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The Economist Agrees - Maybe 10yrs Of Stagnation Coming....

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From this weel's Economist:

---------------------------------------

Hear that hissing sound?

Dec 8th 2005

THE air is slowly leaking from the global housing bubble. In most of the countries that The Economist tracks each quarter the pace at which house prices are climbing has slowed over the past year. An overwhelming majority of experts are still predicting a soft landing with no drop in prices. But property in many countries is so overvalued that even if prices do not fall, they could stagnate for up to a decade.

America's market has remained hot for longer than most, but even it now seems to be coming off the boil. The 12-month rate of house-price inflation slowed to 12% in the third quarter of 2005, from 14% in the second. Prices of new homes, however, rose by only 1% in the year to October, down from 16% in early 2004. A glut of new building is forcing developers to cut prices. The best signal of a further slowdown to come is the increase in the stock of unsold homes. The number of existing homes on the market was equivalent to 4.9 months' sales in October, up from 3.8 months' sales in January.

For a clue on where prices are heading, American homeowners should keep a close eye on Britain and Australia, where housing bubbles started to deflate in 2004. In Britain the Nationwide building society's price index has risen by only 2.4% over the past 12 months; in the summer of 2004 it was clocking up annual growth of more than 20%. Two other surveys, published by Hometrack and the Royal Institution of Chartered Surveyors, suggest that prices have in fact fallen over the past year. This week one British lender said that it would no longer offer buy-to-let mortgages on new properties.

The downturn in the Australian market has now spread beyond Sydney, where prices are already at least 10% below their peak. In the third quarter prices also fell in Melbourne, Brisbane, Hobart and Canberra. Nationally, average prices increased by only 1% in the year to the third quarter. In real terms, they fell.

House-price inflation has also eased in France, Spain, Italy and Ireland. However, Japan's 14-year slide in house prices may at last be nearing an end: prices in central Tokyo are now rising, although the national average is still slipping and is now 40% below its peak in 1991.

Japan shows what can happen when home prices lose touch with reality. But exactly how overvalued are property markets elsewhere? A recent report on the rich world's housing markets by the OECD concludes that Australia has the most over-valued housing market, with prices 52% above their “correct” level. Next in line is Britain, where prices are 33% overvalued.

To judge the fair value of homes, the OECD uses the ratio of prices to rents, which is a sort of price-earnings ratio for housing. If prices are too high relative to rents, potential buyers will rent not buy, eventually pushing down real prices. In Australia this ratio is 70% above its average level over the period since 1970.

However, a higher ratio of house prices to rents may be justified by low interest rates, which make it cheaper to buy a home. The OECD tries to calculate the “user cost” of home ownership, which in addition to interest rates takes account of tax relief, property taxes, maintenance costs and expected inflation. It then compares the actual ratio of prices to rents with a “fundamental” ratio based on user cost. It is by this gauge that the OECD finds Australian property to be 52% too dear. It concludes that only Britain, the Netherlands and Ireland also have significantly overvalued housing (ie, by 15% or more). Spain is modestly overvalued, but America, France, Sweden and New Zealand look reasonably close to fair value. Homes in Germany and Japan are undervalued by more than 20%. So is The Economist wrong to talk about a global housing bubble?

One problem with the otherwise excellent OECD study is that its numbers are out of date. It is based on the average for 2004, since when several markets have surged. Using our house-price indicators, we have updated the figures for the third quarter of 2005. For instance, American prices are now 15% higher than the average for last year while rents have risen by 3%, so the ratio of house prices to rents has risen by 12%. Using the OECD's method, this suggests that housing is now 14% overvalued. If we also adjust for the rise in the mortgage rate since 2004, the American market is almost 20% overvalued.

The chart above shows our updates for other countries (outside America interest rates have barely altered, so we have adjusted the figures only for changes in prices). France, Spain, Denmark, Sweden and New Zealand also now look significantly overvalued. Germany and Japan (not shown) are still notably undervalued.

These estimates are highly sensitive to changes in interest rates, especially in euro-area economies, such as Ireland and Spain, where rates are very low (and where most mortgages are at variable rates). A rise of one percentage point (including the quarter-point rise announced by the ECB last week) could make Irish homes overvalued by as much as 50%.

Commentators in Britain and Ireland like to talk about the housing market “stabilising” after years of froth. But when you are teetering on a high wire, stability is difficult to maintain. Without a decline in prices, it could take as long as a decade, at current rates of consumer-price inflation, for British property prices to get back to fair value. A decade of falling real prices is not something to relish.

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10 years of flat prices is certainly not in my thinking. I would have thought prices would rise after bottoming out 3-4 yrs from now.

Oh well.

John

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I'm beginning to think that 10 years of stagnation is what will happen. A crash would be better for the economy as it would be over quicker and things could return to a growth footing sooner. A decade or more of flat house prices will cause massive damage to the sectors of the economy that rely on continued growth in housing wealth.

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I'm beginning to think that 10 years of stagnation is what will happen. A crash would be better for the economy as it would be over quicker and things could return to a growth footing sooner. A decade or more of flat house prices will cause massive damage to the sectors of the economy that rely on continued growth in housing wealth.

But surely stagflation is based on the presumption that people act rationally? Take a look at soaring prices and soaring gold, everyones now talking about gold, while Bubb was talking about it months ago. People will always look to ride the next big thing, and surely this works on the down too, if houses are not the bees knees and people are over committed and missing out on other profitable areas they will chase the market down, as the smart money leaves and the masses finally succumb and follow!?

Edited by Mr_Sminty

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When it comes to trading advice the economist is about the worst source there is.

Thats because, although they know some economics, they do believe in the statist myth that governments can do good. It is axiomatic that governments CANNOT do good because they are parasitical in nature. Because they believe that government can do good the economist writers cannot make the final link between money, fractional reserve banking, and fiat currency to come to the unavoidable conclusion that the whole system is a fraud. This fatally impedes their logic.

Now back the main point. The economist says houses will stagnate for 10 years. THEREFORE houses will NOT stagnate for 10 years.

That leaves two possibilities. Houses will zoom or houses will crash. Which will it be? The answer to the question, when the price of house it expressed in fantasy units (such as GBP) depends on politics and is therefore not predictable by normal economic logic. Hence the confusion and choas at present.

However the price of houses expressed in free market money is predictable. So step away from the chaos and feel the joy of the GOLDEN constant

BAB

Edited by BayAreaBear

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The economist says houses will stagnate for 10 years.

I feel I should point out that for UK house prices to remain static in real terms for that length of time would be historically unprecedented; so while it is theoretically possible, it remains highly improbable if not utterly implausible.

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I'm not sure that the economist is saying that prices are going to stagnate for 10 years; merely that if they don't crash then they will.

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The ''money illusion'' effect on the psychology of sellers has been underplayed in this forum..........

Every time prices have risen in the past 70 years sellers who would not cut their prices in the ensuing trough would quite happily sell 5 years later for their original asking price even though this is greatly reduced iin real (inflation-adjusted) terms....

and this applies to people with small/no mortgages who can afford to cut as much as highly geared owners..

In a low inflation environment this effect is reduced and the market has a tendency to seize up.........

and the stagnation can go on for a decade.........and if there are no nasty economic shocks this could easily happen this time................but I suspect an economic jolt at any time in the next 8 years could knock it down 15 or so percent..........

Edited by Michael

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"It is axiomatic that governments CANNOT do good because they are parasitical in nature."

They can alleviate the inefficiencies of capitalism. Why do you think Europe has a better and more advanced mobile phone system than the States?

OH. That old chestnut. A favorite of statists everywhere. Governments are needed to help "market failures".

I suppose that when Hyperactivity Gordon was scooping up GBP 4 billion in taxes from the telecom industry around 1999 (by "selling" the frequencies) then that was helping capitalism along? AND wheres the money NOW?

BAB

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It is axiomatic that governments CANNOT do good because they are parasitical in nature.

BAB

What errant nonsense! You really have taken this free-market thing way too far if that is what you think.

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What errant nonsense! You really have taken this free-market thing way too far if that is what you think.

Ooo I seem to have touched a raw nerve around here

Are you dependent on Government for your living by any chance?

Can I suggest a perusal of the works of Menger, Mises, Rothbard or even perhaps some Hayek if you want a leftist slant on the truth.

Edited by BayAreaBear

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Guest Riser

House prices in the UK are 40% above the long term average, the magnitude of the market pressure pulling prices back towards the long term average is proportional to the distance away from the average. Maintaining prices at this level requires energy which has been supplied in the form of a gradual reduction in interest rates over the past 8 years, the higher prices are from the average the more energy is required to maintain that level.

The only way prices can be maintained at this level is through further cuts in interest rates yet the scope for further cuts is limited and it would be prudent to leave some room for manouvre to manage the crash once it is underway. The MPC are faced with a simple choice they can maintain or lower rates next year leading to rampant inflation and a catastrophic crash in 2007, or they can start to increase rates early in the new year and leave a little elbow room for curbing the worst effects of the crash towards the end of next year. Its their choice, a crash is inevetable and they have their mate Mr Brown to thank for it.

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I'm not sure that the economist is saying that prices are going to stagnate for 10 years; merely that if they don't crash then they will.

yep thats exactly how I read it.....it's funny that we can all read the same article yet arrive at different interpitations :ph34r:

House prices in the UK are 40% above the long term average, the magnitude of the market pressure pulling prices back towards the long term average is proportional to the distance away from the average. Maintaining prices at this level requires energy which has been supplied in the form of a gradual reduction in interest rates over the past 8 years, the higher prices are from the average the more energy is required to maintain that level.

The only way prices can be maintained at this level is through further cuts in interest rates yet the scope for further cuts is limited and it would be prudent to leave some room for manouvre to manage the crash once it is underway. The MPC are faced with a simple choice they can maintain or lower rates next year leading to rampant inflation and a catastrophic crash in 2007, or they can start to increase rates early in the new year and leave a little elbow room for curbing the worst effects of the crash towards the end of next year. Its their choice, a crash is inevetable and they have their mate Mr Brown to thank for it.

Nicely put Riser

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Thats because, although they know some economics, they do believe in the statist myth that governments can do good. It is axiomatic that governments CANNOT do good because they are parasitical in nature. Because they believe that government can do good the economist writers cannot make the final link between money, fractional reserve banking, and fiat currency to come to the unavoidable conclusion that the whole system is a fraud. This fatally impedes their logic.

Governments can't do good? There is precisely one country on the planet that doesn't have a government, which is Somalia -- would you care to tell us about what a paradise it is?

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Governments can't do good? There is precisely one country on the planet that doesn't have a government, which is Somalia -- would you care to tell us about what a paradise it is?

Some people round here are really touchy about this subject I guess? Perhaps there are so many tax consumers in the UK now that this should be expected.

I will try to give your question a serious answer although I realize that a lifetime of Keynsian propaganda requires a lot of time, work and study to overcome. This is after all a process that I had to go through myself. Most are not prepared to invest this effort and are therefore mystified by the current action in the gold price. The economist copy writers are guilty on this count also as evidenced by another of their recent articles.

Lets say that at any given time a country has a certain typical standard of living (its "paradise" quotient you might say). What determines that? Why of course it can only be how much is produced by the average worker with an hour of work. What determines that is how much capital equipment exists per worker. Capital can only exist after savings have been made. So the current standard of living is determined - in the long run - by how much savings have been made in the past. It is gift to us from the previous generation.

Governments do not make savings, nor do they produce anything. Therefore any government activity can only subtract from savings and make the future standard of living less than what it otherwise would be.

Now the fact that Somali does not have a good standard of living just means that they have not made many savings in the past. There are many possible reasons for that. But it seems that in this case big government was not to blame.

You want to know what the future standard of living will be - look at the savings being made now. Then you will know what standard of living we will leave to our children. Not good.

Now let me ask you a question. If lots of government is good why is Zimbabwe not a paradise?

Edited by BayAreaBear

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Lets say that at any given time a country has a certain typical standard of living (its "paradise" quotient you might say). What determines that? Why of course it can only be how much is produced by the average worker with an hour of work. What determines that is how much capital equipment exists per worker. Capital can only exist after savings have been made. So the current standard of living is determined - in the long run - by how much savings have been made in the past. It is gift to us from the previous generation.

Now let me ask you a question. If lots of government is good why is Zimbabwe not a paradise?

No, the prosperity of a country is largely determined by the degree to which it has good institutions (both governmental and non-governmental) and the rule of law is enforced fairly and impartially. Zimbabwe is poor because it has weak institutions and corrupt government. Somalia is very poor because it has next to no institutions or justice system. Germany is rich despite having most of its capital equipment destroyed in the war because it preserved strong institutions and a legal framework.

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No, the prosperity of a country is largely determined by the degree to which it has good institutions (both governmental and non-governmental) and the rule of law is enforced fairly and impartially. Zimbabwe is poor because it has weak institutions and corrupt government. Somalia is very poor because it has next to no institutions or justice system. Germany is rich despite having most of its capital equipment destroyed in the war because it preserved strong institutions and a legal framework.

I agree. Bay Area Bear, your wealth is only as good as the government enforced property rights that allow it to exist.

The alternative is to raise a private army to protect your wealth. Chances are somebody with more wealth would walk all over you. Indeed this is how we come to be where we are now - having a govt. to establish institutions which act for the greater good (e.g. enforcing property laws among many other things) is much more efficient than having warring factions continually hampering development and destroying wealth, accumulated knowledge and human lives.

From this weel's Economist:

---------------------------------------

These estimates are highly sensitive to changes in interest rates, especially in euro-area economies, such as Ireland and Spain, where rates are very low (and where most mortgages are at variable rates). A rise of one percentage point (including the quarter-point rise announced by the ECB last week) could make Irish homes overvalued by as much as 50%.

Commentators in Britain and Ireland like to talk about the housing market “stabilising” after years of froth. But when you are teetering on a high wire, stability is difficult to maintain. Without a decline in prices, it could take as long as a decade, at current rates of consumer-price inflation, for British property prices to get back to fair value. A decade of falling real prices is not something to relish.

Surely the thrust of this article is to state that "stabilisation" of the market is extremely unlikely in their opinion.

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No, the prosperity of a country is largely determined by the degree to which it has good institutions (both governmental and non-governmental) and the rule of law is enforced fairly and impartially. Zimbabwe is poor because it has weak institutions and corrupt government. Somalia is very poor because it has next to no institutions or justice system. Germany is rich despite having most of its capital equipment destroyed in the war because it preserved strong institutions and a legal framework.

Err, and the fact that Marshall plan from the US government poured in lots of money. Not to mention the introduction of a free floating Deutsche Mark by the British zone.

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Lets say that at any given time a country has a certain typical standard of living (its "paradise" quotient you might say). What determines that? Why of course it can only be how much is produced by the average worker with an hour of work. What determines that is how much capital equipment exists per worker. Capital can only exist after savings have been made. So the current standard of living is determined - in the long run - by how much savings have been made in the past. It is gift to us from the previous generation.

Governments do not make savings, nor do they produce anything. Therefore any government activity can only subtract from savings and make the future standard of living less than what it otherwise would be.

now that's interesting. Prosperity is a product of existing savings.

Because we seem to be living in a time where our prosperity is based upon our expectation of future income. Or, in cruder terms, debt.

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Err, and the fact that Marshall plan from the US government poured in lots of money. Not to mention the introduction of a free floating Deutsche Mark by the British zone.

And little ironies like the British Army Major, Ivan Hurst, who got Volkswagen production restarted.

Of the Beetle. A design that, iirc, British motor manufacturers could have had as part of war reparations but they declined the offer.

Oh well, can't win them all. The Peace as they say.

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I hvae nothing to add to the thread , I just want to see the VIP bit by name as I've been upgraded.

:)

Dames

I hope you enjoyed the little "accession ceremony" :ph34r:

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  • 302 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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