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karhu

Here's My Analysis Of The Housing Boom

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My theory to explain the huge HPI in recent years. I've tried to boil this down to its canonical form. Feel free to shoot it down. We've debated this for months, but I can't see the complexity. Am I being too simplistic?

In essence I think it has been caused by:

1. Low interest rates.

2. Preoccupation with monthly payments rather than cost over x years caused by (1).

3. "Creative" lending in response to (1) and (2).

4. Due to effect of (1), (2), (3) perception that prices can only go up, and all that entails, speculation etc.

If I'm right this really is a house of cards and interest rates are the key.

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My theory to explain the huge HPI in recent years. I've tried to boil this down to its canonical form. Feel free to shoot it down. We've debated this for months, but I can't see the complexity. Am I being too simplistic?

In essence I think it has been caused by:

1. Low interest rates.

2. Preoccupation with monthly payments rather than cost over x years caused by (1).

3. "Creative" lending in response to (1) and (2).

4. Due to effect of (1), (2), (3) perception that prices can only go up, and all that entails, speculation etc.

If I'm right this really is a house of cards and interest rates are the key.

I have always looked at the wider economic arguments on this site with interest as I do not fully understand them. However what I do understand is that most people I have ever met think very short term.

Debt levels be it secured or unsecured acrued at a time of low interest and inflation are immensely worrying as problems are just stored up and magnify until the inevitable conclusion happens.

There will be more and more debt ammased and property will continue to fluctuate and have small gains and losses throughout the coming months/years until rates start to rise and then all hell will break loose.

Preferably this will happen sooner rather than later as the longer this goes on the worse the end result will be.

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My theory to explain the huge HPI in recent years. I've tried to boil this down to its canonical form. Feel free to shoot it down. We've debated this for months, but I can't see the complexity. Am I being too simplistic?

In essence I think it has been caused by:

1. Low interest rates.

2. Preoccupation with monthly payments rather than cost over x years caused by (1).

3. "Creative" lending in response to (1) and (2).

4. Due to effect of (1), (2), (3) perception that prices can only go up, and all that entails, speculation etc.

If I'm right this really is a house of cards and interest rates are the key.

Yeah, i think this is right to some extent. As long as people can pay the monthly repayments they dont care about the total amount borowed. The problem is, from my point of view, prices have gone up so much that even the monthly payments on a fairly modist place are now higher than I would be comfortable committing to.

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I have always looked at the wider economic arguments on this site with interest as I do not fully understand them. However what I do understand is that most people I have ever met think very short term.

Debt levels be it secured or unsecured acrued at a time of low interest and inflation are immensely worrying as problems are just stored up and magnify until the inevitable conclusion happens.

That's exactly my point. We may think that complex economic phenomena result in HPI, but the average Joe just looks at his monthly outgoings from an interest only mortgage that has been offered (and doesn't know any different). I'm suggesting that low interest rates are the primary cause of this boom. Demand, employment, salaries etc have adjusted at their normal inflationary rate.

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That's exactly my point. We may think that complex economic phenomena result in HPI, but the average Joe just looks at his monthly outgoings from an interest only mortgage that has been offered (and doesn't know any different). I'm suggesting that low interest rates are the primary cause of this boom. Demand, employment, salaries etc have adjusted at their normal inflationary rate.

Not just the cause of the boom but also the cause of of a generation that may find themselves enslaved during their late working years and then enter into old age in poverty as they have run up huge debts in their youth.

I have numerous friends with broadband, monthy mobile bills, high tech gear, cars etc all bought on credit (its only xxy a month) yet no pension!

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One of the things that I've noticed about this site is that it was frequented originally by "thinking" people who considered more than their monthly outgoings. Many people on this site seem to have good salaries and often large financial reserves built up (me for one) and could buy. The thing that stops them is their common sense.

Recently, many more people have come to this site getting increasingly nervous about the amount of money that they would have to borrow.

I'm not a property bear per se. I have owned property, let out property and advised others to buy property in the mid nineties.

Edited by karhu

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My theory to explain the huge HPI in recent years. I've tried to boil this down to its canonical form. Feel free to shoot it down. We've debated this for months, but I can't see the complexity. Am I being too simplistic?

In essence I think it has been caused by:

1. Low interest rates.

2. Preoccupation with monthly payments rather than cost over x years caused by (1).

3. "Creative" lending in response to (1) and (2).

4. Due to effect of (1), (2), (3) perception that prices can only go up, and all that entails, speculation etc.

If I'm right this really is a house of cards and interest rates are the key.

simplistic but generally about right.

a market this size is a very complex and not translucent..

for me the initial prompts were:

-too loose a monetary policy

-a mood change in the transition from tories to labour in 1997 ( things can only get better)

once the bandwagon started it just kept going

i was convinced in 1992-1994 during the last correction that people would never again repeat the mistakes of the 1980s' ( public and government)

how wrong i was.

also, the last few years have ben ones where there has been no effctive opposition to the labour government. in this vacuum they have been free to pursue any policies without any accountability

however, payback time is here and it will get more messy before we settle down again

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The problem is, from my point of view, prices have gone up so much that even the monthly payments on a fairly modist place are now higher than I would be comfortable committing to.

Exactly - and that is why FTB's are absent from the market. The figures just don't add up anymore. This is the thing that some bulls on here don't seem to grasp so I will spell it out to them......

Some people can not afford to buy. It isn't a choice/risk aversion/moaning/wanting it all now etc etc.....they just can not afford to buy

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My theory to explain the huge HPI in recent years. I've tried to boil this down to its canonical form. Feel free to shoot it down. We've debated this for months, but I can't see the complexity. Am I being too simplistic?

In essence I think it has been caused by:

1. Low interest rates.

2. Preoccupation with monthly payments rather than cost over x years caused by (1).

3. "Creative" lending in response to (1) and (2).

4. Due to effect of (1), (2), (3) perception that prices can only go up, and all that entails, speculation etc.

If I'm right this really is a house of cards and interest rates are the key.

I would add; Failure in confidence of other savings and investments. Most people simply do not understand the SM. They understand no. 9 Accacia Avenue.

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I would add; Failure in confidence of other savings and investments. Most people simply do not understand the SM. They understand no. 9 Accacia Avenue.

I'm not sure you're right. I can remember a time when the SM was doing well and even simple people were talking about dot.com and their amazing retirement. Property is in vogue because it has performed so well over the last 10 years. Simple people, as you put it, can't read the fundamentals, only the trends and hence get burnt in property, SM etc etc.

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I'm not sure you're right. I can remember a time when the SM was doing well and even simple people were talking about dot.com and their amazing retirement. Property is in vogue because it has performed so well over the last 10 years. Simple people, as you put it, can't read the fundamentals, only the trends and hence get burnt in property, SM etc etc.

A total lack of confidence in Pensions and huge ramping by TV "experts" has also assisted somewhat ...

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My theory to explain the huge HPI in recent years. I've tried to boil this down to its canonical form. Feel free to shoot it down. We've debated this for months, but I can't see the complexity. Am I being too simplistic?

In essence I think it has been caused by:

1. Low interest rates.

2. Preoccupation with monthly payments rather than cost over x years caused by (1).

3. "Creative" lending in response to (1) and (2).

4. Due to effect of (1), (2), (3) perception that prices can only go up, and all that entails, speculation etc.

If I'm right this really is a house of cards and interest rates are the key.

Plus high government spending has also created a strong feel good factor.

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Plus high government spending has also created a strong feel good factor.

One of the reasons for my theory is that it has happened in virtually every country where lending cirteria have been loosened in response to low interest rates. The boom in Spain/America can't be due to Government spending?

I'm rejecting any cause other than low interest rates and financial stupidity (by both borrowers and lenders); and, of course, those cashing in on their stupidity.

Edited by karhu

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Guest Cletus VanDamme

I'm not sure you're right. I can remember a time when the SM was doing well and even simple people were talking about dot.com and their amazing retirement. Property is in vogue because it has performed so well over the last 10 years. Simple people, as you put it, can't read the fundamentals, only the trends and hence get burnt in property, SM etc etc.

I worked for a dot-com startup in the late 90s. We all thought we were going to be millionaires overnight! It was a great time though, although we all lost our jobs (actually, I quit 'cos I knew it was going nowhere and everyone said 'you're mad, what about your stock options? Which turned out to be worth zilch of course).

What was so nice though was the optimism and enthusiasm. Now everyone is bitter and p***ed off.

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I worked for a dot-com startup in the late 90s. We all thought we were going to be millionaires overnight! It was a great time though, although we all lost our jobs (actually, I quit 'cos I knew it was going nowhere and everyone said 'you're mad, what about your stock options? Which turned out to be worth zilch of course).

What was so nice though was the optimism and enthusiasm. Now everyone is bitter and p***ed off.

Exactly, I've been investing in shares for as long as I can remember. Often I hear people say, "Isn't that risky?". I say, "Why?".

Then they tell me that their trust fund etc has only just reached the value that it had in, for example, 1995. This is still fresh in their memory, and causes them to view the SM with caution (typical Pavlovian conditioning).

However, with the recent rise in the SM, I've seen a few changing their mind recently.

When the fall in property starts it will accerelate for the very same reason, and people will view property once again for what it is, a place to live, rather than a cash machine.

I can remember viewing houses in 1994/5 and seeing loads of repossessed houses that nobody wanted to touch with a barge pole. In some the owners had smashed them up, graffitied and ripped things from the wall before they left. The view on the other side is very different.

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One of the reasons for my theory is that it has happened in virtually every country where lending cirteria have been loosened in response to low interest rates. The boom in Spain/America can't be due to Government spending?

I'm rejecting any cause other than low interest rates and financial stupidity (by both borrowers and lenders); and, of course, those cashing in on their stupidity.

Low interst rates on their own does not mean that anyone can go out and buy a house. Japan had very low interest rates for many years whilst property sunk. In the UK, the government have created a large number of publicly funded jobs. This gave an army of people the confidence to go out and buy a house.

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Low interst rates on their own does not mean that anyone can go out and buy a house. Japan had very low interest rates for many years whilst property sunk. In the UK, the government have created a large number of publicly funded jobs. This gave an army of people the confidence to go out and buy a house.

Yea, but that comes later when the credit dries up, as it will in UK. There's still steam in the UK market, crazy as it seems, until either the lenders tighten or interest rates stay constant or increase. I can see both over the next year.

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Yes, it is simple - its all about affordability and people are still prepared to afford these prices. Thats why there will be no house price crash in the foreseeable future.

IR's and unemployment are the key factors.

IR's are making these prices affordable - only when IRs go above 5% may things start to cool properly. Remember thant 4.75% didn't cause the market to crash, it only slowed down.

5+% IRs are not on the cards in the foreseeable future.

Right now it seems the EAs are busy and prices are rising and thats at 4.5%. What happens if they reduce IRs ?

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Yes, it is simple - its all about affordability and people are still prepared to afford these prices. Thats why there will be no house price crash in the foreseeable future.

IR's and unemployment are the key factors.

IR's are making these prices affordable - only when IRs go above 5% may things start to cool properly. Remember thant 4.75% didn't cause the market to crash, it only slowed down.

5+% IRs are not on the cards in the foreseeable future.

Right now it seems the EAs are busy and prices are rising and thats at 4.5%. What happens if they reduce IRs ?

Yes, but my point is that we are now in a position where we're hypersensitised to IR increases. I agree that this madness could go on for sometime (perhaps another 6-12 months).

However, I don't see how you can claim that we're highly sensitive to interest rates, while at the same time predict stagnation? Doesn't make sense. What you're looking at is UNSTABLE equilibrium. I thought perhaps that there was a chance of IR reductions last year, but that's faded now. The next step is up. I'd say 0.50% by the end of the year. If I'm right, hypothetically, will be still be stagnating?

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I'd be interested to know the true cost of a mortgage for the next 25 years (assuming the base rate remains at 4.5% and CPI at 2%) compared to say a 25 year mortgage taken out in 1981 (the last 25 years) when interest rates, inflation and wage inflation were relatively high, that hence quickly eroded the value of the initial mortgage debt.

Luckily I'm in a position to buy in 2006, like my parents were in 1981. However, the world is different 25 years on as we seem to have the opposite to high interest rates and inflation, namely low interest rates and deflation from the East. So when my parents urge me to buy now saying property is the best investment you can ever make, I feel they're completely wrong but would like the figures to back up my thoughts.

Edited by objective

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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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