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Thoughts On How This Crash Will Be Different

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I have been thinking more and more about how interest rates/inflation might make this crash different.

In the last crash we had high interest rates and inflation. This was good for some and bad for others. For those with under wage inflation pay power they could not get better incomes, the interest rate rises took more of their disposable income so they where repossesed. Those that could get better than wage inflation pay raises found that their pay rose faster than the increased cost due to the higher interest rate rises.

So, simply, because inflation was high there was a lot more room for scope between different people in their ability to get pay raises. This meant there where more obvious winners and lossers.

Now, if this time round we don't have high inflation and high interest rates (remember the real rate of interest is pretty much constant) then the above will not happen. What will this mean? Less big lossers so less repossesions, but also less winners, ie people won't have their mortgage paid of by inflation.

This is a definite difference in my mind. It means people won't be as likely to be kicked out of their home, but it also means that mortgages people are taking out now really are for 25 years, not for 10 years and then just a small % of income like they have been in the past.

Whether this will have follow through affects on the scale of the price reductions, I don't know.

Any thoughts?

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This time round things could get so bad that we have a revolutions and kick all them corrupt MP’s and their merry band of civil servants out and take democracy back for ourselves.

Sometimes things have to get worse before they get better :ph34r:

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If you ignore this bubble and go back to pre-bubble days then many economists used to argue that the then current level of mortgage debt in the UK was such that it stifled the UK economy - basically, people spent too much of their income on houses and hence it sucked up all free cash that could have, as in the case of Germany, make the country more dynamic economially.

If that was the case then what is the situation now and what will it be once credit tightening kicks in.

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I have been thinking more and more about how interest rates/inflation might make this crash different.

In the last crash we had high interest rates and inflation. This was good for some and bad for others. For those with under wage inflation pay power they could not get better incomes, the interest rate rises took more of their disposable income so they where repossesed. Those that could get better than wage inflation pay raises found that their pay rose faster than the increased cost due to the higher interest rate rises.

So, simply, because inflation was high there was a lot more room for scope between different people in their ability to get pay raises. This meant there where more obvious winners and lossers.

Now, if this time round we don't have high inflation and high interest rates (remember the real rate of interest is pretty much constant) then the above will not happen. What will this mean? Less big lossers so less repossesions, but also less winners, ie people won't have their mortgage paid of by inflation.

Indeed, if you have a huge debt around your neck then a "low inflation environment" is not good news even if this is good as far as interest rates are concerned, high inflation also helps disguise real terms falls in price to your average joe.

The "money effect" of seeing real falls in nominal prices is quite profound, people can clearly appreciate a drop from £100k to £60k, but they will not be so aware of static prices for three years for example with the currency devaluing 13% per year (which is what we have now with M3 growth), to them static prices mean a "soft-landing" despite the fact 40% of the equity has evapourated, this is exactly what happened in the 70's, there was a nasty crash but the high inflation environment fooled many people and consequentially bailed out many loans.

A crash with low (stated) inflation is not good news.

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I think another 'i' will be a big factor - the internet; not in existence last time around, the speed at which info is shared now could help things along a bit IMO.

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I have been thinking more and more about how interest rates/inflation might make this crash different.

In the last crash we had high interest rates and inflation. This was good for some and bad for others. For those with under wage inflation pay power they could not get better incomes, the interest rate rises took more of their disposable income so they where repossesed. Those that could get better than wage inflation pay raises found that their pay rose faster than the increased cost due to the higher interest rate rises.

So, simply, because inflation was high there was a lot more room for scope between different people in their ability to get pay raises. This meant there where more obvious winners and lossers.

Now, if this time round we don't have high inflation and high interest rates (remember the real rate of interest is pretty much constant) then the above will not happen. What will this mean? Less big lossers so less repossesions, but also less winners, ie people won't have their mortgage paid of by inflation.

This is a definite difference in my mind. It means people won't be as likely to be kicked out of their home, but it also means that mortgages people are taking out now really are for 25 years, not for 10 years and then just a small % of income like they have been in the past.

Whether this will have follow through affects on the scale of the price reductions, I don't know.

Any thoughts?

Very good, and constructive, post.

I think the best way I can describe it is as follows:

In the last couple of crashes whilst inflation was a factor, it wqas one of many. Interest rates continued to RISE and RISE and this was causing a squeeze on expendible income. Look at it like an elastic band getting stretched and stretched until one day, depending on your income, YOUR elastic band snaps. Others can still survive (highly paid) but the weak fall (lowest paid).

Back in these days debt per household (excl. mortgage) was exceptionally small in comparison to today. So the elastic band could stretch that bit further.

Today we have a lot of things pulling the elastic band but it is being attacked aggressively on 3 fronts.

1) High HPI for those on the market. (More cash/debt needed for every step of the property ladder)

2) High fuel charges (Gas, Electic) and Petrol

3) Credit.

All these factors are at ALL TIME HIGHS! They are causing a massive strain on the elastic band!

I am not so sure of a CRASH per se' but there will have to be some sort of relief on the strain of this elastic band. There 2 ways it can go. Pressure can be taken off the elastic with LOWER HPI/PRICES, LOWER FUEL BILLS, CREDIT TIGHTENING/LOWER IR's.

I think option 2 is VERY Unlikely, I think fuels have been given the 'boiling frog' treatment (see boiled frog)

I think lowering of interest rates will be good for clearing existing debt but will also fuel more borrowing. This may be bad long term, whilst being good short term. Its likely, but I think a good 1>1.5% drop would be required.

This leaves one solution! The biggest portion of everyones wages is their mortgage. We need to bring down the amount of debt to purchase. If they dont allow the prices to drop then I strongly believe that the elastic will be stretched too much and will snap. i.e. a CRASH!

I also believe that the next 6 months are critical. IR's either need to rise to tighten credit and desuade debt. or Drop to relax the pressure on the debt bubble. Either way HPI CANNOT RISE!!! They either stay the same and borrowing rates make it more affordable or drop and bring affordability back a lot sooner. Unfortunately, we are a country of greedy b@stards so I think the option to drop will be a last resort. But, I believe that the VI's now know that this bubble is ready to pop and they have to release the pressure.

Yes it is different this time. The bubble is GIGANTIC (Housing and DEBT) and we are getting strong pressure from Fossil fuels!

Even if HPI drops 10%, with other inflationary pressures it may still be too late to stop a recession, time will tell.

TB

Edited by teddyboy

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I have been thinking more and more about how interest rates/inflation might make this crash different.

In the last crash we had high interest rates and inflation. This was good for some and bad for others. For those with under wage inflation pay power they could not get better incomes, the interest rate rises took more of their disposable income so they where repossesed. Those that could get better than wage inflation pay raises found that their pay rose faster than the increased cost due to the higher interest rate rises.

So, simply, because inflation was high there was a lot more room for scope between different people in their ability to get pay raises. This meant there where more obvious winners and lossers.

Now, if this time round we don't have high inflation and high interest rates (remember the real rate of interest is pretty much constant) then the above will not happen. What will this mean? Less big lossers so less repossesions, but also less winners, ie people won't have their mortgage paid of by inflation.

This is a definite difference in my mind. It means people won't be as likely to be kicked out of their home, but it also means that mortgages people are taking out now really are for 25 years, not for 10 years and then just a small % of income like they have been in the past.

Whether this will have follow through affects on the scale of the price reductions, I don't know.

Any thoughts?

What you are describing are the perfect conditions to cause prices to stagnate for many a year - not enough forced sellers, but prices can only be pushed up very slowly.

Time will tell - watch what happnes to IR's - these need to go up by 1% to cause a true crash. Otherwise stagnation continues for a long time.

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What you are describing are the perfect conditions to cause prices to stagnate for many a year - not enough forced sellers, but prices can only be pushed up very slowly.

I'm not so sure, a static market is no market, you need a constant stream of FTB'ers to maintain momentum otherwise what's the point of owning a house worth a notional £250k if there is no liquidity?

I think 2007 will be an interesting year, it may not be a home grown thing, the US may prove to be a trigger.

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Now, if this time round we don't have high inflation and high interest rates (remember the real rate of interest is pretty much constant) then the above will not happen. What will this mean? Less big lossers so less repossesions, but also less winners, ie people won't have their mortgage paid of by inflation.

This is a definite difference in my mind. It means people won't be as likely to be kicked out of their home, but it also means that mortgages people are taking out now really are for 25 years, not for 10 years and then just a small % of income like they have been in the past.

Correct, it also means that the whole idea of "trading up" after a few years will be much harder. If low inflation continues and you bought your first property when you are making your peak wages, you might be able to trade up once over your whole lifetime, perhaps not even that. In the past, the "property ladder" allowed three or four trade-ups for some people.

frugalista

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I do think from my analysis above and some of people's comments here that stagnation is more likely. While the increase in unsecured debt might have the same affect as those not being able to get inflation busting pay rises in the last crash, so there are other factors this time round that could make it crash - but without those and low nominal interest rates I think stagnation is more likely (which is exactly what happened in Japan, and is perhaps the reason). Whether this is better or worse for the economy is very much debatable.

One thing on energy. While energy prices are rising we are all still spending a *lot* less as a % of income on energy than we being spent 30 odd years ago. Just look at the stats for energy use per £ of GDP. Its a lot lot lower than it was 30 years ago. Oil is still cheaper than it was in the last supply side shock as well.

Correct, it also means that the whole idea of "trading up" after a few years will be much harder. If low inflation continues and you bought your first property when you are making your peak wages, you might be able to trade up once over your whole lifetime, perhaps not even that. In the past, the "property ladder" allowed three or four trade-ups for some people.

Exactly, 20 years ago you got a mortgage, after 10 years the payments where not very high in relation to your income. Now they will remain high in relation to your income for the full 25 years. This is because nominal interest rates are lower enabling people to take out bigger mortgages that won't get easier to pay of 10 years down the line.

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The problem with the stagnation model is that it requires prices and therefore borrowing to remain roughly where it is. There are a raft of reasons why that's unlikely.

- A rising market sucks in money from investors and buyers desperate to buy before prices go out of reach; a stagnant market doesn't, so demand falls and the money goes elsewhere (look at the stock market recently).

- When the housing market stagnates people feel less affluent and spend less. The economy begins to flag so unemployment rises and some people can't make their repayments. This increases supply. People who keep their jobs feel less confident and are reluctant to commit to monster mortgages.

Moreover, society needs a market which enables people to move house. If affordability is a problem, prices will have to fall in order to get the market going again. Don't forget that one EA (I think it was Countrywide) sold fewer houses last year than for thirty years. And in this very small market FTBs are at or near an all time low - according to the Halifax, 7% as against a historical average of about 40%.

Set all this in an economy whose gloss is now fading and which was itself supported by government and consumer borrowing, and prolonged stagnation doesn't look a certainty by any means.

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The problem with the stagnation model is that it requires prices and therefore borrowing to remain roughly where it is. There are a raft of reasons why that's unlikely.

- A rising market sucks in money from investors and buyers desperate to buy before prices go out of reach; a stagnant market doesn't, so demand falls and the money goes elsewhere (look at the stock market recently).

- When the housing market stagnates people feel less affluent and spend less. The economy begins to flag so unemployment rises and some people can't make their repayments. This increases supply. People who keep their jobs feel less confident and are reluctant to commit to monster mortgages.

Moreover, society needs a market which enables people to move house. If affordability is a problem, prices will have to fall in order to get the market going again. Don't forget that one EA (I think it was Countrywide) sold fewer houses last year than for thirty years. And in this very small market FTBs are at or near an all time low - according to the Halifax, 7% as against a historical average of about 40%.

Set all this in an economy whose gloss is now fading and which was itself supported by government and consumer borrowing, and prolonged stagnation doesn't look a certainty by any means.

This is a very succinct description, I buy into this model.

What I cant understand is why HPI began to top out 18 months ago, yet there hasn't been a crash yet. Maybe it's a transitional period as the market glides over the top of its curve, but I feel like it needs a trigger to get started. Or maybe it just takes time for momentum to build?

Anto.

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Despite what I've said I still wouldn't bet the farm on a crash. I've been saying "this can't go on" since about 1997, and it hasn't happened yet. I think the main reasons the market hasn't plummeted are that for a variety of reasons (VI spin, TV market ramping) the British people believe as an article of faith that property always goes up. Therefore we continue to buy into it and prices stay astonishingly solid.

If however we ever do believe that by and large across the country prices are falling, then money will start to flood out of property and investors will be chasing the market down.

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- A rising market sucks in money from investors and buyers desperate to buy before prices go out of reach; a stagnant market doesn't, so demand falls and the money goes elsewhere (look at the stock market recently).

- When the housing market stagnates people feel less affluent and spend less. The economy begins to flag so unemployment rises and some people can't make their repayments. This increases supply. People who keep their jobs feel less confident and are reluctant to commit to monster mortgages.

But then you have what happens in Japan. Interest rates are dropped to zero. Pound crashes. Imports become expensive so people buy locally made stuff. Exports cheaper for other countries so they buy more UK stuff. Economy is restarted.

This is what happened in Japan. Now people think Japan is the new "in place". Stock market will rise, property prices will rise and a new boom will happen. It will of course crash again in a decade. Irrational expectations lead to bomb/bust.

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But then you have what happens in Japan. Interest rates are dropped to zero. Pound crashes. Imports become expensive so people buy locally made stuff. Exports cheaper for other countries so they buy more UK stuff.

What do we make exactly? Our currency would have to be hit pretty hard to appear competitive compared to S-E Asain countries whose workers are paid a few pennies per hour. I cannot see a Nike factory appearing in Buckinghamshire anytime soon, that would truly require a fall from decadence into second world status.

Also, if we've sucked peak resources out of the North Sea and increasingly depend on imports we don't have much choice in the matter.

Edited by BuyingBear

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Guest wrongmove

Those that could get better than wage inflation pay raises found that their pay rose faster than the increased cost due to the higher interest rate rises.

Padders, I totally agree with your points on the effects of high prices/low rates. A post on TMF that stuck in mind did an analysis, aptly titled "20 years of hurt...". (If you are into detailed analysis check out more of trojantraders posts - they are pretty dry though :) )

However, wage rises did not keep up with the increase in mortage payments during the last crash, IRs doubled in a year or so, while wages increased at only 10-15%. The percentage of average take home pay required to service debt was still a lot higher during the last crash than it is now.

Check out this speadsheet: http://www.nationwide.co.uk/hpi/downloads/...ge_payments.xls

It shows the percentage of take home pay required to service a 75% LTV repayment mortage on average earnings (Example 2, lefthand columns).

I have produced a (cr@p) graph of date vs proportion of take home

Image1.png

The proportion peaked at 0ver 0.6 (60%) in the late 80s/early 90s. It is high now, at around 43%, but well short of the last crash.

post-210-1136939503_thumb.jpg

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What do we make exactly? Our currency would have to be hit pretty hard to appear competitive compared to S-E Asain countries whose workers are paid a few pennies per hour. I cannot see a Nike factory appearing in Buckinghamshire anytime soon, that would truly require a fall from decadence into second world status.

Also, if we've sucked peak resources out of the North Sea and increasingly depend on imports we don't have much choice in the matter.

Sorry to burst the buble but we don't actually due a huge amount of trade with Asia. Well over half our trade is from the EU 15. http://www.dti.gov.uk/ewt/uktrade.htm Sure some of that is stuff that has been imported into Europe, valued added and then sold to the UK but still, our currency falling in relation to the Euro or $US will have a major affect. As someone who sells their product in $US, I will certainly notice it.

Wrongmove, thanks for those stats, I am going to digest those. Thanks.

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This crash will be similar to the crashes of the 1970's, in that it will involve rising prices.

It will be different, in that it wont have the large real falls. It also wont be remembered as a crash, but "below trend growth".

FWIW History is on my side, only two periods since the 1930's when house prices fell in nominal terms (1930's and 1990's), and both were because of huge recessions, huge rises in unemployment and large rises in interest rates.

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Guest wrongmove

This crash will be similar to the crashes of the 1970's, in that it will involve rising prices.

:P

No - it will be different this time !!!!

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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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