Jump to content
House Price Crash Forum
Sign in to follow this  
Yandros

I Hate To Say This, But We Need A Recession For A Hpc

Recommended Posts

There seems to a popular viewpoint here that we're currently sailing in uncharted waters - that houses have never been as out of reach.

I've just done a quick back of envelope calculation, and this is WRONG. In terms of affordability, were actually still slightly short of the peak of the early 90s bubble, and pretty much levelled out.

I don't think sentiment counts for much at all - it's all about affordability. (and yeah, I know I sound like a VI saying that :o )

My nagging feeling is that we need either a recession, or significant IR hikes to kick things off.

BTW, yes I know we're in a low inflation environment now, making the debt burden much greater in the long run, but to Joe Average deciding whether to take out their first mortage, that means nothing.

Share this post


Link to post
Share on other sites

You are spot on here.

The sum to most people is simple.

Here I have a gorgeous blonde, I am fed up with knocking her off in my car each night and catching the odd moment at her parents house, even though I can wipe myself off on the curtains while she goes to the bathroom.

How much would it cost if we bought a property, and we could then have some peace and quiet, sex on tap whenever I want it.

We both earn average wage of 25K each, so thats 3K take home pay. I reckon we can afford to spend 2K on mortgage and live on 1K per month for shopping and bills. She can catch the bus to work, and I will keep my car.

Edited by laurejon

Share this post


Link to post
Share on other sites

There seems to a popular viewpoint here that we're currently sailing in uncharted waters - that houses have never been as out of reach.

I've just done a quick back of envelope calculation, and this is WRONG. In terms of affordability, were actually still slightly short of the peak of the early 90s bubble, and pretty much levelled out.

I don't think sentiment counts for much at all - it's all about affordability. (and yeah, I know I sound like a VI saying that :o )

My nagging feeling is that we need either a recession, or significant IR hikes to kick things off.

BTW, yes I know we're in a low inflation environment now, making the debt burden much greater in the long run, but to Joe Average deciding whether to take out their first mortage, that means nothing.

Only slightly short?

Average house price in 1989 = £62k (Nationwide figures)

Average wage £12k

Interest rates 15%

Take home pay £750pm

Mortgage £790pm

Average house price in 2006 = £158k (Nationwide figures)

Average wage £25k

Interest rates 4.5%

Take home pay £1500pm

Mortgage £880pm

IRs stayed high for three long years during the last crash. It's a lot easier today.

If you have a couple buying with:

Salary 1 £23k

Salary 2 £17k

Deposit £10k

combined take home pay £2450pm

It just looks easier still. If they take advantage of long term fixed rate loans (10yrs 4.7% fixed) then they can afford to save a couple of hundred pounds a month in an ISA fund for a rainy day.

Even if they went for a variable rate, they would be fairly immune to modest interest rate rises. Especially if you factgor in YOY wage inflation.

My nagging feeling is that we need either a recession, or significant IR hikes to kick things off.

You can't completely rule out a HPC but we have a chancellor that wants to be Prime Minister.

He will prop up the economy as long as it takes to get into power. Expect lowish rates and plenty of govt borrowing and public spending for a little while longer...

Share this post


Link to post
Share on other sites

My nagging feeling is that we need either a recession, or significant IR hikes to kick things off.

I have been thinking for many months now that only IR hikes will give us crash cruise speed. But I am still not buying now, even taking into account what appears to be a "stable" economy.

It's my view that some sort of financial crisis is around the corner, probably involving the US principally, and this will have knock on effects.

House prices are not going anywhere and are a very poor investment right now. It's still better to save and wait it out, IMO.

Share this post


Link to post
Share on other sites

I personally think the chance of a recession starting later later this year is pretty high B)

Share this post


Link to post
Share on other sites

Do you really think people are prepared to stretch themselves to 2/3 of their income on a mortgage ?

I'm surprised as everyone I know, who will admit to it anyway has credit card debt too.

My single income comparison was there to show it is not as tough today as it was last time.

Today, a single income person cannot expect to buy an average house as a FTB in most parts of the UK.

(but they could buy a flat or a small terrace, unlike the equivalent 1989 FTBer)

look at the figures for the 2006 couple who are buying.

Unless rates go up significantly (and rapidly) there won't be a crash.

Edited by Without_a_Paddle

Share this post


Link to post
Share on other sites

A stock market boom could kill the housing market. In fact, since 2003 the markets have in many cases been been booming. When will Joe Public realise this? If HPs remain stagnant, and stocks start rocketing, I don't think it'll be long before there's asset-switching. Doesn't take many sellers in an illiquid market to cause a big correction.

Share this post


Link to post
Share on other sites

Sure, so Britains Women are going to allow the husband to sell the family home putting her and the kids on the street so he can invest in the Stock Exchange.

Or Grandpa is gonna put Grandma on the street, so he can dabble in stocks and shares.

Get Real Please.

Share this post


Link to post
Share on other sites

Do you really think people are prepared to stretch themselves to 2/3 of their income on a mortgage ?

I'm surprised as everyone I know, who will admit to it anyway has credit card debt too.

Yes. Because I did it once, along with thousands of other sheep. Actually it was about 50% of income for me.

Don't confuse me with a bull - I'm not saying you *should* do it, merely that you could, and may people are doing that right now.

Share this post


Link to post
Share on other sites

I personally think the chance of a recession starting later later this year is pretty high B)

From personal experience and talking to some of my contacts, I would say we are being hit very hard now in the manufacturing sector and would say that the recession started last year. Whether this keeps on rolling is another matter, maybe there will be some sort of correction to stop us going into full recession but I very much doubt it.

We thought that 2005 was a very bad year for manufacturing , but 2006 its going to be worse .....

Share this post


Link to post
Share on other sites

There seems to a popular viewpoint here that we're currently sailing in uncharted waters - that houses have never been as out of reach.

I've just done a quick back of envelope calculation, and this is WRONG. In terms of affordability, were actually still slightly short of the peak of the early 90s bubble, and pretty much levelled out.

I don't think sentiment counts for much at all - it's all about affordability. (and yeah, I know I sound like a VI saying that :o )

My nagging feeling is that we need either a recession, or significant IR hikes to kick things off.

BTW, yes I know we're in a low inflation environment now, making the debt burden much greater in the long run, but to Joe Average deciding whether to take out their first mortage, that means nothing.

This is completely wrong.

The housing market crashing leads to the recession.

If you look at the UK you will see that the housing market had started to fall well before each recession began.

One of the best international studies of how house-price busts can hurt economies has been done by the International Monetary Fund. Analysing house prices in 14 countries during 1970-2001, it identified 20 examples of “busts”, when real prices fell by almost 30% on average (the fall in nominal prices was smaller). All but one of those housing busts led to a recession, with GDP after three years falling to an average of 8% below its previous growth trend. America was the only country to avoid a boom and bust during that period. This time it looks likely to join the club.

http://www.economist.com/finance/displaySt...tory_id=4079027

Edited by BandWagon

Share this post


Link to post
Share on other sites

If you look at the amount of leverage these days, it is far more worrying. A half point move when rates are 12% meant little back then to either a recent purchaser and even less to someone who has seen inflation erode 25-30% of their debt, i.e. someone who bought three years earlier. Therefore a half a percent move mattered little to a very small highly overstretched sample of the mortgage paying public.

Now a half a percent move is roughly 10% on the mortgage outgo. This is a very nervy occurence for both a recent buyer and anyone else who bought since 2004 in most of the country and 2001 in London and paid top whack as they have experienced no inflation erosion of the mortgage. Add into this, those that bought before then but have substantially MEWed. Add further into the equation a portion of amateur BTLers with more than one property who purchased post 2004 and your sample size of potentially worried homeowners is far far greater than the late 80s.

Buying a house now and stretching affordablity is effectively betting IRs will stay at todays rate or below for a least five years and unemployment will also not increase over the same period. That is a pretty big gamble for what appears a fairly limited upside, in even the most bullish of scenarios.

Share this post


Link to post
Share on other sites

Sure, so Britains Women are going to allow the husband to sell the family home putting her and the kids on the street so he can invest in the Stock Exchange.

Or Grandpa is gonna put Grandma on the street, so he can dabble in stocks and shares.

Get Real Please.

As I said, it only takes a few percent of holders of an asset to sell to cause a sharp correction. Anyone into property as a capital investment (and that might include some BTLers), who sees the stock market zooming, will, I believe, give serious consideration to switching.

Edited by Scipio_Africanus

Share this post


Link to post
Share on other sites

whatever new fangled thing people dabble in with investments be it shares, currency housing etc there is only one certainty.

They all eventually head south and will all eventually head back up again..

this can never be argued for it has always been this way.

Not once has this not happened.

Never.

and bulls argue.. that it is different this time..

yeah right.. this time it won't happen..

I laugh at bulls..

you need to understand money.. and how it works.

Understand money and you become a bear.

simple.. ;)

argue away

Share this post


Link to post
Share on other sites

A stock market boom could kill the housing market. In fact, since 2003 the markets have in many cases been been booming. When will Joe Public realise this? If HPs remain stagnant, and stocks start rocketing, I don't think it'll be long before there's asset-switching. Doesn't take many sellers in an illiquid market to cause a big correction.

I assume you are referring to BTLs getting scared about negative equity and bailing out..

See text below from a prev post:

Many BTLs will not be able to bail out. It's not like taking a shirt back to M&S because you think you can buy it in a future sale cheaper.

They have to go 'void' for several months (at maybe £800pm cost?) whilst they try to sell it.

They have to pay legal fees and selling fees to sell the place.

Plus they have to spend time and money to dolly it up suitable for sale (rather than for a tenant)

They will default on the mortgage (penalties for cancelling it early?)

They have to return the tenants deposit (?)

If they keep the property and hang on they won't have to open their wallets as long as they keep their tenant. Negative equity only hurts if you have to sell. If they lose their tenant, my guess is they will try for another tenant.

Even if they have to lower the rent for a couple of years, this will hit their wallet less hard than all those selling/default fees and voids.

Many BTLs couldn't take the cashflow hit of trying to sell.

I laugh at bulls..

you need to understand money.. and how it works.

Understand money and you become a bear.

simple..

argue away

Apom I'm pretty fed up of your constant patronising comments aimed at either boomers, homeowners or bulls.

If you are such a financial whizz who understands money then why are you not rich?

Edited by Without_a_Paddle

Share this post


Link to post
Share on other sites

This is completely wrong.

The housing market crashing leads to the recession.

If you look at the UK you will see that the housing market had started to fall well before each recession began.

http://www.economist.com/finance/displaySt...tory_id=4079027

But, as I pointed out, if affordability is a key factor, we are not yet back to the levels of ~1990. Are we stilll short of the tipping point? That's why I said *IR hike* or recession. A significant rate rise will easily push us to a level where Mr and Mrs average are truly priced out, and then it's not a matter of sentiment, it's pure mathematics. As you say, we then get a crash, then a recession.

Share this post


Link to post
Share on other sites

Yandros

If prices stay absolutely flat, after a time the 8% or so of post tax income taken out as MEW recently must dry up as there is no E left to W.

Do you think that a 8% fall in net income equivalent to 10-12% fall in gross wages for the whole of the working population would not lead to a recession given 75% of GDP is currently generated from consumer spending.

The dry up in available MEW would have led to the recession which then led to unemployment, mortage defaults, credit tightening and a house price correction.

Share this post


Link to post
Share on other sites

Yandros

If prices stay absolutely flat, after a time the 8% or so of post tax income taken out as MEW recently must dry up as there is no E left to W.

Do you think that a 8% fall in net income equivalent to 10-12% fall in gross wages for the whole of the working population would not lead to a recession given 75% of GDP is currently generated from consumer spending.

The dry up in available MEW would have led to the recession which then led to unemployment, mortage defaults, credit tightening and a house price correction.

Yes, I think it's entirely possible that once the credit dries up, and consumer spending collapses, we're in prime recession territory. You know things are getting bad when there are adverts to release equity on your CAR!!!!

My point is, don't look at house price levels for your trigger, because that's a red herring right now. Look elsewhere - IR increases, personal debt, fuel crisis - whatever.

Talking of debt - one of the key differences between now and "when I was a lad", is the huge millstone of student loans. Many of our recent grads have 15K of debt before they start - I had none, and they're having to start repaying as soon as they start earning.

Share this post


Link to post
Share on other sites

Yandros

If prices stay absolutely flat, after a time the 8% or so of post tax income taken out as MEW recently must dry up as there is no E left to W.

Do you think that a 8% fall in net income equivalent to 10-12% fall in gross wages for the whole of the working population would not lead to a recession given 75% of GDP is currently generated from consumer spending.

The dry up in available MEW would have led to the recession which then led to unemployment, mortage defaults, credit tightening and a house price correction.

pelican

spot on

riser( i think) produces graphs of MEW every quarter.

if you look at the pattern this time it is the same as the last crash.

mew has been dropping like a stone for sevarl quarters

there may be slight upticks buit the drop in mew will take the guts out of our miracle economy.

then they will find that we cant rebuild on the back of the exterminated manufacturing scetor.

Share this post


Link to post
Share on other sites

But, as I pointed out, if affordability is a key factor, we are not yet back to the levels of ~1990. Are we stilll short of the tipping point? That's why I said *IR hike* or recession. A significant rate rise will easily push us to a level where Mr and Mrs average are truly priced out, and then it's not a matter of sentiment, it's pure mathematics. As you say, we then get a crash, then a recession.

Don't forget that the last crash was caused by poor monetary policy by the tories in the mid/late 1980s.

Nigel Lawson's monetary policy of targetting the £ caused a rapidly booming economy as foreign investment poured into the UK. Rates fell down to 8% and Lawson had some tax busting budgets which encouraged consumer spending. Inflation soared into double digits so Lawson hiked rates from 8% to 15% in a few months to stem the inflation. Obviously the housing market nose dived.

Then we joined the ERM which turned out to be a disastrous decision in monetary policy.

The £ was tied to the German DM in 1990 when we had high inflation (10%) and high rates (15%)

The trouble is we joined at the wrong time. Germany had just unified with East Germany which brought HUGE inflationary pressure. Despite pleadings from the UK chancellor, Germany refused to reduce their IRs and this caused our economy to spiral deeper into recession and made the HPC worse. Because we were tied to the ERM we were limited in what we could do to counter the recession.

Eventually in 1992 we had to quit the ERM and the value of the £ plummeted.

So the last crash was caused by poor monetary policy and inflamed by the ERM farce.

Today the £ is free floating and UK monetary policy is inflation targetting and this has lead to sustained low IRs for well over a decade. We are also not handcuffed to the ERM like last time.

We may well hit a recession in the near future, but it won't be as acute as the last one.

Share this post


Link to post
Share on other sites

I agree that the inability to drop rates last time due to the £ being at the bottom of the ERM band prolonged the recession. Most of the damage in the housing market had been done by 1992 however.

However last time interest rates were decided by politicians. This time there is some degree of independance and a set target to meet, the inflation level. The BOE would have to risk their hard earned reputation for stablity in these circumstances.

I think that monetary policy could be constrained should the pound come under pressure due to changes in rate differentials and imported inflation rise, although I concede that this constraint would not be as tight as last time.

Edited by pelican

Share this post


Link to post
Share on other sites

A rough comparison of rate hikes during the last house price peaks:

Date   Rate	   Hiked from	 % increase of repayment mortgage1980	17%	  5.3% in 1977			137%1989	15%	  8% in 1988			   65%2004	4.75%	3.5% in 2003			 14%

Share this post


Link to post
Share on other sites

I agree that the inability to drop rates last time due to the £ being at the bottom of the ERM band prolonged the recession. Most of the damage in the housing market had been done by 1992 however.

However last time interest rates were decided by politicians. This time there is some degree of independance and a set target to meet, the inflation level. The BOE would have to risk their hard earned reputation for stablity in these circumstances.

I think that monetary policy could be constrained should the pound come under pressure due to changes in rate differentials and imported inflation rise, although I concede that this constraint would not be as tight as last time.

pelican

the mpc is not really independent.

gordon brown appoints the 5 lay members and the bank officials will realise that the government will determine their careers.

gb also sets the inflation target and the way it is calculated.

this is why he has excluded housing costs.

if these were really honest politicians and bankers they would target money supply growth rather than a bullsh1t number.

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...
Sign in to follow this  

  • Recently Browsing   0 members

    No registered users viewing this page.

  • 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%



×
×
  • Create New...

Important Information

We have placed cookies on your device to help make this website better. You can adjust your cookie settings, otherwise we'll assume you're okay to continue.