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Ft: Almost Inevitable Fall In House Prices Ahead.


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Makes good reading. Logical & common sense.

In the UK, for example, any return to a normal monetary policy will almost inevitably imply another fall in the housing market, which is currently propped up by ultra-cheap mortgages.

http://www.ft.com/cms/s/0/b82d2b96-bc02-11de-9426-00144feab49a.html?nclick_check=1

Edited by eric pebble
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Once perceptions of rising inflation return, central banks might be forced to switch towards a much more aggressive monetary policy relatively quickly – much quicker than during the previous cycle. A short inflationary boom could be followed by another recession, another banking crisis, and perhaps deflation. We should not see inflation and deflation as opposite scenarios, but as sequential ones. We could be in for a period of extreme price instability, in both directions, as central banks lose control.

:blink:

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Do you have another link please as this one only works after registering

Countdown to the next crisis is already under way

By Wolfgang Münchau

Published: October 18 2009 18:42 | Last updated: October 18 2009 18:42

We did not need to wait until the Dow Jones Industrial Average hit 10,000. It has been clear for some time that global equity markets are bubbling again. On the surface, this looks like 2003 and 2004 when the previous housing, credit, commodity and equity bubbles started to inflate, helped by low nominal interest rates and a lack of inflation. There is one big difference, though. This bubble will burst sooner.

So how do we know this is a bubble? My two favourite metrics of stock market valuation are Cape, which stands for the cyclically adjusted price/earnings ratio, and Q. Cape was invented by Robert Shiller, professor of economics and finance at Yale University. It measures the 10-year moving average of the inflation-adjusted p/e ratio. Q is a metric of market capitalisation divided by net worth. Andrew Smithers* has collected the data on Q, a concept invented by the economist James Tobin.

Cape and Q measure different things. Yet they both tend to agree on relative market mispricing most of the time. In mid-September both measures concluded that the US stock market was overvalued by some 35 to 40 per cent. The markets have since gone up a lot more than the moving average of earnings. You can do the maths.

The single reason for this renewed bubble is the extremely low level of nominal interest rates, which has induced people to move into all kinds of risky assets. Even house prices are rising again. They never fell to the levels consistent with long-term price-to-rent and price-to-income ratios, which are reliable metrics of the property markets’ relative under- or over-valuation.

But unlike five years ago, central banks now have the dual role of targeting monetary and financial stability. As has been pointed out time and again, those two objectives can easily come into conflict. In Europe, for example, the European Central Bank would under normal circumstances already have started to raise interest rates. The reason it sits tight is to prevent damage to Europe’s chronically under-capitalised banking system, which still depends on the ECB for life support. The same is true, more or less, elsewhere.

Now, I agree there is no prospect of a significant rise in inflation over the next 12 months, but the chances rise significantly after 2010.

Once perceptions of rising inflation return, central banks might be forced to switch towards a much more aggressive monetary policy relatively quickly – much quicker than during the previous cycle. A short inflationary boom could be followed by another recession, another banking crisis, and perhaps deflation. We should not see inflation and deflation as opposite scenarios, but as sequential ones. We could be in for a period of extreme price instability, in both directions, as central banks lose control.

This is exactly what the economist Hyman Minsky predicted in his financial instability hypothesis.** He postulated that a world with a large financial sector and an excessive emphasis on the production of investment goods creates instability both in terms of output and prices.

While, according to Minsky, these are the deep causes of instability, the mechanism through which instability comes about is the way governments and central banks respond to crises. The state has potent means to end a recession, but the policies it uses give rise to the next phase of instability. Minsky made that observation on the basis of data mostly from the 1970s and early 1980s, but his theory describes very well what has been happening to the global economy ever since, especially in the past decade. The world has witnessed a proliferation of financial bubbles and extreme economic instability that cannot be explained by any of the established macroeconomic models. Minsky is about all we have.

His policy conclusions are disturbing, especially if contrasted with what is actually happening. In their crisis response, world leaders have focused on bonuses and other irrelevant side-issues. But they have failed to address the financial sector’s overall size. So if Minsky is right, instability should continue and get worse.

Our present situation can give rise to two scenarios – or some combination of the two. The first is that central banks start exiting at some point in 2010, triggering another fall in the prices of risky assets. In the UK, for example, any return to a normal monetary policy will almost inevitably imply another fall in the housing market, which is currently propped up by ultra-cheap mortgages.

Alternatively, central banks might prioritise financial stability over price stability and keep the monetary floodgates open for as long as possible. This, I believe, would cause the mother of all financial market crises – a bond market crash – to be followed by depression and deflation.

In other words, there is danger no matter how the central banks react. Successful monetary policy could be like walking along a perilous ridge, on either side of which lies a precipice of instability.

For all we know, there may not be a safe way down.

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Countdown to the next crisis is already under way

By Wolfgang Münchau

Published: October 18 2009 18:42 | Last updated: October 18 2009 18:42

We did not need to wait until the Dow Jones Industrial Average hit 10,000. It has been clear for some time that global equity markets are bubbling again. On the surface, this looks like 2003 and 2004 when the previous housing, credit, commodity and equity bubbles started to inflate, helped by low nominal interest rates and a lack of inflation. There is one big difference, though. This bubble will burst sooner.

So how do we know this is a bubble? My two favourite metrics of stock market valuation are Cape, which stands for the cyclically adjusted price/earnings ratio, and Q. Cape was invented by Robert Shiller, professor of economics and finance at Yale University. It measures the 10-year moving average of the inflation-adjusted p/e ratio. Q is a metric of market capitalisation divided by net worth. Andrew Smithers* has collected the data on Q, a concept invented by the economist James Tobin.

Cape and Q measure different things. Yet they both tend to agree on relative market mispricing most of the time. In mid-September both measures concluded that the US stock market was overvalued by some 35 to 40 per cent. The markets have since gone up a lot more than the moving average of earnings. You can do the maths.

The single reason for this renewed bubble is the extremely low level of nominal interest rates, which has induced people to move into all kinds of risky assets. Even house prices are rising again. They never fell to the levels consistent with long-term price-to-rent and price-to-income ratios, which are reliable metrics of the property markets’ relative under- or over-valuation.

But unlike five years ago, central banks now have the dual role of targeting monetary and financial stability. As has been pointed out time and again, those two objectives can easily come into conflict. In Europe, for example, the European Central Bank would under normal circumstances already have started to raise interest rates. The reason it sits tight is to prevent damage to Europe’s chronically under-capitalised banking system, which still depends on the ECB for life support. The same is true, more or less, elsewhere.

Now, I agree there is no prospect of a significant rise in inflation over the next 12 months, but the chances rise significantly after 2010.

Once perceptions of rising inflation return, central banks might be forced to switch towards a much more aggressive monetary policy relatively quickly – much quicker than during the previous cycle. A short inflationary boom could be followed by another recession, another banking crisis, and perhaps deflation. We should not see inflation and deflation as opposite scenarios, but as sequential ones. We could be in for a period of extreme price instability, in both directions, as central banks lose control.

This is exactly what the economist Hyman Minsky predicted in his financial instability hypothesis.** He postulated that a world with a large financial sector and an excessive emphasis on the production of investment goods creates instability both in terms of output and prices.

While, according to Minsky, these are the deep causes of instability, the mechanism through which instability comes about is the way governments and central banks respond to crises. The state has potent means to end a recession, but the policies it uses give rise to the next phase of instability. Minsky made that observation on the basis of data mostly from the 1970s and early 1980s, but his theory describes very well what has been happening to the global economy ever since, especially in the past decade. The world has witnessed a proliferation of financial bubbles and extreme economic instability that cannot be explained by any of the established macroeconomic models. Minsky is about all we have.

His policy conclusions are disturbing, especially if contrasted with what is actually happening. In their crisis response, world leaders have focused on bonuses and other irrelevant side-issues. But they have failed to address the financial sector’s overall size. So if Minsky is right, instability should continue and get worse.

Our present situation can give rise to two scenarios – or some combination of the two. The first is that central banks start exiting at some point in 2010, triggering another fall in the prices of risky assets. In the UK, for example, any return to a normal monetary policy will almost inevitably imply another fall in the housing market, which is currently propped up by ultra-cheap mortgages.

Alternatively, central banks might prioritise financial stability over price stability and keep the monetary floodgates open for as long as possible. This, I believe, would cause the mother of all financial market crises – a bond market crash – to be followed by depression and deflation.

In other words, there is danger no matter how the central banks react. Successful monetary policy could be like walking along a perilous ridge, on either side of which lies a precipice of instability.

For all we know, there may not be a safe way down.

some truths

but the instability is caused by the central banks

and the bond market will be the last bubble for a while

we wont get deflation though - not with paper money

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No safe way down, thats what any number of us said, there has to be the pain.

+ this: imply another fall in the housing market, which is currently propped up by ultra-cheap mortgages.

how many of us said that the ultra low interest rates would fuel hpi + the response from some some forum members was it wouldnt as there was a shortage of mortgage money + large deposits needed etc.

well, somehow that didnt matter did it, they DID find the money, there has been hpi again. bubble after bubble most probably, though looking at my old areas in London not that much hpi compared to the hype

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Once perceptions of rising inflation return, central banks might be forced to switch towards a much more aggressive monetary policy relatively quickly – much quicker than during the previous cycle. A short inflationary boom could be followed by another recession, another banking crisis, and perhaps deflation. We should not see inflation and deflation as opposite scenarios, but as sequential ones. We could be in for a period of extreme price instability, in both directions, as central banks lose control.

:blink:

Are we out of this one yet?

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At the moment transactions are down by a huge amount compared with the last sveral years. Prices appear to be rising due to very few, more expensive, homes being sold. The effects of rising unemployment on the housing market have been offset to a moderate degree by ultra cheap IR and a partial return to irresponsible lending (LIAR LOANS/self cert., 100-125% LTV, IO/on the never-never etc),due to the government's inability (or lack of will) to regulate the banks.

Meanwhile government debt continues to amass far beyond even wartime records and the world continues to place its faith in our ability to keep the facade going as evidenced by sterling soaring aginst the Euro, Dollar and a few others.

QUOTING THE FT:

Alternatively, central banks might prioritise financial stability over price stability and keep the monetary floodgates open for as long as possible. This, I believe, would cause the mother of all financial market crises – a bond market crash – to be followed by depression and deflation.

Agree.

Edited by Realistbear
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No safe way down, thats what any number of us said, there has to be the pain.

+ this: imply another fall in the housing market, which is currently propped up by ultra-cheap mortgages.

how many of us said that the ultra low interest rates would fuel hpi + the response from some some forum members was it wouldnt as there was a shortage of mortgage money + large deposits needed etc.

well, somehow that didnt matter did it, they DID find the money, there has been hpi again. bubble after bubble most probably, though looking at my old areas in London not that much hpi compared to the hype

there is a shortage of money, coupled with sellers unforced to move by government bailouts for many borrowers....we are nearly a year into these bailouts.

then there is the inflationery scare....dash for assets as Daddy Bear calls it.

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Are we out of this one yet?

The global Ponzi scheme has been kept going for a bit longer by sucking in more punters at the bottom. This time the punters are us - unwilling participants being forced to use our savings to prop it up.

Same as the Greenspan boom in 2000-2007 which deferred financial collapse after the dot-com bubble burst,

Question is whether we carry on as normal for a few years or a few weeks before this fails.

If you think it will take years then the response would be to borrow heavily and buy property and stocks and hope you get out in time. If you think it will pop in weeks then what?

Buy beans and gold?

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there is a shortage of money, coupled with sellers unforced to move by government bailouts for many borrowers....we are nearly a year into these bailouts.

then there is the inflationery scare....dash for assets as Daddy Bear calls it.

I presume that it will be extended but wasn't the mortgage support limited from three months to two years?

p-o-p

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I presume that it will be extended but wasn't the mortgage support limited from three months to two years?

p-o-p

Im not sure, and I dont suppose anybody else knows, how effective the 2 year rollover scheme was.

but the one paying the interest on loans up to £200K Im pretty sure that ones very effective for those losing an income....im not even sure there is a time limit on that one.

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At the moment transactions are down by a huge amount compared with the last sveral years. Prices appear to be rising due to very few, more expensive, homes being sold. The effects of rising unemployment on the housing market have been offset to a moderate degree by ultra cheap IR and a partial return to irresponsible lending (LIAR LOANS/self cert., 100-125% LTV, IO/on the never-never etc),due to the government's inability (or lack of will) to regulate the banks.

Meanwhile government debt continues to amass far beyond even wartime records and the world continues to place its faith in our ability to keep the facade going as evidenced by sterling soaring aginst the Euro, Dollar and a few others.

QUOTING THE FT:

Alternatively, central banks might prioritise financial stability over price stability and keep the monetary floodgates open for as long as possible. This, I believe, would cause the mother of all financial market crises – a bond market crash – to be followed by depression and deflation.

Agree.

But where would people put their money if there was a financial market crises? I doubt many would keep hold of Sterling, which would kill demand, while supply remained high.

I could well imagine there being deflation relative to alternative monies/assets, but I find it hard to believe that fiat would do well in such a scenario.

EDIT: sp

Edited by Traktion
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But where would people put their money if there was a financial market crises? I doubt many would keep hold of Sterling, which would kill demand, while supply remained high.

I could well imagine there being deflation relative to alternative monies/assets, but I find it hard to believe that fiat would do well in such a scenario.

EDIT: sp

erm, probably where 99% of people keep it now...in the banks

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Meanwhile government debt continues to amass far beyond even wartime records and the world continues to place its faith in our ability to keep the facade going as evidenced by sterling soaring aginst the Euro, Dollar and a few others.

Sterling hasn't soared against the Euro at all. It has recovered A LITTLE against the USD in the last few days but no more than that, and only because the world has been hammering the USD so. You are getting pretty borderline in terms of whether I just ignore your posts because they are almost always completely inaccurate and badly informed, but masquerade as if they have some merit.

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doesn't sound very convincing to me.

Just more of the same old mantra....unemployment, higher interest rates down the road. yeah, right.

if this is the bar for writing for the ft these days, then i could do with some extra cash.

You could send them some of the posts you make on here.

Once they've 'cleaned up' after 10 minutes of side splitting and pant wetting laughter, I'm sure they'll send you a polite refusal.

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You could send them some of the posts you make on here.

Once they've 'cleaned up' after 10 minutes of side splitting and pant wetting laughter, I'm sure they'll send you a polite refusal.

you keep waiting then. and keep hanging off merv's every word. he'll dissapoint you time and again.

oh, and the rate of increase in unemployment has slowed. them's facts and realism. not wishing on a star nonsense.

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  • 443 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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