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TheLittleGuy

When Is A Crash Not A Crash?

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Time to kick the wasps nest again. :unsure:

I'm STR and I'd love to see a crash as much as anyone, but we don't always get what we want. Unless something changes radically there is not enough pressure to create rapid price falls. OK, so there are some examples of prices being dropped. However the overall figures show us that house prices have not tumbled. Instead they've fallen slowly and modestly. With IR's about to fall this decline is likley to slow further, stop or even reverse.

In ALL previous crashes this century there have been factors creating distress, forced sales and rapid price falls. In the current environment none of this is true - quite the reverse in fact. Yes, house prices are at or above affordable levels (according to area) but sellers are not panicking. There is no real distress out there; people are coping OK with their debt and can hold out on price. Transaction levels fell sharply, but not so much that the market collapsed, Now they're slowly increasing again, and the forthcoming IR drop will support this trend.

It's no good just going with gut feeling, selective statistics and negative bias. I know the rabid ultra-bears will attack me, but none of the disaster predictions have come true. IR's and inflation have not raced up. There has not been wholesale panic. Sentiment has not turned and created a super crash. Apparently many people are willing to catch a falling knife, provided it looks blunt and is falling very slowly.

In the long term there will certainly be a crash and the economy will worsen, but I can see no reason for prices to fall rapidly in the near future. I could be wrong, but if there's no obvious evidence of a crash by the winter I think things will stay pretty much as they are for years to come.

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Time to kick the wasps nest again.  :unsure:

I'm STR and I'd love to see a crash as much as anyone, but we don't always get what we want. Unless something changes radically there is not enough pressure to create rapid price falls. OK, so there are some examples of prices being dropped. However the overall figures show us that house prices have not tumbled. Instead they've fallen slowly and modestly. With IR's about to fall this decline is likley to slow further, stop or even reverse.

In ALL previous crashes this century there have been factors creating distress, forced sales and rapid price falls. In the current environment none of this is true - quite the reverse in fact. Yes, house prices are at or above affordable levels (according to area) but sellers are not panicking. There is no real distress out there; people are coping OK with their debt and can hold out on price. Transaction levels fell sharply, but not so much that the market collapsed, Now they're slowly increasing again, and the forthcoming IR drop will support this trend.

It's no good just going with gut feeling, selective statistics and negative bias. I know the rabid ultra-bears will attack me, but none of the disaster predictions have come true. IR's and inflation have not raced up. There has not been wholesale panic. Sentiment has not turned and created a super crash. Apparently many people are willing to catch a falling knife, provided it looks blunt and is falling very slowly.

In the long term there will certainly be a crash and the economy will worsen, but I can see no reason for prices to fall rapidly in the near future. I could be wrong, but if there's no obvious evidence of a crash by the winter I think things will stay pretty much as they are for years to come.

Great, ok well off you go then, do you want a list of estate agents? :D

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Time to kick the wasps nest again.  :unsure:

I'm STR and I'd love to see a crash as much as anyone, but we don't always get what we want. Unless something changes radically there is not enough pressure to create rapid price falls. OK, so there are some examples of prices being dropped. However the overall figures show us that house prices have not tumbled. Instead they've fallen slowly and modestly. With IR's about to fall this decline is likley to slow further, stop or even reverse.

In ALL previous crashes this century there have been factors creating distress, forced sales and rapid price falls. In the current environment none of this is true - quite the reverse in fact. Yes, house prices are at or above affordable levels (according to area) but sellers are not panicking. There is no real distress out there; people are coping OK with their debt and can hold out on price. Transaction levels fell sharply, but not so much that the market collapsed, Now they're slowly increasing again, and the forthcoming IR drop will support this trend.

It's no good just going with gut feeling, selective statistics and negative bias. I know the rabid ultra-bears will attack me, but none of the disaster predictions have come true. IR's and inflation have not raced up. There has not been wholesale panic. Sentiment has not turned and created a super crash. Apparently many people are willing to catch a falling knife, provided it looks blunt and is falling very slowly.

In the long term there will certainly be a crash and the economy will worsen, but I can see no reason for prices to fall rapidly in the near future. I could be wrong, but if there's no obvious evidence of a crash by the winter I think things will stay pretty much as they are for years to come.

They've fallen pretty rapidly in some parts e.g. 10% pa in some parts of London, without the kind of trigger you suggest. This is like a snowball - as momentum is gained it will increase rapidly, due to an increasing acceptance that prices `are falling. Prices are so high today that people will see the benefit in waiting i.e. even a 10% reduction on a £200k house is well worth waiting for. This will start a tumble that will be unstoppable.

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Great, ok well off you go then, do you want a list of estate agents?  :D

Come November, if things don't change, I'll probably buy.

They've fallen pretty rapidly in some parts e.g. 10% pa in some parts of London, without the kind of trigger you suggest. This is like a snowball - as momentum is gained it will increase rapidly, due to an increasing acceptance that prices `are falling. Prices are so high today that people will see the benefit in waiting i.e. even a 10% reduction on a £200k house is well worth waiting for. This will start a tumble that will be unstoppable.

In some part that's true, but in others there have been totally different results

As for the snowball theory, do you have any actual evidence to support it? If people were rational we wouldn't be in this situation, so expecting them to act rationally in the future seems, um, irrational?

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I was having a conversation with a friend about his very thing earlier.

I think the reason we will have a crash (let's not get involved in a debate about what defines a crash) is for exactly the same reason that we saw prices rising beyond sensible levels over the last few years: human behaviour.

House prices are dropping at the moment. People will see this and say: "Property is not a good investment". Thus, demand will reduce (as it is already doing) and prices will drop further.

Once things really get going, people will start to panic just because they think they're losing money. In the same way that people thought they were getting richer just because the notional value of their house was increasing.

I can't possible understand the mentality: "House prices are really high so I MUST buy now before it's too late" but that's the way a lot of people were thinking about a year ago. The same will happen in reverse: "Prices are falling, I'd better sell now or it'll be too late". It's crazy but we know that people are crazy.

Some major increase in IRs or unemployment might trigger things but it will happen anyway. Nothing really triggered the disproportionate rise in house prices and nothing needs to trigger a fall.

Also, be careful about correlation vs causality. Just because unemployment was high aroung the last crash doesn't mean it caused it. It may have been the other way around. Or that they were both symptoms of wider socioeconomic conditions.

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As for the snowball theory, do you have any actual evidence to support it? If people were rational we wouldn't be in this situation, so expecting them to act rationally in the future seems, um, irrational?

Yes I do have an example: the recent RISE in house prices.

I'm not expecting people to be rational, I'm expecting them to be irrational just as they were when they pushed houes prices up to 6xwages.

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Guest Bart of Darkness
As for the snowball theory, do you have any actual evidence to support it? If people were rational we wouldn't be in this situation

Exactly. Which is a good reason to anticipate price falls. If people were rational, prices might possibly remain static until incomes catch up. They aren't and they won't.

Prices can therefore either go up or down. Up seems unlikely even with interest rate cuts, so that just leaves down.

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I was having a conversation with a friend about his very thing earlier.

I think the reason we will have a crash (let's not get involved in a debate about what defines a crash) is for exactly the same reason that we saw prices rising beyond sensible levels over the last few years: human behaviour.

House prices are dropping at the moment. People will see this and say: "Property is not a good investment". Thus, demand will reduce (as it is already doing) and prices will drop further.

Once things really get going, people will start to panic just because they think they're losing money. In the same way that people thought they were getting richer just because the notional value of their house was increasing.

I can't possible understand the mentality: "House prices are really high so I MUST buy now before it's too late" but that's the way a lot of people were thinking about a year ago. The same will happen in reverse: "Prices are falling, I'd better sell now or it'll be too late". It's crazy but we know that people are crazy.

Some major increase in IRs or unemployment might trigger things but it will happen anyway. Nothing really triggered the disproportionate rise in house prices and nothing needs to trigger a fall.

Also, be careful about correlation vs causality. Just because unemployment was high aroung the last crash doesn't mean it caused it. It may have been the other way around. Or that they were both symptoms of wider socioeconomic conditions.

I know what you're saying, but I just don't agree.

In ALL previous crashes there have been substantial IR rises creating distress, made worse by unemployment etc. Either this has been the fundamental cause of the crashes or it's an absolutely amazing coincidence. In any event, it has never before been the case that house prices crashed because they were simply overloaded, which is the basic argument for a crash today. I'm not saying it can't happen, just that it never has.

As for sentiment alone turning the market, I'd say we've had 12 months+ since the peak and there's still no sign that this will happen by itself. As far as I can see it'll only occur if prices are falling fast, which will only happen if sellers become desperate, which brings us back to forced sales again.

Prices can therefore either go up or down. Up seems unlikely even with interest rate cuts, so that just leaves down.
That's an assumption; you have no evidence of this. House prices have had periods of staganation in the past. Besides, I'm not saying that house prices won't go down. I'm just saying they'll do it very slowly. Edited by TheLittleGuy

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OK, so there are some examples of prices being dropped. However the overall figures show us that house prices have not tumbled. Instead they've fallen slowly and modestly. With IR's about to fall this decline is likley to slow further, stop or even reverse.

HPI has fallen from over 20% to 0% in 12 months and is now going negative. If it carries on going down at the same rate we'll be at -10% YOY by xmas (-13% real terms). And at the moment there is nothing to suggest that it won't keep going down.

How on earth do you people think that IR cuts of 0.25% - 0.5% will make any difference??? We have borrowed nearly £100Billion more than when rates hit 4.75% a year ago, banks don't always pass on the cuts, unsecured loan rates won't change, taxes and 'real' leaving costs are rising. Also banks are tightening lending criteria due to rise in bad debts so how are people going to get the multiples of their salary required to keep the prices insanely high?

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As for the snowball theory, do you have any actual evidence to support it?

Er..yes. Look at a graph of the last two crashes and you'll see the troughs and peaks and the classic cycles of boom and bust. Now look at the current (last) trough and the current peak. Now tell me seriously that you see no "actual" evidence.

If not convinced then by all means contact your local EA and offer them a large commission for the opportunity of throwing your own money down the drain.

VP

Edited by VacantPossession

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Er..yes. Look at a graph of the 70's and 80's crashes and you'll see the troughs and peaks and the classic cycles of boom and bust. Now look at the current (last) trough and the current peak. Now tell me seriously that you see no "actual" evidence.

If not convinced then by all means contact your local EA and offer them a large commission for the opportunity of throwing your own money down the drain, and at the same time contributing to a delay in the inevitable crash which will come so much quicker if you could just hold back a little longer.

VP

See, now this is exactly what I mean. You've seen a single graph and made assumptions based on it. You haven't looked at the rest of the evidence, or considered what the current statistics are telling you. Well, here's a chart I prepared earlier.

HousePrices4.gif

See how the interest rates are doing something totally different this time? I'm not competing with you; I'm trying to explain that there are fundamental differences in this situation!

HPI has fallen from over 20% to 0% in 12 months and is now going negative. If it carries on going down at the same rate we'll be at -10% YOY by xmas (-13% real terms). And at the moment there is nothing to suggest that it won't keep going down.

How on earth do you people think that IR cuts of 0.25% - 0.5% will make any difference??? We have borrowed nearly £100Billion more than when rates hit 4.75% a year ago, banks don't always pass on the cuts, unsecured loan rates won't change, taxes and 'real' leaving costs are rising. Also banks are tightening lending criteria due to rise in bad debts so how are people going to get the multiples of their salary required to keep the prices insanely high?

Looking at it another way, more than a year after the peak and house prices have still not gone down. There's an IR drop on the way to boost confidence and transactions numbers are already slowly rising again. The economy and consumer debt are both facing uncertain futures, but in the short term there's no immediate distress. As for lending criteria, history has shown us that the banks will not tighten things to the point of strangling business. Let's face it, tightening up from todays standards leaves a lot of scope! Edited by TheLittleGuy

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See, now this is exactly what I mean. You've seen a single graph and made assumptions based on it. You haven't looked at the rest of the evidence, or considered what the current statistics are telling you. Well, here's a chart I prepared earlier.

HousePrices4.gif

See how the interest rates are doing something totally different this time? I'm not competing with you; I'm trying to explain that there are fundamental differences in this situation!

Between 1995 - 1998 inflation was between 1.5% - 3% and IR's were between 5.25% - 7.5%. On this basis our IR's are already too low with our current inflation at 2%, they should be nearer 6%. Now if the BoE does lower IRs they might get away with one, two cuts at the most and then will likely have to quite quickly resort to increasing rates again because of the effect lowering the rates will have on an inflation target that is already about to be breached. In fact lowering them now will probably result in the BoE having to raise rates again more quickly and more aggressively to fight inflation. It could be that the lowering of rates now will result in the higher rates down the road that will be the trigger for the large portion of the HPC.

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Time to kick the wasps nest again.  :unsure:

I'm STR and I'd love to see a crash as much as anyone, but we don't always get what we want. Unless something changes radically there is not enough pressure to create rapid price falls. OK, so there are some examples of prices being dropped. However the overall figures show us that house prices have not tumbled. Instead they've fallen slowly and modestly. With IR's about to fall this decline is likley to slow further, stop or even reverse.

In ALL previous crashes this century there have been factors creating distress, forced sales and rapid price falls. In the current environment none of this is true - quite the reverse in fact. Yes, house prices are at or above affordable levels (according to area) but sellers are not panicking. There is no real distress out there; people are coping OK with their debt and can hold out on price. Transaction levels fell sharply, but not so much that the market collapsed, Now they're slowly increasing again, and the forthcoming IR drop will support this trend.

It's no good just going with gut feeling, selective statistics and negative bias. I know the rabid ultra-bears will attack me, but none of the disaster predictions have come true. IR's and inflation have not raced up. There has not been wholesale panic. Sentiment has not turned and created a super crash. Apparently many people are willing to catch a falling knife, provided it looks blunt and is falling very slowly.

In the long term there will certainly be a crash and the economy will worsen, but I can see no reason for prices to fall rapidly in the near future. I could be wrong, but if there's no obvious evidence of a crash by the winter I think things will stay pretty much as they are for years to come.

Good points well made and I have to say I generally agree with you. We definitely need forced sales and without rising interest rates and high unemployment among existing homeowners I can't see where the panic selling will come from.

I tend to think there will be significant price reductions in localised areas within the next year (15%). But many more areas where a slow decline (5%) a year is more likely. In most areas so far all we've seen is the premium for selling in a rising market being knocked off.

As an STR myself I'm hoping for 10% reductions in my target area - so far I haven't seen any significant reductions except in property that was out of kilter with the local market.

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In ALL previous crashes there have been substantial IR rises

Have you ever considered HOW IR rises create crashes? What happens is that debt servicing costs exceed a certain proportion of people's income, meaning that they start to have difficulty servicing their mortgage, leading to either them selling it themselves or the building society taking it from them and selling it (in the event of a default). Also, because so much of their income is taken up by debt servicing, there is less disposable income for consumer spending, and so the economy turns down, exacerbating the problem. There are two determinants for debt servicing costs, nominal debt and interest rates. In the last few crashes the rise in debt servicing costs has been caused by a sharp rise on the interest rate side of the equation; this time it has been caused by a sharp rise in the nominal debt side of the equation. It is "different this time", but not in the way you think.

http://www.moneyweek.com/article/478/inves...ing-market.html

transactions numbers are already slowly rising again.

Do you have any evidence to back up this claim? (LR figures for example)

Edited by zzg113

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Guest Bart of Darkness
House prices have had periods of staganation in the past.

When? Is there a flat line anywhere in this graph?

youarehere.gif

post-2284-1123085506_thumb.jpg

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HPI has fallen from over 20% to 0% in 12 months and is now going negative. If it carries on going down at the same rate we'll be at -10% YOY by xmas (-13% real terms). And at the moment there is nothing to suggest that it won't keep going down.

The rate of change of HPI is the rate of change of a rate of change. I'm not sure why this shouldn't suddenly stall at or around zero (=house prices stay the same). Why should this keep on going in a trend down to -10%? One might expect the rate of change itself (HPI) to generally be subject to trends but not the rate of change of HPI.

Perhaps like in physics it takes a force to induce a mass to accelerate (acceleration is also the rate of change of a rate of change). [F=ma, one of Newton's Laws]

If so the charts should show when the forces acting on the market changed. But I remain to be convinced markets behave in this way.

Under this model presumably a powerful force in the UK is interest rates so any diminution in this would result in lower rate of change of HPI. Perhaps the BoE can contrive a balanced IR which does indeed yield 0 acceleration in house prices (= soft landing).

Maybe someone even more bored than me could produce a model based on F=ma and weight the relative forces, positive and negative acting on UK house prices

This could settle all the tedious bull vs bears bun fights.

Edited by BoredTrainBuilder

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Good argument – I have long worried about people’s expectations in that sentiment will bring on a snowball effect in people desperate to get out. I don’t think people know that prices are going down and they still think they are going up, and the press only will help this by only reporting how much they went up this month ignoring any bad news.

Although it’s still possible with the BTL’er out there that once they have lost x amount of money they might all bail together increasing the quantity of properties out there and proving that there wasn’t a shortage after all!

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Looking at it another way, more than a year after the peak and house prices have still not gone down.

Sadly the sentence might be more accurately written like this:

Looking at it another way, more than a year after the "peak" and house prices have still not gone down.

I think there might have yet another false dawn on my way to that posh Victorian pile in some leafy part of London and its a few more years of renting squalor for me.

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No, because it's adjusted for inflation.

But.... have there been periods of stagnation of nominal prices?

Yes. Have a look at my chart here:

HousePrices4.gif

It shows both adjusted and nominal pricing, along with nominal earnings and an overlay on IR's for the more recent past. There are a few flat bits.

THey have - but it was concealed by high inflation. E.g 1970's

Not according to the BoE. In the graph above the crash of the 70's was also associated with IR leaps.

Edited by TheLittleGuy

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I know what you're saying, but I just don't agree.

In ALL previous crashes there have been substantial IR rises creating distress, made worse by unemployment etc. Either this has been the fundamental cause of the crashes or it's an absolutely amazing coincidence. In any event, it has never before been the case that house prices crashed because they were simply overloaded, which is the basic argument for a crash today. I'm not saying it can't happen, just that it never has.

But what I'm saying is that, when you have a freak in the economy (such as stupidly high house prices) it affects all other areas. In this case, people have gotten massively in debt (by MEWing), they now have had to cut back on spending which means the high street is suffering, which leads to job cuts...

The BoE might be forced to put up IRs at some point to fit in with their remit (keeping inflation on target) and this might be blamed on any of a number of factors but it may all lead back to house prices (which in turn lead back to other factors).

Unemployment might cause a crash but what's caused the unemployment? Partly because we've delayed a slow-down in our ecomomy by funding spending with borrowing and thus made the hangover period even worse. People would not have done this as much if they hadn't felt richer because of house prices.

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But what I'm saying is that, when you have a freak in the economy (such as stupidly high house prices) it affects all other areas. In this case, people have gotten massively in debt (by MEWing), they now have had to cut back on spending which means the high street is suffering, which leads to job cuts...

The BoE might be forced to put up IRs at some point to fit in with their remit (keeping inflation on target) and this might be blamed on any of a number of factors but it may all lead back to house prices (which in turn lead back to other factors).

Unemployment might cause a crash but what's caused the unemployment? Partly because we've delayed a slow-down in our ecomomy by funding spending with borrowing and thus made the hangover period even worse. People would not have done this as much if they hadn't felt richer because of house prices.

Again, I see you point. We differ on only a couple of things.

they now have had to cut back on spending

Only a bit. They're still employed, can afford their commitments and have an IR drop on the way to set their minds at rest. And they can always borrow a bit more if they need it...

The BoE might be forced to put up IRs at some point

Yes, but when? They wont push the economy into recession on purpose. They might hold off any significant rises for years.

Unemployment might cause a crash

Sure, but it'll take a fair while before unemployment becomes a problem.

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.............As for sentiment alone turning the market, I'd say we've had 12 months+ since the peak and there's still no sign that this will happen by itself. As far as I can see it'll only occur if prices are falling fast, which will only happen if sellers become desperate, which brings us back to forced sales again.

---------------------------------

Surely there are always 'forced sales' - people who have to sell?

Examples:

Bovis, Persimmon, Barratt, Wimpey.........ect.

If they stop selling they stop existing. New builds around Cambridge (not in the city itself yet) seem available with some significant offers such as deposit paid, mortgage paid for a year, free car ect ect ect. That kind of offer presumeably doesn't appear as a reduction in the price itself so will be masked even on the Land Registry figures - but now they're even prepared to do a deal on the list price.

If new build prices fall then second-hand house prices will also fall, whether or not they're up for sale in large quantities.

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  • 301 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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