Bloomberg: The Only Solution to Britain’s Housing Crisis May Be a Crash

[darkmarket]

Just some bear food to start the day.

Quote

According to their model, “price-to-income ratios are likely to stabilize even without major increases in supply, although adjustment could take the form of an undesirable market collapse.”

https://www.bloomberg.com/news/articles/2017-04-10/the-only-solution-to-britain-s-housing-crisis-may-be-a-crash

[zugzwang]

Quote

Noting that market crashes are “hardly an optimal policy,” the academics suggest more “integrated housing policies, where housing issues play a wider role.”

 

[darkmarket]

23 minutes ago, TwoTearsInABucket said:

Much as I love bear food, I'm not sure what these guys are bringing to the argument.

Not much, reads like an opinion piece though there is the study behind it.

The drip drip of headlines like this is good for market sentiment though.

23 minutes ago, TwoTearsInABucket said:

I was hoping for something I could send to friends to add weight to my arguments.

No need to argue the point any more, in my view. Sitting on the sidelines with popcorn works fine.

[darkmarket]

2 minutes ago, TwoTearsInABucket said:

Oh, I'm so far on the sidelines I'm not even in the country any more

This is the rational investor at work leisure.

[Mapatasy]

http://uk.businessinsider.com/britains-housing-market-is-not-being-driven-by-a-supply-and-demand-imbalance-2017-4

 

 

[Errol]

Market crashes are entirely optimal and an entirely natural operation of a normally functioning market.

[Riedquat]

1 minute ago, Errol said:

Market crashes are entirely optimal and an entirely natural operation of a normally functioning market.

Just goes to show that a normally functioning market is a broken system that doesn't function very well at all. Not as broken as the results of trying to keep bubbles inflated, but still broken.

[Wayward]

2 hours ago, TwoTearsInABucket said:

Oh, I'm so far on the sidelines I'm not even in the country any more

 

so why do you care about the price of housing in the UK...?  Seems to me there are a few folks here that emigrate to escape the madness here but can't help themselves but keep an eye on this unfolding disaster.

[darkmarket]

25 minutes ago, Wayward said:

so why do you care about the price of housing in the UK...?  Seems to me there are a few folks here that emigrate to escape the madness here but can't help themselves but keep an eye on this unfolding disaster.

Since that seems quite logical, I think you answered your own question.

[neon tetra]

26 minutes ago, Wayward said:

so why do you care about the price of housing in the UK...?  Seems to me there are a few folks here that emigrate to escape the madness here but can't help themselves but keep an eye on this unfolding disaster.

I am in the same boat - working overseas (don't know how permanently) - hence I still have a return to the UK in mind, and take a keen interest.

[Digsby]

I think this may be the research paper:

https://www.researchgate.net/publication/314134175_Endogenous_UK_Housing_Cycles_and_the_Risk_Premium_Understanding_the_Next_Housing_Crisis

[billybong]

It's preposterous that they're still quibbling over what causes crazy house price rises and what the solutions might be after the tonnes upon tonnes of research papers having been researched and written by every possible organisation including pretty much every different government department over the years and decades

Edited April 11, 2017 by billybong

[darkmarket]

1 hour ago, Digsby said:

I think this may be the research paper:

https://www.researchgate.net/publication/314134175_Endogenous_UK_Housing_Cycles_and_the_Risk_Premium_Understanding_the_Next_Housing_Crisis

Thanks, it's really common for articles discussing studies not to link to them anywhere. As though there's an assumption you'd prefer to trust the journalist's interpretation and won't need the source material.

[Democorruptcy]

5 hours ago, darkmarket said:

Just some bear food to start the day.

https://www.bloomberg.com/news/articles/2017-04-10/the-only-solution-to-britain-s-housing-crisis-may-be-a-crash

From the article:

Quote

Average home values are about 7.6 times annual earnings, up from a ratio of 3.6 times 20 years ago, according to data from the statistics office. Over that period, house prices have more than tripled, far outpacing growth in incomes

It's lending.

20 years ago it was typically 3x Main Income + 1x Second Income say average wages £18k & £9k = £63k

Now enough people are prepared to borrow around 4.5x Joint Income say £25k and £15k = £180k

Income up 50% while house prices tripled.

The only way to reduce prices is to lower salary multiples (for 25 year maximum mortgage terms and 100% of a house not shared equity). 

[darkmarket]

13 minutes ago, Democorruptcy said:

The only way to reduce prices is to lower salary multiples

I'd go as far as to say the only way to not guarantee a boom and bust cycle is to stop lending on excessive salary multiples.

[Bland Unsight]

14 minutes ago, darkmarket said:

I'd go as far as to say the only way to not guarantee a boom and bust cycle is to stop lending on excessive salary multiples.

You need a policy framework that acts boldly to quell real estate bubbles; adequate credit controls over lending secured on property would be a key part of that.

Sadly, we've long tolerated a system which might as well have been designed to create bubbles.

 

[darkmarket]

11 minutes ago, Bland Unsight said:

You need a policy framework that acts boldly to quell real estate bubbles; adequate credit controls over lending secured on property would be a key part of that.

Probably related to this:

2 hours ago, billybong said:

preposterous that they're still quibbling over what causes crazy house price rises and what the solutions might be

The incentives related to making policy are clearly a problem that won't be addressed any time soon.

[zugzwang]

1 hour ago, Democorruptcy said:

From the article:

It's lending.

20 years ago it was typically 3x Main Income + 1x Second Income say average wages £18k & £9k = £63k

Now enough people are prepared to borrow around 4.5x Joint Income say £25k and £15k = £180k

Income up 50% while house prices tripled.

The only way to reduce prices is to lower salary multiples (for 25 year maximum mortgage terms and 100% of a house not shared equity). 

The other way to improve affordability is by increasing the population density. Either by encouraging the construction industry to build smaller flats and houses, incentivising home owners to take in lodgers, or by subdividing the existing housing stock. All three of which are present govt policy, of course.

A longstanding program of uncontrolled mass immigration would also help maintain upward pressure on household sizes.

[North London Rent Girl]

How did I miss that amazing article by Albert Edwards last year that the OP's article links to - was I still in hibernation? What on earth is this lunatic saying?!! This SURELY can't be true...

"One example where I find market participants have totally swallowed the policy-makers mantra is that the solution to the UK housing shortage is to build more houses. This propaganda has been repeated so much that it is has become the 100% accepted truth. Indeed it would have escaped nobody's attention that UK house prices have been booming and are at nose-bleed levels of expense on simple price/earnings measures.

Edwards continues (again, emphasis ours):

I'm sorry, but if monetary policy is too loose, you can concrete over the entire length and breadth of the UK and house prices would still rise. There is no shortage of housing. What there is, is an imbalance between demand and supply and demand is excessive because of crazily loose monetary policy. Its as simple as that. And, as the most prescient guys at Fathom Consulting have pointed out, if there really is a shortage of houses, surely rents, like house prices, would be rising too, way in excess of other prices in the UK economy?"

 

Link in article or here http://uk.businessinsider.com/societe-generales-albert-edwards-on-the-uk-housing-market-2016-4

One thing I want to know is just what the hell the former BoE economist whose research they go on to cite was doing while he was at the BoE. He seems to have his head screwed on, judging by what he found - rents not rising=not a housing shortage. What was he doing? Perhaps the BoE is half-staffed by good economists who are constantly ignored, have to have a stiff drink before they go in to work in the morning and eventually give up and leave.

Edited April 11, 2017 by North London Rent Girl

[Digsby]

4 hours ago, darkmarket said:

Thanks, it's really common for articles discussing studies not to link to them anywhere. As though there's an assumption you'd prefer to trust the journalist's interpretation and won't need the source material.

My feelings too.

It's an interesting paper, and in many ways echoes assertions that have been made on this forum by many different posters in different ways.

The main difference between this model and others, something I think we can all relate to, is that it includes the factor of risk. As house prices rise, so too does the risk premium. But the risk premium in isolation does not put a brake on prices but rather the coefficient between the housing risk premium and that of other financial assets.

It doesn't put it quite so bluntly, but this is the first model I've seen that accounts for the role of speculation, which is interesting and it finds that supply, fiscal and monetary policy are relatively ineffective tools for price stability.

Much of the paper is dedicated to attempting to calculate the rate at which the housing stock must increase to be an effective price stabiliser. Ignoring certain parameters, they conclude that stock must increase in line with incomes. That in itself is a surprising conclusion but the important point here is that they aren't talking about a static target of new builds per year: the number of new builds required in any given year depends on a) the current housing stock (since we're talking growth rates not absolute numbers), b) the growth in incomes, and c) certain other factors some of which they discuss and others they don't. But (a) is the takeaway: the more you build, the more you must build. A static new build target is ineffective because the rate at which the stock is expanding needs to be maintained and a static target decreases the growth rate over time. So the government targets, which are probably unchanged since the Barker report, are hopelessly inadequate now even if they were being met.

Ultimately, the conclusion is that the boom/bust cycle is a built-in feature of the market and while policy can have an impact on that cycle (personally I think the boom is preventable, but if it is not prevented, the bust is not preventable), it can only effect the length and extent of it.

I'd be interested to hear the interpretation of others who have read it.

[darkmarket]

15 minutes ago, Digsby said:

they aren't talking about a static target of new builds per year: the number of new builds required in any given year depends on a) the current housing stock (since we're talking growth rates not absolute numbers), the growth in incomes, and c) certain other factors some of which they discuss and others they don't.

And indeed they find, with added emphasis:

Quote

Muellbauer and Murphy (1997), for example, find the elasticity of house prices with respect to income and the housing stock to be 2.0 and -2.0 respectively, which yields (14'). In this case, the growth in the housing stock must be at least half of the growth in household income for stability in affordability. The condition has been met under these alternative coefficient values over the sample period, but in recent years the increase in the stock has been much less than 1.7%.

Which tallies with this:

32 minutes ago, North London Rent Girl said:

There is no shortage of housing. What there is, is an imbalance between demand and supply and demand is excessive because of crazily loose monetary policy.

Which in turn tallies with their findings on risk, which in turn lead us back to the wholesale transfer of that risk from banks to taxpayers and individuals under too-big-to-fail policies. But at least it leaves a space in their model for a healthy crash, and not much they find contradicts with what you read here from day to day.

[Digsby]

36 minutes ago, North London Rent Girl said:

How did I miss that amazing article by Albert Edwards last year that the OP's article links to - was I still in hibernation? What on earth is this lunatic saying?!! This SURELY can't be true...

"One example where I find market participants have totally swallowed the policy-makers mantra is that the solution to the UK housing shortage is to build more houses. This propaganda has been repeated so much that it is has become the 100% accepted truth. Indeed it would have escaped nobody's attention that UK house prices have been booming and are at nose-bleed levels of expense on simple price/earnings measures.

Edwards continues (again, emphasis ours):

I'm sorry, but if monetary policy is too loose, you can concrete over the entire length and breadth of the UK and house prices would still rise. There is no shortage of housing. What there is, is an imbalance between demand and supply and demand is excessive because of crazily loose monetary policy. Its as simple as that. And, as the most prescient guys at Fathom Consulting have pointed out, if there really is a shortage of houses, surely rents, like house prices, would be rising too, way in excess of other prices in the UK economy?"

 

Link in article or here http://uk.businessinsider.com/societe-generales-albert-edwards-on-the-uk-housing-market-2016-4

One thing I want to know is just what the hell the former BoE economist whose research they go on to cite was doing while he was at the BoE. He seems to have his head screwed on, judging by what he found - rents not rising=not a housing shortage. What was he doing? Perhaps the BoE is half-staffed by good economists who are constantly ignored, have to have a stiff drink before they go in to work in the morning and eventually give up and leave.

Well if I make sense in my above post (and I am right), it should explain the confusion.

If you take the statement "house prices are rising because we're not building enough" and turn it on it's head into "we're not building enough to stop house prices rising", then you start to appreciate that there are two distinct rates at which we need houses built:

1. The rate at which there are enough houses for everybody to live in, and

2. The rate at which house price speculation does not increase prices.

It's pretty obvious that the two are not necessarily the same, but I think the they are commonly conflated. They may be the same at certain points in time, but in a house price boom, 2 is much, much higher than 1.

Thus, we really aren't building enough, but it's a shortfall not a shortage, and it's not causing prices to rise, it's failing to stop them rising, and they are rising because of the conflation, among other factors.

[Digsby]

20 minutes ago, darkmarket said:

Which in turn tallies with their findings on risk, which in turn lead us back to the wholesale transfer of that risk from banks to taxpayers and individuals under too-big-to-fail policies. But at least it leaves a space in their model for a healthy crash, and not much they find contradicts with what you read here from day to day.

Agreed, and I'm glad I'm not the only one seeing a correlation there.