Waiting For The Wrong Crash?

[TheLittleGuy]

I read an thread over at The Motley Fool boards, which has some very brainy people posting in it. The post suggested that the property bubble is nothing more than a shadow of the credit bubble, and that until the credit bubble bursts the property market would remain propped up. Basically people will continue to "borrow to afford", and will borrow their way out of trouble until they no longer can.

If this is the case surely the question stops being about sentiment or BTL'rs flooding the market (or any of the other things that have failed to materialise) and more about enough people simply being unable to borrow any more? Once that happens it seems to me there will be distress leading to a crash and a recession.

I'm totally ignorant on this matter. I know that the financial sector is unregulated, so any controls they impose on themselves are unlikley to seriously damage the credit market. Furthermore I think everyone now agrees that the BoE will keep IRs low in order to avoid a recession, at least in the short & medium term.

So are we all looking at the wrong bubble to burst, and what other factors would burst the credit bubble?

[Guest Time 2 raise Interest Rates]

Ahh thelittleguys back. The one who sold to rent but thinks properties going to keep on rising forever. Nice to see you back. I like a good laugh now and again.

[Phaedrus]

Ahh thelittleguys back.  The one who sold to rent but thinks properties going to keep on rising forever.  Nice to see you back.  I like a good laugh now and again.

<{POST_SNAPBACK}>

Bit harsh. He is just posting an alternative view, backed up with reasons. I think it is good to have this sort of debate.

However, I think the problem is one of affordability. Perhaps FTBs/BTLrs could afford to borrow more, nevertheless, they have exited the market, to me that spells the beginning of the end.

[Guest Time 2 raise Interest Rates]

Bit harsh. He is just posting an alternative view, backed up with reasons. I think it is good to have this sort of debate.

However, I think the problem is one of affordability. Perhaps FTBs/BTLrs could afford to borrow more, nevertheless, they have exited the market, to me that spells the beginning of the end.

<{POST_SNAPBACK}>

A bit harsh. Only my opinion, I feel thelittleguy not quite sure if he's coming or going. Go back a couple of months and read some of his old posts, you might see where I'm coming from but saying that I do enjoy his posts.

[TheLittleGuy]

A bit harsh.  Only my opinion, I feel thelittleguy not quite sure if he's coming or going.  Go back a couple of months and read some of his old posts, you might see where I'm coming from but saying that I do enjoy his posts. 

<{POST_SNAPBACK}>

Yes, I remember you, more's the pity. Back to bang on and on with your lame, childish arguments and then insult me repeatedly, like last time?

It must be sad to be so polarised, where you cannot appreciate any opinion but your own. I see you've done you usual trick of making up your own version of what I've said. So read this closely and try, for the first time in your life, to understand someone elses point of view. ACTUALLY READ IT, DON'T JUST MAKE UP WHAT YOU THINK I'VE SAID.

1) I've never suggested that house prices are going to rise in any sustainable way.

2) I've said I think prices will fall slowly, but not tumble.

3) I've said that in the long run there will be a severe crash.

4) I'm not a bear; I'm not a bull; I think for myself - you should try it sometime.

5) You are a blinkered idiot.

Was that clear enough for you? Would you like me to explain it again? While it sinks in, why don't you go off and find one of my posts where you claim I've said that prices will rise forever? Then you can show it to me and make me eat humble pie; you'd like that.

[Jason]

I read an thread over at The Motley Fool boards, which has some very brainy people posting in it. The post suggested that the property bubble is nothing more than a shadow of the credit bubble, and that until the credit bubble bursts the property market would remain propped up. Basically people will continue to "borrow to afford", and will borrow their way out of trouble until they no longer can.

If this is the case surely the question stops being about sentiment or BTL'rs flooding the market (or any of the other things that have failed to materialise) and more about enough people simply being unable to borrow any more? Once that happens it seems to me there will be distress leading to a crash and a recession.

I'm totally ignorant on this matter. I know that the financial sector is unregulated, so any controls they impose on themselves are unlikley to seriously damage the credit market. Furthermore I think everyone now agrees that the BoE will keep IRs low in order to avoid a recession, at least in the short & medium term.

So are we all looking at the wrong bubble to burst, and what other factors would burst the credit bubble?

<{POST_SNAPBACK}>

You may have a point, but don't you think people borrow money because they 'feel' wealthy? So, once house prices stop rising, like they have done, the masses will be reluctant to borrow against the value.

So you could say the Credit Bubble is a shadow of the Housing Bubble?!?!?

Edited August 3, 2005 by Jason

[Jason]

Another thought:

I think the Housing Bubble and Credit Bubble go hand in hand.

In the beginning the Mrs Credit Bubble was a few steps in front Mr Housing Bubble, but now Mr Housing Bubble has overtaken and leading the way..!

[TheLittleGuy]

You may have a point, but don't you think people borrow money because they 'feel' wealthy? So, once house prices stop rising, like they have done, the masses will be reluctant to borrow against the value.

So you could say the Credit Bubble is a shadow of the Housing Bubble?!?!?

<{POST_SNAPBACK}>

Well you might be right. I think it's a matter for debate. Can't the feeling of wealth can also come from having a stable job, expensive tastes and apparently unlimited credit?

And don't forget the second part. Theres "borrow to afford" but there's also "borrow out of trouble". Will feeling poorer not increase the latter, prolonging the property market stagnation?

[Guest Time 2 raise Interest Rates]

Yes, I remember you, more's the pity. Back to bang on and on with your lame, childish arguments and then insult me repeatedly, like last time?

It must be sad to be so polarised, where you cannot appreciate any opinion but your own. I see you've done you usual trick of making up your own version of what I've said. So read this closely and try, for the first time in your life, to understand someone elses point of view. ACTUALLY READ IT, DON'T JUST MAKE UP WHAT YOU THINK I'VE SAID.

1) I've never suggested that house prices are going to rise in any sustainable way.

2) I've said I think prices will fall slowly, but not tumble.

3) I've said that in the long run there will be a severe crash.

4) I'm not a bear; I'm not a bull; I think for myself - you should try it sometime.

5) You are a blinkered idiot.

Was that clear enough for you? Would you like me to explain it again? While it sinks in, why don't you go off and find one of my posts where you claim I've said that prices will rise forever? Then you can show it to me and make me eat humble pie; you'd like that.

<{POST_SNAPBACK}>

Like I said, we're all entitled to our own opinion and my opinion is you still don't know if you're coming or going.

[Vivaldo]

WHAT CAME FIRST - THE HOUSING OR CREDIT BUBBLE??????

ANSWERS S'IL VOUS PLAIT!

Seein that everyone seems to be relying on ever-increasing house prices for their lifestyle income then prices may go up for a few months yet as Mr and Mrs Belcher from Belch Green carry on pouring money in. I'll then sit back and enjoy the crash. Remember Japan - the bigger the bubble the bigger the crash!

Edited August 3, 2005 by Vivaldo

[FTBagain]

TheLittleGuy,

Interesting point, but I agree with Jason, they probably go hand in hand. In any event I think the banks are already starting to tighten their rules. For the last couple of months the news papers and even the BBC web site have been full of stories of banks increasing their allowances for bad debt! Not good reading for the shareholders. Soon they will start take increasingly tough measures to get their money back!

The process is already moving and it will be gathering pace over the winter. Some people are going to have a very unhappy Chrismas I fear, but next Christmas will be even worse.

[OnlyMe]

Debt creation is the mechanism by which the govt. has propped up the economy, housing just happens to be material item that has been expolioted as the measn for doing so. It could just as easily have been any other item or resource, even tulip bulbs, it just so happens that housing fits the bill perfectly as single houses trade for high prices and it is not difficult to whip up demand and restrict supply (or indeed temporarily drown existing supply with demand by uncontrolled illegal immigration - legal or otheriwse).

If you merely helicopter drop money it is too noticeable and your currency is immediately devalued, you only have to hide the creation of money make it look as is it is your economy/GDP that is growing to get away with it - as that nominally confers higher value to your currency - until everybody realises that a significant portion of GDP was never sustainable and just an artifact of the debt creation process.

[Vivaldo]

And whatz to stop lenders lending and lending and lending and lending more and more and more and more freely. When does the cycle stop?? What has stopped this cycle of crazy lending before here and abroad?????

???

[Vivaldo]

Soz - I realize we haven't had such a crazy cycle here before but you get what I mean dontcha!

Bubba, howz about setting yourself up as a part-time property economics guru and getting some prime-time spots for HPC - think TTRIR said it before - I reckon you could cut it!

Edited August 3, 2005 by Vivaldo

[TheLittleGuy]

I appreciate that property and credit are part of the same problem What I'm trying to say is that to ***** the credit bubble will require a different set of conditions than those suggested (but not materialised) for the property bubble.

Is it reasonable to say that the property bubble has not burst because the credit bubble is holding it all together? If this is the case it does not matter about BTL or sentiment or snowballs. The housing market wont crash until enough people can't get credit.

And whatz to stop lenders lending and lending and lending and lending more and more and more and more freely.

That's exactly what I'm asking.

Edited August 3, 2005 by TheLittleGuy

[Jason]

If you merely helicopter drop money it is too noticeable and your currency is immediately devalued,process.

<{POST_SNAPBACK}>

Isn't this what the Nazi's attempted to do during WW2 (although it was fake, but realistic, money)?

How much currency did they plan to drop? I bet it is a no where near the debt we have today.

[Rapid Descent]

The problem with house prices is that the current valuations are based on the assumption of capital growth.

Two years ago that made sense, because houses were rising at 20% per year.

Last year the capital growth stopped dead in its tracks. There is nowhere for the capital growth to go - FTBs can't afford to get on the ladder, BTL yields are abysmal, the bottom rung of the ladder is broken.

The problem is, once realisation dawns that there is no more capital growth, suddenly the valuations that were based on capital growth are meaningless. The cold light of day means you have to value the house differently - its worth as a BTL or its worth to an FTB. In these terms, the properties are worth perhaps 30-40% below current prices.

It is a misconception that high interest rates, or a credit crunch, are a prerequisite to bursting a housing bubble. The only prerequisites are (1) overvalued housing stock and (2) excess supply and insufficient demand, both of which we have today.

Once houses fall, the credit problem will become more of an issue because of problems with negative equity, inability to sell or escape the debt during economic downturns.

[Unexpected]

TheLittleGuy.

"3) I've said that in the long run there will be a severe crash."

So are you really saying that you might buy later this year even though you say there will be a SEVERE crash in the long run? Or would you plan on selling before this severe crash? If so then that could be really hard to time or even carry out if the market is in stagnation.

Whats up? Do you feel bad about yourself for renting? Do your friends or family think there is something wrong with renting? Or is it pressure from the other half?

[TheLittleGuy]

So are you really saying that you might buy later this year even though you say there will be a SEVERE crash in the long run? Or would you plan on selling before this severe crash? If so then that could be really hard to time or even carry out if the market is in stagnation.

Whats up? Do you feel bad about yourself for renting? Do your friends or family think there is something wrong with renting? Or is it pressure from the other half?

<{POST_SNAPBACK}>

Nah. Long Run means years. I'm thinking that if market activity stays low but sustainable (as it is) and prices dwindle rather than fall (as they are) for quite some time to come there's a case for buying, renovating and selling as an alternative to STR. It's just a thought though, and since I am honestly interested in this credit bubble topic I don't really want to sidetrack the orginal topic.

Edited August 3, 2005 by TheLittleGuy

[RJG18]

....Basically people will continue to "borrow to afford", and will borrow their way out of trouble until they no longer can.

If this is the case surely the question stops being about sentiment or BTL'rs flooding the market (or any of the other things that have failed to materialise) and more about enough people simply being unable to borrow any more? ....

<{POST_SNAPBACK}>

But you can't borrow your way out of trouble. It's like trying to get yourself out of a hole by digging, it just makes the problem worse.

Borrowing money, (including MEWing), decreases your net wealth over time, not increases it. For every item you buy on credit or with borrowed money, the reduction in your future earnings (through repayments) is more than the value of the item purchased, IN EVERY SINGLE CASE.

For example, if someone with a reasonable sized credit card balance on a typical credit card uses it to purchase a CD Album costing £15, then just makes minimum payments, the CD will likely end up costing them about £50 of their future earnings before it's repayed. Every item you by in borrow money disproportionately reduces your future spending capabilities. It currently does not appear this way to most people, as they are currently still increasing their borrowing. What I mean by this is that they don't feel the £50 loss of money caused by their £15 CD purchase, and don't go without goods or services to the value of £50 in future to pay for their CD, because they can appear to plug that gap by simply putting another £50 on their credit card, hence see no immediate visible reduction in their ability to purchase goods or services. However, they continue to make the minimum payment and this £50 now costs them £200 over time. Again, obviously they do not "go without" £200 worth of purchasing in future, as they can increase their borrowing by £200, which reduces their future available real wealth by probably £800. and so on.

However, all this time their minimum payment on this credit card is increasing..... £5 a month..... then £50 a month before too long...... then £500 a month before too long. At first they don't feel this, because they can always plug the £500 gap with more borrowing. That's how it creeps up on people. But the effect doesn't creep up, it hits you with a bang the moment you can't service the minimum payments on your debts. At that point the cost of the repayment becomes real in realtion to your income, and the future growth in borrowing levels immediately becomes unavailable, and suddenly you're left with none of your monthly income available to you to actually spend, while at the same time needing to repay tens or hundreds of thousands of debts off. Then, game over.

We're in the endgame of all this now, it's affecting nearly everyone, and it's nearly checkmate.

Edited August 3, 2005 by RJG18

[Guest Time 2 raise Interest Rates]

Nah. Long Run means years. I'm thinking that if market activity stays low but sustainable (as it is) and prices dwindle rather than fall (as they are) for quite some time to come there's a case for buying, renovating and selling as an alternative to STR. It's just a thought though, and since I am honestly interested in this credit bubble topic I don't really want to sidetrack the orginal topic.

<{POST_SNAPBACK}>

But to quote you in your lovely reply to my first post, you said in question 2 "you think prices will fall slowly" but then in question 3 you also think "there will be a severe crash". Then in question 4, you're not a bull or a bear. I think for me to say you're not sure if you're coming or going was rather polite.

Edited August 3, 2005 by Time 2 raise Interest Rates

[TheLittleGuy]

But to quote you in your lovely reply to my first post, you said in question 2 "you think prices will fall slowly" but then in question 3 you also think "there will be a severe crash".  Then in question 4, you're not a bull or a bear.  I think for me to say you're not sure if you're coming or going was rather polite.     

<{POST_SNAPBACK}>

Jesus, you really are a pratt! It's like explaining chemistry to a dog. Why don't you stop bothering me?

[Guest Time 2 raise Interest Rates]

Jesus, you really are a pratt! It's like explaining chemistry to a dog. Why don't you stop bothering me?

<{POST_SNAPBACK}>

Because I really feel you're full of sh**. Enough said.

[TheLittleGuy]

However, I think the problem is one of affordability. Perhaps FTBs/BTLrs could afford to borrow more, nevertheless, they have exited the market, to me that spells the beginning of the end.

<{POST_SNAPBACK}>

Sorry mate, I got so annoyed I didn't read your point, which actually pees all over my argument a bit!

Perhaps the point is that they credit is easy now, so things are not crashing. However if/when credit is less easy others who are over commited cannot borrow sufficient funds to get them out of trouble, and the whole thing unravels. Suddenly we have widespread distress, and from there we get a crash.

But you can't borrow your way out of trouble. It's like trying to get yourself out of a hole by digging, it just makes the problem worse.

Logically yes, but in practice that's not how it works. For example, people MEW to pay of CC bills, and they take CC interest free deals to pay other credit. All of this is considered completely normal. It's all short term ********, but it puts off the problem for a while. And so the problem grows. Edited August 3, 2005 by TheLittleGuy

[RJG18]

Logically yes, but in practice that's not how it works. For example, people MEW to pay of CC bills, and they take CC interest free deals to pay other credit. All of this is considered completely normal. It's all short term ********, but it puts off the problem for a while. And so the problem grows.

<{POST_SNAPBACK}>

Ok, just so long as we're in agreement that borrowing to repay debt simply defers the problem slightly by increasing the scale of the problem substancially.

And don't forget, MEW is not free money, and not a method of releasing "profits". It's simply another loan, which has to be repayed, and at far greater values than the amount you borrow. Don't forget, on a 25 year (remaining) mortgage, for every £100,000 you borrow you repay about £190,000.

I.e., by MEWing to buy a £18,000 car you may actually simply be paying nearly £35,000 for a car that's only worth £18,000 (and will continue to lose value). You'll still be paying this money for possibly decades after this car has rusted away and be scrapped.

MEWing the rising equity in your house makes you massively less wealthy rather than increasing your wealth.