Minor Crash Then Rebound

[chevin]

Most people are basing a HPC on the consistent projection of the HPI trend. But my question is: Has anything changed that may suggest the projection will be ‘permanently’ shifted, when we exit the current bubble/ burst cycle?

Consider the following factors (if it’s full of holes, please go easy on me)

Financially too many currencies are tied to other ones to the extent that localised shifting of Interest Rates could well be a thing of the past (stability being the name of the game). Inflation can never again ‘be seen’ to run rampant, if we are ever to see the Asian countries catch up with our expensive overheads. Look at the Euro IR (unchanged for 2.5 years). Even though we aren’t, as yet, joining the Euro, both the impending possibility and the increased ease of transferring currencies means that the UK IR can’t deviate too far with respect to the Euro IR, without people taking advantage of it. Financial products will soon permit greater shifting of funds should certain inflation/ currencies go haywire. Save in the UK but take your loans from Europe!

In a nutshell, if IRs can’t rise to the levels they once did, then the HPI should be adjusted to reflect this change of circumstance. Based on this I would expect a slight crash followed by a rebound, that long term, will show a permanent shift on the HPI (same projection curve, but just shifted upwards).

What do you think?

[bubbleturbo]

So what you are basically saying is:

"it is different this time"

[theChuz]

Most people are basing a HPC on the consistent projection of the HPI trend. But my question is: Has anything changed that may suggest the projection will be ‘permanently’ shifted, when we exit the current bubble/ burst cycle?

Consider the following factors (if it’s full of holes, please go easy on me)

Financially too many currencies are tied to other ones to the extent that localised shifting of Interest Rates could well be a thing of the past (stability being the name of the game). Inflation can never again ‘be seen’ to run rampant, if we are ever to see the Asian countries catch up with our expensive overheads. Look at the Euro IR (unchanged for 2.5 years). Even though we aren’t, as yet, joining the Euro, both the impending possibility and the increased ease of transferring currencies means that the UK IR can’t deviate too far with respect to the Euro IR, without people taking advantage of it. Financial products will soon permit greater shifting of funds should certain inflation/ currencies go haywire. Save in the UK but take your loans from Europe!

In a nutshell, if IRs can’t rise to the levels they once did, then the HPI should be adjusted to reflect this change of circumstance. Based on this I would expect a slight crash followed by a rebound, that long term, will show a permanent shift on the HPI (same projection curve, but just shifted upwards).

What do you think?

Its differnt this time?

P.S bubble, was exactly what i was thinking when i read through so i basically wanted to re-itterate it

[theChuz]

In a nutshell, if IRs can’t rise to the levels they once did, then the HPI should be adjusted to reflect this change of circumstance. Based on this I would expect a slight crash followed by a rebound, that long term, will show a permanent shift on the HPI (same projection curve, but just shifted upwards).

What do you think?

I decided it was unfair to leave ya hanging like that without any reason for why its not really that differnt this time.

what you say are valid points to a degree but you over look certain things

the debt is tied to the IR's of today, IRs do not need to get anywhere near as high as last time for the same effect, all the steam has gone out of the market and people are starting to struggle to meet payments. So at 4.5% IR (historically low) people are stuggling abit now, alot is due to CC's and other unsecured debt etc which have no relevance on IR's.

When IR's move from there historically low status back to historically normal then people who have the debt at todays IR's will suffer.

Ummm imagine it like this as an example..

IR's @ 1% if IR's go to 2% your repayment has just grown by 100% i.e you are now paying double.

IR's @ 6% (historic norm until someone tells me otherwise) then IR's need to go to 12% to double your payment.

Our silly lil episode of low IR's (down to 3.5%, arguably because of sept 11) lasted to long (its one of them things that feeds on itself, there is never a GOOD time to pull out of it there is only a less worse time) now everyone is geared up at the historically low rates, which will return to historic norms.

It would be nice to think that we can stay at 3.5% - 4.5% for ever but we are part of a global economy and we have to trade with these countries (especially since we dont make things that much these days ourselves). Inflation creeps up and the BOE has to act to bring it under control, they do this by raising rates.

Bubble mentality 101 - People look for reasons why the outcome will be differnt this time round.

hope that makes atleast a little sense

EDITED:

all IMHO of course

Edited October 27, 2005 by theChuz

[chevin]

So what you are basically saying is:

"it is different this time"

It's always different! If you map the past profiles of HPI boom/ bust/ recovery, they are always different because the circumstances change. I'm asking if the circumstances have changed sufficiently so to alter the HPI trend. Just a simple, no vested interest, question!

I decided it was unfair to leave ya hanging like that without any reason for why its not really that differnt this time.

what you say are valid points to a degree but you over look certain things

the debt is tied to the IR's of today, IRs do not need to get anywhere near as high as last time for the same effect, all the steam has gone out of the market and people are starting to struggle to meet payments. So at 4.5% IR (historically low) people are stuggling abit now, alot is due to CC's and other unsecured debt etc which have no relevance on IR's.

When IR's move from there historically low status back to historically normal then people who have the debt at todays IR's will suffer.

Ummm imagine it like this as an example..

IR's @ 1% if IR's go to 2% your repayment has just grown by 100% i.e you are now paying double.

IR's @ 6% (historic norm until someone tells me otherwise) then IR's need to go to 12% to double your payment.

Our silly lil episode of low IR's (down to 3.5%, arguably because of sept 11) lasted to long (its one of them things that feeds on itself, there is never a GOOD time to pull out of it there is only a less worse time) now everyone is geared up at the historically low rates, which will return to historic norms.

It would be nice to think that we can stay at 3.5% - 4.5% for ever but we are part of a global economy and we have to trade with these countries (especially since we dont make things that much these days ourselves). Inflation creeps up and the BOE has to act to bring it under control, they do this by raising rates.

Bubble mentality 101 - People look for reasons why the outcome will be differnt this time round.

hope that makes atleast a little sense

EDITED:

all IMHO of course

It made perfect sense except 'everyone is geared up at the historically low rates, which will return to historic norms'

Not everyone bought at the top and the new 'norm' could be different, for the reasons I offered.

[theChuz]

It's always different! If you map the past profiles of HPI boom/ bust/ recovery, they are always different because the circumstances change. I'm asking if the circumstances have changed sufficiently so to alter the HPI trend. Just a simple, no vested interest, question!

It made perfect sense except 'everyone is geared up at the historically low rates, which will return to historic norms'

Not everyone bought at the top and the new 'norm' could be different, for the reasons I offered.

ahh yea 'everyone' is abit misleading is wrong, i mean vast amounts of people have taken on a financial position at the historically low rates, ( i shoudlnt use the word geared either )

Its not just FTB'rs that have taken a position, homeowners have gone for newer mortgage deal at a lower rate (good choice) BUT many of them have MEWd (hence the massive MEW figures) it away (instead of reducing the payments), nuBTL'rs have a position at the lower rates too.

Alot of FTB'rs simply cannot afford to buy, they havnt been able to for some time now so the purchasing power has come from nuBTL and MEW, again all with a position on the historically low rates.

Edited October 27, 2005 by theChuz

[Matt]

The reason it is not different this time is that human greed will always ensure that debts get proportionately the same during every boom. If interest rates had reached 1% then debt would be three times higher = same result.

[Culpability Brown]

I agree with people when they say "It's different this time", because it is.

It's worse than ever before.

Coming into a major downturn the cronically indebted British public have never been worse placed to deal with it.

IMO the economic malaise is playing itself out just as predicted by many on this site over the preceding 12 months.

The only person left in line for a surprise is Property Gimp but something tells me he is beyond redemption of any form!

I hope the rest of you are prepared and have no stupid notions of taking on ludicrous amounts of debt during this period.

[Rebel]

Debt does not matter as long as you can repay it.

People here keep on saying that there is a debt of 1 trillion plus and therefore UK plc has to come crashing down.

However, look at the affordability. Most people have no problem repaying their mortgages. Even Mac jobs are good enough for one to pay this off this. Job situation is good. Repossession rates are historically at the lowest. How many people do you see who seem to be struggling living tightening their belts (except some OAP who anyway do own houses)?

We are richer than ever. There is no downward pressure on house prices in the near future.

[Culpability Brown]

Debt does not matter as long as you can repay it.

People here keep on saying that there is a debt of 1 trillion plus and therefore UK plc has to come crashing down.

However, look at the affordability. Most people have no problem repaying their mortgages. Even Mac jobs are good enough for one to pay this off this. Job situation is good. Repossession rates are historically at the lowest. How many people do you see who seem to be struggling living tightening their belts (except some OAP who anyway do own houses)?

We are richer than ever. There is no downward pressure on house prices in the near future.

Sorry but boll**! Join Gimpy in the surprise queue.

[zorn]

When IR's move from there historically low status back to historically normal then people who have the debt at todays IR's will suffer.

What do you mean by "historically normal"? For over a hundred years in the late 19th and early 20th centuries, UK interest rates were consistently below 4%. Why can't it go back to that historical norm? Or are you saying that it's different this time?

[OnlyMe]

NO rebound in the trade deficit

NO rebound in manufaturing

NO reduction of costs - business and perosnal

NO reduction in tax

NO reduction in red tape

NO reduction in business rates

NO reduction in business rents

NO reduction in employee costs

NO reduction in debt

NO reduction in the cost diffential between the UK and nearly every other competitive nation

NO recution in public debt

NO reduction in govt debt

NO reduction in student debt and debt amongst the upcoming generation

In fact for most of the above quite the reverese.

It's a bubble and it is getting bigger and the the fallout will continue until it is properly pricked. A rate cut seems to have lead a few into the market, it has also caused another upsurge in debt. This will just end up worse than it would have when it eventually bursts for the duration.

[dog]

Chevin you wrote:

Financially too many currencies are tied to other ones to the extent that localised shifting of Interest Rates could well be a thing of the past (stability being the name of the game).

Some people are saying that UK interest rates are going to fall because of weak sales on the high street. You are saying differently though (and I think I agree with you). Our interest rates are more likely to rise in sympathy with other currencies.

Historically we have had a bad reputation for controlling public spending (which has stimulated inflation) and that is why our interest rates have been so high. If Gordon Brown has solved the problem of controlling public spending then you might be right and we can look forward to a future of low interest rates.

[Guest Bart of Darkness]

Debt does not matter as long as you can repay it.

Jeez, how many years of study did it take to come up with that pearl of wisdom.

Home reposessions rocket

Consumer CCJ's rocket

IMF warns UK over 1 trillion pound debt

Thousands face debt ruin

If we are in fact "richer than ever", why do we owe so much money to the banks?

Edited October 27, 2005 by Bart of Darkness

[theChuz]

What do you mean by "historically normal"? For over a hundred years in the late 19th and early 20th centuries, UK interest rates were consistently below 4%. Why can't it go back to that historical norm? Or are you saying that it's different this time?

You actually raise an important point there.. well it stopped me in my mental tracks for a minute.

When it is said that "its differnt this time" it is refering to the outcome. The circumstances that create the bubble always vary (albeit along the same lines).

Your probably aware that you can take any slice of history and pull it out of context i.e 89 - 92 the IR was about 12% which (i think) we can both agree is not the 'norm'.

Because economies do change over a very long period to actually pinpoint a 'norm' would be very hard when you take the whole set of information into account.

Now, with that in mind this is how i would define the 'norm'

The most recent stable set of data between two extremes - that might sound like a weak definition but let me put it into context. For that i have to make some assumptions

I am going to assume that you do not refute the crash of 89.

I am also going to assume that you agree we are in a housing bubble at the moment and that bubble started to inflate in 2000 /2001.

If you refer to this link http://www.moneyworld.co.uk/dictionary/Int...ory-003455.html between 1992 and 2000 seems to be the most recent stable period of IR's between 2 extremes. I have not added the numbers and averaged them out properly but giving them a quick mental scan i would suggest that the average is somewhere between 6% and 7%.

This is what i consider to be the 'norm'

Of course i am open to any other defintions of what could be considerd a 'norm' for interest rates in todays economic climate.

[Goat]

ahh yea 'everyone' is abit misleading is wrong, i mean vast amounts of people have taken on a financial position at the historically low rates, ( i shoudlnt use the word geared either )

Will people please stop saying that interest rates are at historically low levels, it is not correct.

Nominal rates are at low levels however have been shown to have no effect on house price fundamentals.

Real interest rates (the ones that matter) are at about the same level as they have been for many years.

[theChuz]

Will people please stop saying that interest rates are at historically low levels, it is not correct.

Nominal rates are at low levels however have been shown to have no effect on house price fundamentals.

Real interest rates (the ones that matter) are at about the same level as they have been for many years.

Sure if you can believe the inflation figures, i believe nominal rates dropping to 3.5% led the banks to be more generous with thier lending.

Correct me if im wrong cause im not that bright at times but doesnt nominal rates enable the likes of barclays to offer a higher mortgage multiple for the same risk. If thats true then doesnt that mean there is more money in the system, which untimatly gets fed back round into housing and HPI.

EDITED:

Gonna try and make that make more sense although my figures wont be intrinsically accurate they should act as a half decent indicator

I am bob i earn £20K i can have a mortage at 6.5%

I am barclays i borrow money from the BOE at 4.5% and lend it bob at 6.5%

I am barclays i will allow bob to borrow 4 times his salary because thats all he can afford to pay me back

Bob can buy a house for 80K

2 years earlier

I am bob i earn £19K i can have a mortage at 5%

I am barclays i borrow money from the BOE at 3.5% and lend it to bob for 5%

I am barclays i will allow bob to borrow 4.5 times his salary because thats all he can afford to pay me back

Bob can buy a house for 85.5K

So by my understanding IR's do play a significant part to HPI

Edited October 27, 2005 by theChuz

[oracle]

Most people are basing a HPC on the consistent projection of the HPI trend. But my question is: Has anything changed that may suggest the projection will be ‘permanently’ shifted, when we exit the current bubble/ burst cycle?

Consider the following factors (if it’s full of holes, please go easy on me)

Financially too many currencies are tied to other ones to the extent that localised shifting of Interest Rates could well be a thing of the past (stability being the name of the game). Inflation can never again ‘be seen’ to run rampant, if we are ever to see the Asian countries catch up with our expensive overheads. Look at the Euro IR (unchanged for 2.5 years). Even though we aren’t, as yet, joining the Euro, both the impending possibility and the increased ease of transferring currencies means that the UK IR can’t deviate too far with respect to the Euro IR, without people taking advantage of it. Financial products will soon permit greater shifting of funds should certain inflation/ currencies go haywire. Save in the UK but take your loans from Europe!

In a nutshell, if IRs can’t rise to the levels they once did, then the HPI should be adjusted to reflect this change of circumstance. Based on this I would expect a slight crash followed by a rebound, that long term, will show a permanent shift on the HPI (same projection curve, but just shifted upwards).

you are talking b0ll0cks!

...nice try putting some economic/currency jargon in,but it still doesn't wash.

some of your theory holds water,but I'm of the belief that a HPC in the uk is actually good for company earnings.

don't get too hung up on the domestic story....we in UK are fortunate enough to have some big global players listedon the FTSE,and as we slow,global growth elsewhere will pick up the tab.

this coming decade is more like the late 70's/80's economically....but to sustain growth further out when the pensioners retire en masse in about 10 years,we need some ammo in the bank,which is why IR's will rise further,and so will the threat of inflation.

2012 onwards will look really good for bonds....for now commies rule!

What do you think?

[Tempest]

Sure if you can believe the inflation figures, i believe nominal rates dropping to 3.5% led the banks to be more generous with thier lending.

Correct me if im wrong cause im not that bright at times but doesnt nominal rates enable the likes of barclays to offer a higher mortgage multiple for the same risk. If thats true then doesnt that mean there is more money in the system, which untimatly gets fed back round into housing and HPI.

EDITED:

Gonna try and make that make more sense although my figures wont be intrinsically accurate they should act as a half decent indicator

I am bob i earn £20K i can have a mortage at 6.5%

I am barclays i borrow money from the BOE at 4.5% and lend it bob at 6.5%

I am barclays i will allow bob to borrow 4 times his salary because thats all he can afford to pay me back

Bob can buy a house for 80K

2 years earlier

I am bob i earn £19K i can have a mortage at 5%

I am barclays i borrow money from the BOE at 3.5% and lend it to bob for 5%

I am barclays i will allow bob to borrow 4.5 times his salary because thats all he can afford to pay me back

Bob can buy a house for 85.5K

So by my understanding IR's do play a significant part to HPI

What risk though?

Bob may be the same risk but the risk of interest rates increasing is higher is it not? (on the basis that they are statistically below trend). I am not saying they do not lend on such affordability grounds - they do, but it is b*alls surely.

If interest rates dropped to 0.25% someone could get a £1m loan on "affordability" grounds at £3,500 a month (32k total interest burden). Should one agree to pay £1m for a house that was once worth a fraction of that amount though? What is it really "worth"? If rates went to 6% or so from there the same monthly payment would only allow someone with the same cashflow to purchase a £500,000 property. What has happened to the "value" of my property?

To try to make this clearer: If I buy a house with a 100% mortgage for £500,000 and interest rates are (for arguments sake) 6.7% for the life of my 25 year loan I will repay £500,000 of capital and £531,000 of interest - total cost to me in terms of drain on my income = £1,031,000.

If I buy a house with a 100% mortgage for £1000,000 at Japanese interest rates of 0.25% I will repay £1,000,000 of capital and £31,000 of interest - total cost to me is the same £1,031,000.

The difference is in one case I have bought the asset for £1m and the other for 50% of that amount....EVEN THOUGH IT HAS COST ME THE SAME IN CASHFLOW TERMS.

I think this is why basing asset values purely on "affordability" is dangerous. Imagine the rental yields in the above examples! I have no magic solution though! I just rely on the historic trend multplier level to see me right.

Edited October 27, 2005 by Tempest

[theChuz]

What risk though?

Bob may be the same risk but the risk of interest rates increasing is higher is it not? (on the basis that they are statistically below trend). I am not saying they do not lend on such affordability grounds - they do, but it is b*alls surely.

If interest rates dropped to 0.25% someone could get a £1m loan on "affordability" grounds at £3,500 a month (32k total interest burden). Should one agree to pay £1m for a house that was once worth a fraction of that amount though? What is it really "worth"? If rates went to 6% or so from there the same monthly payment would only allow someone with the same cashflow to purchase a £500,000 property. What has happened to the "value" of my property?

To try to make this clearer: If I buy a house with a 100% mortgage for £500,000 and interest rates are (for arguments sake) 6.7% for the life of my 25 year loan I will repay £500,000 of capital and £531,000 of interest - total cost to me in terms of drain on my income = £1,031,000.

If I buy a house with a 100% mortgage for £1000,000 at Japanese interest rates of 0.25% I will repay £1,000,000 of capital and £31,000 of interest - total cost to me is the same £1,031,000.

The difference is in one case I have bought the asset for £1m and the other for 50% of that amount....EVEN THOUGH IT HAS COST ME THE SAME IN CASHFLOW TERMS.

I think this is why basing asset values purely on "affordability" is dangerous. Imagine the rental yields in the above examples! I have no magic solution though! I just rely on the historic trend multplier level to see me right.

Dangerous for sure it will cause it to crash, on the 0.25% variable then obviously a 0.25% movement doubles your payment - big problems.

While the fixed rate mortgage is affordable then assest prices will match that value because the market price is set by what someone is willing/able to pay for it.

What you have done though (i dont know if intentially) is show the difference what a lower variable rate can have. People can borrow more, so long as it remains affordable then people will take on that debt and it will set the market price.

The pain in the a** is when it is no longer affordable, this can come from differnt angles. For a variable rate its obvious IR's go up.

For a fixed rate.. death,divorce, unemployment, creditcards, paycut etc, so even on your fixed rate product you can still be exposed to external factors.

What it all boils down to is the availability of cash, the more the banks are prepared to lend the higher the prices will go, when the banks are no longer prepared to lend vast sums of money at a low rate then prices will adjust accordingly. The banks have to keep a balance between charging a premium rate for defaults and restricting the money that they initially lend out. The lower the bank can borrow money the lower they can lend it on to you.

I think.

EDITED:

So the risk involved in from the banks perspective on defaults V losing market share.

Edited October 27, 2005 by theChuz