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Fundamental Shift

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Hello all,

On a website such as this I think it can only be helpful to have a bit of balance so I was wondering how much consideration has gone into just how sustainable current house prices are.

Just because house prices are higher than usual it does not mean that they necessarily have to come back to a recognised 'normal' level.

Any number of shifts in fundamental econcomic conditions can mean that the current levels of house prices are actually servicable.

Consider for instance the effect that China is having on how cheap it is to buy everyday household items (especially clothes and white goods) and also the effect of the big supermarkets on reducing the cost of groceries. Other than the service industry there does not appear to be very much inflation in the economy which could mean that people have enough spare cash after buying the necessities to be able to afford larger mortgages.

Conversely of course there may well be a point at which the bubble bursts. In this case there would need to be some kind of triggering event. Does anyone have any idea just what single factor or combination of factors will cause this to happen?

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Triggering event? Take your pick:

* Oil causing massive inflationary increases, pushing IR's up.

* A record £1.1t of debt

* China unpegging from the dollar, again causing inflationary pressures.

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Just because house prices are higher than usual

This is understating the situation somewhat. Nominal UK house prices are the highest they have ever been in recorded history.

there does not appear to be very much inflation in the economy

So there will be less debt erosion and debt will remain burdensome for longer; to steal Dames's sig quote:

"Low inflation: letting your loan linger longer"

there would need to be some kind of triggering event.

Not necessarily:

http://www.thisismoney.co.uk/news/article....97&in_page_id=2

Professor David Miles, chief UK economist at Morgan Stanley and author of the Treasury-commissioned report into long-term fixed-rate mortgages, said the growing perception that housing is overvalued could be sufficient to tip the market into a sharp slide.

'A significant fall in nominal house prices is not implausible,' Miles said. 'It does not require some trigger such as a rise in interest rates or unemployment. Expectations of a degree of overvaluation becoming widespread can itself be a factor driving prices down.'

Edited by zzg113

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Triggering event? Take your pick:

*  Oil causing massive inflationary increases, pushing IR's up.

*  A record £1.1t of debt

*  China unpegging from the dollar, again causing inflationary pressures.

OK, but........

Oil is high in nominal terms but not so much in real terms and it doesn't so far seem to be causing inflationary pressure. Inflation at current levels is about 2% so you have to ask how high is too high for oil?

Debt may be high at £1.1t but the majority of that is secured and although bankruptcies and bad debts are increasing they are still pretty low in relative terms. Again you have to ask how high is too high? What if the economy has more debt capacity?

Finally, China unpegging the dollar....... I'm no macro econcomic professor but it seems to me that it is China is doing a very good job of funding Americas current account defecit. To be honest I'm not even sure what the impact of China and the dollar has on UK house prices. Would you like to explain?

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Consider for instance the effect that China is having on how cheap it is to buy everyday household items (especially clothes and white goods)

That couldn't go on forever - latest BoE report stated that import prices have stopped falling.

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OK, but........

Oil is high in nominal terms but not so much in real terms and it doesn't so far seem to be causing inflationary pressure. Inflation at current levels is about 2% so you have to ask how high is too high for oil?

Takes a while for higher oil prices to feed through to inflation, companies try and absorb the extra costs, for example factory input prices in the UK are up 13% but factory gate prices are up only 3% although this is a massive jump from 2.5% in June and is a big inflationnary pressure. Factories absorbing these costs may choose to cut their workforces instead of passing on the costs to consumers and this will result in higher unemployment, more people unable to pay their debt, higher repossesions.

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Takes a while for higher oil prices to feed through to inflation, companies try and absorb the extra costs, for example factory input prices in the UK are up 13% but factory gate prices are up only 3% although this is a massive jump from 2.5% in June and is a big inflationnary pressure. Factories absorbing these costs may choose to cut their workforces instead of passing on the costs to consumers and this will result in higher unemployment, more people unable to pay their debt, higher repossesions.

So if we work on the basis that oil prices lead to inflation, doesn't that just mean that wage settlements increase (there is not exactly an excess supply of labour at the moment) so we get into an inflationary cycle and this erodes the value of debt meaning that house prices are affordable after all?

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Hello all,

On a website such as this I think it can only be helpful to have a bit of balance so I was wondering how much consideration has gone into just how sustainable current house prices are.

Just because house prices are higher than usual it does not mean that they necessarily have to come back to a recognised 'normal' level.

Any number of shifts in fundamental econcomic conditions can mean that the current levels of house prices are actually servicable.

Consider for instance the effect that China is having on how cheap it is to buy everyday household items (especially clothes and white goods) and also the effect of the big supermarkets on reducing the cost of groceries. Other than the service industry there does not appear to be very much inflation in the economy which could mean that people have enough spare cash after buying the necessities to be able to afford larger mortgages.

Conversely of course there may well be a point at which the bubble bursts. In this case there would need to be some kind of triggering event. Does anyone have any idea just what single factor or combination of factors will cause this to happen?

Hi Demo,

Balance and argument is always good.

And bears should indeed wonder whether there really has been a "paradigm shift" that means Britons forever should expect to pay five, six, seven... times the average annual salary for the average property.

I would say a lot of consideration has gone into this question on this site.

The problem I have with such arguments is that those who propose them vociferously (you may not be in this group, your post reads more as a "devil's advocate" rather than as a "believer") usually only consider one side of the argument.

For example, it is true that China (and other places) are helping to keep a lid on price inflation for many goods in the UK. But the corollary to this is that it also helps keep a lid on wage growth, which limits the opportunity for debt to be inflated away by high levels of wage growth as it did in my parents' case.

So a rational case might argue that a housebuyer will expect to have more disposal income as the price of the goods he will buy are kept low... but that he should expect little nominal wage growth over his lifetime (if he continues to do the same average job and doesn't become a successful pop star).

I would have thought the second effect would outweight the first (with the burden of higher debt for longer more than offsetting the relative savings on the cost of shoes or whatever... what with housing being a much weightier expense).

As for the supermarkets, I have to say I'm personally very sceptical about this - I think Tesco etc is VERY good at getting people to (steathily) increase what they spend on groceries etc. But, even so, I'd say this impact is still massively overshadowed by the burden of long-term debt that isn't being inflated away (and other issues such as council tax rises etc).

And the service part of the economy? As I understand things, Britain is increasingly a service economy - this is the engine of the British economy today.

I would suggest our overall debt burden and the apparent damage interest rates of just 4.75% have done point to something other than a very prosperous economy full of people who feel they have notably higher disposable income than they did in the past.

This is in turn reflected in the real economic growth of the country (after inflation is stripped out) and if you compare the country's real wealth with the real value of our housing stock (a price-to-earnings ratio at the national level if you like) you find that house prices have ballooned as a proportion of our real wealth. This seems illogical to me.

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So if we work on the basis that oil prices lead to inflation, doesn't that just mean that wage settlements increase (there is not exactly an excess supply of labour at the moment) so we get into an inflationary cycle and this erodes the value of debt meaning that house prices are affordable after all?

Doesn't this assume the British worker has the ability to demand higher wages - against a backdrop of deflationary pressures/competition from China etc?

And would it not be accompanied by higher interest rates, to stave off the inflation, and so pushing up the cost of servicing the debt?

Wouldn't this mean that the housing is not any cheaper to those who own it - your wage goes up but so does your interest costs - although it makes it cheaper (in real terms) for those who want to buy in future. This is just one way house prices could correct in real terms.

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Nominal house prices are nearly always the highest they've ever been. That's inflation for you.

Real house prices are also at record highs.

realprices.gif

if we work on the basis that oil prices lead to inflation

It leads to cost-push inflation only if companies are able to pass on input cost price rises to their customers.

http://www.tutor2u.net/economics/content/t.../oli_prices.htm

The evidence for the UK is that fluctuations in crude oil prices are no longer as important in influencing the rate of inflation as they were ten or twenty years previously. Our oil-energy dependency ratio has declined and the flexibility of our labour and product markets has increased which has the effect that pay is more flexible in response to changes in inflationary pressure (wages no longer automatically rise when inflation surges) and many businesses have witnessed a decline in their ability to immediately pass on increases in input costs when there are short term changes in raw material prices.
(there is not exactly an excess supply of labour at the moment)

http://www.migrationwatchuk.org/

Also consider globalisation, outsourcing, etc. There is a vast excess supply of labour in India and China.

Edited by zzg113

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So if we work on the basis that oil prices lead to inflation, doesn't that just mean that wage settlements increase (there is not exactly an excess supply of labour at the moment) so we get into an inflationary cycle and this erodes the value of debt meaning that house prices are affordable after all?

I don't know if we are necessarily going to see inflation in the double figures again - the kind the really erodes debt. The BoE target is only 2% CPI and they will use IRs to try and keep it there if they do their job properly.

Wage settlements usually would increase, particularly at this stage of the economic cycle, but remember we've got to compete with the rest of the world and live with the threat of having our jobs off shored where the work can be done for a fraction of what we get paid in the west. That keeps a lid on wage inflation.

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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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