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Fred

Your Top 5 Reasons For A Crash?

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I find myself trying to explain to friends why there will be a house price crash, but usually not very well.

What would your top 5 points be when explaining it to somebody?

Somethning like the SIPP's turnaround could be one for example.

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Maybe they think that because we are in a low inflation environment with artificially suppressed interest rates things are going to be different this time...............

What they dont want to understand is this is probably the worst economic climate to have a housing bubble in............

No chance of wages catching up with the increased costs like they have done in previous busts is going to make the fallout from this one truly epic..............

Anyone fancy a decades worth of negative equity?

Because thats what we are looking at before house prices ever get anywhere near this high again............

Some poor sod buying a new build last year is going to have the economic equivalent of looking down the barrel of a loaded gun for the next ten years..................

People go on about the scars that still exist from last time we had a housing downturn but at least the market healed itself and got back to normal...........

This time I think the trauma will be too great and I dont think there will be any forgatting this one............

Remember that the economy was a lot healthier in the eighties and the wage increases that were there if you could keep your job made it all that bit more bearable............

We have lost 25% of our manufacturing under labour and stand to lose a hell of a lot more before they are out of office..................

No other government has pulled the wool over the eyes of the public for so long about the true state of the nation...............

All thats gone now and we will probably be the most unproductive country left over when they are finished..............

Edited by miser

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1)rising unemployment

2)rising cost-of-living,outstripping any pay rises earned

3)BTL find a new "sexy" investment and sell up

4)BTL costs rise and rents unable to keep pace...so sell up

5)media coverage turning bearish

...oh and the full realisation that SIPPS has gone,plus a few crafty tax-grabs by gordon in the budget.

Edited by oracle

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Reason one, (Karl Marx told it better than I did but here goes). Capitalism is a cycle. A ferris wheel if you like. We have reach the top of the ferris wheel, and there is only one way to go. When we reach the bottom there will also be only one way to go.

A second reason, there is only a finite expansion of lending capacity. That is 12.5x the amount of actual money that exists in the economy. We have reached the outer edges of that lending capacity, and as people go bust the amount of lending capacity contracts by 12.5 x the amount of pretend money that they write off.

Edited by Elizabeth

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1) UK economy basically too reliant on consumer-spending and cheap imports

2) Huge and IMO unsustainable amount of personal debt (£1.1T)

3) Pending global energy crisis (oil, gas etc.)

4) Excessive public spending leading to higher taxation

5) No foundation for further rises with FTBs priced out of the market (7% of total) and revenue for BTLs now basically dependent on further house price inflation

All IMHO, of course.

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1. Boom bust is part of the economic cycle

2. All bubbles eventually pop

3. There is never something for nothing--HPI based on credit will not last

4. House prices are a matter of opinion whereas DEBT is real

5. There are more houses than people to buy them (just go onto findaproperty.com)

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1. Only a complete d!ckhead would buy a house at these prices.

2. Contrary to all evidence not everyone in Britain is a d!ckhead.

3. Even though there is a new supply of d!ckheads coming to the market, they cant afford it.

4. Even d!ckheads can now see they will have no life if they buy now.

5. Who are the main people saying prices will rise?...... 'estate agents'... quite in line with all evidence estate agents are d!ckheads.

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Im increasingly thinking that the use of the word crash is a mistake to use, first its hard to define and most people expect something that a crash applies to is quick and sudden. I think a long Japan style slide is what might occur in most likelyhood. We are not going to find ourselves waking up one morning and everyone has sold their houses at 75%price of what they wanted to.

I think its hard to argue(difficult to debate and for people to comprehend your points) for a crash for a number of reasons

a)Demand is still pretty strong and will remain so while people still believe in property being the best investment for cap gain, retirement etc. plus the modern "lifestyle" of expressing oneselve via homeownership and its contents and design

b)Economy is still in the short term moving along

c)Any short term downturns will be slowed or reversed by demand in the speculators thinking they are getting bargains etc

d)VI and government seem to be adept at not providing a fair and unbiased appraisal, until things literally are so bad that people finally see things first hand with mr jones next door being chucked on the street jobless etc

e)Finance and credit still seem readily available in all honesty

There are basic fundamentals which no one can be in denial about

a)Past performance of houses and real debt i.e.we bought our house for 20k in the 70s its now 150k are not understood by most people, nominal figures grab the headlines adjusted numbers dont

b)Basic economics and the housing chain, FTB's are needed to keep things moving, if there are none how will it work?

c)Ask them how much their mortgage costs. Not monthly, not yearly, total term over 20 years etc. Work out how much "dead" money they are paying in interest charges potentially, and work out how much the house must increase if they cannot sell until 20 years is up. It will just expose the fact that most people are financially illiterate and cannot do such sums, they are basing there great financial coupes on nothing more than whats happened in the last 5 years and what VI tell them.

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Ask people to look at this graph and intuitively say what happens next. Maybe don't tell them it's a house price to earnings graph so you get some honest answers.

We need a more uptodate version odf that graph. If you went by that graph, you'd think that the market should have crashed 4 years ago, but it didn't (although it should have). A newer graph would be more dramtic as it would show that the ensuing fallout is likely to be far greater than recent ones.

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(Rising house prices are a global phenomenon - I don't think it's necessary to explain it in terms of the UK economy.)

1. Reversion to the mean - average property prices have been rising constantly since the time records began. But it's a gradual rise. There will be times when prices overshoot the mean, and they must, by definition do the opposite. If we're now several standard deviations above the mean, we must go down, until we're several SDs below. So 5+X annual salaries must, I think, got down to 2X annual salaries.

2. The world is flush with cheap money, and interest rates are at historically low levels. See point 1. about reversion to the mean. But we don't need interest rates to go up to cause a crash - look at Japan.

3. Houses are like any other asset - it only take 5-10% of holders to bail out to cause a cause a correction. Banks then tighten their lending criteria, discouraging new buyers. So even without interest rate rises we have a potential crash. If interest rates go up at this point, then it's good bye Vienna.

4. New buyers are often stretched to their limit, and are often on an interest only mortgage, with little or no stake in the house and negligible savings. This is the equivalent of a spread bet, and the moment the margin call comes they'll have to close their position. Remember point 4.

5. Capital appreciation in property is currently hard to find. Smart money will be looking at other assets to switch into. See point 3.

Edited by Scipio_Africanus

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Fred - tell them to look at historical prices in their own local post town (HBOS historical data sets, 1988-2006) and notice how they have risen by 3x in the last 9 years, then point out that this is fundamentally irrational, part of the usual boom and bust behaviour of house prices, and that when the income from HP inflation exceeds income from paid employment (the critical or nonsense point) the game is obviously up; then the irrational dynamics driving prices up goes into reverse and drives them back down again. As evidence, point out the 17% (or thereabout) drops in the HBOS data from 1989 to 1994, and say that this is now going to happen again, but this time earnings growth and inflation, which limited the size of the nominal falls last time, are much lower now, so the potential is now much worse.

Then point to the historical low IRs and how there is more upside then downside on future changes, and explain that each 0.25% point rise directly drives a 2.5% fall in house prices. Say that the lower cost of borrowing money from 1992 onwards, instead of making houses cheaper, has been squandered as people simply competed amongst themselves and paid more (and borrowed more) for the same houses. Explain how this leaves recent buyers hugely vulnerable to both rising repayments and falling prices if the IR cycle unwinds. Explain that a recession almost always accompanies the downward correction after the peak.

Mention that the recent craze of BTL investments has destabilised the market and will make the ups and downs more extreme, and give the Ashford maths lady as an example of just on person who now ‘owns’ nearly 700 heavily geared houses. How the whole Ashford market could collapse if she ran into trouble and decided to go for bankruptcy. How many others are there like her?

Etc. etc.

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I think it is up to date (see the second peak). I got it from Bandwagon's post.

The graph is up to date to the end of 2005, although the scale goes to 2004. This was just due to resizing in Excel, it was easier to read this way.

I got sick of people telling me that there would be no HPC because the economy was strong. That sounded just like 1988 to me.

The trouble is that when a housing boom ends, unemployment shoots up (the boom jobs go, like they did after the dot-com boom), and the recession follows.

This usually takes about 2 years, so I'm expecting a recession to start later this year.

Have a look at MFI right now. They're just the tip of the iceberg.

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The graph is up to date to the end of 2005, although the scale goes to 2004. This was just due to resizing in Excel, it was easier to read this way.

That explains it then, looked to me like it only went up to 2003ish. Sorry.

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1: Interest rates

The Bank of England uses interst rates to control inflation. Soaring energy prices are creating inflationary pressures which the BoE will have to control. They will do this by raising interest rates. People who stretched themselves to the limit buying hugely overpriced houses at low rates of interest will find themselves unable to keep up with their mortgages. They will be forced to sell but noone can afford to buy, so they'll have to sell significantly cheaper or have their house repossessed.

2: Utility Bills

Utility bills are soaring. Wages aren't. People are having to make economies to be able to meet with these huge expenses. They can only cut back so far before they can cut back no more. Then the mortgage goes into arears... and remember to combine this with point 1.

3: Unemployment

Having made economies by spending less on the high street to pay for soaring energy bills and slowly inflating mortgage repayments, shops are starting to feel the pinch. They can only reduce prices so much before they have to start cutting staff and how, exactly, are those newly unemployed people supposed to afford their mortgages? They can't. More houses repossessed and onto the market. More people claiming unemployment benefit which leads to...

4: Higher Taxes

Yep! As if soaring utility bills and mortgage repayments weren't enough, there'll now be less take home pay with which to cover these things! Paying your mortgage has never been more difficult!

5: Estate Agents finally accepting the truth

A well known estate agent in Bingley has had a two-bed flat on the market for over a year at £169,950. Clearly they don't want to recommend that the vendor reduces their expectations as that would mean less commission for the agent too, and they don't want to trigger widespread acceptence that house prices are falling, so they do nothing and hope it will all blow over. However, estate agencies are businesses and businesses have to make money, or they die, so sooner or later they will have to reduce the prices of their properties in order to stay in business. Once one does it the Camel's back is broken and there'll likely be widespred panic-selling as agents try to offload properties with discounts of maybe 10% or more, in a bid to avoid having to discount them even more at a later point. The market will be flooded and will suddenly become extremely competitive as the buyers hold the power – there'll be some serious bargains to be had! The graph that Durch very helpfully posted indicates that we shouldn't buy until the average house price experiences a correction to 3x the average salary. Anyone who buys sooner than that is a living, breathing embodiment of that famous old saying about a fool and his money.

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1. Only a complete d!ckhead would buy a house at these prices.

2. Contrary to all evidence not everyone in Britain is a d!ckhead.

3. Even though there is a new supply of d!ckheads coming to the market, they cant afford it.

4. Even d!ckheads can now see they will have no life if they buy now.

5. Who are the main people saying prices will rise?...... 'estate agents'... quite in line with all evidence estate agents are d!ckheads.

:lol::lol::lol::lol:

Tell it like it is

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Don't need 5 reasons:

In most areas of the country the price of a property big enough to house a husband, wife and a couple of kids is around 10 times the average local salary and, going forward, today’s equity poor twenty something couples just will not be in the financial position to accommodate that much debt. For this one reason only prices will have to come down significantly if our society is to be viable in the future.

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1) I'm a first time buyer - I can't afford it.

2) Other first time buyers who have bought recently are kidding themselves - they can't afford it.

3) Your average consumer cannot consume at the rate they have been - they can't afford it.

4) Businesses are cutting back to pay for pension deficits etc. - they can't afford it.

5) Gordon Brown generally can't afford anything he's doing, but he continues to say we can afford it!

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1 Because we've had a boom, guess what comes next?

2 'They' can't stop it happening.

3 The ATM now has a capped limit. (no super-sonic HPI=credit limits are now set)

4 Banks are starting to share information about customers.

5 Unemployment rising.

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1. DEBT (out of control)

2. REAL INFLATION (what’s left in your pocket after all the bills are paid)

3. HOUSE’S NOT WORTH THE MONEY (sh!tty one bed flat for £130k?)

4. MARKET CYCLES (all of them do, houses are no different)

5. RECESSION (it’s going to be a bad one, very bad)

People that missed the boat are not prepared to jump-in and drown.

They have more sense and can read the writing on the wall.

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1. Only a complete d!ckhead would buy a house at these prices.

2. Contrary to all evidence not everyone in Britain is a d!ckhead.

3. Even though there is a new supply of d!ckheads coming to the market, they cant afford it.

4. Even d!ckheads can now see they will have no life if they buy now.

5. Who are the main people saying prices will rise?...... 'estate agents'... quite in line with all evidence estate agents are d!ckheads.

:lol:

frugalista

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3. Houses are like any other asset - it only take 5-10% of holders to bail out to cause a cause a correction. Banks then tighten their lending criteria, discouraging new buyers. So even without interest rate rises we have a potential crash. If interest rates go up at this point, then it's good bye Vienna.

5 - 10%? I'm not convinced it needs to be that high. Housing isn't a particularly liquid asset so I would have thought it would have been considerably less than 5% needing to bail out to cause a correction. Agreed with your point though.

Using another (totally unrelated) market as a guide to how sensitive these things are, during testing of a new major electricity interconnector in Australia the supply to the receiving end of the link was boosted by around 2% in total whilst demand remained almost constant. The price promptly fell about 55% in response to that supply increase. OK, electricity and houses are very different but my point is that these things are sensitive to very small changes in supply / demand which can lead to big changes in price. Look at oil, demand went up around 5% and price went up 100%.

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I find myself trying to explain to friends why there will be a house price crash, but usually not very well.

What would your top 5 points be when explaining it to somebody?

Somethning like the SIPP's turnaround could be one for example.

rental yields way too low

price to average income too high

massive deviation from historical trend according to analysis from Yale professor Schiller

british people have an irrational obsession with owning their own proprty unlike most of rest of world who have no problem renting-this may change

economy is bound to slow and with prices historically high chance of a large correction is much higher.

people buying in hope of capital appreciation and unconcerned with rental yield is an indication of massive speculation and therefore a bubble.

economic fundamentals make buying a house now a bad investment the only thing keeping property high is not anything economic but rather an overriding desire to own their own home regardless of fundamental economic reality.

also interest rates arent historically low! people look at nominal rates and fail to take into account inflation , when interest rates were 10% inflation was probably much higher leaving us with negative REAL interest rates.real interest rate now is around 3%

Edited by ronnie

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I find myself trying to explain to friends why there will be a house price crash, but usually not very well.

What would your top 5 points be when explaining it to somebody?

Somethning like the SIPP's turnaround could be one for example.

I've been telling various people to do their homework before purcchasing yet all 3 of them have gone out blindly and bought a property, some people just don't listen, house prices always go up!

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1. Prices are too high. If they weren't they wouldn't be able to crash.

2. Unemployment increasing. No new real jobs.

3. Huge inflation on things like council tax, gasbills etc etc

4. Erm see 1.

5. see 4.

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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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