriously think the majority of people are going to stop having kids, or better, that they will contractually agree not to have kids during the period of the loan....)

Also my other problem with affordability is that it uses current interest rates (most important part of the calculation) to project whether someone can pay back a 25 year loan. Should rates be very low, or high, compared with long term averages, it would give a false impression of the borrower's ability to repay. Whereas I can take a view that at 3x salary, I'm generally shielded from even pretty extreme rate hikes. Whereas at 6x, it wouldn't take much of a rise to make me default.

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Some great posts in this thread, especially those from abharrison whose views I find myself in agreement with.

The amount of retracement of the initial graph that is feasible is limited by the change in demographics with more two-income families now being the standard. Joint incomes and a generally looser credit market have helped affordability to fall although I think we should now see a return to trend.

The demographic change of more women working and people working for longer has meant a one-time shift in the long run income multiple which will not be seen again.

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