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Why Were Properties Not Always This Expensive?

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So,

We have seen house price rises before and subsequent adjustments following behind.

Either wage push inflation in the 60's and 70's or the price drops of the 89-90's

So, why have prices not been this high before?

You can't have been the first to really understand housing.. Did man invent the house before the wheel? I don't know

But they have been with us for a while.

Now investors have tried before, and house prices have gone up before and then become affordable again.

So, my point is.

If house prices are sustainable at this level, why were they not at this level before?

And why have prices come down or massive inflation bought wages up each time this has happened before?

And what exactly is different this time?

(Note, there are more houses per head of capita then at any time in history, so its not a shortage, and the way people wish to live has not changed since the last crash. Smaller households are due to less kids…)

Bulls seem to be hear in force..

I am of out with the girl for some food..

I will check back this evening for clear answers..

Please try.

If this is ignored I will presume that there is no answer..

and trust me Bulls, each time before.. there were people just like you.. chances are with more dubious facial hair and fashion sense..

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So,

We have seen house price rises before and subsequent adjustments following behind.

Either wage push inflation in the 60's and 70's or the price drops of the 89-90's

So, why have prices not been this high before?

You can't have been the first to really understand housing.. Did man invent the house before the wheel? I don't know

But they have been with us for a while.

Now investors have tried before, and house prices have gone up before and then become affordable again.

So, my point is.

If house prices are sustainable at this level, why were they not at this level before?

And why have prices come down or massive inflation bought wages up each time this has happened before?

And what exactly is different this time?

(Note, there are more houses per head of capita then at any time in history, so its not a shortage, and the way people wish to live has not changed since the last crash. Smaller households are due to less kids…)

Bulls seem to be hear in force..

I am of out with the girl for some food..

I will check back this evening for clear answers..

Please try.

If this is ignored I will presume that there is no answer..

and trust me Bulls, each time before.. there were people just like you.. chances are with more dubious facial hair and fashion sense..

I'm a Bear but I will answer anyway. They are this high because IRs are so low, making it possible for people to borrow so much more. Actual affordability is probably no worse than when I first bought in 1975, even though the ratio of house prices to salaries is much higher.

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As I have said over & over & over again, THA 1988 as amended in 1996 opened up the BTL market in the UK which bought lenders into the game in 1997 in a major way. Thus property value is now more related to rental income than restrictive lending practices allowed with wage multiples.

This is one of the factors, but I guarantee you that THIS IS WHY THEY'RE HIGHER THAN PREVIOUS BOOMS.

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A combination of many factors:

1. Low interest rates.

2. Banks being very generous when giving credit.

3. BTL mortgages.

4. The idea that anyone can make a mint from BTL.

5. High immigration.

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So,

We have seen house price rises before and subsequent adjustments following behind.

Either wage push inflation in the 60's and 70's or the price drops of the 89-90's

So, why have prices not been this high before?

If house prices are sustainable at this level, why were they not at this level before?

And why have prices come down or massive inflation bought wages up each time this has happened before?

And what exactly is different this time?

(Note, there are more houses per head of capita then at any time in history, so its not a shortage, and the way people wish to live has not changed since the last crash. Smaller households are due to less kids…)

Its pretty simple, its all to do with affordability.

With low interest rates or rapidly rising wages, then houses become more affordable - but momentum takes time to build in the housing market, years in fact. This being on the upside and downside of the cycle.

At the moment, IRs are low - and prices have being playing catch up for the last 5 years. In the mid 90s, house prices were massively undervalued - hence once the momentum got going, they shot up strongly to where we are now.

We currently at at the point of rough equilibrium, where current prices are affordable, fully supported by the low IRs and wealth passing down through the generations. This is why the BoE state that if we are truly in a 'low interest' environment and we have reverted back to the trend of everything before 1970, then prices are completely in line with fundamentals.

So in other words, the 30 years period 1970-200 was the odd ball, not where we are now.

The 90's crash was caused by high interest rates and a 2 year economic depression.

So the question is - where is the re-run of those circumstances, that will cause a house price crash ? ........ there isn't one on the horizon. People on here like to think they are fantastic economists who know better than the professionals, but I just don't buy that.

The outlook is economically stable and IRs will stay low - these two simple factors tell me that house prices at these levels are here to stay. I don't think prices will go much higher because we have reached the point at which people can't afford more, but that doesn't mean prices will automatically drop.

People on here are coming up with their pet theories to explain why IRs are set to rocket and none of them stand up to scrutiny. Hence I'll stand by my belief, prices will stary high for a while to come, until IRs truly start going upwards and substantially.

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It’s not an easy one to answer and there is probably not a single answer. My own theory is pretty similar to Casual Observer’s low interest rates and low inflation have done two things simultaneously:-

Made high property prices “affordable” and made other sorts of investments unattractive.

The problem with my theory is that if you look back beyond the 1960’s we had low interest rates and low inflation and house prices were fairly flat. Bang goes that theory.

So I’m left with an unscientific “feeling” it’s some sort of mass hysteria and will end with the sort of regrets which German’s of a certain age have.

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Its pretty simple, its all to do with affordability.

With low interest rates or rapidly rising wages, then houses become more affordable - but momentum takes time to build in the housing market, years in fact. This being on the upside and downside of the cycle.

At the moment, IRs are low - and prices have being playing catch up for the last 5 years. In the mid 90s, house prices were massively undervalued - hence once the momentum got going, they shot up strongly to where we are now.

We currently at at the point of rough equilibrium, where current prices are affordable, fully supported by the low IRs and wealth passing down through the generations. This is why the BoE state that if we are truly in a 'low interest' environment and we have reverted back to the trend of everything before 1970, then prices are completely in line with fundamentals.

So in other words, the 30 years period 1970-200 was the odd ball, not where we are now.

The 90's crash was caused by high interest rates and a 2 year economic depression.

So the question is - where is the re-run of those circumstances, that will cause a house price crash ? ........ there isn't one on the horizon. People on here like to think they are fantastic economists who know better than the professionals, but I just don't buy that.

The outlook is economically stable and IRs will stay low - these two simple factors tell me that house prices at these levels are here to stay. I don't think prices will go much higher because we have reached the point at which people can't afford more, but that doesn't mean prices will automatically drop.

People on here are coming up with their pet theories to explain why IRs are set to rocket and none of them stand up to scrutiny. Hence I'll stand by my belief, prices will stary high for a while to come, until IRs truly start going upwards and substantially.

I have to say that I can find no argument with any of your points. I think you're right and that we are, in fact, in for a period of price stagnation. Prices may fall a bit if unemployment or taxes increase, but I no longer believe there will be a crash in the near/medium term.

The problem with my theory is that if you look back beyond the 1960’s we had low interest rates and low inflation and house prices were fairly flat. Bang goes that theory.

But credit (mortgages) was very limited back in the 60's, and that prevented HPI

Edited by Casual Observer

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People on here like to think they are fantastic economists who know better than the professionals, but I just don't buy that.

Professional economists. Eeeeeeek !!!

Even Nobel Prize winning economists sometimes find their theories discredited after a few decades. Unlike physics or chemistry, economics is not a true science. I would say it's the modern day equivalent of alchemy.

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Jeez, agreement from bulls and bears alike ........ the reasons that prices are this high is because they are 'affordable' for the majority of people in the country.

Now, I feel sorry for those people who find these prices unaffordable, but that doesn't mean they will come down. The law of markets, unfortunately tends to be the law of the jungle.

I think people just need to be realistic, about what will cause house prices to crash - but also be realistic that they might still be unaffordable if one's own economic position suffers due to unemployment or much higher IRs.

Its a tough position, when you actaully come to realise that the mid 90's was the absolutely perfect time to buy, and may well not be repeated for a generation :(:(

If you missed the boat, then you may be a very long time waiting for the next one - it isn't imminent in my humble opinion.

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Jeez, agreement from bulls and bears alike ........ the reasons that prices are this high is because they are 'affordable' for the majority of people in the country.

How do you reason this?

How do you know what people's personal spending requirements are?

Not everyone has partaken in a transaction during this boom. If the majority of people had taken part, this would prove your assertion correct. So, I can't see you how can draw any solid conclusions about affordability.

Prices are set by those transactions that take place only. Not by the idle majority [ loads of people I know HAVEN'T moved house for 10 yrs+ ] , which includes those advertising For Sale, yet fail to actually sell.

Edited by megaflop

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If you missed the boat, then you may be a very long time waiting for the next one - it isn't imminent in my humble opinion.

The problem that I've not seen bulls tackle yet is that if there is a boat that has been missed by pretty much an entire generation (and therefore those that follow, until the grim reaper does his stuff, but unless you're clever or deceitful, the chancellor will be a major recipient), provision will have to be made to ensure that these folks have a roof over their heads for their 'retirement'.

It's not enough to say prices will stagnate, or prices will only go up, without looking at the social consequences which are immense. If the redistribution doesn't happen through economic cycles (as has always been the case), then it will happen through government intervention. But it will happen. Politically and economically, such gross inequalities are not sustainable. And would you want to live in a country where they were?

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There is also a psychological effect as well. People are willing to buy something they can afford that they know is overpriced providing its value will increase with time. Only when it reaches a point where the likelihood of significant price rises is minimal will they become reluctant to buy.

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A combination of many factors:

1. Low interest rates.

2. Banks being very generous when giving credit.

3. BTL mortgages.

4. The idea that anyone can make a mint from BTL.

5. High immigration.

1. Not true, it is real rates that matter.

2. Credit constraints argument debunked by Farlow (in second paper?), it doesn't hold either.

3 & 4. You are actually arguing for a bubble here.

5. Nonsense again! Certainly goes nowhere near explaining a doubling in prices over the last 5 years.

Whatever argument you give, it always boils down to speculative bubble.

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Further to my above post, I think IMUp was referring to monthly payments.

However, with a doubly-priced house, this doubles the amount of time to pay back the mortgage. (Ok, bear with me).

So for that "second half" of the period, you're STILL paying mortgage money! With a "singly-priced" house, the mortgage would have been cleared, leaving this money available for purchase of cars, holidays, home improvements, home extensions, clothes, luxuries, entertainment.... whatever.

These will all die a death if these prices RELATIVE TO SALARIES are sustained in some way.

So essentially, any Briton running his own business that serves the British consumer will be praying for massive wage inflation from now on. Or a house price crash (before too many people buy in).

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Further to my above post, I think IMUp was referring to monthly payments.

However, with a doubly-priced house, this doubles the amount of time to pay back the mortgage. (Ok, bear with me).

So for that "second half" of the period, you're STILL paying mortgage money! With a "singly-priced" house, the mortgage would have been cleared, leaving this money available for purchase of cars, holidays, home improvements, home extensions, clothes, luxuries, entertainment.... whatever.

These will all die a death if these prices RELATIVE TO SALARIES are sustained in some way.

So essentially, any Briton running his own business that serves the British consumer will be praying for massive wage inflation from now on. Or a house price crash (before too many people buy in).

Yes, you are right, those people taking on large mortgages are going to find it tough 15 years down the line when they might expect things to get easier, if wage inflation doesn't take away their problem.

The problem gets worse each year prices stay high, as even more people become burdened. The issue is that its all out in the future, say 10 - 15 years or more down the line. As such no one is thinking about it.

So if prices stay high and IR and inflation stay low, at some point way off into the future there is a long slow grinding down process of prices/economic growth etc and we move away from a consumption led economy.

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1. Not true, it is real rates that matter.

2. Credit constraints argument debunked by Farlow (in second paper?), it doesn't hold either.

3 & 4. You are actually arguing for a bubble here.

5. Nonsense again! Certainly goes nowhere near explaining a doubling in prices over the last 5 years.

Whatever argument you give, it always boils down to speculative bubble.

I said it is a combination of many factors. Not just one thing on its own. Most real world systems are functions of several variables.

There certainly is a speculative bubble but the crux of the matter is why, and what has encouraged a massive injection of money into property. Money doesn't just jump into something on its own accord.

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Apart from reasons all ready given. In recent years IMO since the endowment scandal, dot com con, and general stockmarket falls, some people have tended to transfer their cash into property for security....The future?Who knows?...Maybe the tables may turn ;)

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When he started researching the housing market Shiller says he was dumbfounded that no one had ever looked at the trend in U.S. residential real estate prices over any extended period of time. So he meticulously constructed his own.

Which led him to a rather startling conclusion: residential real estate has not been the wonderful investment most people believe it to be.

In fact, except for two periods — the early 1940s and the late 1990s — when adjusted for inflation, home prices in this country "have been mostly flat or declining."

This trend holds true even in what Shiller calls the "glamour cities" such as Los Angeles — where you hear of recent double-digit price increases. That's because while these areas get a lot of publicity when real estate prices skyrocket, they also tend to experience periods of significant price declines (which get less media coverage). As a result, the average inflation-adjusted price increase in Los Angeles real estate since 1980 isn’t much higher than that seen in Milwaukee.

Huh?! How can this be possible? We all know people — our parents or grandparents, perhaps — who bought their house for $30,000 and sold it for, say, more than $80,000 thirty years later.

Do the math. This works out to an annual return of about 3.5 percent — the average rate of inflation for the 20th century. Sure gramps got more for it than he paid, but all he earned was the inflation rate. When you factor that out, what he got back was his initial investment.

And a place for his family to live, which is the main reason you should be buying a home, according to Shiller. Speculating on real estate, hoping to get out at the right time so you can make a killing can get you into trouble. Because, just like the tech stock phenomenon, the real estate bubble is going to end and it could be ugly.

Just as he doesn’t give low interest rates credit for sparking the housing frenzy, Shiller doesn’t think higher rates will end it, at least not directly. In his opinion, talk starts financial bubbles and talk — the negative kind — ends them. "People change their minds. It’s like the stock market boom. There was lots of talk about the Internet bubble. That led to a decline in Internet stocks and started a contagion."

The tremendous volume of talk about the real estate bubble suggests to Shiller that "we could be coming to an end." In fact, prices are showing signs of cooling in some formerly hot markets such as Boston and San Diego as homes take longer to sell.

When asked if people should be buying residential real estate right now Shiller cautiously replies, "Not if you don’t need a place to live." He points out there are advantages to owning a home, provided, he adds, you don’t "overreach and can afford what you buy. Owning your home means you don’t have to worry about the rent going up if you’ve got a fixed-rate mortgage," he says.

The point is if you’re counting on real estate to be your ticket to a rich retirement, Shiller’s research suggests you shouldn’t bet on it. He expects that "home prices are going to be pretty stable over the next 100 years." They’ll increase at a rate similar to or just slightly above inflation. He predicts, "A hundred years from now in San Diego you’ll see glamorous high rises with ocean views [and they’ll be cheap]" in terms of what a dollar will buy at that point.

"The returns on real estate over the long term will not be like the stock market," says Shiller. "People don’t understand this." While he fully endorses owning some real estate as part of a diversified portfolio, he calls buying a second home a "risky investment" right now.

Whether you live in one of the "hot" housing boom areas or not, the most important issue is not whether or when the bubble will burst, but what the "end" will it look like. Shiller confesses he has no idea. He says a lot depends on the other factors or "symptoms" in the mix.

In the extreme scenario, buyers start to default on adjustable-rate mortgages and trigger a financial crisis in the banking sector. Real estate prices nosedive as properties are abandoned. If this is compounded by significantly higher oil prices, "it could change the psychology," says Shiller. "Consumer confidence plummets and people pull back on spending." This causes a downward economic spiral and leads to recession.

In the "soft landing" version, real estate prices simply remain flat for years, much as they did after the boom in the 1970s, until they’re back in line with inflation. "This is what people are counting on happening," says Shiller. He considers this outcome unlikely "because the signs of a bubble are stronger."

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I agree with most of the posts above, and see it as a broadly equal split between the low-IR mechanism (people spend a fixed and remarkably constant proportion of income on housing, hence prices vary roughly inversely with IRs) and a bubble (an affordability stretch, current house value reflects imagined future gains). The bubble part should now evaporate, and average prices relative to earnings will sink back down to that consistent with the historical repayment-earnings ratio. However, due to current situation being only part bubble this fall may not be as large as some might think, but still quite significant though!

Edited by spline

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Its pretty simple, its all to do with affordability.

With low interest rates or rapidly rising wages, then houses become more affordable - but momentum takes time to build in the housing market, years in fact. This being on the upside and downside of the cycle.

At the moment, IRs are low - and prices have being playing catch up for the last 5 years. In the mid 90s, house prices were massively undervalued - hence once the momentum got going, they shot up strongly to where we are now.

We currently at at the point of rough equilibrium, where current prices are affordable, fully supported by the low IRs and wealth passing down through the generations. This is why the BoE state that if we are truly in a 'low interest' environment and we have reverted back to the trend of everything before 1970, then prices are completely in line with fundamentals.

So in other words, the 30 years period 1970-200 was the odd ball, not where we are now.

The 90's crash was caused by high interest rates and a 2 year economic depression.

So the question is - where is the re-run of those circumstances, that will cause a house price crash ? ........ there isn't one on the horizon. People on here like to think they are fantastic economists who know better than the professionals, but I just don't buy that.

The outlook is economically stable and IRs will stay low - these two simple factors tell me that house prices at these levels are here to stay. I don't think prices will go much higher because we have reached the point at which people can't afford more, but that doesn't mean prices will automatically drop.

People on here are coming up with their pet theories to explain why IRs are set to rocket and none of them stand up to scrutiny. Hence I'll stand by my belief, prices will stary high for a while to come, until IRs truly start going upwards and substantially.

I think there is quite a high degree of agreement with the bear case in your post. At least two inportant points are shared:

1. There is a house price cycle, with an upside and a downside.

2. We are roughly at the point of equilibrium, people cannot afford moreand there is not much prospect of big rises in the future.

The key pont of difference judgement of the economic prospect. Can we be so complacent about that? Huge levels of debt in the US and UK economies. Huge expansion of the money supply. Declining profitablity. Big imbalances as new low cost producers come into the world market etc. Looming pensions crises. Etc etc...There are many economists and investors who think this is not sustainable - Warren Buffet and George Soros to mention just two. As the Nationwide put it earlier this week, the risks in the economy are all on the downside...

So, if you have a choice, why buy a house at this point?

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If you missed the boat, then you may be a very long time waiting for the next one - it isn't imminent in my humble opinion.

But that bit doesn't add up - if too many people have "missed the boat", then there is unsufficient market demand, and prices will fall.

IMO, prices will stagnate, and the number of buyers will gradually increase, as wages rise (albeit slowly)

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There certainly is a speculative bubble but the crux of the matter is why, and what has encouraged a massive injection of money into property. Money doesn't just jump into something on its own accord.

I disagree with you on one point, I don't think there is a speculative bubble.

Prices are where there are based on sound fundamentals about the limits of affordability i.e. peoples monthly repayments.

A speculative bubble is like the dot.com boom, where asset prices were not based on fundamentals at all. Suddenly the whole thing imploded when people realised they weren't going to make a return on there capital.

With property, investors can still make a return i.e. rental yield on a property still seems to be about 5%. This together with the monthly mortgage repayments, suggests to me that current prices are supported by fundamentals, but prices cannot rise much further - only in line with wages inflation at best.

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But that bit doesn't add up - if too many people have "missed the boat", then there is unsufficient market demand, and prices will fall.

IMO, prices will stagnate, and the number of buyers will gradually increase, as wages rise (albeit slowly)

What I meant was, that people missed the boat in terms of the window of opportunity to buy cheaply, which was mid 90's. It might be a long time before the opportunity to buy cheaply comes around again. In the meantime people will just have to bite the bullet and buy at higher prices.

I agree completely that prices will stagnate, I also came to this conclusion a while back.

Given wages are rising at 3% or so, then I think this is the best that we could expect in terms of price rises, but what it does mean is that you are unlikely to become more disadvantaged by waiting........ and by waiting you have the chance that something comes along to unsettle the current equilibrium, which might cuase IRs to go up significantly.

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Quote I'm up North

'prices cannot rise much further - only in line with wages inflation at best.'

Completely agree with you

However there is also a significant chance of falls if Oil hits $100 dollars per barrel, IRs increase in line with USA, Labour increase taxes , or unemployment increases.

Any or all of the above may have some impact on property.... and it may not be upwards....

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  • 334 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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