Possible No Housing Market Bubble-boe's Nickell

[catandcrow]

This guy is basically saying new paradigm - welcome to the high job security, two income, low interest rate world --- lets see if it last as long as all the other new paradigms...

[majorwilliammartin]

I don't post much under this alias. I only use it when I have "sensitive" information.

In short, I was speaking to my acquaintance who works at the BoE again yesterday.

I didn't realise this previously, but only 2-3 years ago he was working on the housing market. At that time his analysis was that prices were going to go down. He gave this advice to some friends, who promptly ignored him and went ahead and bought anyway.

There's two lessons from this. One, leading institutions don't really know what where we are with the housing market, and are having to re-write their theories as they go on. Second, even if people get advice from someone at the BoE they ignore it as "house prices don't go down".

I suspect that the sheer bloody-mindedness of the consumer in this country has mystified many learned people.

[bears all]

Brainclamp, I'm not sure all the slack in the housing market (ie all the properties unsold at present; and there are a lot) can be taken up by BTLrs. After all, you'd think that with capital growth a certainty BTLrs would have been leaping already to mop up all the stuff that the FTBrs couldn't afford.

And yet this hasn't happened. What has happened is that the market has pretty much ground to a halt, at least when you compare it to normal levels of activity. If price falls become widespread, and are perceived to be so, what BTLr in their right mind would buy?

[RRP]

Interesting that Nickell thinks increased debt doesn't matter, because assets have increased disproportionately more.

And there you have the core of it. We must now bow to the man whose head expanded. We are all wrong. What ever gave us the opinion that the economy was running on debt?

Trying to think of an Alice in Wonderalnd quote which sums this up.

The different branches of Arithmetic -- Ambition, Distraction, Uglification, and Derision.

Alice in Wonderland.

Edited September 20, 2005 by RRP

[Spoony]

"There has not been a spending boom, the non-spending boom was not credit-fuelled and there has probably not been a house price bubble," Nickell said.

Is he mad? We are 1.1 Trillion in debt. Any idiot can see house prices are higher than ever before and so is credit fuelled spending!!

[theChuz]

this lifts the lid totally for me.

the mpc (in my opinion of course!) are, in the main, mere political placements.

i no longer believe in the MPC as the fabulous brave new world independent commitee. it is like the so called 'war on terror', an utter political farce to hide a very dirty truth indeed.

this is the last time i will post or visit HPC, it is causing me so much anxiety that it is just affecting my everyday life.

i take back all those comments i made about believing that inflation was not apparent and that CPI was a reasonable way of measuring broad-based price pressures.

what a fool!

so long and thanks for all the useful info HPC, i may never buy a house, period; this whole oil thing has taken the fight out of me and i would never dare get into debt for anything - i'm off to try and live my life for today instead of getting involved in all this cr@p.

<{POST_SNAPBACK}>

Go swill your face with ice cold water then bring it to me for a slap. We are only stretching at the moment the fight is yet to come, now shake it off and come out ready for some VI ass whoopin.

[Mushroom]

Go swill your face with ice cold water then bring it to me for a slap. We are only stretching at the moment the fight is yet to come, now shake it off and come out ready for some VI ass whoopin.

<{POST_SNAPBACK}>

You should be a scriptwriter for some of our comedians.

[uro_who]

Personally I think that Nickell was talking rubish. The funny thing is that the closer you are to the action the more difficult it is to see the broader picture (also see warrior fighting vehicles, SOS men and Iran). There are also some powerful reasons for sophistry in the Bank OE at the Mo.

[El_Pirata]

When the economic ice-age arrives, Nickell should be made to crawl bloodied through the streets of the City wearing around his neck a lead plaque bearing the inscription "There has not been a spending boom, the non-spending boom was not credit-fuelled and there has probably not been a house price bubble."

Then forced to watch as his master Brown is strung up from the nearest lamp post, before being thrown to a baying mob of starving chavs.

[uro_who]

I love the way that Nickell says today that if consumer speding dips rates can respond. Yet, on the same day US rates go up again (despite Katrina) and trumpeted to go to 4.5%.

Does he know something we don't

[Guest Charlie The Tramp]

Does he know something we don't

<{POST_SNAPBACK}>

Well the MPC minutes published tomorrow should give us a clue.

[spline]

Acording to Reuters ...

The housing market, which rose 123 percent between early 1999 and the middle of last year, may well not have been in a bubble, Bank of England policymaker Stephen Nickell said on Tuesday.

Nickell said a fall in long-term real interest rates from about 4 percent in the mid-1990s to around 2 percent by 2000 was one factor that has likely driven a substantial rise in the equilibrium house price to earnings ratio since the mid-1990s.

"Of course, there is a good deal of uncertainty here, but it is clear that it may be legitimately argued that there has been no housing bubble whatever," Nickell told an academic audience

Well, he’s just articulating the argument we have on this other thead – but we say no bubble until about mid-2002!

Edited September 20, 2005 by spline

[RRP]

"There has not been a spending boom, the non-spending boom was not credit-fuelled and there has probably not been a house price bubble."

"Can you do addition?" the White Queen asked. "What's one and one and one and one and one and one and one and one and one and one?" "I don't know," said Alice. "I lost count."

Through the Looking Glass.

"Alice laughed: "There's no use trying," she said; "one can't believe impossible things."

"I daresay you haven't had much practice," said the Queen. "When I was younger, I always did it for half an hour a day. Why, sometimes I've believed as many as six impossible things before breakfast."

Alice in Wonderland.

[uro_who]

Spline I agree completey with 2002. It was then that things here in Derbyshire really went in to orbit. I still stand by the wood for the trees argument. How can £1 trillion on something as without intrinsic worth as housing not be a bubble.

Sorry I'm no mathematician but I used to find that I did better in my friends A Level economics MCQ papers as I had the benefit of not studying the subject!

[spline]

It’s a bit audacious and quite funny but actually (sort of) right – house cost = price * <cost of borrowing, IRs> so house costs can stay constant while IRs drop and prices rocket. This is not considered a bubble, it’s really more of a changed equilibrium position, and because it’s not driven by sentiment it can’t evaporate … but raising IRs will reverse it, and painfully so. But is *is* almost exactly the argument we’ve been looking at.

Edited September 20, 2005 by spline

[El_Pirata]

It’s a bit audacious and quite funny but actually (sort of) right – house cost = price * <cost of borrowing, IRs> so house costs can stay constant while IRs drop and prices rocket. This is not considered a bubble, it’s really more of a changed equilibrium position, and because it’s not driven by sentiment it can’t evaporate … but raising IRs will reverse it, and painfully so. But is *is* almost exactly the argument we’ve been looking at. 

<{POST_SNAPBACK}>

What ought to be a limiting factor on this equation is the amount of credit available to buyers - ie the salary multiple you can borrow. But unfortunately we have seen the rise of 4x, 5x, 6x and self-cert mortgages. This has pumped a huge amount of extra money into the market, inflating prices. But it is not real money, the bank has in effect just printed it. I would like to see strictly enforced limits put on salary multiples for the good of all.

[DoubleBubbleTrouble]

Are we not missing the point here as pointed out earlier. This guy is obviously laying the groundwork for something...

What is it?

The two things that spring to mind are

1. Laying some spin groundwork for some impending bad news about the housing market

2. Preparing us for a serious bout of interest rate cuts - although Mervyn shirley has been trying to avoid that?

Either way it's a very odd position for someone associated to the BoE to be taking at this moment in time. Even Kate Barker managed to mention the b**ble word at one point.

[Smell the Fear]

What ought to be a limiting factor on this equation is the amount of credit available to buyers - ie the salary multiple you can borrow. But unfortunately we have seen the rise of 4x, 5x, 6x and self-cert mortgages. This has pumped a huge amount of extra money into the market, inflating prices. But it is not real money, the bank has in effect just printed it. I would like to see strictly enforced limits put on salary multiples for the good of all.

<{POST_SNAPBACK}>

I agree. We have a more or less fixed housing stock. Regardless of how much credit we have access to, we are the same people with the same incomes and will slug it out in the market to decide who gets which property.

The availability of credit does nothing to change this. It simply raises the stakes. If one person is prepared to borrow from the bank to buy a property, then everyone else has to do the same to compete with the inflated bid the borrower can put on a house.

If lenders go to 4x, 5x, 6x and some people are prepared to borrow this much, then house prices reflect this. If you aren't in, you can't win a house.

What is the result? For the same outcome for us (home ownership, or even just rental as rents reflect prices to some extent) the banks make a f*cking killing on interest charges.

Quite frankly I feel sick thinking about it. Why the hell are they allowed to persist with this robbery? Selling the nations assets back to us at ever inflating prices for their own gain.

NEW SYSTEM.

BAN MORTGAGE DEBT. Houses to be purchased with cash.

LIMIT home ownership to 1 or maybe maximum 2 properties.

Prices will fall to affordable levels to reflect what people can truly afford. The market still exists. The rape of a nation doesn't.

Mortgages are the main method of supplying money to the economy. Another way has to be found to do this. Government should issue money, not private corporations.

Edited September 20, 2005 by Smell the Fear

[Catch22]

looks like they are going to attempt to spend the economy out of trouble by lowering interest rates. Falling pound, rising inflation, you know the usuall stuck in a corner crap. Either that or they have nothing left to offer only a commentary on the "Emperors fine clothes"

Good job we have the Chuz to keep us focused

[tonification]

Why are you all surprised? Nickell is the definition of V.I.

[Smell the Fear]

Why are you all surprised? Nickell is the definition of V.I. 

<{POST_SNAPBACK}>

Nickel by name nickel by nature. Cheap tat.

[Pete]

Acording to Reuters ...

Nickell said a fall in long-term real interest rates from about 4 percent in the mid-1990s to around 2 percent by 2000 was one factor that has likely driven a substantial rise in the equilibrium house price to earnings ratio since the mid-1990s.

There was a similar argument by the BofE about a year ago - can't remember if same bloke. They explained that housing valuations based on rents did not show overvaluation because real interest rates have dropped to 2%, hence a 4% yield BTL providing a 2% risk premium is OK (2% risk premium is the long run average).

John Calverley in his book "Bubbles and how to survive them" counters this, claiming that an investor should demand a higher risk premium when inflation is low because property loses its traditional investment attractiveness as a hedge against inflation. And don't forget Greenspan's recent comments about risk premiums being too low.

Just goes to show that everyone, including academics, get caught up in this thing. I would have thought the fact that comments like this are being mad at all, is a far more reliable indicator of a bubble because it show the complacency built into current prices.

[Yankee]

Wasn't it Paul Krugman in the US who reckoned the dot-com boom was a new paradigm - i.e. arguing that the huge rise in stock prices was in fact a new equilibrium and entirely sustainable.

I think Nickell is arguing along similar lines.  I for one expect the eventual outcome will be similar as well.

<{POST_SNAPBACK}>

Are you sure it was Krugman? He's been warning about the housing bubble lately.

[justanewbie]

"Of course, there is a good deal of uncertainty here, but it is clear that it may be legitimately argued that there has been no housing bubble whatever," Nickell told an academic audience

======================================

So, Nickell is "uncertain" and thinks it "could be argued" when he

addresses an "academic" audience.

1. Economic history disagrees with him - the crash of 1929, the dot.com

bubble, the past three housing boom/busts.

2. Present experience disagrees with him - prices are (slowly) correcting,

FTBs are hardly buying, BTL investors are hardly buying, properties

are stagnating if the rpice is not corrected downwards.

3. Debt reality disagrees with him - increased bankruptcies, increased

debt problems, low retail spending

4. Industry disagrees with him - increased redundancies, slowed

growth, poor returns

The length of time that a house price correction takes is so long,

measured in years, that we can be deceived into thinking that it

is not happening.

Even if we have a string of qualifications and a high position.

Mr Nickell's words are noted and we will see if they stand up to

the test of time.

[London-loser]

Nickell also said that low inflation, the rise in two-salary households and increased levels of job security and rapid prospective earnings growth may also make it more sensible for households to borrow more now than they have in the past.

I think it has been said on this thread that job security is lower today rather than higher (as BraiNclamP keeps telling us, there is an endless stream of Polish people who will do our jobs for half the price), which also leads to serious questions about "rapid prospective earnings growth" - earnings growth is running at about 4-4.5% at present (and falling).

Low inflation has gone hand in hand with LOWER prospective earnings growth. Nickell only seems to see one side of this coin. The REAL interest rate is indeed lower than historically - but NOT half... and this is not necessarily a permanent thing.

The rise in two salary households doesn't have that great an effect - if Britain's GDP rises by 3.5% then we are 3.5% richer, whether this money is spread across two people per household or just an old fashioned "breadwinner" (man and wife earnings £30k each or man earning £60k) there is no more money to spend on property.

The graph of GDP versus aggregate house prices shows exactly the same boom and bust pattern that the individual house-prices-to-incomes graph does.

Tim Congdon of Lombard Street Research used these exact arguments in his debate against Bootle a while back. He concluded these issues could be argued to have pushed the "stable" house-prices-to-incomes ratio up from its long-term average of about 3.6 to perhaps 4.

Presumably Nickell is just massively more bullish about these effects.