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Guardian: The Roof Is Being Fixed But Beware The House Crashing Beneath It

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From Larry Elliot in the Grauniad

The roof is being fixed but beware the house crashing beneath it, 6 December 2015

Reporting of a Camridge University Judge Business School Centre for Business Research paper:

“There is a dilemma for UK macroeconomic policy,” the CBR paper notes. “Fast-rising household debt is needed to maintain a reasonable rate of growth in consumers’ spending and GDP in a world of government debt reduction and in a context of slow growth in world trade, itself caused by debt-reduction policies especially within the eurozone. The problem is that financial ratios and house prices eventually become stretched well beyond historic and probably beyond sustainability.”

The paper itself is here, (the link in the article is dead at time of writing).

Very high house prices will require a combination of high rents and large mortgages for first-time buyers to support them. At some point these supports will fail to raise prices further. Once expectations of further rises are removed the likelihood is that demand will collapse, leading to a sharp fall in house prices. House prices are projected to increase throughout our forecast period to 2025 but price rises approach zero as the period advances. This suggests that a financial crash becomes more likely towards the middle of the next decade.

Next summer is towards the middle of the next decade ;)

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The CBR forecasts it hitting 17 by 2020, a third above where it was before the crisis and double its level in 1996, when house prices troughed at the end of the property crash that followed the Lawson boom. [...]If the economy pans out in accordance with the CBR forecasts, there will be a colossal housing crash that will rip through the banks and threaten a repeat of 2008.

Banks can handle it this time; it's what the last few years have been about. Drawing in more greed and allowing banks to rebalance. Market participants holding the risk, rather than core financial institutions.

HPC, correction over some time for real HPC, followed by rebalancing profitable fresh lending, at much lower risk. Safer for borrower and lender on a £150K mortgage vs a £300K. All my family ready to take on a mortgage after HPC.

And future decades of higher volume housing transactions, with the lending that comes with it, at non hpi bubble house prices. More profit.

9bdquu.jpg

Oldie HPI smuggers, owning outright of very small mortgages, are not earning any money for the banks. It's what the HPI smuggers who tip up saying what their homes are worth (and BTLs) don't understand, when they go on about Conservatives not going to allow it (HPC) to happen because they are 'core-voters'.

No one is stopping owner side cashing in at bubble prices with the risks ahead.

I'm just not prepared to pay these prices, in a market where very fell sellers, for the moment at least, coming to market - although plenty of other buyers currently are willing to pay. Most of my latest RM saves gone Sold STC in past few weeks. 'Forever HPI' and 'they won't let it happen'.

http://www.rightmove.co.uk/property-for-sale/property-51261533.html

10 Jun 2015

House prices could rise by a quarter in the next five years, a report predicts today after finding the number of homes for sale has fallen to its lowest level since records began in 1978.

http://www.telegraph.co.uk/finance/property/house-prices/11666634/Housing-market-grinds-to-a-halt-as-sales-hit-lowest-level-since-1978.html

£200 Billion debt the BTLers have taken on, theirs to deal with, and in HPC more affordable debt taken on by HPCers to buy houses. I agree there should be a jump in consumer debt, via HPC. Let it rip through the smug HPIers.

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These brainy PhD economics types never discuss basis; banks control credit and interest rates, just as it has been since 1694.

Those are the only tools needed to stimulate any market, either up or down.

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From the CBR's report (emphasis added):

The housing market has been partly sustained by buy-to-let purchasers, partly with migrant tenants in prospect, but rents cannot continually rise relative to incomes. At some point prices will cease to rise, and expectations of future price increases will fade. In these circumstances a sudden collapse in house prices can easily occur as it did in 2008-9. The possibility of defaulting loans then puts banks under pressure. Something similar happened in 2008-9 at much lower levels of both household debt and house prices than we expect by 2020. Bank collapses occurred in 2007-8 before UK loan default rates became high, mainly due to housing finance problems in the USA. These led to a freezing of the markets for inter-bank loans, and to the bankruptcy of adventurous banks like Northern Rock which had come to depend on short-term debt rather than deposits. UK bank balance sheets are now stronger than they were in 2008, and may be strong enough to withstand a house price collapse. If no financial crisis occurs, we still believe that demand for loans would retreat, leading to slower economic growth after 2020 unless offset by a rapid expansion of government spending.

[. . .]

The house price ratio reached a historically high level of 14 in 2007. Although it fell back a little in 2009, the fall was much less than in the USA and was soon reversed to reach another record of 15 in 2015. On current government policies for housing our forecasts suggest a ratio of 17 by 2020 making homes increasingly unaffordable for young and other first-time buyers. Such high levels of house prices will exert a strain on the financial system. This is not directly modelled here but suggests that the danger of another banking crisis will steadily increase. There are signs that the Bank of England is aware of the dangers of a renewed boom in household borrowing. The Chancellor also plans to address the housing shortage, although measures to assist first-time buyers are offset by increased costs for buy-to-let investors. It is not obvious however that the Chancellor’s measures will moderate the rise in house prices.

[. . .]

Household investment has been rising rapidly in 2014 and 2015 helped by the expansion of mortgage credit, itself stimulated by several government schemes to assist first-time buyers. Whether fortuitously, or not, this mini-boom in house-building and improvements boosted economic growth in the run-up to the last election. The boom is expected to last into 2016 but then die away quickly as interest rates rise. The number of new dwellings completed is forecast to rise in the private sector, many of them buy-to-let properties (chart 4.2). In the social (mainly housing association) sector we have predicted a decline in completions mainly due to the decline in the real value of government investment. Plans to force Housing Associations to sell their existing stock of dwellings to tenants are also predicted to diminish Housing Associations’ appetite for new building.

It is commonly argued that the level of house building is much too low for a growing population. The number of dwellings per hundred people traditionally rose year upon year but peaked at 44 dwellings per hundred people soon after immigration from the new eastern European member states began in 2004 (see chapter 8). The ratio has subsequently fallen. The three million rise in population due directly to net immigration since 2001 has not led to a commensurate response in house-building. Most immigrants are unlikely to qualify for mortgages at least in their early years. Instead buy-to-let landlords have bought up both existing and new property to let to immigrants often at high densities. One result has been to drive up house prices, and driving indigenous first-time buyers out of the market for owner-occupation. As can be seen in chart 4.2 there has been little response from the social housing sector and on current fiscal plans any future response also looks unlikely.

[. . .]

The number of dwellings per thousand people rose historically at 1% per annum, but this rate slowed markedly from 1990 and ceased growing around 2004 at the beginning of large scale East European migration into the UK (chart 8.2). Since then the number of dwellings per thousand people has fallen and is forecast to continue to fall. In other words the occupancy density has been rising with more people per dwelling on average. Much of this is likely to reflect high densities in rented properties bought under buy-to-let mortgages.

The buy-to-let market has raised average house prices through purchasing existing properties. Not enough new dwellings have been built to house the rising population and we forecast that this will continue, with the result that house prices keep rising throughout the forecast period (table 8.1, chart 8.3). Our equations suggest that the lack of new social housing is an important influence on rising prices and that a major increase in building would considerably reduce the rate of house price inflation.

The result is a large rise in the ratio of average house prices to disposable income (chart 8.4). Already in 2015 this ratio is above the pre-financial crisis level, and higher than in any previous year. By 2020 we forecast that the ratio will have risen to 17, a third above the pre-crisis level, and will remain at that high level after 2020. Such an unprecedented level looks unsupportable, but not because mortgage interest payments would reach unsustainable levels. While rising interest rates in 2016 and 2017 are likely to double mortgage interest payments as a share of household disposable income, the level reached would only equal the average level over the 1990s. Very high house prices will require a combination of high rents and large mortgages for first-time buyers to support them. At some point these supports will fail to raise prices further. Once expectations of further rises are removed the likelihood is that demand will collapse, leading to a sharp fall in house prices. House prices are projected to increase throughout our forecast period to 2025 but price rises approach zero as the period advances. This suggests that a financial crash becomes more likely towards the middle of the next decade.

The CBR seems to be arguing that house prices will continue rising for several years until they collapse spectacularly due to reaching the upper bound of affordability as constrained by serviceable rents and mortgage payments, at which point speculative demand predicated on house price inflation will be removed from the market and another financial crisis will ensue.

This apparently ignores the fact that prevailing credit conditions dictate what mortgage payments actually consist of (for instance if interest only lending were removed for buy-to-let then for many of them their mortgage payments would instantly become unserviceable at current prices) even whilst acknowledging that credit conditions, especially in buy-to-let lending, have driven up house prices and/or previously constrained borrowing.

It also rests on the argument that the Government-backed "mini-boom in house-building" will be knocked on the head by rising interest rates (quite an assumption when applied to interest rates as a whole, rather than market rates for specific sectors) and that a slight decline in the number of dwellings per 1,000 people since 2004 (see Chart 8.2, page 57) represents a house price crash-preventing shortage in housing supply, despite the current number of dwellings per 1,000 people being significantly higher now that it was during the 1990s house price crash (or bull trap, depending on how you want to look at it, again see Chart 8.2, page 57 <_<).

Fundamentally they seem to assume that, even though "UK bank balance sheets are now stronger than they were in 2008, and may be strong enough to withstand a house price collapse", the current Government has no appetite for seeing off major financial stability risks before they develop into financial crises.

There is a chance, of course, that this may be correct, but the current run of policy in terms of actively supporting house-building whilst simultaneously disincentivising buy-to-let strongly suggests that the Government aren't happy to just sit back and wait for the next financial crisis to explode in their face.

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Out of curiosity, why is most of what Carney says can be poo pooed except for the claim that banks are safer this time?

Are they not simply safe within the confines of what they've been stress tested on? What if any approaching economic problems should (shock horror) arrive bringing details not forseen/accounted for?

I would specify but, you know, you can't see the unforseen. Hence the term.

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Are they saying that the government is finding sweeteners to persuade the young to get into debt (student loans and mortgage support schemes of various flavours), but the capacity to do this will be maxed out come 2025?

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Our money and banking system is failing to meet the needs of society. It has left us with unaffordable housing, worsening inequality and banks that are subsidised and underwritten by taxpayers' money.

At Positive Money we think things could be different. We believe a public inquiry is essential if we are going to to examine the root cause of our unstable financial system. Monetary policy adopted since the crash has been ineffective. Quantitative Easing has increased inequality, and we are now seeing a return to pre-crisis levels of household debt.

Sign the petition?

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Pleasing and yet depressing (if the report's forecasting proves accurate). Nice to see a report that explicitly acknowledges that prices cannot go on rising and are likely to collapse when expectations of further rises vanish, but the projected timescale! 2025 is a long time to wait. Even if an HPC was a certainty around that time, I could potentially have accrued around 25% of equity just by paying down the mortgage over 10 years if I bought now. If you factor in (gradually slowing) price inflation, then even a 50% correction in 2025 probably wouldn't wipe out the gains. One could lose faith....

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Pleasing and yet depressing (if the report's forecasting proves accurate). Nice to see a report that explicitly acknowledges that prices cannot go on rising and are likely to collapse when expectations of further rises vanish, but the projected timescale! 2025 is a long time to wait. Even if an HPC was a certainty around that time, I could potentially have accrued around 25% of equity just by paying down the mortgage over 10 years if I bought now. If you factor in (gradually slowing) price inflation, then even a 50% correction in 2025 probably wouldn't wipe out the gains. One could lose faith....

You should definitely buy a house tomorrow. :rolleyes:

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Dave, the Tory tw@t who can't remember how many houses he owns, is still committed to keeping them as expensive as possible for everybody else to acquire.

http://www.telegraph.co.uk/news/politics/12036291/David-Cameron-200000-more-people-will-be-able-to-get-on-the-housing-ladder.html

Nearly 200,000 people will be able to get on the housing ladder under a major extension of the Government's shared ownership scheme, the Prime Minister will announce today.

Mr Cameron will announce plans to sweep away restrictions on the scheme - which allows people in England to part-buy, part-rent properties, increasing their share of the ownership over time.

He will scrap rules so that anyone who earns less than £90,000 in London and £80,000 outside the capital will be able to buy a home. At present they are often reserved by councils for key workers.

He will also remove restrictions which bar people from taking advantage of the scheme more than once, enabling people to climb the housing ladder. Removing the restrictions is expected to extend the scheme to up to 175,000 people.

Speaking during a visit to the West Midlands he is expected to say: "For years, we've had shared ownership, where you part-buy, part-rent a property. So many people are attracted to this idea, especially those who thought they'd never have a chance of owning a home," he will say.

"But, because it's been heavily restricted, many of those people have missed out. We've had local councils dictating who is eligible, based on everything from salary to profession to where the buyer comes from."

http://www.telegraph.co.uk/news/politics/12036291/David-Cameron-200000-more-people-will-be-able-to-get-on-the-housing-ladder.html

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Something will have to give either prices/rents or you need wage inflation or alternatively people just give all their wages to either the bank or landlord and don't eat.

Well, wages are rising and mortgage payments relative household income are closer to cycle lows than highs so I think youve answered your own question.

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Shared ownership isn't anything like 'getting on the housing ladder'.

It's more like holding the ladder and letting someone else put their feet on your shoulders.

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^ CBR


House prices are projected to increase throughout our forecast period to 2025 but price rises approach zero as the period advances. This suggests that a financial crash becomes more likely towards the middle of the next decade.

So that report appears to be using Harrison's 18 year house price cycle to justify the prediction of the next crash being in 2025 (maybe not in so many words) - so by implication that assumes that the 2007/2008 crash is over and it's going to be house price blue skies for the next 10 years.

The ratio of average house prices to disposable income to rise to 17 by 2020. Wow - and Call Me Dave has just announced another shared ownership prop.

Edited by billybong

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Dave, the Tory tw@t who can't remember how many houses he owns, is still committed to keeping them as expensive as possible for everybody else to acquire.

Dave spending other people's money on making houses more expensive for people to buy - again.

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House prices in the UK are largely about lending.

Average house £60k in 1998 because banks were lending around 3x main income of £18k

Average house £180k+ in 2015 because banks lend 4.5x household income of £40k (£25k and £15k)

Equates to a move from about 3x single income to about 8x or 9x a single income without the commensurate income rises and so rewarded speculation.

Lots of houses that were bought using a single income are still to swap hands to couples using two incomes. HPI was for parents but a joint mortgage Household Debt Trap awaits their children. Eventually the younger generation will realise they cannot have the the same HPI because incomes cannot be stretched in the same way. There won't be another tripling of 8x or 9x single income to a 24x or 27x single income.

Surely the threepence will drop (the usual penny plus 2 pennies mortgage interest)? Then people borrow less, their main living cost drops and freedom from debt slavery awaits. They could have it next year if they all only offered 3x main income on 100% of a house.

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House prices in the UK are largely about lending. [...] They could have it next year if they all only offered 3x main income on 100% of a house.

There are two sides to the lending equation. Can't lend without willing applicant borrowers.

Well my family wasn't born to protect HPI for those who outbid us by fortunes, whether bomad or pure mortgage debt.

There's no having it all ways; pushing and falling over one another to pay super-high prices with HPI+++ spreadsheets of future, then protection-bailouts from HPCs cause 'core-voters' or 'media victims'. Don't most of us want to buy/own a house. Anyone concerned a few (because it's not much vs the wider owner side) on the buyer/owner side are at risk of negative equity can donate to the individuals out of their own finances next time.

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House prices in the UK are largely about lending.

Average house £60k in 1998 because banks were lending around 3x main income of £18k

Average house £180k+ in 2015 because banks lend 4.5x household income of £40k (£25k and £15k)

Equates to a move from about 3x single income to about 8x or 9x a single income without the commensurate income rises and so rewarded speculation.

Lots of houses that were bought using a single income are still to swap hands to couples using two incomes. HPI was for parents but a joint mortgage Household Debt Trap awaits their children. Eventually the younger generation will realise they cannot have the the same HPI because incomes cannot be stretched in the same way. There won't be another tripling of 8x or 9x single income to a 24x or 27x single income.

Surely the threepence will drop (the usual penny plus 2 pennies mortgage interest)? Then people borrow less, their main living cost drops and freedom from debt slavery awaits. They could have it next year if they all only offered 3x main income on 100% of a house.

According to the ONS median non-retired household income is £28.1k (down from £28.9k in 2008).

Totally agree that house prices are all about lending but, given the removal of interest only and the soft cap on LTIs, if they were just about lending to owner occupiers then the current bubble should at least be smaller than it is now.

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According to the ONS median non-retired household income is £28.1k (down from £28.9k in 2008).

Totally agree that house prices are all about lending but, given the removal of interest only and the soft cap on LTIs, if they were just about lending to owner occupiers then the current bubble should at least be smaller than it is now.

The increase in lending at higher income multiples has pushed prices up. This has made BTL more profitable because of the capital appreciation and so encouraged the speculation. However if lending went back to 3x main income for a whole house and only relied on wage rises, then the BTLers would run a mile. People piling into BTL seem to think they will always be able to make as much capital appreciation as in the past. Though as lending at higher salary multiples gets too stretched and eventually plateaus, where can another tripling of lending multiples that leads to the previous capital appreciation come from? Of course the governbankment is "helping" people all it can, to keep shoving debt down peoples' throats by encouraging them to buy parts of houses and ignore part of the initial mortgage. If enough people are happy to work every hour they can and never retire, just to pay for part of a shelter, then the debt slavery can continue.

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The increase in lending at higher income multiples has pushed prices up. This has made BTL more profitable because of the capital appreciation and so encouraged the speculation. However if lending went back to 3x main income for a whole house and only relied on wage rises, then the BTLers would run a mile. People piling into BTL seem to think they will always be able to make as much capital appreciation as in the past. Though as lending at higher salary multiples gets too stretched and eventually plateaus, where can another tripling of lending multiples that leads to the previous capital appreciation come from? Of course the governbankment is "helping" people all it can, to keep shoving debt down peoples' throats by encouraging them to buy parts of houses and ignore part of the initial mortgage. If enough people are happy to work every hour they can and never retire, just to pay for part of a shelter, then the debt slavery can continue.

If that's the case then how have current average house prices exceeded current average household incomes at current average income multiples?

Edited by Neverwhere

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If that's the case then how have current average house prices exceeded current average household incomes at current average income multiples?

Because we haven't hit the Household Debt Trap plateau yet. There are still lots of houses that were bought using one income that the BoE want sold to people using two. There are still lots of people on lower income multiple mortgages who the BoE want to live the dream and take on more debt at 4.5x household income. This is why they allow 15% to be greater than 4.5x to help edge the overall average up. This is still pushing prices up and so tempts in the BTLers for capital appreciation. Plus the afore mentioned governbankment schemes are deferring debt and making non-affordable houses look affordable.

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