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Consumption Booms And Housing Busts

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Rising house prices do not always have the same cause. The US house price boom was caused by an over-consumption boom funded initially by excessive unsecured consumer lending which was then routinely refinanced by equally excessive secondary mortgage lending. Clearly, the lesson from the US consumer boom and ensuing housing bust is that wealth effects cannot be allowed to become borrowing opportunities.

But there is zero evidence that anything similar is going on in the UK now. Admittedlly, London house prices do look inflated: but the London boom is mainly driven by rich people putting their money into cash purchases of prime real estate (and overseas buyers borrowing from overseas banks to buy prime London real estate), not by cash-strapped households over-mortgaging themselves to pay off credit card debts. There may in due course be a correction in London house prices, in which case people who foolishly over-mortgaged themselves in order to buy into the boom will get caught - though mortgage lending standards are so tight at the moment that there won't be very many of those, and they are hardly the poorest in society anyway. And there would be an impact on Government finances because of the Help to Buy guarantee. So there may be a case for macro-prudential activity to limit cash purchases, and at the very least the government subsidy for purchases of overvalued property should be ended. But would a London housing market correction be a disaster on the scale of 2007-8? I think not.

We do not have a consumer consumption boom any more. We aren't going to have a consumer consumption driven housing crash, either. This isn't nuts (yet), and if there is going to be a crash, it's a long time off.



http://www.pieria.co.uk/articles/consumption_booms_and_housing_busts

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You're right: most consumers can't actually afford to consume any more.

I think you're right about the crash being a long way off as well. It'll be within the next 10-15 years though. Basically a market only foreign investors and the elderly can afford to buy into will have to turn at some point.

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This isn't nuts (yet), and if there is going to be a crash, it's a long time off.

http://www.pieria.co.uk/articles/consumption_booms_and_housing_busts

Houses are worth what buyers and sellers transact at. Not just for one house in isolation, but the price agreed and transacted upon gives a comparable value for other properties in an area. With markets setting values each and every month.

Disaster? It was very welcome until people started lobbying for the victims and making excuses up for those with the most reckless indebted positions. ("They just wanted a home" including those who upsized to a 4 bed terrace paying £500,000 which sold for £200,000 just a few years earlier... "They couldn't have expected a crash.").

Disaster? For the banks? No - they are in a much more robust position. Gov Carney was saying similar in one of his recent speeches.

All the winners via hpi reflation are not a team. I mean those holding the better housing assets (equity rich/outright owners), not lower end housing stock at low-to-mid end of the market they saved for the 'badness' of repossession (and thus protected values of their own homes).

The winners now having seen a second round of hyper-house-price-inflation haven't got an accord to all hold out and not sell for "less than it's worth." The crash will come from doubts and distrust and those who panic first, to get out with a good price, a lower then peak price, and thus bringing down house prices for other owners, provoking more sellers to accept lower prices

They've protected one side, whilst also putting more attrition on a younger buyer side - even whilst pulling in a lot of malinvestment from those who'll take subprime style schemes to pay high prices. I note weakening markets in other prime locations outside of UK. Look to what buyers will and can pay, for your crash that can't happen any time soon, unless you believe there is a constant flow of buyers (foreign money) going to meet asking prices as is.

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The address of the magazine - for context:


Office
Pieria Ltd.
1st Floor, 42 Southwark Street
London, SE1 1UN

The writer of the article - below - for context.

Maybe she's correct but then there's also a good chance that the article is written from the perspective of a VI not much in touch with the devastation high house prices and the mega bubbles past and present cause to the lives of people of all ages.

Frances Coppola Associate Editor

Additional information

In a past life I worked for banks...now I write about them, and about finance and economics generally. I'm an alumnus of Cass Business School, where I did an MBA with a specialism in finance and risk management. I spent 17 years working for various banks, from large to small, retail and investment banks, and even a charity (yes, there is a charity that is a bank!). I'm a singer and musician as well, and left banking 10 years ago to concentrate on singing and teaching. But in the last couple of years I've found myself talking and, now, writing about the industry I thought I had left behind. Funny how things come back to haunt you.

Much of my work in banks was concerned with IT systems, which are of critical importance in banking. I designed risk management systems for Treasury and Capital Markets at Nat West, and a group consolidated financial & regulatory reporting system for RBS Group. I'm moderately proud of the fact that RBS used that system to report its appalling financial results! I was also involved in the design of an asset & liability management system at Midland Bank prior to its takeover by HSBC. That project was cancelled by HSBC, but I learned a lot both then and at RBS about bank capital and liquidity management, and those experiences inform my current writing, much of which is on those subjects.
Edited by billybong

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In a past life I worked for banks...now I write about them, and about finance and economics generally. I'm an alumnus of Cass Business School, where I did an MBA with a specialism in finance and risk management. I spent 17 years working for various banks, from large to small, retail and investment banks, and even a charity (yes, there is a charity that is a bank!).

That's no surprise at all.

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97.jpg

But there is zero evidence that anything similar is going on in the UK now. Admittedlly, London house prices do look inflated: but the London boom is mainly driven by rich people putting their money into cash purchases of prime real estate (and overseas buyers borrowing from overseas banks to buy prime London real estate), not by cash-strapped households over-mortgaging themselves to pay off credit card debts. .....This isn't nuts (yet), and if there is going to be a crash, it's a long time off. * Interestingly it was the elimination of the equivalent subsidy in the UK – which was announced well in advance - that triggered the late 1980s housing boom and 1990 crash. **It's certainly the case that the UK, which has had more frequent corrections, did not have the disastrous residential property crash that the US experienced.

Yes, good old UK 'naturally' escaped the HPC, and has had loads of frequent corrections.

For all her MBAs and banking experience, I don't think she has much clue to how markets work. Prices being set at the margin, affecting values of all property. And that subsidy ending (main part of MIRAS) announcement, caused "victims" to rush out (or in HPC terms... dragged into the banks) and pay ever silly higher prices, for more of a crash when it ended on top or ERM pain.

San Diego realtor... (8 June 2014) all looks good to me. Incidentally something like MMR has begun over there recently, with more scrutiny on applicant borrowers. Let's upsize without selling the first house, despite same guy telling us anything less than premium houses are sitting around on the market, and the frenzy has constricted way down. (Get your excuses ready for victims of the frenzy, like last 12 years). Topping out and weakening imo, and then some sellers will accept lower prices, to cash out, before others beat them to it.

Edited by Venger

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I wouldn't write Francis Coppola off as a VI. Her blog is well worth following; I frequently disagree with it, but it's always carefully reasoned, thought-provoking and compassionate. Definitely not a ramper.

Well her premises don't make too much sense to me.

But would a London housing market correction be a disaster on the scale of 2007-8? I think not. We do not have a consumer consumption boom any more. We aren't going to have a consumer consumption driven housing crash, either. This isn't nuts (yet), and if there is going to be a crash, it's a long time off.

It wasn't a disaster in the first place, for non-owners. What was a disaster was the protection and reflation for VI positions.

She recognises prices in London high (look inflated), she recognises tighter credit conditions and tighter pound in people's pockets with less consumption.

So how does she expect prices to maintain at these levels? By flow of wealthy foreign buyers?

I think she makes assumptions there will always be buyers willing and able to pay these crazy high prices, and no owners willing to accept less (total solidarity of property-owners)... and perhaps quite rapidly a lot less, in order to sell.

Only very few sellers exchange investment asset for cash at 90% of value into a bear market. Some might sell at 80%, others at 60%, but the vast majority hold all the way to the market bottom.

Quote from her latest article - published today, her being one of the 60% who own. Laced with excuses for why buyers have paid ever higher prices - the love affair with property, no matter what the asking price it seems, always buyers to lap it up.

THE BRITISH OBSESSION WITH PROPERTY
by Frances Coppola on Jun 14th 2014,

...They sold that house when I was sixteen for approximately double what they paid for it. And they bought a six-bedroom Victorian house in Beckenham for £16,000 – again, on my father's income alone. They sold it in 1998 for £200,000. Anyone who thinks that house price inflation is a recent phenomenon should look at the rise in house prices over the last 50 years. Yes, the last ten years or so have been insane. But the previous forty weren't much better.

Yet the evidence that house prices have risen to levels never imagined by our grandparents doesn't dissuade people from buying. Indeed, people are MORE likely to buy when house prices are rising, because they think they can benefit from the house price rises. And they have reason for believing this. House prices have risen pretty consistently for over fifty years: yes, in that time there have been three crashes, but the losses in the first two have all been more than recovered, and the losses from the most recent one will soon be recovered too. Property is risky in the short-term, but as a long-term investment it is high-yielding and virtually risk free. And that makes it a better investment for ordinary people than virtually anything else. No wonder people prefer to buy property than save in bank accounts or stocks & shares.

The same buyer victims, at ever stupid crazy prices, many on hpc love to find excuses for when they massively outbid the rest of us. Or at least have been doing. There may come a time they no longer can.

Sure she then tells how owners love HPI and block any threat to losing any of their HPI, and a bit lip service about the plight of those who don't own. Same old builders won't build nonsense (in my opinion) - because it's not like new entrant builder could have savings/finance to buy some other builders plots at a lower price and build with lower priced (market corrected) materials and still sell for a profit.

She's certain of one thing, and I'm certain of another; I won't pay anything like the asking prices these owners think their homes are worth (in any of my areas I'd like to buy), and I hope other buyers fall away too, or are forced to by more expensive/restrictive lending, or their own income circumstances, to make people like her suffer a big crash in value on their homes.

Builders will not build into a falling market: home owners will obstruct developments they believe will reduce their house values. The two combine to prevent us building the houses we need.

http://www.pieria.co.uk/articles/the_british_obsession_with_property

Edited by Venger

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Although it's depressing when you see the house she's used as a graphic in the article, is current Sold STC at £720,000 on Righmove.

http://www.rightmove.co.uk/property-for-sale/property-44431433.html

And so much of the other local stock Sold STC or Under Offer - although it can come to a sudden stop. http://www.rightmove.co.uk/property-for-sale/Worcester-Park.html?includeSSTC=true&_includeSSTC=on

As per Realtor Jim in what has been a red-hot SoCal market; "frenzy has constricted way down" and that's occurred quickly and into what should be busiest selling months but selling volume is down too - and I read inventory is finally showing signs of picking up.. sticking on market.

Perhaps some of those owners will accept lower prices. Especially if they've upsized without selling off first home etc, into the mania, or bought an investment property into the frenzy "because it's not earning anything in the bank." (Good point Biilybong).

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You're right: most consumers can't actually afford to consume any more.

I think you're right about the crash being a long way off as well. It'll be within the next 10-15 years though. Basically a market only foreign investors and the elderly can afford to buy into will have to turn at some point.

...but if interest rates rise the pound gets stronger, prices for those buying in foreign currency goes up.....also easy to deter foreign buyers get them to pay as much tax or more as residents have to. ;)

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...but if interest rates rise the pound gets stronger, prices for those buying in foreign currency goes up.....also easy to deter foreign buyers get them to pay as much tax or more as residents have to. ;)

The tax thing would definitely help.

Not sure if higher interest rates put foreign buyers off before interest rates were lowered? There was still heavy foreign investment when rates were above 5%.

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But who are these reckless and undiscriminating overseas buyers? Massively leveraged, QE fattened American, Chinese and Japanese banksters of course! One set of ponzi actors feeding another. And when the market turns they'll no more be able to meet their margin calls than they could in 2008, lose their jobs en masse and become forced sellers.

Edited by zugzwang

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Well her premises don't make too much sense to me.

It wasn't a disaster in the first place, for non-owners. What was a disaster was the protection and reflation for VI positions.

She recognises prices in London high (look inflated), she recognises tighter credit conditions and tighter pound in people's pockets with less consumption.

So how does she expect prices to maintain at these levels? By flow of wealthy foreign buyers?

I think she makes assumptions there will always be buyers willing and able to pay these crazy high prices, and no owners willing to accept less (total solidarity of property-owners)... and perhaps quite rapidly a lot less, in order to sell.

Only very few sellers exchange investment asset for cash at 90% of value into a bear market. Some might sell at 80%, others at 60%, but the vast majority hold all the way to the market bottom.

Quote from her latest article - published today, her being one of the 60% who own. Laced with excuses for why buyers have paid ever higher prices - the love affair with property, no matter what the asking price it seems, always buyers to lap it up.

The same buyer victims, at ever stupid crazy prices, many on hpc love to find excuses for when they massively outbid the rest of us. Or at least have been doing. There may come a time they no longer can.

Sure she then tells how owners love HPI and block any threat to losing any of their HPI, and a bit lip service about the plight of those who don't own. Same old builders won't build nonsense (in my opinion) - because it's not like new entrant builder could have savings/finance to buy some other builders plots at a lower price and build with lower priced (market corrected) materials and still sell for a profit.

She's certain of one thing, and I'm certain of another; I won't pay anything like the asking prices these owners think their homes are worth (in any of my areas I'd like to buy), and I hope other buyers fall away too, or are forced to by more expensive/restrictive lending, or their own income circumstances, to make people like her suffer a big crash in value on their homes.

http://www.pieria.co.uk/articles/the_british_obsession_with_property

That's simply incredible! How these lunatics ever get employed is beyond me. Only in economics and finance.

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That's simply incredible! How these lunatics ever get employed is beyond me. Only in economics and finance.

Her low mortgage rate won't lock in the value of her home or the other older owners with houses bid up to incredible heights.

It's an illusion, all that fantasy value, that can be shattered with contraction on the buying side. And you won't find me out protesting on forums (as others do) for the very people who've bid up prices at the margin ("They just wanted a home - Media/banks/society forced them to borrow big, and their savings weren't earning anything in the bank."). In fact I think many hpcers have steeled up a bit since 2008-2010 with that everyone is innocent no matter how reckless they were, routine.

Rent or its equivalent is usually the largest item of household expenditure. So it's understandable that when mortgage payments are similar to rentals, people might find buying, rather than renting, attractive. After all, mortgages come to an end, and then the house is yours. Renting never ends.

Some will sell at lower prices, and bring down the value of their houses too. Even for owners who own outright, the value of their homes falls if/when other sellers and buyers transact at lower prices.

When she offers this, in my opinion, wishy-washy, solution to the young. Nothing about lower house prices. Quite a lot of lushing about the HPI long-wave of the past 60 odd years. The long wave that never tops out or ends. I know my enemy, whereas others take the market is all egalitarian, and full of innocents.

If we wish to break this doom loop, we need a resurgence of social housing – both to rent and to buy. We need a return of long-term protected tenancies. We need alternative savings vehicles to break the dependence on property. We need to find other ways of enabling people to feel in control of their finances, their environment and their lives, both now and in the future.

She talks about owning outright as being what people want. Well it's a long slog and full of dangers with mortgages of hundreds of thousands of pounds, on houses which are very vulnerable to downvalue price change.

Run some numbers through one of the mortgage interest calculators Frances. Also her previous crashes and HPI recoveries to kick on in price, doesn't mean a new crash can't be more severe for values of houses such as her own, than all of the crashes combined. Of course I want a home, but not at prices she most likely thinks are fair in her vested-interest areas, given her reading that prices, and a half-hearted reading that "London house prices do look inflated."

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We do not have a consumer consumption boom any more

There wasn't a consumer consumption boom, contrary to popular opinion, media confirmation and Tory rhetoric to justify austerity.

I've posted a good chart on this in the 'charts' thread.

Agree with the overall thrust of the OP. The 'bust' in UK was largely due to the securitisation markets seizing up, commercial real estate and RBS collapse, leading to huge loss of output.

With banks recapped, housing market has returned largely to the situation prior to the securitisation markets freeze. In other words it's a structural market problem, rather than a credit problem, contrary to what most people insist is the case.

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There wasn't a consumer consumption boom, contrary to popular opinion, media confirmation and Tory rhetoric to justify austerity.

I've posted a good chart on this in the 'charts' thread.

Agree with the overall thrust of the OP. The 'bust' in UK was largely due to the securitisation markets seizing up, commercial real estate and RBS collapse, leading to huge loss of output.

With banks recapped, housing market has returned largely to the situation prior to the securitisation markets freeze. In other words it's a structural market problem, rather than a credit problem, contrary to what most people insist is the case.

You're just playing with words. The only thing the UK does is arrange bubble loans for the rest of the world. Prior to 2008 this provided the UK with millions of highly paid bubble jobs in banking, finance and insurance. Post 2008 many of these jobs have disappeared, hence the enormous drop in productivity. It's only Osborne's manic borrowing and printing that's kept the losses from being even greater. UK banks are every bit as exposed to international markets as they were before the crash, even though their underwater positions seem largely under control at present, it won't take much to send them scurrying back to the taxpayer. Osborne's efforts to reinflate UK house prices have bequeathed the UK a Stalinist legacy of capital inefficiency and debt that will take a generation to work off.

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QE and other measures to bring about that recap. A whole underwriting of the system, and the market itself.

Now just a' structural' problem, where few young aren't in position to afford homes; offered HTB2 to pay what it's worth. Only special interests protected, the children of the VI special protected winners in position to afford.

And older VI home-owners showing a coarsening vulgarity on toward the ridiculous hyperinflated value of their homes.

It's come to something when I'm reading millionaires and other property VI saying there are only 2 ways to deal with someone in negative equity is to cut their mortgage to give them equity, or reflate the market. (a different recent article). How convenient that is to prevent value discovery, and prevent outright owners losing any value in their homes.

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