Quick Bit Of Reality.

[apom]

Borrowing became cheap and house prices surged.

this is natural.

People noticed that they had gained a fair chunk of equity..

£10,000 jump seems small in housing.. its not small in your pocket.

borrowing was getting cheaper and people thought.. thought that perhaps if house price were doing this.. well.. Borrow, invest.. and..

Easy money.

We have no shortage of housing in this country that differs between any other point in the country.

House prices went up as borrowing was cheap and a lot of people made a lot of easy money.

all of the other arguments are essentially smoke getting blown up your bottoms ladies and gentlemen..

Its been about nothing more then Easy Money.

There is no reason for house prices to stay this high apart from people believe they have to pay it and are prepared to do so.

Easy money...

Of course its gone wobbly now.

[FTBagain]

In all honesty there is no such thing as easy money! There is always pay back somewhere. Someone will get hurt, badly. There are going to be alot of sad and sorry tales over the next few years.

[John Smith]

Reminds me of a theory I came across whilst studying Systems Theory, namely ...

Complex Adaptive Systems whereby over time people adapt to the situation ... therefore creating a new system based on the new features (in this case low IR's high house prices, easy money,etc). So once people have adapted, everything ticks along as though this is how it has always been ... resulting in not much progress until some bright spark(s) do something that zaps the status quo, thus causing more changes leading to more frantic adapting and so on to another system.

However, the negative side is that unless other systems adapt as well, then things can go pop because the other systems have not kept pace and therefore things get very strained (eg FTB system = decreasing numbers of buyers, BTL system = decreasing buyers as profits decrease, etc). Therefore the fuel required for growth will be minimised.

So using the house price example, people are stacking up debt due to easy money and house prices are increasing making some very wealthy. Also some people cannot afford to buy, so people are adapting to this system, as though it is the norm. So when this system inevitably changes e.g. when IR's raise, people no longer see higher profits in their property value, less able to MEW as bought high so less equity, then they will ADAPT accordingly therefore adapting to a new system.

Its this new system that bothers me becuase surely IR's cannot go any lower else people will keep adapting, so the only way to stimulate more growth would be to then lower IR's even more to reduce a pop ... until they reach zero. Hmmm what happens then?

So if IR's go the other way then the system may not be able to adapt (due to higher debt, etc), which leads to another pop.

Have we witnessed both of the above --> low IR=runaway HP inflation, increased IR's = current HP depreciation.

Are we therefore stuck in a middle stage without knowing what is going to happen next to the system - and either way seems bad - who knows how people are going to behave in 6 months time?.

Hey, this theory seems like another perspective on the bubble thery. It is a theory, so please feel free to break it if you want.

[canny man]

I did some stuff with complex adaptive behaviour in markets a few years ago when I was consulting- (Surfing the Edge of Chaos etc)

The neat thing with ref to HPI is that only small seemingly unrelated interventions can have enormous impacts. It's the old butterfly wing in China, Hurricane in the USA metaphor. Thus, the trigger for system change this time need not be a big, easily forseen event (e.g. IR's up), but might already have happened without us even noticing.

[laughing_goat]

Borrowing became cheap and house prices surged.

this is natural.

People noticed that they had gained a fair chunk of equity..

£10,000 jump seems small in housing.. its not small in your pocket.

borrowing was getting cheaper and people thought.. thought that perhaps if house price were doing this.. well.. Borrow, invest.. and..

Easy money.

We have no shortage of housing in this country that differs between any other point in the country.

House prices went up as borrowing was cheap and a lot of people made a lot of easy money.

all of the other arguments are essentially smoke getting blown up your bottoms ladies and gentlemen..

Its been about nothing more then Easy Money.

There is no reason for house prices to stay this high apart from people believe they have to pay it and are prepared to do so.

Easy money...

Of course its gone wobbly now.

Apom,

Your posts are always sensible and a joy to read.

This post is no different.

I don't believe for one second that this country has a housing shortage. Yes, there is a shortage of affordable house, but that is a result of HPI going skywards in the last few years, not a reason for it. IMHO the best way to provide affordable housing is for house prices to drop.

If Mr Prescott builds affordable homes, what is to stop them from becoming 'unaffordable'? and if they do, how will he solve that one? Will he build more homes again?

It is true (IMO) that this has been caused by nothing more than media hype and people seeing nothing more that pound signs whenever they think about their home.

Like current flowing through a circuit, the average resident of GB will always take the easiest route to where they want to be. Why save for a car when my house will buy one for me?

LG

[paradox]

There may be a shortage of houses in premium locations (ie overlooking a mill pond in a lovely historic centre) - which by their very nature are limited.

but a shortage bog standards semi detached homes, or a shortage of city 2 bed flats, there certainly aint.

[zorn]

but a shortage bog standards semi detached homes, or a shortage of city 2 bed flats, there certainly aint.

There's a colossal shortage, and always has been. If price were no object, I expect the average person would like a large detached house in a leafy suburb or the countryside, a pied-a-terre in London, and maybe a holiday home in Cornwall or the Lake District. Or both, why not. Some of them would share, so let's call it two properties per adult. So demand of 90 million properties, supply of 25 million properties, leaving a shortfall of 65 million properties. It is essential that people are priced out of owning all the property they want, and it always will be.

[paradox]

Sorry, I was not referring to leafy suburban detached houses in Surrey. I was referring to bog standard semi detached houses in Swindon, Sheffield or anywhere you care to mention.

Of course there is a threshold level and if supply exceeds that threshold then it becomes affordable to have two or three houses etc.

But on the other hand there is not such a shortage in supply for most people (who dont actually want / need more than one UK residence).

Have you checked out the London 2 bed flat market recently?

In December 2005 high prices for a 3 bed barrett home in Rochdale are not the result of a supply shortage of 3 bed semis. Instead they are the result of other factors that constrain the market from behaving as a "perfect market" according to the textbooks.

There are market imperfections in abundance (spin, sentiment, imperfect knowledge, relative cost of money - ie interest rates, liquidity constraints - ie not all houses are on sale at all times, transaction costs) etc

[lewissheridan]

Borrowing became cheap and house prices surged.

this is natural.

People noticed that they had gained a fair chunk of equity..

£10,000 jump seems small in housing.. its not small in your pocket.

borrowing was getting cheaper and people thought.. thought that perhaps if house price were doing this.. well.. Borrow, invest.. and..

Easy money.

We have no shortage of housing in this country that differs between any other point in the country.

House prices went up as borrowing was cheap and a lot of people made a lot of easy money.

all of the other arguments are essentially smoke getting blown up your bottoms ladies and gentlemen..

Its been about nothing more then Easy Money.

There is no reason for house prices to stay this high apart from people believe they have to pay it and are prepared to do so.

Easy money...

Of course its gone wobbly now.

very lucid account of where we're at, but where does it go? I firmly believe that there isn't a shortage of houses, and i know this is anecdotal but i know indirectly of 2 people who own in excess of 10 btl properties! And that's only two people i indirectly know, i'm sure everyone on this forum knows of someone who has more properties. When will this easy money dry up ?

[oracle]

I did some stuff with complex adaptive behaviour in markets a few years ago when I was consulting- (Surfing the Edge of Chaos etc)

The neat thing with ref to HPI is that only small seemingly unrelated interventions can have enormous impacts. It's the old butterfly wing in China, Hurricane in the USA metaphor. Thus, the trigger for system change this time need not be a big, easily forseen event (e.g. IR's up), but might already have happened without us even noticing.

it's fairly basic stuff.Money is a fluid substance.

....the nearest analogy I can come up with is a weather system.you would think that high pressure and low pressure would eventually equalise(the utopia no-more-boom-and-bust scenario),but they don't.areas of pressure just move around from place to place with the occasional heatwave and hurricane thrown in....and as with global warming we can expect these hurricanes to become more severe and more frequent.

...the trick is to know where the low pressure bit is that is going to be filled by somebody else's "squeeze" of high pressure.

Edited December 2, 2005 by oracle

[laughing_goat]

it's fairly basic stuff.Money is a fluid substance.

....the nearest analogy I can come up with is a weather system.you would think that high pressure and low pressure would eventually equalise(the utopia no-more-boom-and-bust scenario),but they don't.areas of pressure just move around from place to place with the occasional heatwave and hurricane thrown in....and as with global warming we can expect these hurricanes to become more severe and more frequent.

...the trick is to know where the low pressure bit is that is going to be filled by somebody else's "squeeze" of high pressure.

I have to agree we will never get rid of boom and bust. I was only 23 when Gordon Brown anounced that there would be no more boom and bust. But even at this tender age (and I'm certainly not a remarkable person) I thought, how can he control this? Human nature controls this and human nature is always to follow the crowd.

[Marina]

There's a colossal shortage, and always has been. If price were no object, I expect the average person would like a large detached house in a leafy suburb or the countryside, a pied-a-terre in London, and maybe a holiday home in Cornwall or the Lake District. Or both, why not. Some of them would share, so let's call it two properties per adult. So demand of 90 million properties, supply of 25 million properties, leaving a shortfall of 65 million properties. It is essential that people are priced out of owning all the property they want, and it always will be.

Using your anally retentive logic, house prices could never fall.

But they have, do and will.

[the_duke_of_hazzard]

There's a colossal shortage, and always has been. If price were no object, I expect the average person would like a large detached house in a leafy suburb or the countryside, a pied-a-terre in London, and maybe a holiday home in Cornwall or the Lake District. Or both, why not. Some of them would share, so let's call it two properties per adult. So demand of 90 million properties, supply of 25 million properties, leaving a shortfall of 65 million properties. It is essential that people are priced out of owning all the property they want, and it always will be.

What a strange argument. Prices are a reflection of the relationship between supply and demand where demand incorporates the ability to pay. Saying that prices have to be high so that there's enough to go round is getting it back to front.

By your logic there's an infinite shortage of everything, as, if price were no object, I'd like to own everything.

[BandWagon]

What a strange argument. Prices are a reflection of the relationship between supply and demand where demand incorporates the ability to pay. Saying that prices have to be high so that there's enough to go round is getting it back to front.

By your logic there's an infinite shortage of everything, as, if price were no object, I'd like to own everything.

Hence the classic defintion of economics:

Economics is the allocation of limited resources among unlimited demands.

Edited December 2, 2005 by BandWagon

[BuyingBear]

What a strange argument. Prices are a reflection of the relationship between supply and demand where demand incorporates the ability to pay.

Indeed, some people forget the flip side of supply and demand, as prices rise you kill off demand (demand destruction).