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RichM

Why This Crash Will Be Truly Horrific - P S Y C H O L O G Y

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I say "an old hand", I'm 26, but I've been on this site for a whopping two years.

This post, and hopefully this thread, is about the psychology of the crash. As many on here recognise, what really is driving this mess is psychology. Put simply, it's fear and greed. Fear about not getting "on the ladder" and greed for wanting to ride the property wave, drives house prices up. Fear about not getting trapped in negative equity or losing your home and greed for cashing in on capital gains, drives house prices down.

So why the bold title? Well, I am not an economist. But then economics doesn't really come into this, not really - the hundreds of thousands of house sales over the past five or six years didn't involve an in-depth economic analysis by each party. A simple deference to some crude investment rule of thumb, encouraged by the media, has been to enough to encourage the view that property is the investment class.

We have good fun on here trying to spot the trigger for the HPC. The list is endless. Obviously IRs are at the top of the list, then there's soaring unemployment, oil prices, a credit crunch, terrorism, a change in the rules (housing, banking, etc), other enticing investments, a simple "running out of steam". But as it so often turns out, the real punisher, the thing that will really screw up the housing market, won't be the trigger (whatever that might end up being) - it will be the ensuing panic.

Don't believe me? Well, I honestly think that when it happens, when house prices are obviously falling nationwide for a few months, when newspaper headlines are screaming "house price gloom continues" and the rest, I will be shocked. And yet, I will have been expecting it for several years when it finally happens, fully aware for some time that the madness would have to stop eventually. So just how shocked is some poor FTBer/BTLer/"mover-upper", mortgaged up to the eyeballs, going to be when when they realise that the market is screwed and they are already in negative equity?

I have referred before to "shattered assumptions" theory. Basically this is a part of social-cognitive psychology, where it's argued that an individual's response to a traumatic event is related to the discrepancy between their pre-existing beliefs and the present horror. The greater the discrepancy, the greater the ensuing emotional distress. While a poor theory when applied to certain specific mental health problems, this theory is, I believe, going to be a huge factor in the coming crash.

Not only has this boom on for such a long time, encouraging the view that this is the norm and allowing the memory of the last crash to fade out of our collective consciousness. On a mass scale, across parts of continental Europe, Ireland, the UK, Australia, and the US, we have also ditched the mental life-rafts, the psychological strategies that once kept people going through the peaks and troughs. No "it's good to have more than one kind of investment", no "debt is bad", no "just be patient", no "it's sensible to understand something properly before you invest a lot of money in it". All we have left is a buy-at-all-costs mentality attached to an exaggerated trust in the ability of our beloved chancellor and the BoE to keep IRs under 4.75% for the next twenty years or so.

When people wake up and realise how badly they've been duped, do we think they will suddenly start acting rationally? Or will they panic in their millions?

Think of it this way - one day I was sat in my office looking at the screen, when someone says that there's been a major incident in New York. We spend the rest of the day glued to the internet, listening to the radio, scarcely believing what we were hearing and seeing as "9/11" unfolded. Now, whenever I go online, I check the e-newspapers - you just never know what might be happening. It was a complete change of mindset for me. I really started to appreciate how the world is uncertain and changing, not necessarily in ways that are very nice. Perhaps we'll never get anything so shocking happening again in our lifetimes. But I doubt it.

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an exaggerated trust in the ability of our beloved chancellor and the BoE

Good points. May I also ofer an additional point or two?

Risk and trust are closely related. If you trust something you will take bigger risks. Remember that game where you get your mate to stand behind you and you fall backwards and (you hope!!) they catch you...trust him..you will take the risk.

People have taken massive financial risks over the last few years becuase they trust GB and the BoE. When they realise what has gone on, when they realise they have been duped, that trust will go and people will stop taking risks. The housing market will grind to a halt.....and then go into freefall as people panic.

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I think I am going to christen it the baby boomer bust................

No other generation will have left its children and their children with such a tainted legacy.................

I mean what the hell were they thinking of driving prices to the level they are at...................?

As it is now we have got to work to a much older age,we have got a piss poor pension in comparison to them,and thats if the system hasnt collapsed under the strain of so many old and so few young by then...........

And now they want to price us out for eternity and make us rent off them for a lifetime...................

Is it me or have they lost all their marbles?

You dont make your generation rich by making the next to come twice as poor because you had the opportunity..............

I hope every single one of these selfish sods gets the financial kicking they deserve...............

I have no problem with people speculating on stocks and shares..........or even currency but for gods sakes leave housing alone ................. you impact on peoples lives so dreadfully and stop them growing the way you should be allowed to do.

Rant Over

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Great Post Rich.

It occurred to me recently how screwed the UK economy would be if the average man in the street behaved like I do. Basically I consume as little as possible. I save every penny I can. It's a reaction to overpriced housing - rent cheaply and save - spend as little as possible. The economy would be screwed if everyone was like me.

Hundreds of thousands of people in negative equity will react in the same way and send our consumer economy even further down the shitter. The result will be increased unemployment which will promote even more savings. A self perpetuating downward spiral.

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Great Post Rich.

It occurred to me recently how screwed the UK economy would be if the average man in the street behaved like I do. Basically I consume as little as possible. I save every penny I can. It's a reaction to overpriced housing - rent cheaply and save - spend as little as possible. The economy would be screwed if everyone was like me.

Hundreds of thousands of people in negative equity will react in the same way and send our consumer economy even further down the shitter. The result will be increased unemployment which will promote even more savings. A self perpetuating downward spiral.

Yes indeed - and pretty much what happened in Japan fifteen years ago. It does turn around eventually but it can take many years. I agree that the psychology of economic processes is very important - and I believe that understanding the interaction between psychology and economics is a hot topic amongst economists at the moment.

One question I have about Rich's account is that about time scale. How long will it take for the reverse process to happen? It to years for the mass of people to be drawn into the belive that house ownership is an investment that cannot fail. That depended on successive waves of progressively less well informed and gullible people being enrolled into the idea. Won't they will also be the last to realise that prices can go down?

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Think of it this way - one day I was sat in my office looking at the screen, when someone says that there's been a major incident in New York. We spend the rest of the day glued to the internet, listening to the radio, scarcely believing what we were hearing and seeing as "9/11" unfolded. Now, whenever I go online, I check the e-newspapers - you just never know what might be happening. It was a complete change of mindset for me. I really started to appreciate how the world is uncertain and changing, not necessarily in ways that are very nice. Perhaps we'll never get anything so shocking happening again in our lifetimes. But I doubt it.

The one thing which really stood out for me on 9/11 was the absolute shock reaction locally. In particular the lack of traffic on the roads was very noticeable. Likewise the normally music focused youth radio stations running constant news updates every 15 minutes and the local newspaper seeing fit to put out an extra edition that afternoon and deliver it to every house whether they subscribed to home delivery or not. Absolute shock and the reactions I've mentioned above weren't rational but in a panic that's what happened. Nobody knew what they ought to do so they just did whatever came to mind despite it being an event literally on the other side of the world.

So I certainly get the point about how people panic when something totally uexpected happens. We all know in the back of our minds about the risk of floods, earthquake, fire and so on so tend to react reasonably sensibly if they occur. But very few seem prepared for a house price crash.

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I think I am going to christen it the baby boomer bust................

No other generation will have left its children and their children with such a tainted legacy.................

I mean what the hell were they thinking of driving prices to the level they are at...................?

As it is now we have got to work to a much older age,we have got a piss poor pension in comparison to them,and thats if the system hasnt collapsed under the strain of so many old and so few young by then...........

And now they want to price us out for eternity and make us rent off them for a lifetime...................

Is it me or have they lost all their marbles?

You dont make your generation rich by making the next to come twice as poor because you had the opportunity..............

I hope every single one of these selfish sods gets the financial kicking they deserve...............

I have no problem with people speculating on stocks and shares..........or even currency but for gods sakes leave housing alone ................. you impact on peoples lives so dreadfully and stop them growing the way you should be allowed to do.

Rant Over

Not so much bust engineered by any particular generation but the good old traditional ECONOMIC CYCLE. Please allow me to introduce it for it has been around for many long years: Supply and demand becomes distorted by too much or too little liquidity in the economy. What ensues is "froth" (Al Greenspan's word) which bubbles up as long as the level supporting it rises. The "froth" eventually hits the ceiling as determined by affordability that is created by productivity. The cycle runs roughly within 10 year spans. The Great Crash began in the very late 80's and ended in the mid 90's. We are ten years on and the froth has hit the ceiling again and down we go again. It just happens that the post WW 2 generation were the ones who got caught in the updraft. The "World Crash" that is dawning is just another manifestation of that same old cycle. As Solomon so aptly put it: there is nothing new under the sun. All is vanity.

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Not only has this boom on for such a long time, encouraging the view that this is the norm and allowing the memory of the last crash to fade out of our collective consciousness.

I have a relative who is an estate agent, so its their job to talk up the market, but their own property purchases are also based on the 'prices always go up' theory

In that respect, they are practising what they preach

However in the last crash their first place was bought for 65K - it peaked at 75K and was eventually repo'd for 25K

Maybe because it was such a nasty experience, it was better to let the memory fade, but it still amazes me how somebody can experience that and then totally discount it a few years later!

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Guest Cletus VanDamme

I hope every single one of these selfish sods gets the financial kicking they deserve...............

Rant Over

Unfortunately it won't be the baby boomers that get the financial kicking. They've paid off their mortgages, have nice final salary pensions, had free education and healthcare all their lives. It's their children and their grandchildren that are already getting, and will continue to get, a financial kicking for the rest of their lives.

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Guest Cletus VanDamme

"It's their children and their grandchildren that are already getting, and will continue to get, a financial kicking for the rest of their lives"

NONSENSE.

The Market will correct. many boomers will be left with inadequate pensions, and a diminished lifestyle.

The young will be young enough to rebuild in a devastated and less expensive market

The greedy-and-overgeared latecomers are the ones that will be destroyed by their own greed,

and that will be many in their thirtires, forties and fifties that followed the crowd into BTL.

Sad-pig is full of them

I really do hope you're right Bubb.

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Well the banks and government must TRUST the public to pay it all back.

What would happen if EVERY man and Woman in this country said "ah, f*ck it - Im gonna stop paying my mortgage". "What are they gonna do - evict us all and lock us up"?

Ill just register myself as homeless and get social services to find me a home.

Yadda yadda yadda... You get my drift?

They are taking big risks that people CAN and WILL pay all this money back. To be honest, I partly HOPE, and partly BELIEVE that IF/WHEN IR's go up to 5% there will be major problems.

The Banks will be less hasty to borrow meaning HP's need to drop to what people will be ALLOWED to borrow.

Those jumping from their 4.2% fixed mortgages to 5.5% will be in for a shock. Unfortunately people believe 2 things - House Prices go UP and Interest Rates GO DOWN!

On top of all this we have the energy crisis - where are we all gonna find this extra money from? Those that are already on the bones of their ass will be in big 'doodoo'!

Business that obviously use fuels - where do they get the extra money from? I know from our point of view, we are getting squeezed on price all the time. Any sign of an increase and they put the business up for tendor! We have to absorb these costs.

UK PLC should have went into receivership years ago! I cant see how we are gonna get out of this mess. MRS T was a complete and utter ********* but I bet my bottom dollar, she would not have let the Governments finances get into this state.

GB should be hanged for Treason. I am/was a labour supporter but based on the financing of this country I would vote for TORY or RAVING LOONY PARTY before I would vote for GB. He is a Bell-end!!

TB

Edited by teddyboy

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Interesting thread. I draw no comfort from knowing where all this is going to end up. I’ve been watching the whole (hpi/easy credit/mew for lifestyle/fake it till you make it/live for today) situation ratchet up. From my chair at the tables of the post baby boomer dinner party circuit, I’ve struggled to understand the sheer level of collective memory loss and denial. People don’t get it, or don’t want to get it. They’re in too deep. Greed always overcomes fear until it’s too late! Then it’s more denial (keep borrowing and all will be well, protecting ones ego/feeling of self worth). This denial driven by fear, only serves to turn the ratchet further and increase the pressure on the creaking dam, named ‘inevitable reality’. As things get worse, more individuals come to realise that the cost of maintaining the lie is too great. However by then, individually or collectively it’stoo late. The trickle from the dam becomes a flood as it gives way under the pent up pressure. Then comes blame, ‘it wasn’t our fault it was peer pressure, it’s the banks fault, it’s my parents fault etc.

I can understand how a lot of 20 to 30 year olds, must be thinking how did this whole mess happen?

Pablo Silver or lead?

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NONSENSE.

The Market will correct. many boomers will be left with inadequate pensions, and a diminished lifestyle.

The young will be young enough to rebuild in a devastated and less expensive market

The greedy-and-overgeared latecomers are the ones that will be destroyed by their own greed,

and that will be many in their thirtires, forties and fifties that followed the crowd into BTL.

Sad-pig is full of them

I hope you're correct, but in my Greed/Fear equation, the great fear is that governments around the bubble world will engineer an inflationary outcome simply because of the 'too big to let fail' factor.

As an ant, it would absolutely gut me at the personal level to see the grasshoppers bailed out again.

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Miser, I couldn't agree more... particularly with this bit:

I hope every single one of these selfish sods gets the financial kicking they deserve...............

I have no problem with people speculating on stocks and shares..........or even currency but for gods sakes leave housing alone ................. you impact on peoples lives so dreadfully and stop them growing the way you should be allowed to do.

Rant Over

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"It's their children and their grandchildren that are already getting, and will continue to get, a financial kicking for the rest of their lives"

NONSENSE.

The Market will correct. many boomers will be left with inadequate pensions, and a diminished lifestyle.

The young will be young enough to rebuild in a devastated and less expensive market

The greedy-and-overgeared latecomers are the ones that will be destroyed by their own greed,

and that will be many in their thirtires, forties and fifties that followed the crowd into BTL.

Sad-pig is full of them

You are right in a way..

Its horrible to watch.. but for the mopst part Bulls have shifted from gread to terror..

I think this builds the numbers of bulls in a way as I have faith in human nature..

and terror is easier for most then gread..

don't resent all bulls.. Some are just those who have now realised that their certain investment is now one with massive inherint risks..

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Well the banks and government must TRUST the public to pay it all back.

What would happen if EVERY man and Woman in this country said "ah, f*ck it - Im gonna stop paying my mortgage". "What are they gonna do - evict us all and lock us up"?

Ill just register myself as homeless and get social services to find me a home.

Yadda yadda yadda... You get my drift?

They are taking big risks that people CAN and WILL pay all this money back. To be honest, I partly HOPE, and partly BELIEVE that IF/WHEN IR's go up to 5% there will be major problems.

The Banks will be less hasty to borrow meaning HP's need to drop to what people will be ALLOWED to borrow.

Those jumping from their 4.2% fixed mortgages to 5.5% will be in for a shock. Unfortunately people believe 2 things - House Prices go UP and Interest Rates GO DOWN!

On top of all this we have the energy crisis - where are we all gonna find this extra money from? Those that are already on the bones of their ass will be in big 'doodoo'!

Business that obviously use fuels - where do they get the extra money from? I know from our point of view, we are getting squeezed on price all the time. Any sign of an increase and they put the business up for tendor! We have to absorb these costs.

UK PLC should have went into receivership years ago! I cant see how we are gonna get out of this mess. MRS T was a complete and utter ********* but I bet my bottom dollar, she would not have let the Governments finances get into this state.

GB should be hanged for Treason. I am/was a labour supporter but based on the financing of this country I would vote for TORY or RAVING LOONY PARTY before I would vote for GB. He is a Bell-end!!

TB

What happens if the financial system goes into meltdown. I believe that the countries assets would move into the ownership of the banks, not bought by them, simply possessed by them. The state would be left to pay the rents through benefits and the banks would control supply and demand to thier own benefit. The state could then go bust as well.

Your new masters could be HSBC, think about that!

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nets%20on%20ledge.jpg

Wow, certainly looks 'windswept and interesting' although rather alarmingly precarious :) , but I can’t quite make out the magic ATM – has someone noticed it’s now broken, and kicked it over the edge?

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What happens if the financial system goes into meltdown. I believe that the countries assets would move into the ownership of the banks, not bought by them, simply possessed by them. The state would be left to pay the rents through benefits and the banks would control supply and demand to thier own benefit. The state could then go bust as well.

The High Street banks would be nationalised by Act of Parliament. I don't suppose anybody here is old enough to remember the windfall tax on the banks during the early 1980s. This proves the Government can do just about anything it likes within the laws of physics. The state can't go bust because it has the final say when it comes to putting money into circulation. After all, it is the state and not the High Street banks that own the gold bars.

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RichM, A great post. I tend to agree, because most people only ever see price and ignore value. If prices goes up, it's good - if prices fall, it's bad, irrespective of value. As value investors will tell you, once you start looking at things based on value rather than price, your whole perception of the world (or at least money) is turned upside down. If prices fall, that's good - it allows the value players to buy more assets cheaply. If prices rise, it makes it harder to buy assets at good value.

Edited by Van

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Well the banks and government must TRUST the public to pay it all back.

What would happen if EVERY man and Woman in this country said "ah, f*ck it - Im gonna stop paying my mortgage". "What are they gonna do - evict us all and lock us up"?

Not quite, but they will take ownership of a lot of properties, rent them out (as there will always be demand for housing) and sell them again once the crisis is over. An asset bubble fuelled by loose credit always results in wealth being shifted to the money lenders. This is exactly what is happening in this current housing cycle.

Think about it another way: The totality of all the residential dwellings in the UK today is roughly the same as in 1995 (apart from stock added through newbuilts etc., but this is small compared to the totality of all dwellings). But today, homeowners owe the moneylenders significantly more than they did in 1995. Do you get the picture?

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Good post. One thing which has struck me is how many intelligent people who have bought and sold houses for years simply do not grasp, or have never paused to consider the psychological aspect of the market.

I can't decide if a crash is more likely if the herd understands the psychological aspect or if it doesn't. I suspect it is actually more likely if it doesn't.

So, sshhh! ;)

frugalista

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Good post. One thing which has struck me is how many intelligent people who have bought and sold houses for years simply do not grasp, or have never paused to consider the psychological aspect of the market.

I can't decide if a crash is more likely if the herd understands the psychological aspect or if it doesn't. I suspect it is actually more likely if it doesn't.

So, sshhh! ;)

frugalista

I think the psychological aspect will slowly leak out in a "rosie millard" kind of fashion.The majority of the population won't understand it,but will follow the herd out of property,and will stampede given a little promting from the media.....however,the real doom and gloom headlines on a consistent basis will only happen at the end of the crash and are a contrarian buy signal.

....any FTB's on this site take note,protect yourselves now by renting as cheaply as you can for the next couple of years,pay off ALL your debts and get yourselves into as good a buying position as you can NOW....but just sit tight.

I'd like to say try and try and recession-proof your employment situation as best you can,but for most folks this is only partly within your control.....anyone working in retail really needs to change jobs...fast!

...civil unrest is also a fairly good indicator to buy.remember brixton/toxteth.

Edited by oracle

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Good thread!

Psychology governs all that we do as individuals, and certain 'triggers' will cause the same reaction in most people. A tangible example is if a fire starts in the room you are stood in, you get out as quickly as possible! However, if a fire alarm sounds, most people wait a while to find out whether or not it is a false alarm. The trigger to run is seeing and hearing the panic of others, not the fire itself.

Same with the impending HPC. Once the panic stories appear in The Sun, The Mirror, and on TV, then "investors" will panic sell, crashing the market. However a modest increase in IR's won't have the same effect, as most will try and ride it out on the basis that everyone else is.

I feel, though, that the news is being manipulated to ensure that no negative stories are printed. I don't know by who or how. Ridiculous stories run as headlines by BBC TV news such as "House Prices in Scotland rise by 40%" (they were £20k in a rough area, and are now £28k because property speculators see them as being cheap compared to the rest of the overpriced UK), whereas increases in repossessions and personal bankruptcy barely gets a mention.

All forms of 'control of the masses' hinge on one fact discovered by Sun Tzu, the Chinese military philosopher, who put it best: "kill one, terrify ten thousand."

In this context.... "Let 'em think everyone is doing well through investing in property, and the rest will copy whether they can afford it or not"

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A superb thread.

I have often argued on the psychology of markets. Not just the housing market, but all markets have a strong psychological aspect to them.

It sometimes amazes me that most people still believe in simple "Supply and Demand" as being principle price drivers, without appreciating that demand can be manipulated so easily.

A house price is merely a matter of opinion between a buyer and seller. A seller will tell you that is "what it is worth", but ultimately its worth, is the value he thinks someone is prepared to put on it, at that snapshot in time.

I am reminded of the story of the man selling very well presented boxes of tasty chocolates at a food fair. He was doing a very good trade, selling them at £20 a box every day. That is, until the last day, in order that he could pack up early, he slashed the price of the remaining boxes to £8. Then he couldn't sell any more - no-one considered them worth buying.

Economists and Analysts are paid vast sums to come up with reasons as to why prices move. You know the sort of thing: "the Dollar went down today because investors considered Fed fiscal tightening to be ending, and worried about the underlying strength of the US economy...blah..blah.."

If instead our analyst told the truth and said "Some large Dollar selling appeared early in the day, which then encouraged other sellers in and ultimately drove the price down during the session as more sellers appeared. I don't know why." - He wouldn't be in a job very long.

After the House Price Crash, "experts" will come up with all sorts of tosh to explain what has happened - just as they currently do to explain the house price increases over the last few years. You can discount most of it.

Edited by Flash

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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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