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John The Pessimist

Hpc Heresy! 2007 Prices Not Bubblicious....

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Syndicated from the FT, Martin Wolf's article resonates with many HPC themes such as the decline of per capita GDP, decline of manufacturing, 'Austerity Lite' etc.

However buried in the text is the assertion (as I read it) that '07 prices weren't 'unsustainably high'. There is no reference to QE, near ZIRP, FLS & various forms of HTB.

http://www.irishtimes.com/business/economy/martin-wolf-uk-recovery-conceals-dire-productivity-growth-1.2193277

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Hilarious, I love the bit at the end about fantasy of the UK economy being the most prosperous economy in 2030 is fantasy but yet in 2007 everything was fine even houseprices!

Comedy gold.

Although to be fair in a sense he's correct as house prices in many areas have been maintained at these levels so the market still agrees that house prices aren't overvalued.

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Syndicated from the FT, Martin Wolf's article resonates with many HPC themes such as the decline of per capita GDP, decline of manufacturing, 'Austerity Lite' etc.

However buried in the text is the assertion (as I read it) that '07 prices weren't 'unsustainably high'. There is no reference to QE, near ZIRP, FLS & various forms of HTB.

http://www.irishtimes.com/business/economy/martin-wolf-uk-recovery-conceals-dire-productivity-growth-1.2193277

Yeah, how come it collapsed the banking system Then?

How come people couldn't pay for houses with interest rates at low levels., ie 4%?

imho, he is talking out his rear end.

I guess the conclusion we could draw that he expects non London house prices to go 2007 levels plus 30%?

Sure, push up those prices. When the banks collapse for the second time there is nothing they will be able to do to stop the collapse.

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Here are some past articles by him on housing:

http://www.ft.com/cms/s/0/aa1c9dfa-30ea-11e3-b478-00144feab7de.html

http://www.ft.com/cms/s/0/b82aa19a-95c4-11e4-a390-00144feabdc0.html

http://www.ft.com/cms/s/0/f5b26d8a-ac59-11e4-9d32-00144feab7de.html

Skimming through, he thinks house prices are crazy but that it is a supply demand issue rather than a credit one. All of the articles talk about new starts and population growth. Though, I think I remember reading one he wrote ages back condemning HTB.

This supply/demand vs credit debate seems to be a controversial one on HPC.

I suppose that is because if it did turn out to be a supply / demand issue then an immediate price crash would be unlikely as the mismatch would take years / decades to clear.

The answer seems to me that both are causes of high prices. But perhaps the key driver of prices is different across the country e.g. there is clearly a credit bubble in London / South East housing supplementing the supply / demand mismatch.

Edited by growlers

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Syndicated from the FT, Martin Wolf's article resonates with many HPC themes such as the decline of per capita GDP, decline of manufacturing, 'Austerity Lite' etc.

However buried in the text is the assertion (as I read it) that '07 prices weren't 'unsustainably high'. There is no reference to QE, near ZIRP, FLS & various forms of HTB.

http://www.irishtimes.com/business/economy/martin-wolf-uk-recovery-conceals-dire-productivity-growth-1.2193277

Thats all it boils down to. If you're too lazy and/or stupid to understand the credit issue, the simple fact that the market is so awash with interventions should be evidence enough something is very very wrong.

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It depended on prevailing rates obviously.

When rates were 5% house prices were proven to be in a bubble. When they crashed rates and repayments they re-set what the bubble level was.

All I would add then, there was absolutely no need to push the entire northern banking industry to bankruptcy. Halifax, Bradford and Bingley, Alliance and Leicester, Northern Rock, Scarbrough etc. If they had extended liquidity and cheap loans to them as they did later, they would be thriving in this regimen.

The different attitude to financial institutions according to where they were based is one of the great injustices of the financial crisis.

Do you think this was deliberate?

It does seem the mutuals were hit Hard.

My worry is the are setting up the biggest and most powerful for a big fall. What would London give to get their hands on via nationwide?

All fantasy of course, I am sure there is not some evil plan being played out by the London centric bankers. Just idiots borrowing too much and a desperate government underwriting the lending.

Scary scenario either way.

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Yeah, how come it collapsed the banking system Then?

? it didn't it was a small part of a global collapse where lending was out of control to everyone across the world through the casino banks The UK property market did not collapse the banking system did it ? Brown had that right we were hit hard because of stupid labour polices but it was worldwide

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Here are some past articles by him on housing:

http://www.ft.com/cms/s/0/aa1c9dfa-30ea-11e3-b478-00144feab7de.html

http://www.ft.com/cms/s/0/b82aa19a-95c4-11e4-a390-00144feabdc0.html

http://www.ft.com/cms/s/0/f5b26d8a-ac59-11e4-9d32-00144feab7de.html

Skimming through, he thinks house prices are crazy but that it is a supply demand issue rather than a credit one. All of the articles talk about new starts and population growth. Though, I think I remember reading one he wrote ages back condemning HTB.

This supply/demand vs credit debate seems to be a controversial one on HPC.

I suppose that is because if it did turn out to be a supply / demand issue then an immediate price crash would be unlikely as the mismatch would take years / decades to clear.

The answer seems to me that both are causes of high prices. But perhaps the key driver of prices is different across the country e.g. there is clearly a credit bubble in London / South East housing supplementing the supply / demand mismatch.

Indeed.

For me it is mostly supply/demand and failure of the market over c 40 yrs.

BUT this was overlayed with an obvious credit derivaties bubble from 2004-2007. It doesnt have to be either or.

So, US, Spain, Ireland had a bubble in the true sense, with supply ramping up during the securitisation (credit derivative) bubble. That was only sustainable for the 4 years of that bubble and clearly led to massive over supply which as the credit bubble burst resulted in a collapse in prices back to and below long term trend.

UK however was different in the sense that supply DIDNT ramp up during the credit bubble, with the exception (imo) of some city centre 2 bed apartments (BTL bubble - did burst) and very top end vanity projects. Result being that during the temporary credit markets collapse prices fell - why? Because the banks collapsed. Simple as that. They didnt collapse due to massive oversupply as in US, Spain, Ireland and so that over supply did not need to be worked off.

hence in UK, as soon as the credit markets and banks were cleaned up (of a fashion) prices bounced back up to where they had been and in fact far beyond in London (also for well documented additional reasons)

Interest rate is a red herring. It was clearly too tight at 5% prior to the financial market collapse and it wasnt low enough (see thread on Bernanke and Taylor rule) for the years followin 2008.

So in UK rates are now more or less appropriate for the economy - BUT housing supply is still way way below demand (all tenures) and credit is still woefully tight. Low LTVs leading to htb etc.

Which is partly why I personally believe were still in the early staes of the next credit cycle which will continue until c mid 2020s as LTVs slowly rise, banks are repaired etc.

What hasnt been fixed and simply cannot be fixed in the near term is supply. In fact, it is getting worse.

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Indeed.

For me it is mostly supply/demand and failure of the market over c 40 yrs.

BUT this was overlayed with an obvious credit derivaties bubble from 2004-2007. It doesnt have to be either or.

So, US, Spain, Ireland had a bubble in the true sense, with supply ramping up during the securitisation (credit derivative) bubble. That was only sustainable for the 4 years of that bubble and clearly led to massive over supply which as the credit bubble burst resulted in a collapse in prices back to and below long term trend.

UK however was different in the sense that supply DIDNT ramp up during the credit bubble, with the exception (imo) of some city centre 2 bed apartments (BTL bubble - did burst) and very top end vanity projects. Result being that during the temporary credit markets collapse prices fell - why? Because the banks collapsed. Simple as that. They didnt collapse due to massive oversupply as in US, Spain, Ireland and so that over supply did not need to be worked off.

hence in UK, as soon as the credit markets and banks were cleaned up (of a fashion) prices bounced back up to where they had been and in fact far beyond in London (also for well documented additional reasons)

Interest rate is a red herring. It was clearly too tight at 5% prior to the financial market collapse and it wasnt low enough (see thread on Bernanke and Taylor rule) for the years followin 2008.

So in UK rates are now more or less appropriate for the economy - BUT housing supply is still way way below demand (all tenures) and credit is still woefully tight. Low LTVs leading to htb etc.

Which is partly why I personally believe were still in the early staes of the next credit cycle which will continue until c mid 2020s as LTVs slowly rise, banks are repaired etc.

What hasnt been fixed and simply cannot be fixed in the near term is supply. In fact, it is getting worse.

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They were doling out 125% mortgages with no evidence of income.

BTLers like the Wilsons were allowed to leverage up to buy 1000 houses on the premise that house prices only ever go up.

Then housing benefit increases because of the rising house prices, creating a feedback loop.

And people think that easy credit was not the major cause of this crisis? Madness.

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Positive money point out that the supply vs demand plays a part, but the deregulation of the financial sector which enabled speculation has been the biggest factor. Check this graph out:

House%20Prices%20vs%20Population_zpszksv

Housing stock appears to have just kept above population growth. Someone on another thread said it costs £30k to build a flat and £70k for a house? My street was built in 1999-2001 and the land registry figures show most were initially sold for around 37-40k. Now they are 'worth' £120k?

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Positive money point out that the supply vs demand plays a part, but the deregulation of the financial sector which enabled speculation has been the biggest factor. Check this graph out:

Housing stock appears to have just kept above population growth. Someone on another thread said it costs £30k to build a flat and £70k for a house? My street was built in 1999-2001 and the land registry figures show most were initially sold for around 37-40k. Now they are 'worth' £120k?

Excellent post. Here's another graph from them:

Sectoral-Lending.png

Very little of the trillion pounds that banks created between 2000-2007 went to businesses outside of the financial sector:

  • Around 31% went to residential property, which pushed up house prices faster than wages.
  • A further 20% went into commercial real estate (office buildings and other business property)
  • Around 32% went to the financial sector, and the same financial markets that eventually imploded during the financial crisis.
  • But just 8% of all the money that banks created in this time went to businesses outside the financial sector.
  • A further 8% went into credit cards and personal loans.
Edited by Eddie_George

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? it didn't it was a small part of a global collapse where lending was out of control to everyone across the world through the casino banks The UK property market did not collapse the banking system did it ? Brown had that right we were hit hard because of stupid labour polices but it was worldwide

True but when the banks were better regulated (not by the FSA) they survived worse shocks World War II etc without any bank runs.

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Haven't been on here for a while --- but - be assured ---- a HUGE cause of the insane and downright criminal prices and rents was - and still is

PREDATORY LIAR LOANS.

See below.

THAT is how it was all done.

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Indeed.

For me it is mostly supply/demand and failure of the market over c 40 yrs.

BUT this was overlayed with an obvious credit derivaties bubble from 2004-2007. It doesnt have to be either or.

So, US, Spain, Ireland had a bubble in the true sense, with supply ramping up during the securitisation (credit derivative) bubble. That was only sustainable for the 4 years of that bubble and clearly led to massive over supply which as the credit bubble burst resulted in a collapse in prices back to and below long term trend.

UK however was different in the sense that supply DIDNT ramp up during the credit bubble, with the exception (imo) of some city centre 2 bed apartments (BTL bubble - did burst) and very top end vanity projects. Result being that during the temporary credit markets collapse prices fell - why? Because the banks collapsed. Simple as that. They didnt collapse due to massive oversupply as in US, Spain, Ireland and so that over supply did not need to be worked off.

hence in UK, as soon as the credit markets and banks were cleaned up (of a fashion) prices bounced back up to where they had been and in fact far beyond in London (also for well documented additional reasons)

Interest rate is a red herring. It was clearly too tight at 5% prior to the financial market collapse and it wasnt low enough (see thread on Bernanke and Taylor rule) for the years followin 2008.

So in UK rates are now more or less appropriate for the economy - BUT housing supply is still way way below demand (all tenures) and credit is still woefully tight. Low LTVs leading to htb etc.

Which is partly why I personally believe were still in the early staes of the next credit cycle which will continue until c mid 2020s as LTVs slowly rise, banks are repaired etc.

What hasnt been fixed and simply cannot be fixed in the near term is supply. In fact, it is getting worse.

gotta love these Keynesians. They talk about non market interventions like rates not being rigged high or low enough, more bank bailouts etc etc, and then come to a free market conclusion: supply was out of whack with demand ! Comedy gold.

How do you get the concept of malinvestment due to rate rigging into their thick skulls ?

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Indeed.

For me it is mostly supply/demand and failure of the market over c 40 yrs.

BUT this was overlayed with an obvious credit derivaties bubble from 2004-2007. It doesnt have to be either or.

So, US, Spain, Ireland had a bubble in the true sense, with supply ramping up during the securitisation (credit derivative) bubble. That was only sustainable for the 4 years of that bubble and clearly led to massive over supply which as the credit bubble burst resulted in a collapse in prices back to and below long term trend.

UK however was different in the sense that supply DIDNT ramp up during the credit bubble, with the exception (imo) of some city centre 2 bed apartments (BTL bubble - did burst) and very top end vanity projects. Result being that during the temporary credit markets collapse prices fell - why? Because the banks collapsed. Simple as that. They didnt collapse due to massive oversupply as in US, Spain, Ireland and so that over supply did not need to be worked off.

hence in UK, as soon as the credit markets and banks were cleaned up (of a fashion) prices bounced back up to where they had been and in fact far beyond in London (also for well documented additional reasons)

Interest rate is a red herring. It was clearly too tight at 5% prior to the financial market collapse and it wasnt low enough (see thread on Bernanke and Taylor rule) for the years followin 2008.

So in UK rates are now more or less appropriate for the economy - BUT housing supply is still way way below demand (all tenures) and credit is still woefully tight. Low LTVs leading to htb etc.

Which is partly why I personally believe were still in the early staes of the next credit cycle which will continue until c mid 2020s as LTVs slowly rise, banks are repaired etc.

What hasnt been fixed and simply cannot be fixed in the near term is supply. In fact, it is getting worse.

I agree you apart from the bit about supply. Building more homes is possible if there were the will. Alternatively making pro single parents share would produce a million + homes in a year without a single brick being laid. Good news for people who work and for double bunk manufacturers.

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Indeed.

For me it is mostly supply/demand and failure of the market over c 40 yrs.

BUT this was overlayed with an obvious credit derivaties bubble from 2004-2007. It doesnt have to be either or.

So, US, Spain, Ireland had a bubble in the true sense, with supply ramping up during the securitisation (credit derivative) bubble. That was only sustainable for the 4 years of that bubble and clearly led to massive over supply which as the credit bubble burst resulted in a collapse in prices back to and below long term trend.

UK however was different in the sense that supply DIDNT ramp up during the credit bubble, with the exception (imo) of some city centre 2 bed apartments (BTL bubble - did burst) and very top end vanity projects. Result being that during the temporary credit markets collapse prices fell - why? Because the banks collapsed. Simple as that. They didnt collapse due to massive oversupply as in US, Spain, Ireland and so that over supply did not need to be worked off.

hence in UK, as soon as the credit markets and banks were cleaned up (of a fashion) prices bounced back up to where they had been and in fact far beyond in London (also for well documented additional reasons)

Interest rate is a red herring. It was clearly too tight at 5% prior to the financial market collapse and it wasnt low enough (see thread on Bernanke and Taylor rule) for the years followin 2008.

So in UK rates are now more or less appropriate for the economy - BUT housing supply is still way way below demand (all tenures) and credit is still woefully tight. Low LTVs leading to htb etc.

Which is partly why I personally believe were still in the early staes of the next credit cycle which will continue until c mid 2020s as LTVs slowly rise, banks are repaired etc.

What hasnt been fixed and simply cannot be fixed in the near term is supply. In fact, it is getting worse.

The next credit cycle? You mean, like this?

uk_debt_boom.jpg

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