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Pimco - Uk Housing Bubble? No. Overvalued Asset For Next 5 Years? Yes

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http://europeandevelopments.pimco.com/EN/Insights/Pages/Is-There-a-UK-Housing-Bubble.aspx

  • We see the UK experiencing a very traditional monetary cycle involving lower mortgage rates, higher house prices and then – hopefully – higher transactions.
  • The Bank of England can address rising house prices either by raising financing costs via the banking system or by raising interest rates. Markets will watch BoE activity closely.
  • Our expectation is for a gradual and modest interest rate cycle, with low rates in the UK economy for years to come. Housing may be an overvalued asset, but one that is secularly supported by low rates.


To date, the improvement in housing transactions in the UK has been very disappointing, with volumes still barely at levels consistent with previous cycle lows; there is certainly ample scope for transactions to rise. To make the recovery more sustainable, we would need to see higher volumes (and lower price rises would be most welcome). Unfortunately, until the banking system is fully recapitalised, and therefore able to provide additional financing for (risky) new home building, it is hard to see a rapid acceleration in UK housing transactions. This should be a warning to us all. Without a fully rehealed banking system, and absent a government programme to significantly increase social housing projects, it remains likely that prices will continue to take the lion’s share of the improvement in UK housing sentiment.

It is also pretty clear why house prices are rising – mortgage costs as a percentage of disposable income remain low. Mortgage payments on a typical repayment mortgage are just under 30% of disposable income, and have rarely been lower. In short, house prices in the UK are going up because the cost of servicing the debt has been coming down (see Figure 4).

UKPerspectives_May2014_Fig4.JPG

New Neutral rates will be a part of the UK environment for years to come
As my colleagues Bill Gross and Richard Clarida elaborated in PIMCO’s recently published May 2014 Secular Outlook, “The New Neutral”, we expect secularly low official interest rates to support growth given continued high levels of aggregate debt. This will most certainly include the UK, where gross levels of debt remain high, the banking system remains under regulatory pressure and the savings rate remains low. As we have seen in the last 12 months, that does not preclude an economic recovery; but it does strongly suggest that the interest rate cycle will be modest and that low rates will be a characteristic of the UK economy for years to come. So, to answer the initial question – do we believe there is a housing bubble? No. An overvalued asset that will be secularly supported by low policy rates? Yes.

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I wonder what advice they give clients who pay?

Higher prices on very thin volume, and many cash-purchases / bomad heavy LTV purchases. It's not the supply of new houses so much that banks have to fund to take heat out of the market - it's supply and demand for credit. Demand side might be topping out. How do banks make money when lending . I know US banks are gutting staff in their mortgage divisions on lower mortgage demand and refinancing demand.

To make the recovery more sustainable, we would need to see higher volumes (and lower price rises would be most welcome). Unfortunately, until the banking system is fully recapitalised, and therefore able to provide additional financing for (risky) new home building, it is hard to see a rapid acceleration in UK housing transactions.

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The wonders of low rates, they mask how lending multiples have increased.

At the last low in 1998 it was 3 times main + 1 times. with wages then 3 x £17k + 1 x £8k = £59k and that's how much the average house cost

Now it's 4.3 times joint income, with wages now 4.3 x (£25k + £15k) = £172k and that of course is why house prices are that high now

To avoid the bump up and mortgages taking well over 50% of income we need some/all

low rates forever

huge wage rises

income multiple lending to fall

once all the women are working servicing debt we put children back up chimneys and add their income in

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What an absurd statement by them. So banks can take extremely large risks with respect to lending on an asset that is substantially overpriced, but cannot afford to do similar for new house building? Have they completely forgotten funding for lending which is now 100% directed at business activity?

Give me a break....

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once all the women are working servicing debt we put children back up chimneys and add their income in

Damn right. They better well get use to working as they will be servicing the debt for the next 100 years or so, in any case. Once those inter-generation mortgages come into play! Got to keep the ponzi going!

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do we believe there is a housing bubble? No. An overvalued asset that will be secularly supported by low policy rates? Yes.

Funny way to look at it. Coming up with a way not to call it a bubble won't make the fallout for a recent buyer any better.

Overvalued and supported by temporary measures has the same affect on a buyer when those temporary measures are removed as a bubble would when it pops.

Playing games with the language doesn't actually alter reality. We know rate rises will bring this overvalued asset back down to fair value again, as would rises in the cost of borrowing unrelated to the base rate or restrictions on lending, or building, or sentiment, etc. All means its worth less than you paid for it. What other reason would there be to avoid buying in a bubble? Lets call it a rabbit instead. Why not.

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The wonders of low rates, they mask how lending multiples have increased.

At the last low in 1998 it was 3 times main + 1 times. with wages then 3 x £17k + 1 x £8k = £59k and that's how much the average house cost

Now it's 4.3 times joint income, with wages now 4.3 x (£25k + £15k) = £172k and that of course is why house prices are that high now

To avoid the bump up and mortgages taking well over 50% of income we need some/all

low rates forever

huge wage rises

income multiple lending to fall

once all the women are working servicing debt we put children back up chimneys and add their income in

Well, the next rate move is likely to be down not up (i.e. more QE/stimulus rather than an interest rate hike) so your first point is safe. The other three are ultimately dependent on Osborne's ability to keep borrowing £120bn/yr. Don't fancy his chances there. In fact it's hard to see how he can keep both the housing market and the stock market inflated for much longer given the evident slowdown in economic activity all around the world.

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Well, the next rate move is likely to be down not up (i.e. more QE/stimulus rather than an interest rate hike) so your first point is safe. The other three are ultimately dependent on Osborne's ability to keep borrowing £120bn/yr. Don't fancy his chances there. In fact it's hard to see how he can keep both the housing market and the stock market inflated for much longer given the evident slowdown in economic activity all around the world.

Why? The economy is growing.

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