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rantnrave

Lower Prices Wont Help Housing Market

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Posted over on EA Today:

To answer your points......

Point 1:

Do you feel that the wrong mindset is being adopted here? That Agents, instead of concentrating on their income by volume, should instead knuckle down to significantly lower volumes with Fee structures revised to compensate for the lower turnover?

Answer 1:

Yes, absolutely. Agents are 100% wrong to even countenance price cuts as a solution for returning volumes, and any significant market wide cutting of prices will end up reducing both volumes and revenue for agencies.

There is no shortage of housing need, nor of desire to buy, nor of ability to service the debt. The sole limiting factor for converting need, desire and ability to effective demand is that of mortgage rationing.

Banks don't have the money to lend any more than they are doing today. They are constantly varying the eligibility criteria, credit scoring, deposit levels, etc, to shrink the pool of borrowers to match available funding.

To put it in perspective, if 250,000 FTB-s showed up tomorrow with perfect credit scores and 25% deposits, the banks would have absolutely no choice but to move the goal posts yet again to further shrink the pool of borrowers, as they simply could not fund that many mortgages.

Point 2-

As far as I can see, knocking 10%, 20% or whatever off prices will not have the effect that people are wishing for. Many prospective sellers will be unable to even consider selling due to negative or no equity issues. Buyers will be reluctant to buy for fear (or expectancy...) of prices falling further. So... by my reckoning there will be less cake, less buyers - and LESS potential Fee income for Agents to scrabble over.

Answer 2-

Absolutely correct again. Classic economic theory shows us that price is set where supply and demand intersect, and that invariably lowering prices will lower supply until a market reaches equilibrium.

Falling prices will reduce supply to the market, exactly as we saw in 2008. Lower supply = lower volumes of listings, and lower volume of sales.

Now whilst it is possible for any individual agent to increase volume by reducing prices, you are not stimulating the wider market by doing so, just stealing market share from others.

The end result of all agents or vendors doing the same can be nothing other than falling levels of transactions and supply drying up until prices start rising again.

A repeat of the ultra-low volumes of late 08 and early 09 are the last thing any agency can cope with at the moment, but they're the inevitable result of prices falling on a market wide level.

And Miles at Rightmove should know this full well.

Frankly, anyone that advocates falling prices in an effort to stimulate volume knows nothing about economics..... (Which is as polite a way as I can think of for saying he's a blithering idiot for even thinking about it.)

If agents need volume to survive, then by advocating price falls they're signing their own execution order. The absolutely inevitable consequence of falling prices will be listings drying up and sales volumes plummeting.

As has been explained in my earlier posts, the ONLY way to increase volume by any significant margin is to increase mortgage lending. Agents should spend their time lobbying government to get lending moving again rather than wasting time on price cutting gimmicks that are doomed to failure.

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A US default next week, subsequent downgrading of the US, collapse in the markets immediately and resulting increase in global IRs might be worth having just so as to go into an EA's office and watch the panic.

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nor of ability to service the debt.

********. So much so that the efforts to get sercuritised lending going again and hence allow trash lending is a failure - there is no belief that borowers can borrow ever more to feed thi ponzi scheme without it backfiring on the bondholder and next time they may not get bailed out.

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A US default next week, subsequent downgrading of the US, collapse in the markets immediately and resulting increase in global IRs might be worth having just so as to go into an EA's office and watch the panic.

Btter to watch them convince themselves towards closure and redundancy. It seem they are getting what they want, let them choke on it.

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It's quite sad to think that people think they can control a market. Gordon Brown has taught them well.

Denial is one of the most powerful & difficult life lessons to learn and overcome.

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He / she is also wrong( can't be bothered to check the gender of the poster) on a fundamental point.

Mortgages are not being rationed due to funding restrictions, they are being rationed because at frigging last the powers that be are placing very large capital restrictions on shite lending.

All banks must stress their mortgage Ltvs and as such in order to avoid huge capital charges , they seed only interested in lending to folks with large deposits and hence low Ltvs. The costs involved and lack of leveraging of capital means that mortgages with high Ltvs are effectively unprofitable. That my dear ea is why there is do called rationing.

Trust me if you go into a bank with a syringe hanging out your arm swigging from a ten litre bottle of vodka, they'd still fall over themselves to lend to you if you have a 60 pc deposit.

The solution if you ea's want to not join the dole queue? Persuade your dozy clients to drop their prices so that prospective buyers can put down 25pc and your stock will shift.

The result may be that a few people have to spend a few years paying back debts they overborrowed through greed or some people have less equity than they thought, tough it's called a Market , you can't expect to earn three quarters of your wealth by sitting on an unproductive asset . The country will fail as a consequence.

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Mortgages are not being rationed due to funding restrictions, they are being rationed because at frigging last the powers that be are placing very large capital restrictions on shite lending.

classic

I like you!

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Posted over on EA Today:

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Arf. Yet another person who fails to distinguish between the price of houses and their cost. It is easy to argue that houses are cheap because interest rates are low but ignore the fact that the same situation arises if our reverse the factors - i.e. lower house prices at higher rates. Its a see-saw.

The problem that needs to be addressed is that if banks have a fixed pool of funds to lend then volumes can be increased by lending less for each house. This requires the market to reflect the realities of reduced funding by reduing prices to increase volumes to meet the demand that exists. Sadly, this person makes the tired plea for supply to be taken care of to the detriment of demand - in other words, allow high prices to met from borrowing and therefore increase the amount of lending available instead.

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Aye Rant, I was following that banter; guy obviously knows (some of) his beans but his almost angry dismissal of a HPC gives away his VI methought.

At least he was a lot more informed than most over there. Was using a lot of my best ammo in defence!

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Now whilst it is possible for any individual agent to increase volume by reducing prices, you are not stimulating the wider market by doing so, just stealing market share from others.

Love this bit - classic prisoner's dilema, and can't think of a more appropriate group of individuals for it to be posed (apart from perhaps prisoners) :D

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Arf. Yet another person who fails to distinguish between the price of houses and their cost. It is easy to argue that houses are cheap because interest rates are low but ignore the fact that the same situation arises if our reverse the factors - i.e. lower house prices at higher rates. Its a see-saw.

The problem that needs to be addressed is that if banks have a fixed pool of funds to lend then volumes can be increased by lending less for each house. This requires the market to reflect the realities of reduced funding by reduing prices to increase volumes to meet the demand that exists. Sadly, this person makes the tired plea for supply to be taken care of to the detriment of demand - in other words, allow high prices to met from borrowing and therefore increase the amount of lending available instead.

As I stated earlier, there is money a plenty sloshing around (they've printed enough of the stuff), its just that housing loans on large ltv's attract too much capital to make them profitable. (and its going to get worse!). His theory is ok except it doesnt fit with the facts.

There is no funding restriction in any bank, it is a capital restriction. Banks have oodles of liquidity, they just dont have the ability to lend against property without significant haircuts (deposits). Why? because they know that houses are currently over valued.

Would dropping prices lead to increased volumes? Yes it bloody well would because the losses (ie reduced equity for the sibleys) would be taken by the "equity" owners and thus reducing the risk of the bank. Lower risk, lower capital charges, more sensible lending, more volumes at lower prices.

Would the eventual result be another bubble at some point? Depends on whether the regulators learn their lesson or not. It is more then possible to have a vibrant housing market that doesnt lead to an increase in price if the banks are forced to allocate appropriate capital to appropriate risks.

If EA's weren't so economically illiterate they'd be knocking down grannies to try and get this situation to happen, alas most (not all I grant you) have learnt their trade in only one environment, one where a trained monkey could have shoved house sales out the door. They honestly believe that only higher prices can work for them.

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Posted over on EA Today:

Absolutely correct again. Classic economic theory shows us that price is set where supply and demand intersect, and that invariably lowering prices will lower supply until a market reaches equilibrium.

Well. He is an estate agents lecturing about economic theory.

What else but deranged drivel could we expect?

Edited by _w_

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Well. He is an estate agents lecturing about economic theory.

What else but deranged drivel could we expect?

he got it wrong - lowering prices does not lead to lowering supply, this is a meaningless term; moving the demand curve to the left both lowers prices and reduces transaction-rate (what he means by supply) at the same time; he is mixing correlation and casusation up

on the other hand lowering prices, if you just look at the demand curve in isolation, increases demand, and gets the market moving again

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he got it wrong - lowering prices does not lead to lowering supply, this is a meaningless term; moving the demand curve to the left both lowers prices and reduces transaction-rate (what he means by supply) at the same time; he is mixing correlation and casusation up

on the other hand lowering prices, if you just look at the demand curve in isolation, increases demand, and gets the market moving again

Although in a ZIRP negative equity environment lowering prices may lower supply (as long as falls are not excessive in which case supply would increase with price falls until demand rises enough to match it and stop the falls).

As for it being classical economic theory, that's just him spewing out nonsense to promote his actions (that are probably linked to the existence of a sizable and unsaleable BTL portfolio).

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he got it wrong - lowering prices does not lead to lowering supply, this is a meaningless term; moving the demand curve to the left both lowers prices and reduces transaction-rate (what he means by supply) at the same time; he is mixing correlation and casusation up

on the other hand lowering prices, if you just look at the demand curve in isolation, increases demand, and gets the market moving again

Surely the argument is that the market isn't at equilibrium, which is why supply is building up. Demand isn't matching supply because prices are not being adjusted, and so we have a glut.

This has nothing to do with estate agents really, they don't set prices.

Like all brokers, they exist to aid market liquidity, and if they don't do that they won't get paid. Speeding price discovery is in their own interests, but ultimately the price is set by buyers and sellers.

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Point 2-

As far as I can see, knocking 10%, 20% or whatever off prices will not have the effect that people are wishing for. Many prospective sellers will be unable to even consider selling due to negative or no equity issues. Buyers will be reluctant to buy for fear (or expectancy...) of prices falling further. So... by my reckoning there will be less cake, less buyers - and LESS potential Fee income for Agents to scrabble over.

Answer 2-

Absolutely correct again. Classic economic theory shows us that price is set where supply and demand intersect, and that invariably lowering prices will lower supply until a market reaches equilibrium.

This is the crux of his argument, and his biggest error.

Sure, some prospective sellers will be in negative equity and unable to proceed with putting their houses on the market, but he is forgetting that the majority of houses do not even have a mortgage on them, and that the majority of those that do only have a relatively small one.

Falling prices will not affect the supply of houses coming onto the market as a result of old people dying or moving into residential care, or from middle aged people downsizing or divorcing. Indeed, as the cost of living rises inexorably in relation to earnings, we might finally see repossessions start to kick in for many of those mired in debt.

Falling prices might restrict supply in the very short term while people wait to see if they bounce back, but once the realisation sinks in that the only way is down panic will bring the supply back up again in pretty short order.

Edited by Mr Yogi

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Arf. Yet another person who fails to distinguish between the price of houses and their cost. It is easy to argue that houses are cheap because interest rates are low but ignore the fact that the same situation arises if our reverse the factors - i.e. lower house prices at higher rates. Its a see-saw.

The problem that needs to be addressed is that if banks have a fixed pool of funds to lend then volumes can be increased by lending less for each house. This requires the market to reflect the realities of reduced funding by reduing prices to increase volumes to meet the demand that exists. Sadly, this person makes the tired plea for supply to be taken care of to the detriment of demand - in other words, allow high prices to met from borrowing and therefore increase the amount of lending available instead.

prices are ALWAYS low when lending is not in the marketplace distorting everything.

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We all know he's wrong, and some here with good reasons why.

For me, I can see his logic, with only a restricted supply of mortgage funding, reducing prices will increase volumes, but the amount of mortgage money coming to the market will stay the same and so the revenues for an ea will not change. This, on the face of it is a reasonable argument. However, he has forgotten about deposits. Now that buyers need deposits there days increasing volumes will also increase the amount of deposit money coming to the market and thus increase the revenue share for all ea's. Yes some of the recent buyers and mew's may go ne, but that might mean more houses on the market for more sales choice and greater volume sales. The ea suffers no penalty if a house he sells goes ne. Once sold, thats the end of the deal!

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knuckle down to significantly lower volumes with Fee structures revised to compensate for the lower turnover?

How? Right now EAs near me are selling at less than 1% (+VAT). I guess they could charge to list properties, but with the rise of the internet, how long will it be before people advertise in their own right

The sole limiting factor for converting need, desire and ability to effective demand is that of mortgage rationing.

Not true. Fear of redundancy, wage cuts, high interest rates for high LTV, potential for rise in interest rates, potential for price to fall are all additional limiting factors (and there are probably more)

Many prospective sellers will be unable to even consider selling due to negative or no equity issues.

Less than 5% of householders have negative/no equity. Even with a 20% drop, it is still unlikely to be much more than 15%. That's still 85% of houses that can sell and pay the mortgage. Maybe only 50% would be in profit, but that's another matter.

lowering prices will lower supply until a market reaches equilibrium.

Not true. When prices fell in 1990, there was a glut of property from people trying to get out before the bottom of the market. Falling prices increased supply.

it is possible for any individual agent to increase volume by reducing prices,

you are not stimulating the wider market by doing so, just stealing market share from others.

This is the way EAs survive. They simply put the others out of business.

A repeat of the ultra-low volumes of late 08 and early 09 are the last thing any agency can cope with at the moment,

but they're the inevitable result of prices falling on a market wide level

Aren't volumes as low now? Do a market trend on rightmove for any area... http://www.rightmove.co.uk/house-prices-in-my-area/marketTrendsTotalPropertiesSoldAndAveragePrice.html?searchLocation=IG8

Miles at Rightmove should know this full well.

...

If agents need volume to survive, then by advocating price falls they're signing their own execution order.

The absolutely inevitable consequence of falling prices will be listings drying up and sales volumes plummeting.

Rightmove know that it's only a matter of time before EAs start to fold all over the UK, and they will need to adopt a new model.

I think these EAs are deluded. Time's up, they need to concentrate on lettings and leave house sales to private buyers/sellers. The old advantages they had of knowing the market have gone thanks to the likes of netmouseprice and rightmove. Buyers and sellers have all the information they need without having these middlemen in the way.

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I like how even when people like this mention the possibility of price falls, they are always in the 10-20% range, as if that would be sufficient correction after a tripling of prices (almost quintupling in many parts of London/SE) in just over a decade.

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  • 284 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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