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Father Fred

Hpc / Inflation

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The standard thinking on this site is... House Price Boom leads to House Price Bust. Fair enough, quite logical, it always has before.

BUT, hasn't the bust always happened in a high inflation environment? If we get a crash would it not be the first HPC in the UK in a time of low inflation? Is there not an argument that we are in for a period of stability rather than a crash?

I am not a bull. But neither am I as bearish as many on here.

For the record, even assuming that what I have just posted is correct, that is no reason for would-be FTBs not to keep renting for a few more years while (low) inflation slowly brings real prices down to more sustainable levels. And it doesn't mean that STR isn't a good idea for some people who are knowledgeable investors outside of property and for whom the personal reasons for owning are relatively unimportant.

FF

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The standard thinking on this site is... House Price Boom leads to House Price Bust. Fair enough, quite logical, it always has before.

BUT, hasn't the bust always happened in a high inflation environment? If we get a crash would it not be the first HPC in the UK in a time of low inflation? Is there not an argument that we are in for a period of stability rather than a crash?

I am not a bull. But neither am I as bearish as many on here.

For the record, even assuming that what I have just posted is correct, that is no reason for would-be FTBs not to keep renting for a few more years while (low) inflation slowly brings real prices down to more sustainable levels. And it doesn't mean that STR isn't a good idea for some people who are knowledgeable investors outside of property and for whom the personal reasons for owning are relatively unimportant.

FF

It's a good point, which I've thought about before. In the early 70's wages doubled in 4 years whilst house prices stayed pretty level (in actual terms). At the end of it, very few people realised that there had been a complete crash in real house prices!

I'm not sure what pyschological effect low inflation has on buyers and sellers. It seems to me it's easier for people not to increase agreed prices (in a high inflation environment) than to lower them in a low inflation scenario. This may lead towards stagnation rather than crash, possibly, or at least many years of small falls.

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Hi FF,

It's always good to hear from you. I hope you are studying hard. :D

It is an interesting question.

The data I have to hand only goes back to 1973 but the last three times it is true that inflation was high (roughly double digits and more) before house prices corrected. I don't know about pre-1973 without going to do some digging but I would not be surprised to see a house price correction against a low inflation environment.

I think there is no doubt we are in a relatively low inflation environment for the foreseeable future (whether you believe it is going up a little or down a little I'm not sure anyone can suggest it is going to double digits any time soon).

The last time around (annual) inflation was roughly 7.5% when the UK property market peaked in nominal terms (Q3 1989) but actually rose to over 10% less than a year later.

The two things I'd note are:

1) In 1989 people could have made the case that in the last two corrections (1974 and 1979) inflation had been 20% or more so how can prices correct when inflation is ONLY 7.5%? This argument might have held as much logic as your point today but was ultimately proved wrong.

You might conclude it is not relevant but I'm sure people would point out Japan saw house prices fall with no inflation at all.

2) I actually think it is the relationship between things like inflation, interest rates, economic growth, wage growth, rental yields, house prices etc that is important rather than the nominal levels of these factors.

Presumably the view is that as inflation is low then interest rates are low and therefore the burden of high interest rates is not what it was before so people can keep paying their mortgages... so no crash (something like this?).

The opposite side of this coin though is that wage growth is low so the debt burden (of very high house prices) is not eroded so each new buyer of property at these high prices puts themselves into a great deal of debt for a looong time (in the absence of high wage growth to erode the impact of the debt) and finds it extremely difficult to climb what used to be called the property ladder.

As much as property bulls don't want to accept it, the housing market is supported only if the bottom rung is supported. This bottom rung long along priced out the vast majority of the traditional FTB market so now it relies on BTL buying (or returning prices to levels where FTBs once again support the market). But BTL buying in the face of no capital growth becomes more and more difficult, especially IF credit starts to dry up, and actually less and less logical.

I suspect wiser BTLs have seen the writing on the wall while some amateur BTLs are already being forced out of the market but many existing BTLs just continue to tell themselves it will be fine (this is a long-term investment, prices will rise again with Sipps in the Spring etc). My bet is there will be an erosion in the support for BTL and this will drive prices down as sellers realise they have to cut prices to actually sell.

It seems patently obvious to me that the current situation is entirely unhealthy and unsustainable. Exactly how, why or when it will correct I cannot say but I thin the odds are very much on a correction in prices rather than the seven/eight/ten years of flat prices needed for our low wage growth economy to correct the imbalance.

I think it might well play out more slowly than many people here would like but, like you say, I'll just look to stay on the right side of the equation saving and investing in the meantime.

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I think it will lead to a crash. High inflation does it for you, but in times of low inflation the nominal prices have to come down. The economic cycle is pretty reliable in its duration so if prices are to correct 'in time' there must be a fall in nominal prices.

That is one techie arguement, the sentiment based arguement is simpler. I want to buy a house at a reasonable price and cost. The cost is the critical point because I consider the 'full life' of the loan and I am not the lonely one, as comments on this site bear testiment to. As my salary is rising only slowly, I and others will be out of the market for a long time if stagnation is the mechanism to reduce 'real' prices. That would imply a FTB buyer rate of 9% for years to come! I do not think the market could stagnate under those circumstances, especially in these days of huge personnal debt!

Result: Crash!

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It's a good point, which I've thought about before. In the early 70's wages doubled in 4 years whilst house prices stayed pretty level (in actual terms). At the end of it, very few people realised that there had been a complete crash in real house prices!

I'm not sure what pyschological effect low inflation has on buyers and sellers. It seems to me it's easier for people not to increase agreed prices (in a high inflation environment) than to lower them in a low inflation scenario. This may lead towards stagnation rather than crash, possibly, or at least many years of small falls.

Possibly.

I think it is more difficult for sellers to accept falling prices, as opposed to the value being eroded by inflation.

But... when prices start falling you may see homeowners react (especially the more indebted ones) more like people holding shares. People might want to exit asap from the market if sentiment is pointing towards it tanking. People will only be able to sell by competing with the other properties. The massive number of sellers versus the low number of buyers would drive the market down itself.

We already have massive numbers of sellers (big backlog of houses to sell with most EAs) and a very low number of buyers (FTBs at 9% and BTL levels falling), and we now have the corresponding low number of sales too (See LR figures).

What comes next?

I don't think its stagnation.

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Phsycology is important.

People just don't want to drop prices unless they absolutely have to.

In the past, the real damage was done by inflation - prices did drop but mostly peoples earnings increased and after a few years the 'problem' went away. At the moment that just isn't an option.

So, IF we have a price crash then prices are going to have to drop.

But will prices drop ? - like FF I'm not so sure.

People don't want to lose money, so they won't reduce prices much unless they are forced to. This means a lot more forced sellers are required to create a crash scenario.

So, until or when or if, IRs go up quite a bit or employment unexpectedly falls very rapidly then peoples housing costs stay affordable if you are already a homeowner.

So, as far as I can predict I see stagnation or very very slow price falls. Plus lower social mobility as people just decide to stay put, because they just can't find a buyer.

Also, if this stay the same for a period of years, then the only people buying are wealthy property investors. And their model continues to work well becuase there is an increasing demand for rental properties.

When the HPC pirates and amateur economists finally spot the trigger can someone let me know, because I will then change my mind.

Until then, I'm sticking with the professional economists, the BoE etc who actually have been proven right in comparison to HPCers over the last couple of years.

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FF,

Inflation is rocketing. Forget the electronic goods - they have always gone down in price - if they hadn't only 5 governments in the world would have been able to afford a computer (according to IBM head honcho).

Services

Health

Energy

Tax

Cost of housing

Cost of providing for a pension

Many insurance products, legal costs etc.

Almost everything to do with running a busniness

Commodities

A lot of the "low" inflation we have seen in the past has just been shoddy cheap rubbish produced witht he lowest level of material and design content in the cheapest locations in teh world. Meanwhile anything of any real quality has hardly fallen in price or in fact gone up in price.

Still it doesn't even need high interest rates and inflation if you push the economy hard enough in the wrong direction - US of the 30's build on debt and crashed, Japan of the 80's again built on debt and crashed.

Edited by OnlyMe

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After posting the rather obvious point came to mind that high inflation and high interest rates tend to go hand in hand, therefore saying that prices only fall when inflation is high is tantamount to saying that prices only fall when IRs are high.

Psychologically, people do not like losing money. They won't do something that loses them money unless they have to. To me, losing money is buying something for £180k and selling it for £160k. To many, buying something for £10k, believing it was worth £200k last year and selling it for £195k this year is losing £5k!!!!

Combine that with people not understanding inflation fully, and you have the situation where real falls are MUCH more likely than nominal falls in my opinion. Especially if low nominal IRs mean that there are relatively few forced/ desperate sellers.

[Note: it is arguable that IRs - real IRs, what matters, the difference between nominal IRs and inflation, are actually quite high at the minute]

It also appears to be true that markets rarely stay flat... they tend to rise or fall, and I can see no reason why they should rise.

Anyone not considering significant falls is a fool, but equally a certainty of a crash happening is quite dangerous too.

FF

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FF,

[Note: it is arguable that IRs - real IRs, what matters, the difference between nominal IRs and inflation, are actually quite high at the minute]

Depednds on what you take as the figures. I;ve said before I thought the rate of inflation is in the regio of 7%, I still stick by that as a representative figure for a lot of peope with a normal cost profile.

Broand money supply is growing at double digit rates - that is maybe an even better measure of inflation - the rate at which paper is being devalued,

The CPI is a lie, period, instigated by a crook who has already squandered £b's a year from savings/pensions and will do anything to steal more money from the future.

Now, mortgagaes are still pretty cheap and may well be below the rate of inflation for many, however once in teh clutch of debt and struggling just see how high the rates go on various products from loans to overdrafts and credit cards - 15 / 20 /30 % +, now those rates really are high, especially when compared to the rate of income growth, yet alone real income growth.

Slowly but surely the real economy is being bled dry by the banks or priced out of existence.

Edited by OnlyMe

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The standard thinking on this site is... House Price Boom leads to House Price Bust. Fair enough, quite logical, it always has before.

BUT, hasn't the bust always happened in a high inflation environment? If we get a crash would it not be the first HPC in the UK in a time of low inflation? Is there not an argument that we are in for a period of stability rather than a crash?

I am not a bull. But neither am I as bearish as many on here.

For the record, even assuming that what I have just posted is correct, that is no reason for would-be FTBs not to keep renting for a few more years while (low) inflation slowly brings real prices down to more sustainable levels. And it doesn't mean that STR isn't a good idea for some people who are knowledgeable investors outside of property and for whom the personal reasons for owning are relatively unimportant.

FF

I don't think we can sustain a period of price stability before prices go up again.

High house prices are sucking money out of the economy, debt is increasing by £1M every 4 mins in the UK.

As the debt burdon grows so to does the amount spent on servicing the debt and therefore there is less money going into the economy. Then there is the extra tax burdon we are all experiencing and this is likely to grow too.

Spending is already slowing and whilst debt is still growing, spending can only decline further. Ultimately this has to lead to higher unemployment, perhaps next year unemployment will start to rise significantly, perhaps the year after.

In the absence of higher inflation it will probably be the higher unemployment that will be the trigger to the larger house price falls we are expecting.

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Phsycology is important.

People just don't want to drop prices unless they absolutely have to.

In the past, the real damage was done by inflation - prices did drop but mostly peoples earnings increased and after a few years the 'problem' went away. At the moment that just isn't an option.

So, IF we have a price crash then prices are going to have to drop.

But will prices drop ? - like FF I'm not so sure.

People don't want to lose money, so they won't reduce prices much unless they are forced to. This means a lot more forced sellers are required to create a crash scenario.

So, until or when or if, IRs go up quite a bit or employment unexpectedly falls very rapidly then peoples housing costs stay affordable if you are already a homeowner.

So, as far as I can predict I see stagnation or very very slow price falls. Plus lower social mobility as people just decide to stay put, because they just can't find a buyer.

Also, if this stay the same for a period of years, then the only people buying are wealthy property investors. And their model continues to work well becuase there is an increasing demand for rental properties.

When the HPC pirates and amateur economists finally spot the trigger can someone let me know, because I will then change my mind.

Until then, I'm sticking with the professional economists, the BoE etc who actually have been proven right in comparison to HPCers over the last couple of years.

I'm not sure whether referring to HPCers generally as pirates is better or worse than mentalists.

Anyway, I agree the psychology is important and that people don't WANT to drop prices.

However, I wonder how many people are willing to stubbornly put their lives on hold for a looong period of time just to avoid having to cut their price?

Remember also that the vast majority of these people are not taking losses yet anyway - they just have to accept that the £200k profit they thought they were going to make will actually only be £180k.

For example, all those bleaters on the ex-pat forums with their visas sorted out only waiting for their property to sell before they get on with their lives, they are not FORCED sellers but will they prefer to stay in Bognor or wherever rather than accept that their house isn't worth what the estate agent promised?

I'm also not at all sure your view on wealthy property investors' buying because there are rents on offer. If you can buy an unimpressive yield today, with little prospect of major rental growth (given low economic growth, low inflation and low wage growth) and even less prospect of notable capital growth (given the wall of supply WAITING to sell when prices to rise) why would these wealthy people not just decide to invest elsewhere? Wealthy people generally aren't that stupid... or they don't stay wealthy for long.

Father Fred,

I agree, it is the REAL interest rate that is important.

We COULD end up in a weird world where property on the whole does not sell. Where high sales to stock ratios become 'normal', where low transaction volumes become 'normal', where it is 'normal' for houses to stay on the market for a year or more... but I doubt it.

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Hi FF,

It's always good to hear from you. I hope you are studying hard. :D

It is an interesting question.

The data I have to hand only goes back to 1973 but the last three times it is true that inflation was high (roughly double digits and more) before house prices corrected. I don't know about pre-1973 without going to do some digging but I would not be surprised to see a house price correction against a low inflation environment.

I think there is no doubt we are in a relatively low inflation environment for the foreseeable future (whether you believe it is going up a little or down a little I'm not sure anyone can suggest it is going to double digits any time soon).

The last time around (annual) inflation was roughly 7.5% when the UK property market peaked in nominal terms (Q3 1989) but actually rose to over 10% less than a year later.

The two things I'd note are:

1) In 1989 people could have made the case that in the last two corrections (1974 and 1979) inflation had been 20% or more so how can prices correct when inflation is ONLY 7.5%? This argument might have held as much logic as your point today but was ultimately proved wrong.

You might conclude it is not relevant but I'm sure people would point out Japan saw house prices fall with no inflation at all.

2) I actually think it is the relationship between things like inflation, interest rates, economic growth, wage growth, rental yields, house prices etc that is important rather than the nominal levels of these factors.

Presumably the view is that as inflation is low then interest rates are low and therefore the burden of high interest rates is not what it was before so people can keep paying their mortgages... so no crash (something like this?).

The opposite side of this coin though is that wage growth is low so the debt burden (of very high house prices) is not eroded so each new buyer of property at these high prices puts themselves into a great deal of debt for a looong time (in the absence of high wage growth to erode the impact of the debt) and finds it extremely difficult to climb what used to be called the property ladder.

As much as property bulls don't want to accept it, the housing market is supported only if the bottom rung is supported. This bottom rung long along priced out the vast majority of the traditional FTB market so now it relies on BTL buying (or returning prices to levels where FTBs once again support the market). But BTL buying in the face of no capital growth becomes more and more difficult, especially IF credit starts to dry up, and actually less and less logical.

I suspect wiser BTLs have seen the writing on the wall while some amateur BTLs are already being forced out of the market but many existing BTLs just continue to tell themselves it will be fine (this is a long-term investment, prices will rise again with Sipps in the Spring etc). My bet is there will be an erosion in the support for BTL and this will drive prices down as sellers realise they have to cut prices to actually sell.

It seems patently obvious to me that the current situation is entirely unhealthy and unsustainable. Exactly how, why or when it will correct I cannot say but I thin the odds are very much on a correction in prices rather than the seven/eight/ten years of flat prices needed for our low wage growth economy to correct the imbalance.

I think it might well play out more slowly than many people here would like but, like you say, I'll just look to stay on the right side of the equation saving and investing in the meantime.

Great post (ecspecially for someone still getting to grips with economics)

:D

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Presumably Ir's wont go as high as 1990. If people are'nt completely stretched by current interest rates (and they have a long fixed rate) then there would be no real need to sell, just sit tight and wait. Do you think the current situation hinges on how long BTL'ers will hold onto props (provided real appreciation in the asset stagnates)?

If there is a crash, wont banking networks tighten lending significantly? If so, surely the people to benefit from a crash will be STR's, canny BTL's and those with large savings-none of these really characterise FTB'ers? Wont those who have substantial funds jump back into the market and snap up lots of props, pushing prices back up?

p.s go easy on me, naive and still learning...

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Bob,

I very much doubt IRs are going anywhere near 1990 levels.

It used to be a bull argument that until rates hit 15% (or at least double figures) there would be no problem in the UK housing market. However, rate rises to just 4.75% started having people say we couldn't cope with 6% let alone double digits.

I would agree that interest rates are not harsh now. The problem is that while the interest is not a problem the actual debt (the loan taken to buy the very expensive property) IS a problem. Hence why bulls have decided interest-only mortgages are a great solution rather than a symptom of the problem (none of us need to actual buy property anymore as long as we are willing to take what is effectively a long lease with a future attached).

The interest rate is not high but the high debt means small changes in the interest rate ARE very painful.

I do believe that BTL activity holds the key now. They SAY they will not sell, they will hold for the long-term, they will keep buying etc. Time will tell how much is talk and how much they back it up with hard cash (borrowed, naturally) and to what extent they CAN keep borrowing and doubling their bet in the face of poor returns.

I do believe a correction will bring a credit tightening and it will benefit the people you suggest (and so many users of this site).

People WILL come back in and it will drive prices up over time but it will not happen quickly. It seems odd to say it today but people will be scared off by property (today it is seen as risk-free by many, at the bottom of the market it will be seen as too risky).

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Bob,

I very much doubt IRs are going anywhere near 1990 levels.

It used to be a bull argument that until rates hit 15% (or at least double figures) there would be no problem in the UK housing market. However, rate rises to just 4.75% started having people say we couldn't cope with 6% let alone double digits.

I would agree that interest rates are not harsh now. The problem is that while the interest is not a problem the actual debt (the loan taken to buy the very expensive property) IS a problem. Hence why bulls have decided interest-only mortgages are a great solution rather than a symptom of the problem (none of us need to actual buy property anymore as long as we are willing to take what is effectively a long lease with a future attached).

The interest rate is not high but the high debt means small changes in the interest rate ARE very painful.

I do believe that BTL activity holds the key now. They SAY they will not sell, they will hold for the long-term, they will keep buying etc. Time will tell how much is talk and how much they back it up with hard cash (borrowed, naturally) and to what extent they CAN keep borrowing and doubling their bet in the face of poor returns.

I do believe a correction will bring a credit tightening and it will benefit the people you suggest (and so many users of this site).

People WILL come back in and it will drive prices up over time but it will not happen quickly. It seems odd to say it today but people will be scared off by property (today it is seen as risk-free by many, at the bottom of the market it will be seen as too risky).

Ftb's Uk today, wrong time, wrong place.

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we are in historically unprecedented circumstances right now.

It IS different this time, which is what makes it so gripping... especially, if a priced-out-FTB like me, things can only get better. Our only enemy is impatience.

I remain resolutely bearish. I think the real-terms fall will be as it always has been. The fact that this will involve much greater pain this time as it will also represent large nominal falls should ensure that this one will be thought of as the worst of all, even though it is no worse in real terms.

I'd offer my detailed reasoning if I wasn't so busy working (to accumulate deposit, of course) so I could leave early today and sip OJ with the chaps.

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FF,

The level of gearing has doubled in some cases (5x mortgages instead of 2.5x) compared to the past.

So effectively, interest payments for a borrowed £100k with a 7% to 12% (5%) increase in interest rates in the past equals those of a borrowed £200k with 3.5% to 6% (2.5%) increase in interest rates now.

Inflation is on the up. Increased commodity prices will filter through to the consumer at some point - the figures can't be cooked forever.

Rates will go up, and over-geared borrowers will be in peril - especially those coming off fixes.

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ouch, have friends who borrowed when they got their first grad job at 3.75%, then rates go to 5.5%, theyre f**ked. I know a few are having trouble keeping up as it is. Thank god I came to my senses.

Im begining to realise how low rates on a long mortgage can be extremely misleading...

Edited by bob monkhouse

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ouch, have friends who borrowed when they got their first grad job at 3.75%, then rates go to 5.5%, theyre f**ked. I know a few are having trouble keeping up as it is. Thank god I came to my senses.

Im begining to realise how low rates on a long mortgage can be extremely misleading...

Yepp, rates only need to go up to 7-8% and some people will feel like those owing at 15% in the last crash.

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  • 301 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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