When Is A Crash Not A Crash?

[TheLittleGuy]

You're suggesting that large buiding companies, with ample resources, would deliberately crash their own market by panic selling their stocks off super-cheap? When they can afford to hold on? Not likley.

The kind of forced sale I'm talking about, and the kind you need a lot of for a crash, are vendors who have no choice but to sell in a hurry in a buyers market. These are the people who have to sell at a loss just to get out. At the moment these people are very few and far between.

Edited August 3, 2005 by TheLittleGuy

[JST]

The kind of forced sale I'm talking about, and the kind you need a lot of for a crash, are vendors who have no choice but to sell in a hurry in a buyers market. These are the people who have to sell at a loss just to get out. At the moment these people are very few and far between.

<{POST_SNAPBACK}>

There are always forced sellers. People who have to sell at a loss just to cover their debts. The real question is what will the new BTLer's do when they realise prices are declining? Surely they're the real unknown quantity in todays market. My suspicion is they will bail out. You are correct that sentiment has not changed substantially yet, although I suspect it soon will.

EDIT: I am not convinced you need a lot of 'forced' sellers to cause a crash. Even if most sellers sit it out at first, if you have a few sellers willing to sell at what they deem to be BMV prices, this is sufficient for small month on month falls. This may create a momentum of its own as sellers fear prices dropping further (i.e. not what you would describe as forced sellers, but people who respond to what they deem to be the market direction).

Edited August 3, 2005 by JST

[boom_and_bust]

You're suggesting that large buiding companies, with ample resources, would deliberately crash their own market by panic selling their stocks off super-cheap? When they can afford to hold on? Not likley.

The kind of forced sale I'm talking about, and the kind you need a lot of for a crash, are vendors who have no choice but to sell in a hurry in a buyers market. These are the people who have to sell at a loss just to get out. At the moment these people are very few and far between.

<{POST_SNAPBACK}>

There are large players out there now (property holders) who are more than interested in a price crash, not just people who are FTB's or wannabe-trade-uppers. Do you really think that people want to hold a stagnant investment if they can make a tonne of cash on the way down? There does exist big players who can shift the market and unload stocks and make a tonne of cash selling high and buying back low. You don't think it happens? More than you will ever know (he!he!).

[VacantPossession]

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.

See how the interest rates are doing something totally different this time? I'm not competing with you;

<{POST_SNAPBACK}>

Interest rates cannot endlessly influence a grossly inflated market. That has been discussed here ad nauseam. You can find any statistic you like, but for me the dominating statistic is simple. Whatever way you look at it, the only people able to afford a house are those who already own one and who've started substantially paying it off, or that tiny proportion of the population for whom cost is no object.

The other VAST majority of remaining buyers simply cannot afford the prices, WHATEVER interest rates prevail.

But please do go ahead and reach deep into your pocket.

VP

[IMupNorth]

Well done The Little Guy - completely agree with you. And particularly well done in the intelligent and measured responses you have given to some of the mentalist bears that have replied. I seldom have the patience for it myself.

House Price Crash is a long way off, for every downward argument there a number of factors, all mentioned by yourself that are upward pressures - net result is stagnation. I reckon at least 6 months more of stagnation.

Each month that goes by, its another month of soft landing ....... err isn't that what the BoE and Government want ??!!!

[Casual Observer]

Well done The Little Guy - completely agree with you. And particularly well done in the intelligent and measured responses you have given to some of the mentalist bears that have replied. I seldom have the patience for it myself.

House Price Crash is a long way off, for every downward argument there a number of factors, all mentioned by yourself that are upward pressures - net result is stagnation. I reckon at least 6 months more of stagnation.

Each month that goes by, its another month of soft landing ....... err isn't that what the BoE and Government want ??!!!

<{POST_SNAPBACK}>

13 straight months of falling prices? People's debt rose by about 10% from last year's 1 trillion all-time high?

Where's your mentalist bear argument?

Edited August 3, 2005 by Casual Observer

[Rapid Descent]

The observation that IRs are low today is a common bull argument. It is an interesting observation, but may not prevent a crash.

In the late 80's crash, the boom happened when IRs were around 9% - people took on debt that was a stretch at that level, and when IRs went up by a further 6% (an increase of just 2/3rds) the pack of cards came down.

This time around, people have stretched themselves at 3.5% - and now, with IRs increased to 4.75%, we are seeing repossessions going up by something like 50% per quarter.

The bottom line is that high interest rates can play a sideline influence, they are not a prerequisite for property falls (you just have to look to Japan to realise this). The only strict prerequisites for property price falls are:

(1) Overvalued housing stock

(2) Supply exceeding demand

Once property prices start to fall, just as they did on the way up, the herd instinct kicks in. This is because capital changes drive our housing market, not the underlying value, which has a massive positive feedback effect.

Unless interest rates drop to below 3.5%, sharp falls will not be staved off. I think this level is, at best, unlikely. To get property going up again, in todays conditions, we would probably need interest rates at 2% - and all that would happen would be that people would get themselves into even deeper trouble. This would make the crunch, when it finally arrived, conisderably worse.

[busta move]

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.

<{POST_SNAPBACK}>

Well, I think we can agree to disagree. I'm pretty sure that the rise in unemployment, and bad debts is just the tip of the iceburg and that as the bar gets lowered, it will force a few more people into trouble and so on, gathering momentum.

Either way, we can at least agree on a strategy given that we're both renters:

Don't buy for a bit (like at least couple of years to give things a fair chance to crash) and if prices are still about the same as they are now. I might decide that you were right and that we have our first ever stable house prices and work out if I can stretch myself to buy. I'll be the first to congratulate you on your prediction of the market.

If, on the other hand, the prices do crash in the next few years, you can congratulate me on picking the markets and we can both buy houses cheaply and be on our way.

Either way, not buying now seems like the best bet!!

[boom_and_bust]

Each month that goes by, its another month of soft landing ....... err isn't that what the BoE and Government want ??!!!

<{POST_SNAPBACK}>

Hi,

Well it's hard not agree with you, you are such a lovely little thing, enjoying yourself by the pool, but I have stick to the topic goddamit!

I think what BoE wants and what BoE gets are sometimes different. I think back in the 70's they didn't want naughty curreny speculators trashing the pound but they still had to go to the IMF cap-in-hand for a loan. We are still paying for it.

And I don't think BoE wanted naughty city traders to trash the pound again in the early nineties and force Uk plc out of the ERM and I am really sure they didn't want the housing crash after (or the one in 1989).

And, didn't BoE itself say a year or so ago that it can do little to prevent assest bubbles (i.e,. it used the word asset buuble and houses together).

But let's hope it can end nicely.

[TheLittleGuy]

Well, I think we can agree to disagree. I'm pretty sure that the rise in unemployment, and bad debts is just the tip of the iceburg and that as the bar gets lowered, it will force a few more people into trouble and so on, gathering momentum.

Either way, we can at least agree on a strategy given that we're both renters:

  Don't buy for a bit (like at least  couple of years to give things a fair chance to crash) and if prices are still about the same as they are now. I might decide that you were right and that we have our first ever stable house prices and work out if I can stretch myself to buy. I'll be the first to congratulate you on your prediction of the market.

If, on the other hand, the prices do crash in the next few years, you can congratulate me on picking the markets and we can both buy houses cheaply and be on our way.

Either way, not buying now seems like the best bet!!

<{POST_SNAPBACK}>

We can agree to disagree. Be careful though; using language like that will upset a lot of people round here!

Anyway, I'm torn between agreeing with your strategy 100% or trying to make a little money on the way down. As I see it buying (with a massive STR deposit) the right kind of property (a renovation project in a good area) at the right time (winter) in a nervous buyers market will give me a LOT of negotiating power. If I can get 20-25% BMV (factoring in renovation costs) I can sell it on at my leisure and come out ahead.

So my current plan is to wait till winter and see what transpires.

[Unexpected]

We can agree to disagree. Be careful though; using language like that will upset a lot of people round here!

Anyway, I'm torn between agreeing with your strategy 100% or trying to make a little money on the way down. As I see it buying (with a massive STR deposit) the right kind of property (a renovation project in a good area) at the right time (winter) in a nervous buyers market will give me a LOT of negotiating power. If I can get 20-25% BMV (factoring in renovation costs) I can sell it on at my leisure and come out ahead.

So my current plan is to wait till winter and see what transpires.

<{POST_SNAPBACK}>

I think your problem is that you want to buy. I on the other hand dont want to buy and am very happy renting because of the flexibility. If the crash happened this year I'd be thinking "Sh1t I'll have to buy now to make the most of this crash". Also, I'm enjoying making money on the SM using my expanding deposit so my way of thinking is that a 5 year stagnation will do very nicely.

What is it that makes people "need" to own the property they live in? I can understand it in a rising market as you see it getting further and further out of reach, but in a falling market when you see it getting closer and closer I cant think of a single LOGICAL reason.

Edited August 3, 2005 by Sine270

[TheLittleGuy]

I think you're problem is that you want to buy. I on the other hand dont want to buy and am very happy renting because of the flexibility. If the crash happened this year I'd be thinking "Sh1t I'll have to buy now to make the most of this crash". Also, I'm enjoying making money on the SM using my expanding deposit so my way of thinking is that a 5 year stagnation will do very nicely.

What is it that makes people "need" to own the property they live in? I can understand it in a rising market as you see it getting further and further out of reach, but in a falling market when you see it getting closer and closer I cant think of a single LOGICAL reason.

<{POST_SNAPBACK}>

Quite simply, the current situation is lose-lose. STR allows us to lose slightly less than ownership in the current declining market, but we still lose. Each month, either way, we pay for a roof over our heads.

But why wait years for a crash to knock 15-20% off prices, when agressive negotiation at the right time could achieve that in months (and let you fix a low IR mortgage)? I'm not commited to buying, but I don't rule it out if I can get the right deal.

[AgeingBabyBoomer]

Little#guy,

Just one question, back in the middle of the dot com crash of 2000, did you 'see' the

rise in prices to their current levels happening?

By my reckoning, it was a couple of years before people cottonned on to the low interest thing, and by then a lot fo the advantage had already been eaten up.

I think history will tellus that mid 2004 was the 'start' of the crash.

Also, unless inflation is 0.00%, then even stagnation counts as a real fall in prices.

ABB

Edited August 3, 2005 by AgeingBabyBoomer

[busta move]

We can agree to disagree. Be careful though; using language like that will upset a lot of people round here!

Anyway, I'm torn between agreeing with your strategy 100% or trying to make a little money on the way down. As I see it buying (with a massive STR deposit) the right kind of property (a renovation project in a good area) at the right time (winter) in a nervous buyers market will give me a LOT of negotiating power. If I can get 20-25% BMV (factoring in renovation costs) I can sell it on at my leisure and come out ahead.

So my current plan is to wait till winter and see what transpires.

<{POST_SNAPBACK}>

Well, I think you'd have to find a house at a very good price and then you'd still be doin' well to make a profit.

The problem is that it's taking a long time to sell houses at the moment so you'd have to drop the price to sell it quickly.

Either that you you get left chasing the market down.

Edited August 3, 2005 by busta move

[Guest Time 2 raise Interest Rates]

Quite simply, the current situation is lose-lose. STR allows us to lose slightly less than ownership in the current declining market, but we still lose. Each month, either way, we pay for a roof over our heads.

But why wait years for a crash to knock 15-20% off prices, when agressive negotiation at the right time could achieve that in months (and let you fix a low IR mortgage)? I'm not commited to buying, but I don't rule it out if I can get the right deal.

<{POST_SNAPBACK}>

So according to HomeTrack the ave price of a London house has fallen £13,000 to

£261,000 since july last year and Wriglesworth said "There are no signs of London

prices increasing." HomeTrack predicts prices will fall by 5% over the year.

If you had sold to rent why would you buy now. If prices are falling by £13,000 a year you're quids in and it's only the beginning.

[FTBagain]

Just caught up with this thread so I am a bit late with this point, Sorry.

I would really like to point out that the argument that interest rates do have not risen as much as they have in previous crashes is completely misleading. It overlooks a very important point.

People measure what they can afford by how much they can afford to repay per month at the time of taking out the loan. This means that the last people on to the market at 3.5% probably stretched themselves too far.

The rise in IR to 4.75% is a huge hike to them, or it will be when they come of their 2 year fix rate period. (Interestingly enough the repossesion rate in climbing which could indicate that the process is already starting.)

Look at it this way to someone who is already stretched a rise from 3.5% to 4.75% is equivilant to about 10% to about 14%, that would begin hurt. For those who took out mortgages at about 4% a 0.25% rise is far more significant than it used to be when IR were at 10% say. In other words the market is highly sensitive to IR's/ Far more so than previously. The BoE knows this. That is why they are being so cautious.

Oil is likely to keep rising, pushing up inflation. I suspect the BoE will be slow to react to inflation being driven by oil alone as they will be hoping that the single driver will fall back letting them offf the hook. I strongly suspect they will be disappointed given that China and India are sucking in oil like it is going out of fashion (which some say it is!). So when oil driven inflation takes hold the BoE will start driving up the IR's and the over sensitive housing market will be overwelmed. IR's only need to go to 7% or 8% and a lot of people's mortgages will have Doubled. There is your HPC big time. Seen the latest record for oil!!

[TheLittleGuy]

Well, I think you'd have to find a house at a very good price and then you'd still be doin' well to make a profit.

The problem is that it's taking a long time to sell houses at the moment so you'd have to drop the price to sell it quickly.

Either that you you get left chasing the market down.

<{POST_SNAPBACK}>

Worth considering, though.

I've done renovations before and come out well ahead. The trick is always in buying well and knowing having realistic expectations in terms of resale. If the sums add up it should be OK. Even if I were to break even it'd still save money when compared to STR or buying a standard house at MV. I'm not rushing into anything, but I will seriously consider it as the year goes on.

[RJG18]

Worth considering, though.

I've done renovations before and come out well ahead. The trick is always in buying well and knowing having realistic expectations in terms of resale. If the sums add up it should be OK. Even if I were to break even it'd still save money when compared to STR or buying a standard house at MV. I'm not rushing into anything, but I will seriously consider it as the year goes on.

<{POST_SNAPBACK}>

As I've said before, "Below market value" (BMV) is largely a myth. It's a delusion that you always see when prices begin falling after any asset bubble. If you DO manage to buy a house now at 20% below its summer-2004 price, do you think you should pat yourself on the back for being shrewd enough to buy BMV, or do you think that it would be an indicator that the house in question has fallen 20% from it's peak, and because of this will probably continue to fall.

By buying at 20% "Below Market Value" all you have done is set a NEW Market Value of 20% below its previous level, and that by definition has become the new "market value". For example, your purchase will contribute to the LR figures showing prices falling rapidly and substancially.... surveyors and EA's will now find recent comparables when making valuations showing prices of that sort of house in that area down 20%..... NetHousePrices etc will show the substancial falls.

So, in what way is buying into a falling market buying "BMV" ?

Edited August 3, 2005 by RJG18

[TheLittleGuy]

Hometrack reported last month that 'housing transactions had grown slightly'.

However, this type of comment isn't enough to get me to sit up and take note. I'd be gobsmacked if transactions didn't increase in July, even in a weak market. It's just a seasonal thing and come October the numbers will be heading in the opposite direction again.

I'm more interested in the year on year figures. If they start rising by more than a few percent before 2010 then I'll accept that I'm wrong.

<{POST_SNAPBACK}>

Sorry to bring this topic back, but I did promise to provide evidence of rising transactions. Here we are:

http://news.bbc.co.uk/1/hi/business/4699241.stm

UK mortgage lending picked up markedly in June, according to the British Bankers' Association (BBA) and Council of Mortgage Lenders (CML). ...

... Lending for house purchase stood at £11.9bn in June up from £9.9bn in May, the CML said.

However, lending for house purchase was still £2bn lower than for the same month last year. ]

So as I said, transactions are rising but still subdued. The (now official) IR drop will reinforce this tend. There's nothing obviously nasty on the immediate horizon. The market is showing no signs of collapsing, nor is it showing signs of substantial recovery. In other words this uneasy stagnation (or "soft landing") looks like it's sustainable for a good while yet.