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Buddleia

Bears, Why Isn't It "different This Time"?

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I just pulled out of buying an over-priced, "luxury" two-bed new-build in Wimbledon (without dishwasher, decent water-pressure, central-heating or even off-street parking), mainly because I'm fearful of losing most of my deposit in the correction.

Having told people of my reasons, however, I have been villified, nay, lambasted. I am a scare-mongerer! I have been told I am a fool and that I believe everything I hear.

Above all, I am told "it's different this time".

Apparently, this bubble cannot be compared to the 1989 bubble and crash, because in those days Britain was constrained by the ERM and was unable to easily shift its interest rates, instead being forced to keep them at ruinous rates that exacerbated the recession. These days, we have an independent CB that can - and will - tweak interest rates to keep the economy rolling along, avoiding recession and a HPC.

Therefore it's "different this time", and a gentle landing is the most likely scenario.

Bears, if this is a crock of sh*t, then give me some good arguments to pole-axe the pub bores that endlessly repeat it.

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Reasons:

Debt has doubled in 8 years and is at breaking point

Inflation is going up (even though REAL inflation is sky high)

Sentiment is turning in regards to housing being a good investment

Wages cannot keep up with 5% annual rises, let alone 20%

I'm sure others will add more reasons!

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Bears, if this is a crock of sh*t, then give me some good arguments to pole-axe the pub bores that endlessly repeat it.

I'm sorry, this whole website is devoted to exactly that. It only takes a little digging of your own to find these arguments.

http://www.housepricecrash.co.uk/forum/ind...?showtopic=4078

Interest rates may be low now, but so is inflation. Today's homeowners will not have their mortgages paid off for them by inflation like their parents did. If the Bank of England drop interest rates every time the housing market looks like wobbling then the pound will be sold off on the international markets and the cost of imports will rise, raising inflation and forcing them to put the rates up again to meet their inflation remit. Also, cutting interest rates is not some magical cure-all to prevent an economic downturn; you only have to look at Japan and Germany to see low interest rates did not prevent an economic recession. If anything cutting interest rates only makes the ensuing carnage even worse.

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I just pulled out of buying an over-priced, "luxury" two-bed new-build in Wimbledon ...

Bears, if this is a crock of sh*t, then give me some good arguments to pole-axe the pub bores that endlessly repeat it.

Why? The arguments are good enough to prevent you buying: isn't that enough?

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It is different this time...

... it's worse!

Personal debt is probably the biggest danger. £1.1 Trillion. Never has so much been owed by so many to so few (banks).

Second is inflation. Interest rates are near historic lows and inflation is rising. One of 2 things is likely to happen: 1. Interest rates rise to cut inflation. 2. Inflation is left to errode spending power.

Record debt coming in contect with rising interest rates or falling spending power has a similar effect to excrement coming in contact with a fan!

Your' wait and see' policy may be the best decision you have made in your life!

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Why? The arguments are good enough to prevent you buying: isn't that enough?

No.

Any fool can look at a graph and see that prices are on the crest of a wave and get scared enough to pull out.

However, detailed economic analysis is a totally different thing. I've been told time and time again that the CB can respond to threats by dropping interest rates, and I don't buy it, but I have feck all understanding of economics so can't back up my arguments.

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Well, IMHO it is both 'different' and 'the same' this time round – there is a bubble, but the post-1992 lower IR environment supports (to some extent) the level of pricing, and the peak prices are partly ‘bubble’ and partly IR lifted. The bubble component will evaporate as before (the same) but down to a floor supported by lower IRs (different). The detailed argument is given in this 'House Price Precictions' thread. Post #19 shows how the predicted crash percentage varies with the IRs over the next few years.

The counter argument is that while lower IRs have been converted into higher debt at a *constant* affordability (or service cost) the problem is that (with low IRs) a greater fraction of future earnings is committed. This is the real extra cost ...

Edited by spline

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It is different this time...

... it's worse!

Personal debt is probably the biggest danger. £1.1 Trillion. Never has so much been owed by so many to so few (banks).

Second is inflation. Interest rates are near historic lows and inflation is rising. One of 2 things is likely to happen: 1. Interest rates rise to cut inflation. 2. Inflation is left to errode spending power.

Record debt coming in contect with rising interest rates or falling spending power has a similar effect to excrement coming in contact with a fan!

Your' wait and see' policy may be the best decision you have made in your life!

Where's the evidence for rising inflation? The CB just knocked a slice off IRs.

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The soft landing scenario relies on interest rates and unemployment remaining at low levels.

The only reason unemployment has stayed so low in recent years is that we've had a consumer spending boom financed predominantly by ever-increasing personal debt, which in turn has relied on ever-increasing house prices.

With house prices currently looking flat, there is no more fuel for this debt-driven consumer spending binge, and as a result, people aren't spending anymore. So retailers are suffering, and unemployment is rising.

In addition, CPI inflation is looking like it might be raising its ugly head (it has more than doubled from 1.1% to 2.4% in about a year). If inflation keeps on rising, interest rates will have to rise.

Rising interest rates will make mortgages less affordable for everyone, particularly recent buy-to-let landlords, who are already struggling to keep their cash flows positive. If they go under en masse, they will become distressed sellers and the market will quickly become flooded.

There's no guarantee that a soft landing won't happen, but these upsides to unemployment and interest rates mean a hard landing is becoming ever more likely.

Edited by doogie

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Well, IMHO it is both 'different' and 'the same' this time round – there is a bubble, but the post-1992 lower IR environment supports (to some extent) the level of pricing, and the peak prices are partly ‘bubble’ and partly IR lifted. The bubble component will evaporate as before (the same) but down to a floor supported by lower IRs (different). The detailed argument is given in this 'House Price Precictions' thread. Post #19 shows how the predicted crash percentage varies with the IRs over the next few years.

The counter argument is that while lower IRs have been converted into higher debt at a *constant* affordability (or service cost) the problem is that (with low IRs) a greater fraction of future earnings is committed. This is the real extra cost ...

Understoodm, but is there any truth in this argument that the last crash was exacerbated by piss-poor fiscal policy - particularly with the IRs?

Being a kid at the time I had understandably little interest in Negative Equity.

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I just pulled out of buying an over-priced, "luxury" two-bed new-build in Wimbledon

I think your wasting not only your own time but our's as well. Further more I would suggest you listen to your drinking pals and pop back to the EA's and secure that flat double quick. :ph34r:

Edited by Catch22

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These bullish arguments (such as the idea that interest rates can be adjusted to prop up the market) are fine as long as nobody has considered them before. However markets have a way of pricing in known factors, both good and bad (take the Olympics that has already pushed up prices in Stratford). This is the so called efficient market: any risk free upside or downside is quickly arbitraged away.

Future price movements will occur because of unknowns.

This of course makes perfect sense. Humans have a way of absorbing information and acting on it. And it is humans that link the market of 1989 to the market now.

Whether it be grain, equities, forex: all these markets are essentially the same, because the market is NOT composed of grain or equities or currencies but PEOPLE.

When people discover something about the market that makes them worried, they all revert to cavemen, just like they did in 1989, just like they'll do in any future fall.

So why be bearish if th emarket will only move on unknowns? Surely, unknowns could be "good" unknowns? true. But big market movements occur when market participants discount negatives and only consider positives.

Consider the example your friends gave: prices can't go down because any bad news for housing will be countered by a rate cut, and that will be good for housing.

Let me write that as an equation just to make it clear:

Bad_News + Good_News = Good_News

Now ask yourself why it can't be that:

Bad_News + Good_News = Bad_News

Clearly, no good reason exists. This tells you all you need to know: sentiment in housing has become unreasonably positive. Some might call it irrational exhuberance.

Edited by Sledgehead

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As doogie says, the debt driven consumer-spending splurge seems to be over. Fair enough, the MCP may start cutting rates a bit more seriously, but firstly its ability to do so is already being constrained by high oil prices (which in the short term lead to inflation), and secondly there's no certainty that consumers will be willing to carry on borrowing to the same extent. Figures from the BBA this morning show that consumers are paying back credit cards more than of late. If consumers don't take up the slack where is the growth in the economy going to come from? Answer, there won't be much growth. Again, today there's a story (see the newsblog page) demonstrating that currently growth is at about 1.5%, rather less than Brown's projected 3 to 3.5%. Seems to me the only question is, how deep will the economic downturn be? Will we get into negative growth? So cutting interest rates may not be enough after all.

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Germany have had an independant bank for far longer than we have. And theirs is really independant also they have had a recession.

BUT they haven't had a housing crash either.

Nor has Netherlands, where I live - 3 years of piss-poor economic performance, even recession some quarters, but the housing market has barely budged from its peak, much to my frustration.

I admit that the housing bubble has been more pronounced in England (and even more in Ireland, poor sods), but I am surprised that years of downturn in Europe hasn't killed house prices, at least where I am.

Anybody care to comment on that?

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Just found this great speech by Andrew Large (deputy gov at BoE) about personal debt.

Check out the table on page 5 (and bear in mind that that data is now two year old - the lines would be steeper now...):

http://www.bankofengland.co.uk/publication...4/speech217.pdf

Also worth bearing in mind that Japan has had a 15-year recession with debt to income ratio of 120%; we are now at 150%, according to creditaction.

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Understoodm, but is there any truth in this argument that the last crash was exacerbated by piss-poor fiscal policy - particularly with the IRs?

Being a kid at the time I had understandably little interest in Negative Equity.

I would say that in the late 1980s (and before) prices where lifted by tax advantages - their removal partly pre-inflated the bubble and got it started whereas a very high IR spike in 1990 deflated the bubble very effectively, but from 1992 onwards the IR dropped and provided a support at a 'de-bubbled' exit p/e ratio of around 3.2x. In other words, over 1989-1995 peak and trough, the tax advantages have been replaced by low IR advantages. But note the real cost of low IRs in terms of the fraction of future earnings committed.

Edited by spline

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Where's the evidence for rising inflation? The CB just knocked a slice off IRs.

The evidence is on the BofE website!

The CPI is rising fast and the BofE are pridicting an upwards-trend. see BofE website http://www.bankofengland.co.uk/publication...port/infrep.htm

Now if interest rates continue falling while inflation is rising then that is a BAD thing. Your wages will not buy as much and you'll have difficulty asking for a pay rise. This is not good for people in debt or by extension house prices.

Do you really believe that inflation is staying low? Have you tried putting petrol in your car recently?

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BUT they haven't had a housing crash either.

Nor has Netherlands, where I live - 3 years of piss-poor economic performance, even recession some quarters, but the housing market has barely budged from its peak, much to my frustration.

I admit that the housing bubble has been more pronounced in England (and even more in Ireland, poor sods), but I am surprised that years of downturn in Europe hasn't killed house prices, at least where I am.

Anybody care to comment on that?

I know they haven't had a housing crash just pointing out that they have an Independant bank and still had a recession. The reason they haven't had a HPC is because they think that in order to make money you need to make something rather than paint a house a different colour and think you deserve 30% on your 'investment'.

Basically it can't crash if it wasn't ever a bubble. I was pointing out that governments and central banks can't stop recessions etc by controlling IR.

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I know they haven't had a housing crash just pointing out that they have an Independant bank and still had a recession. The reason they haven't had a HPC is because they think that in order to make money you need to make something rather than paint a house a different colour and think you deserve 30% on your 'investment'.

Basically it can't crash if it wasn't ever a bubble. I was pointing out that governments and central banks can't stop recessions etc by controlling IR.

Understood.

Although the bubble in Netherlands was very pronounced, pushed up by all sorts of propety pron and over-lending by the banks. The yearly HPI tailed off several years ago, but prices have remained at elevated levels despite a crap economy (stable, but not growing).

I'm wondering why prices in Holland aren't dropping - could it be that you can get a mortgage at 3.25% ? I wonder if this stagnation will be the same model for the UK if interest rates continue to flap around the low end of the scale.

Cheers all,

Buddleia.

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BUT they haven't had a housing crash either.

Nor has Netherlands, where I live - 3 years of piss-poor economic performance, even recession some quarters, but the housing market has barely budged from its peak, much to my frustration.

I admit that the housing bubble has been more pronounced in England (and even more in Ireland, poor sods), but I am surprised that years of downturn in Europe hasn't killed house prices, at least where I am.

Anybody care to comment on that?

The independence of the central bank is a red herring. Where did everyone get this idea from? New Labour! ("no more boom and bust"). Although the Tories did manipulate IRs for electoral advantage, removing this possiblility is not enough to stop boom and bust.

The important thing to stop house price boom and bust is a proper regulatory system for mortgage lending. I'll bet that non-housing-bubble countries like Germany have exactly that.

frugalista

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  • 302 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% +
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      • up 5%



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