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What's The Best Logical Argument For Hpc?

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I'm finding it hard to convince someone reasonably intelligent that house prices are falling/ due to fall further rather than going to stagnate for several years to come.

For me, everything points in the direction of a correction. However, much of the evidence feels "anecdotal" in flavour. For example:

(i) Looking at graphs of property prices suggests that property is over-valued. In my world this means that the imperfect market that we call property is due a correction to restore its equilibrium. At the moment these property prices have been decided by a relatively small number of agents who have recently bought but can it be shown that as time progresses and more join this number that these prices are unsustainable? What argument is there against everybody from now on only selling for a recent Nethouseprices price and everybody being happy to buy at that price? - like a cartel communicating prices.

(ii) FTB% is very low. I take this to mean that at the moment property is basically being traded by existing owners who have decided that rather than spend a mortgage-free second half of their working lives, they would rather buy more property. I don't believe in the "property ladder" but how can it be shown that we won't turn into a divided country of property owners and their tenants?

(iii) Yields are very low. I believe that if yields (adjusted for risk) in one market are low, investors will move their money into other markets with the consequence that yields in the first market will rise. However, maybe people don't care about yields and find that the intangible benefits of property outweigh them - like goodwill in accounting.

(iv) Others include: banks are in the boom period of their credit cycle, the government has borrowed and spent too much, interest rates are too low, US rates have been rising, foreign labour is much cheaper, oil is more expensive etc. (I believe that the main counter-argument to at least one of these is that the BoE loses its credibility and writes a letter to Gordon explaining that having tried to under report inflation with a new DPI measure, we are going to tolerate high inflation for the good of all the country's debtors).

The reason why I describe these examples as "anecdotal" is because they are abundant and stand as evidence but it requires a further step to reach the conclusion that prices must therefore fall. Does the evidence we see around us meet the definition of "sufficient condition" to cause a price fall?

This makes it very difficult to convince someone as it always comes down to your belief that one thing means prices must fall, against their belief that it doesn't mean that or that stagnating prices are sustainable in spite of it.

So does anyone know of a logical argument or piece of unambiguous evidence that couldn't rationally be argued against?

Or more precisely:

In the absence of an exogenous shock to the system, what reason is there that prices remaining level is unsustainable and they must fall?

Forgot to say - thanks in advance for any replies, particularly those that do the trick and most particularly for those that do the trick before next Tuesday (which is when I meet my landlord).

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All previous HP corrections except the last one saw no nominal price falls......just price stagnation whilst incomes rose....to catch up........(falls in inflation-adjusted prices only).........and this pattern has repeated itself over 75 years..

''Money illusion'' is important in the psychology of sellers..........They'll refuse to cut their price 10% now but will quite happily accept the same price in 4 years' time after 20% inflation.....which is obviously less in real terms....and apart from very recent buyers with 90% plus mortgages ...sellers can afford to cut prices...

Edited by Michael

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Who is selling.?

Someone who has owned for a long time and has seen massive rises in the value of the property... does not need to sell.

Someone who has not owned for so long and was hoping to flip, they need to sell but they need to get what they paid for the property or more..

The Sipps thing kept people investing until very recently as prices were expected by many (if not many on here) because of Sipps..

So those who needed to sell might have found it easier to find a buyer.... Easier then .. harder now..

and how many of those buyers were expecting to flip the property when Sipps kicked in..

So who is buying now?

BTL does not make sense and Sipps has scared the flippers..

Sipps has also removes the sipps investors of course.

and what inflation..? granted inflation became a fraudulent measure when labour moved housing and taxes.. (the biggest expenditures)..

But they have not removed salary. thats why we are poorer..

and the MPC is to cobat inflation above all else..

Look at your mortgage.. hope you can afford it.. its not going to get easier.

Edited by apom

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This is my own theory.

1 Over the long term property prices like share prices will show an average year on year growth at above inflation. And I am talking very long term - say 40 years or so.

2 Over shorter periods of say 5 years or so the graph fluctuates like mad. And the fluctuations are getting bigger.

3 The problem is the size of the fluctuations. If you just buy when it is right for your own conditions you can end up buying at a peak and see your price fall or loose in real terms for years. Likewise if you buy in a trough you can see your price soaring for a few years as prices go to the peak of the fluctuation.

4 If we were talking about the stock market then the solution is to put your money in by instalments, so some of your investment is at a peak and some on the way up some at the top and some on the way down. So you end up averaging out the fluctuations.

5 The problem with your own home is that you make just one purchase at a time. And its a big one. Its many times more than what you earn in a full year. Whether its 3 times or 6 times its still enormous.

6 So at the moment you are forced to second guess the market. No matter what anyone tells me I dont believe anyone has a scientific method which will produce a best time to buy or sell. No one ever identifies the exact top and exact botton. And if you miss it by even 10% you are talking big money.

7 There are two seperate types on this site. There are First Time Buyers who want to buy but cant because it costs too much. Then there are those who have actually sold to pocket the cash because they think prices are too high.

The second set split into two groups - The first group is those frightened that if they hadnt sold they would end up in negative equity. These people have been forced to second guess the market when they probably would rather not. The second smaller group are just speculating on making a killing by buying when prices are cheap. I would think most are in the fear of negative equity group.

8 There must be a better way for people who just want a reasonable house to live in. For most people this must be the only objective. For speculators its really up to them, if they want to play the market and take the risks/rewards then thats ok provided it doesnt hit ordinary buyers.

9 I think the answer is for some property company somewhere to create the equivalent property fund to a FTSE tracker. If such an animal existed then you could pop your money into this over time so you get the averaging effect of drip investing.

You would know the money you popped into this wouldnt get left behind by property prices. And because you were investing over a period you wouldnt have to second guess the market. This investment animal would buy properties and let them. I think it would split the BTL market - a lot of investors would sell to this vehicle, leaving the speculators to do it as they please.

10 Youre aspiring first time buyer could then buy units in this fund, he could then choose to take the leap into buying his own property when he wanted to or he could decide renting is better anyway. He would probably take the leap when his fund was about the value of the property he was after or just below it. So out would go massive mortgages and fear of negative equity.

11 The property fund would be a big player, properly run with proper standards and real property experts like a few directors from LandSec and BritishLand. It would be high profile and by definition wouldnt be a rip off merchant. Because it would aspire to be a tracker it wouldnt be speculating or trying to beat the market. It wouldnt be gearing either. I think the effect of this would be to dampen the big swings in property prices. It would stop the "missing the boat effect".

12 Overall effect would be to dampen the massive price fluctuations in property prices. In turn making it a less attractive sector for speculation. Out would go the estate agents spin - it would be pointless to direct the spin to the ordinary buyer with this system. All the evils solved at a stroke.

Or isnt it this simple?

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I think there will definitely be a HPC when/if the demand for buying houses declines massively.

If that happens, there will definitely be a crash, The thing is, I don't see how that will happen. And I'm not confident there can be a crash unless it does happen.

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I think there will definitely be a HPC when/if the demand for buying houses declines massively.

If that happens, there will definitely be a crash, The thing is, I don't see how that will happen. And I'm not confident there can be a crash unless it does happen.

What like the current demand driving prices up 2.3% YoY.

:blink:

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One problem with housing is that it is not a Liquid Asset. It takes months rather than minutes to complete a sale.

Consequently, investors can't just take their capital out quickly and stuff it into some other better performing asset.

I think this is why it will take 3 - 5 years (ish) to correct. Markets like shares, precious metals, currencies etc can drop overnight.

Redwing

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...interest rates are too low...

This is the only argument that matters. If interest rates stay around 4-5% for the long term, then everyone is going to have to get used to permanently lower yields and higher asset values. And the problem with the "Interest rates are much too low compared with historical figures" argument is that if you look back further in history, you see that they're actually a bit on the high side. UK interest rates were below 4% for all but a few years of the two centuries from 1700 to 1900.

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I think there will definitely be a HPC when/if the demand for buying houses declines massively.

Transactions did drop massively in 2005 so in your terms you've got an HPC :)

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If interest rates stay around 4-5% for the long term, then everyone is going to have to get used to permanently lower yields and higher asset values.

agreed. But even *if* they remain in this area, house prices are still around 20-25% over-valued. If we have indeed attained stability with inflation & IRs then the growth premium that buyers in the last 2-3 years have been paying needs to be worked out of the system.

and all this pre-supposes that inflationary pressures will not appear in the economy. The jury is still firmly out on this one. Tis the future that matters now, not the past!

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Thanks for all your replies.

Michael - agree re money illusion but like Crashisunderway would love to see the evidence re the last crash being different. Is it not just the nominal price graph looking like that?

Apom - agree completely. Turnover of transactions may be smaller now for many years and wage inflation will take much more time to erode in real terms a transaction price stuck at a nominal value.

Johnnyw - very interesting idea. My only concern would be that with companies buying private property they would be tempted to buy a sufficient number to grant them monopoly pricing.

Londoner - as usual its demand falling through people not being able to get mortgages and supply rising through people not being able to pay their mortgages.

Urban hymn - demand dropped but didn't supply too? Therefore the market is still in equilibrium at the current price level. (Willingness to supply at a certain price is different to the number of properties on the market)

Zorn and Fancypants - I guess it all comes down to the BoE's credibility.

I see two scenarios:

(1) No exogenous shocks to the economy and BoE is able to maintain relatively low rates by retaining its inflation management credibility.

In this situation it appears that constant prices are possible. The price you paid for a property is very slowly eroded by inflation and the effective yield (your imputed rent divided by the price paid) very slowly improves with time (assuming rents move with wages, wage inflation is marginally above CPI, CPI is an appropriate measure of inflation and therefore discount factor).

(2) Exogenous shock to the economy and/ or BoE has to and does increase interest rates noticeably.

Price falls!

So to me, the outlook looks like stagnation with huge risks on the downside.

Of course the conundrum with shocks is that by definition we cannot see them coming.

Any other thoughts anyone? I still haven't managed to find something that proves scenario 2 is the only one.

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Easy,

FTBs are at an all time low because all but a very few are priced out of the market.

The bubble is being sustained by new BTL money coming into the market.

BTLs are facing rental yields of below 6%, even if they can rent the house without agents fees, void periods or repairs this only just covers the mortgage.

The only argument for investing in BTLs is the hope of future capital gains.

Even the most bullish of forecasters are forecasting stagnation.

New BTL is drying up, partly because of the above and partly because of credit tightening by the mortgage banks.

Existing BTLs facing very low yields and no capital gains are starting to sell up.

Result, demand falls, supply increases, prices crash.

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Easy,

FTBs are at an all time low because all but a very few are priced out of the market.

The bubble is being sustained by new BTL money coming into the market.

BTLs are facing rental yields of below 6%, even if they can rent the house without agents fees, void periods or repairs this only just covers the mortgage.

The only argument for investing in BTLs is the hope of future capital gains.

Even the most bullish of forecasters are forecasting stagnation.

New BTL is drying up, partly because of the above and partly because of credit tightening by the mortgage banks.

Existing BTLs facing very low yields and no capital gains are starting to sell up.

Result, demand falls, supply increases, prices crash.

Price inflation will subside....Once the recently purchased BTL's have sold (at a loss) due to,

- Property not as profitable as led to believe by the sheeple.

- Instead of making money, they are standing still (hoping for an improvement) or their investment is costing them money and aggravation.

- Unable to hide to fact that blood is thicker than mortar ;)

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I think there will definitely be a HPC when/if the demand for buying houses declines massively.

If that happens, there will definitely be a crash, The thing is, I don't see how that will happen. And I'm not confident there can be a crash unless it does happen.

How do you think recent entrants to the housing market who have taken on massive mortgages at an average age of 34 to get on the housing ladder - how do you think they are going to climb the property ladder?

At the age of 34 you are well into your career. Globalization and technology mean on-going downward pressure on wage increases.

Even if prices stagnate, youngsters will never be able to afford to live the same sort of houses their parents live in.

It is unsustainable. Something has to give. That something is prices.

Prices of detached houses in the 500k range 2 years ago are already down to 400k (in my area).

Likewise flash 2 bed flats that sold for 255k 2 years ago are now lucky to fetch over 200k.

You can get a 20% discount on new build 2 bed flats.

What is actually already happening in the market is masked by the relentless media and VI spin. The chief executive of Redrow Homes said 'worst market in 30 years'. I reckon he should know.

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How do you think recent entrants to the housing market who have taken on massive mortgages at an average age of 34 to get on the housing ladder - how do you think they are going to climb the property ladder?

This is an extremely important point often overlooked in the debate.

In brief the gaps between the rungs on the property ladder are now so great that many on the first rung will never be able to bridge the gap to the next rung. Looking to the future who will be able to afford these 'next rung' houses? Ask those in their 40s and 50s, who bought years ago, whether they could afford to buy their own houses at current prices. Very few I suspect.

Something has to give; either wages must rise massively or house prices must drop. I am putting my money firmly on the latter.

Edited by Red Baron

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My best *logical* argument for a HPC is this:

House prices are WAY above their long term average price. Why do you think it's called the long term average?

Of cause this doesn't really predict whether there will be a HPC or just a long slow slide. In fact it doesn't really prove anything, but I would have though it *logical* that they should return to their long term average.

Of cause if Zorn's nightmare scenario of permenantly low yeilding high property prices comes to pass and we return to the Dickensien society of two hundred years ago then the long term average will eventually rise, but this would take generations I would have thought.

No economic shocks for a generation? I wouldn't bet my house on it!

I think your "stagnation with huge risks on the downside" is probably a pretty good summary of where we are now.

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Marina I like the cut of your jib (gib?)

The first time buyer has always "Struggled" to get on the ladder. This is said to anyone who says current prices are too expensive. Yet over time we are assured that things will get easier.

Because if you buy at 23, you should be nowhere near your top earning potential. So by your 30s the mortgage (additionally eroded by inflation in the meantime) becomes much more manageable, and you can afford to have kids etc, which might be considered a traditional 'normal life' and despite that sounding old fashioned, many still want that today.

THE REAL DIFFERENCE NOW is that the average FTB is 34. This means that you are not struggling because you are way off your earning potential, but because prices are so high and you have to be near your summit to get on the ladder.

This means that the chain up the ladder is dead as people don't have the time or money to move up it and the sellers at the top are stuck, until they reduce.

This also means that the generation of current FTB will have less children which will create a long term demand shortage. Whichever way you look at it the market has only one direction.

My hairdresser was telling me this morning that her cousin has a lovely big expensive house that has been on the market for over a year, this is the third such person we know in this 'shituation'.

In shortform, I would always ask anyone the following question when doubters dismiss a problem in prices: "Would you be able to afford your own house now?" Invariably the answer is NO.

THis usually gets people thinking about what greater fool will replace their little position in the market, when they decide to cystalise their championed profits.

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I don't buy this long term stagnation argument in the current environment, the reason being is wage inflation is at very low levels, and will probably remain so.

During previous cycles (excluding the 90s) wage inflation was far higher, therefore the market didn't stagnate as such, it leveled off, as the affordability quickly improved. If I bought now, and got my average 3% pay rise it would all go on buying food, and paying my bills rather than paying more off my mortgage!

I think the greatest argument for house price falls is MEW (Debt) and the coming Recession.

Quite simply, MEW has accounted for up to 9% of national income, and logically it cannot go on for ever. What happens when this falls to 3-4% growth (inline with wage inflation) and people start to pay off their mortgages? Well look at the downturn in consumerism over the last year, which will lead to company failures (which it has) unemployment (which it has), and the spiral will continue until an equilibrium is reached.

How much longer can UKPLC hold it's breath??? And will the BoE pass another set of disposable breathing apparatus so we can all dive deeper??? The problem is, it will take years.

Edited by Jason

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UK interest rates were below 4% for all but a few years of the two centuries from 1700 to 1900.

A period when we had hard currency, not pieces of paper which government was printing at a rate of hundreds of billions of pounds a year. And a period where, I believe, there was very little movement in house prices (if you have actual data on that, it would be interesting to see).

Fiat currency with low interest rates is one of the surest ways to destroy an economy.

"Would you be able to afford your own house now?" Invariably the answer is NO.

Indeed. And that is exactly why prices are going way down.

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BTLs are facing rental yields of below 6%, even if they can rent the house without agents fees, void periods or repairs this only just covers the mortgage.

Which still makes it a good investment, AND IF you can get a longer term fixed rate mortgage, a lowER risk one.

You borrow £XXXk for a BTL that yields enough to cover a repayment mortgage, you rent it for 25 years.

Someone has paid your mortgage off no matter what HP's do, and you now have a property worth £?, probably more than £160k after 25 years.

IMO only one thing will cause a HPC.

As the Dr has already mentioned the most likely and inevitable, credit tightening, the predictable 'bank cycle' or 'business cycle'.

The whole HPI and gold thing is a direct and text book reaction to increased money supply, investors protecting their money against inflation.

Now, because inflation is being 'fiddled' against cheap Chinese high technology and kept <3% we are under the illusion of low inflation, (But as all of you with large deposits know, your pot was a life changing amount only five years ago, now it's just a deposit.) so there is not enough 'official' upward pressure on IR, yet.

This is the only way we'll see the recession and unemployment synonymous with a HPC.

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Guest magnoliawalls

A period when we had hard currency, not pieces of paper which government was printing at a rate of hundreds of billions of pounds a year. And a period where, I believe, there was very little movement in house prices (if you have actual data on that, it would be interesting to see).

Fiat currency with low interest rates is one of the surest ways to destroy an economy.

A point too often ignored.

Another reason that falling prices are inevitable is that the cost of necessities keep going up - council tax, transport, utilities etc. We have not had wage inflation in a long time, so never mind that we can still buy cheap Chinese tat and the same £££ will buy you a faster pc, people just have less money to spend than they used to.

The oil price increases of last year may not yet be showing in the price of energy intensive goods. As contracts are renegotiated it will be harder to fiddle the figures to make it look like inflation is low.

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Which still makes it a good investment

A 6% return is a 'good investment' after all the hassle of renting out a house? Who in their right mind would put all that time and effort in for a whole... 6%?

If I was going to borrow 100k+ in order to put it into a speculative investment, I'd sure as hell not put it into anything that was likely to return less than 20-30% a year.... what's the point otherwise?

Renting out a house for a 6% return is for losers.

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A 6% return is a 'good investment' after all the hassle of renting out a house? Who in their right mind would put all that time and effort in for a whole... 6%?

If I was going to borrow 100k+ in order to put it into a speculative investment, I'd sure as hell not put it into anything that was likely to return less than 20-30% a year.... what's the point otherwise?

Renting out a house for a 6% return is for losers.

However, most punters wouldn't be loaned £100k+ for a spec investment other than a house.

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  • 301 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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