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House Price Crash Forum

House crash=general crash? - discuss


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From the Guardian Article today:

Mr Calverley is not all doom and gloom, however. He says a fall of 50% in house prices, which would have "catastrophic" consequences for the economy, is unlikely.

Not being an economist I don't know the technicalities, but why is it always assumed that a crash in DOMESTIC property prices implies a general economic collapse? The only people affected, prima facie, are the few professions whose income is reliant on prices rather than turnover and those who overstretched their mortgages or took out multiple mortgages, or borrowed an arm and a leg against their notional house value.

I recognise that an extreme fall might generate bankruptcies which have knock on effects - but surely when the decks are cleared there will be, overall, a benefit to the vast majority. In 1990 it was very different because there was a general recession already in full swing, the pound sank against other currencies and we left the ERM.

That is not the case now, so aside from the inevitable effects on some, we're talking mainly of the notional value for those who already have a house. They can still move and transact because everyone else's house would be at the same level. But with the advantage that FTB's can then keep the "market" alive.

I am also confused by the seemingly odd and constant use of the phrase "slow down" by economists and property professionals, rather than "price reduction". Surely the two are quite distinct. A "slow down" implies fewer transactions, which again mainly affects the profits of EA's, surveyors and other agency-type bodies. In fact it seems to me that the description "slow down" is loaded with self interest on the part of EA's because they are by this admitting that they want high turnover and constant MOVEMENT in the market which manifestly is the only thing which allows them to exist.

If the market is "slow" that is because new buyers are not interested, and to my mind that is currently a good thing. And if houses are (which almost everyone agrees) grossly over-valued, how can a needed reduction have such a "catatrophic" effect? Surely the effect would be even more catastrophic if prices kept rising ad infinitum.

I realise economics is an extremely inexact science, but it intrigues me why economists' use of language appears both confusing and often inappropriate.

VP

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Guest wrongmove

I think the problems to the greater ecomony are expected to come from the loss of the "feel-good" factor. If prices drop, then spending will be reined in. Heaven forbid, people may even start to save ! As growth in the economy seems to be based on borrowing to consume (often against the value of your home), this is bad news. The current state of affairs in unsustainable anyway, but there is an election coming...

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From the Guardian Article today:

Not being an economist I don't know the technicalities, but why is it always assumed that a crash in DOMESTIC property prices implies a general economic collapse?

I believe the most important statistic in the UK economy is the rate of increase in household debt. The total debt now stands at some £1024 Bn, and is increasing at a rate of about £120BN or 12% p.a.

It is difficult to estimate how much of this additional borrowing stimulates the economy. However, if we assume that the majority of personal loans overdrafts, credit card borrowing and second mortgages (commonly but erroneously called MEWing) directly feeds through into buying goods and services in the UK, this alone gives us a figure of about £80 BN. In addition some element of traditional mortgages for house purchase, especially for new build also contribute to the UK economy.

Assume for the sake of argument and round numbers that 100 Bn, of this extra borrowing by UK households is supporting the UK economy. This is 10% of GDP. Compare this with current growth predictions of just over 3%

If UK house prices dip or there is some external shock like high oil prices, UK consumers, feeling less wealthy, might make a collective and conscious decision, to take on no new extra debt in 2005. If this happens the UK economy will fall off a cliff.

This surely highlights the dilemma facing the MPC, despite their remit to target inflation. Either they raise interest rates to cut off extra borrowing, risking a painful recession, or they let the debt increase, postponing the inevitable and mortgaging the nation’s future.

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Where the property market is concerned, I believe there is a good case for throwing out virtually all classical economics re supply and demand, money supply and efficient markets etc, and instead to place a much heavier emphasis on behavourial economics and psychology which accounts for herd behaviour and sentiment.

Taking these branches of social science into account, I think it's virtually impossible to separate the housing market from the "feel good" factor, that underpins good economic health. When people's houses rise in value, they see their main asset increasing in value (never mind that it's a non-realisable), and think that their overall wealth has improved. They feel good, so go out and spend that extra "wealth" The economy booms. The exact opposite happens when houses fall in value - people cut back on spending because their main asset has fallen in value (never mind that it will make trading up easier), and they don't know how much further it might fall.

I remember an episode of Star Trek in which the crew have crash landed on a planet. They are attacked by marauding beasts, which they manage to fend off, killing one of the beasts in the process. They think they have driven the beasts off, but instead beasts retaliate and one of the crew is killed. Spock remarks "There was no reason for the creatures to retaliate - a most illogical reaction.", to which an incensed McCoy retorts "Didn't you logic tell you that the creatures would be angry that one of their members had just been killed - didn't it it occur to your logic that they would react emotionally and not logically?"

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It does seem extraordinary to me that such delicate threads in the balance are almost entirely reliant on "sentiment" and "feel-good" factors. Kind of makes formal economic theory even more of an irrelevance than I previously thought.

Why is the nation paying thousands of economists high salaries to pontificate and "advise" large corporations if none of their applied theories have the slightest bearing on what the herd does, and their dubious wisdom (which in any case seems more allied with their personal political persuasion than cold hard facts) is not acted upon?

As the above posts point out, pumping money from personal credit into the economy is only delaying the inevitable.

Seems that Bush is doing this even more than Brown in the US!

VP

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