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Nominal Vs Real Falls.....

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Seems a lot of folks (to quote GWB :) ) are getting a bit bullish of late and expect little in the way of nominal falls in house prices.

<VIEWPOINT>

I can understand the argument that in the past most housing crashes have mainly been falls caused by inflation (real falls) as opposed to actual lower house prices (nominal falls).

What I can't understand is where this inflation will come from.

My view is that the only inflation relevant to house purchase (with a mortgage) is wage inflation.

And even then it is only wage inflation that results in higher disposable income (ie not taxed away or spent on other goods with higher inflation) that is relevant.

So if you consider that only inflation of disposable income actually relates to erosion of the mortgage debt then you need to consider how disposable income is on average increasing or decreasing.

Consider:

  1. What wage inflation is doing!
  2. What inflation of neccessities (goods you have to buy) are doing!
  3. Taxes paid on income are doing!

IMHO wage inflation is being constrained by a number of factors that will stop it from rising. Globalisation, manipulated CPI inflation stats and already high (in a global sense) wages all lead to supressed wage inflation for most.

I'd assume that most people will see wage settlements of no more than 2-3% for a lot of years.... if they keep their job.

Many people made unemployed will likely end up back in a job on the same/lower earnings than before, effectively wage stagnation/deflation.

So what about inflation in neccessities. Seems to be on the increase, at a far higher rate of inflation than wages. Gas prices, electricity prices, petrol prices, food prices..... all going up at a far higher rate than wage inflation. OK, so MP3 players are getting cheaper... and... I don't need an MP3 payer to eat or heat my home :angry:

And taxes. Anybody betting on lower taxation in the next few years? GB has borrowed massively (and delviered little, but thats another rant) during the most prosperous years this country is likely to have for a while, how exactly can taxes do anything other than rise (by stealth or direct)?

So if we assume wage inflation will be low (as GB has expressed he wants it to stay) and inflation in neccessary goods (heating, transport, food etc) will be higher than wage inflation (very likely to continue IMHO) then disposable income will (on average) fall.

Add on static tax bands (not rising with inflation) and possible higher direct and stealth taxes and disposable income looks like it will fall further.

Disposable income matters because it is what people use to pay their mortgage. I could have my pay doubled tomorrow, but if it is all swallowed up by increased taxation and increases in costs of neccessities then my pay rise has had no real effect.

The only thing that could counter the effect of falling disposable income is further loosening of credit, but that is subject to relying on a certain amount of stupidity... ie. The general public must be stupid enough to be willing to commit an ever rising proportion of their disposable income into their housing costs.

And it looks like credit tightening is on the horizon, not loosening.

It is different this time.... we do not have the possibility of wage inflation to bail out over indebted consumers.

</VIEWPOINT>

Now tear it to shreds if you like.

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I guess your model doesn't include promotions in exchange for higher pay rises?

Didn't think so.

Promotions eh?

Well, lets take that into account then.

If you look at the past there has always been promotions, and wage increases throughout peoples careers. But this is still subject to limits in order for companies to remain competitive.

Most people hit a point in their career where they peak in earnings capacity.

That has never changed.

What is different is that companies are beginning to tighten up on wages (generally - I admit not all companies).

As most large employers are required to deliver adequate returns for shareholders, the wages of the workers become (often) a secondary consideration.

Many large companies have used redundancies to reduce OPEX in order to try and reverse a decline in profits/dividends... this will probably continue.

If the economy starts to falter (and it is faltering now - see retail) then it becomes a downward spiral.

If a company is seeing poor results then watch how fast they cut staff. And companies which are seeing declining profits/dividends will also avoid paying higher wages/promoting staff whenever possible.

Unemployment is currenty climbing, and the unemployment rate will accelerate IMHO. This will probably start in retail (already started) and work its way through the economy.

When you have higher unemployment then you have a pool of people willing to accept wages less than they did before for the same job (else they end up long term unemployed). This effectively supresses wage demands (either promoted or non-promoted) as there is a pool of labour that can be employed for less.

If there are 1000 unemployed engineers knocking about and your existing engineers ask for a 10% pay rise, or a promotion (with higher wages) then why bother paying when there are 1000 people knocking about who would do the same job for less??

TTRTR, what you are missing is that the economy is in a very poor state.

Can you really say that you do not expect unemployment to climb?

Can you really say that you expect higher than inflation (CPI) wage increases (on average)?

Can you really say that you expect people will not be paying higher taxes?

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Read it & weep sunshine:

http://business.timesonline.co.uk/article/...2103558,00.html

Shifting jobs for higher pay also hides the boost to a person's income as it's not measured since their 1st job was finalised & the 2nd was a fresh start (usually at a higher salary). So no X% income rise to measure officially, but X% raised in reality.

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Read it & weep sunshine:

That's a bit nasty. We all know wages have not done 125% over the past five years.

Let's not get pretending that things are better than they are.

:P:D

I expect an inflationary period, followed by a mass busting of people, followed by a deflationary recession because of the absence of significant wage inflation because of outsourcing.

EDIT: 125% is my figure for my area. Feel free to alter as necessary.

Edited by megaflop

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Read it & weep sunshine:

http://business.timesonline.co.uk/article/...2103558,00.html

Shifting jobs for higher pay also hides the boost to a person's income as it's not measured since their 1st job was finalised & the 2nd was a fresh start (usually at a higher salary). So no X% income rise to measure officially, but X% raised in reality.

I've no need to weep.

And that article relates to 327,600 of city professional types in London.

What is that as a %age of the working population?

And remind me what happens when the stock market isn't looking so healthy?

Oh, and I'd also love you to explain how perpetual growth works?

Ah... perpetual growth dosen't work does it. So sooner or later there must be a fall after significant rises (unless you're GB I suppose, and then you just don't measure the fall :lol::P ).

Answer these questions:

Is unemplyment increasing?

Are there actually far more unemplyed than on the Government stats?

Also worth noting:

If this country stays hell-bent on spending ever increasing propotions of its disposable income solely on housing, and does not invest in its future then sooner or later all that will be left is houses... but no jobs and no pensions.

There is a pensions crisis. How will that be addressed if everyone has to pay most of their disposable income to provide a roof over their heads?

And don't be too smug. If this situation continued for many more years then you could end up with a situation where the 'have nots' start taking from the 'haves'..... why buy when you can squat. Desperate people do desperate things. If you plunge a massive proportion of the populace into poverty then they have little incentive not to steal/rob/riot/revolt..... if unabated HPI continued then it can only be a question of WHEN, not IF, this country falls apart.

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Seems a lot of folks (to quote GWB :) ) are getting a bit bullish of late and expect little in the way of nominal falls in house prices.

<VIEWPOINT>

I can understand the argument that in the past most housing crashes have mainly been falls caused by inflation (real falls) as opposed to actual lower house prices (nominal falls).

What I can't understand is where this inflation will come from.

My view is that the only inflation relevant to house purchase (with a mortgage) is wage inflation.

And even then it is only wage inflation that results in higher disposable income (ie not taxed away or spent on other goods with higher inflation) that is relevant.

So if you consider that only inflation of disposable income actually relates to erosion of the mortgage debt then you need to consider how disposable income is on average increasing or decreasing.

Consider:

  1. What wage inflation is doing!

  2. What inflation of neccessities (goods you have to buy) are doing!

  3. Taxes paid on income are doing!

IMHO wage inflation is being constrained by a number of factors that will stop it from rising. Globalisation, manipulated CPI inflation stats and already high (in a global sense) wages all lead to supressed wage inflation for most.

I'd assume that most people will see wage settlements of no more than 2-3% for a lot of years.... if they keep their job.

Many people made unemployed will likely end up back in a job on the same/lower earnings than before, effectively wage stagnation/deflation.

So what about inflation in neccessities. Seems to be on the increase, at a far higher rate of inflation than wages. Gas prices, electricity prices, petrol prices, food prices..... all going up at a far higher rate than wage inflation. OK, so MP3 players are getting cheaper... and... I don't need an MP3 payer to eat or heat my home :angry:

And taxes. Anybody betting on lower taxation in the next few years? GB has borrowed massively (and delviered little, but thats another rant) during the most prosperous years this country is likely to have for a while, how exactly can taxes do anything other than rise (by stealth or direct)?

So if we assume wage inflation will be low (as GB has expressed he wants it to stay) and inflation in neccessary goods (heating, transport, food etc) will be higher than wage inflation (very likely to continue IMHO) then disposable income will (on average) fall.

Add on static tax bands (not rising with inflation) and possible higher direct and stealth taxes and disposable income looks like it will fall further.

Disposable income matters because it is what people use to pay their mortgage. I could have my pay doubled tomorrow, but if it is all swallowed up by increased taxation and increases in costs of neccessities then my pay rise has had no real effect.

The only thing that could counter the effect of falling disposable income is further loosening of credit, but that is subject to relying on a certain amount of stupidity... ie. The general public must be stupid enough to be willing to commit an ever rising proportion of their disposable income into their housing costs.

And it looks like credit tightening is on the horizon, not loosening.

It is different this time.... we do not have the possibility of wage inflation to bail out over indebted consumers.

</VIEWPOINT>

Now tear it to shreds if you like.

You have answered your own question here (in terms of the forecast for the next few years)

The inflation targetting monetary policy of the govt will aim to keep inflation under control.

Wage inflation will continue at 2-3% and rates will stay lowish.

So you get stagnation in house prices whilst wages creep up.

You might get some nominal falls in prices but no crash. Where's the trigger?

The only stats I can find on disposable income are for an average of the whole population and this is showing a RISE yoy.

Real disposable income increasing at 4% yoy

Real Household spending increasing at 2% yoy

savings ratio 5% yoy

Mortagage Equity Withdrawal FALLING wrt previoius years.

Why is Real disposable income increasing? Well it's for the average of the population. those with long established mortgages are seeing more of their paypacket each month as their mortgage debt shrinks in comparison to wage increases.

Doesn't sound like a recipie for a crash does it?

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Why is Real disposable income increasing? Well it's for the average of the population. those with long established mortgages are seeing more of their paypacket each month as their mortgage debt shrinks in comparison to wage increases.

Doesn't sound like a recipie for a crash does it?

This might be true for older OOs, but is certainly not true for younger FTBs.

The market will get decided on sales not people sitting in their houses till retirement.

Those exposed to the greatest risk, and most likely to be selling, are younger people.

IMHO younger people move more often (either to another area or within the same area), but older people seem to stay in the family home for decades before downsizing (if moving at all).

And... I don't believe that real disposable income is rising.

Those stats relate to income after income taxes (NET Pay, I believe) but before debt repayments and essential outgoings.

Its the fact that inflation of essential goods is higher than inflation in this disposable income that creates the squeeze.

These stats also won't take into account the massive inflationary costs such as council tax, TV license and gas/electricity bills.

Once you've factored those in then I suspect the disposable income is actually falling.

It all depends on how you define disposable: For me disposable is what I have left after shelter, clothing, heating, transport, food, non-income based taxes etc.

EDIT TO ADD: with the national personal debt levels now at £1.2 Trillion there is ever higher levels of credit interest to be paid too.

Edited by non-FTBer

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This might be true for older OOs, but is certainly not true for younger FTBs.

The market will get decided on sales not people sitting in their houses till retirement.

Those exposed to the greatest risk, and most likely to be selling, are younger people.

IMHO younger people move more often (either to another area or within the same area), but older people seem to stay in the family home for decades before downsizing (if moving at all).

And... I don't believe that real disposable income is rising.

Those stats relate to income after income taxes (NET Pay, I believe) but before debt repayments and essential outgoings.

Its the fact that inflation of essential goods is higher than inflation in this disposable income that creates the squeeze.

These stats also won't take into account the massive inflationary costs such as council tax, TV license and gas/electricity bills.

Once you've factored those in then I suspect the disposable income is actually falling.

It all depends on how you define disposable: For me disposable is what I have left after shelter, clothing, heating, transport, food, non-income based taxes etc.

EDIT TO ADD: with the national personal debt levels now at £1.2 Trillion there is ever higher levels of credit interest to be paid too.

I think Real disposable income is after tax deductions and debt repayments.

Also note that household savings ratio is on the increase. 4.4% last year, 5.5% this year. This doesn't stack up according to your interpretation.

Also remember that the number of council houses is falling as more and more people are buying their own property. Then there is the BTL phenomenon. This has tended to increase the levels of average personal debt in the short term.

If things are going to go tats up then it won't be for a while yet... stagnation is the future IMO.

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One way to frame this argument is to first point out that house prices are much higher now relative to earnings than historically – so what has pushed them up? Is it sustainable (based on fundamentals) or not (a bubble)? The question is really about deciding what fraction of the current peak is a bubble, and *will* deflate, leaving the rest to be decided by interest rates, population, household income, supply response, etc.

The bull position is “no bubble” now, so it all depends on how the fundamentals pan out, the bear position is “100% bubble” so a reversion to historical trend is inevitable over the next couple of years. But we have solid evidence, discussed on this site and in the academic papers recently reviewed on another thread, that any bubble component, or at least any significant one, has only developed since around 2003 and consequently that the rises up to then must be based on fundamentals. The reasons are not difficult to see and are, of course, low interest rates, increases in the net number of households and spending power from dual income households, more inequality in earnings, and a poor supply response to the increased demand. Obviously some of this will reverse if rates go back up but it’s unlikely to collapse otherwise. In contrast, the bubble component, i.e. the extra increase since 2003 *must* collapse – almost by definition.

So the question boils down to “what fraction is explained by a bubble?” This should be quite easy gauge – just look at the price to earnings ratio around 2003 and expect a reversion to that but adjusted for any interest rate changes. That to me looks like a “mini crash” by the standards of this board but still significant and obviously not to be ignored.

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One way to frame this argument is to first point out that house prices are much higher now relative to earnings than historically – so what has pushed them up? Is it sustainable (based on fundamentals) or not (a bubble)? The question is really about deciding what fraction of the current peak is a bubble, and *will* deflate, leaving the rest to be decided by interest rates, population, household income, supply response, etc.

The bull position is “no bubble” now, so it all depends on how the fundamentals pan out, the bear position is “100% bubble” so a reversion to historical trend is inevitable over the next couple of years. But we have solid evidence, discussed on this site and in the academic papers recently reviewed on another thread, that any bubble component, or at least any significant one, has only developed since around 2003 and consequently that the rises up to then must be based on fundamentals. The reasons are not difficult to see and are, of course, low interest rates, increases in the net number of households and spending power from dual income households, more inequality in earnings, and a poor supply response to the increased demand. Obviously some of this will reverse if rates go back up but it’s unlikely to collapse otherwise. In contrast, the bubble component, i.e. the extra increase since 2003 *must* collapse – almost by definition.

So the question boils down to “what fraction is explained by a bubble?” This should be quite easy gauge – just look at the price to earnings ratio around 2003 and expect a reversion to that but adjusted for any interest rate changes. That to me looks like a “mini crash” by the standards of this board but still significant and obviously not to be ignored.

Another way to look at it is if prices crashed overnight by the size of the 'bubble' (20-25%?) then what would happen to prices?

At the peak of the last boom (1989) they would stay there or mabe keep falling (because rates were at 15%)

Today if prices magically fell 20-25% across the board (overnight) then we would have another boom on our hands.

The race to the EAs would be frenetic. (after all, houses are selling now, at today's prices aren't they?)

So how big is the bubble in 2006? i would say a lot less than 25%, more like 15%. A couple more years of stagnation and the bubble will be nearly gone.

Gordon Brown has enough tricks up his sleeve to prop up the economy for at least two more years.

Sorry guys...

Edited by Without_a_Paddle

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So with a price to earnings ratio in 2003 at marginally over 4x and the current peak at, let’s say, 5.6, we can be generous to the bears and call it a 40% bubble (5.6/4); this would deflate over say 6 years in a 29% *real* crash, but is supported by earnings growth at say 3.5% yielding a only 12% *nominal* crash – noteworthy, but clearly somewhat short of an apocalyptic meltdown.

Edited by spline

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I think that the bubble is higher in some areas.

The South West has one of the highest HPER ratios in the country.

I expect two crashes.

A short sharp reversal of the bubble, but this will be sentiment driven and hasn't happened yet... but I still think it will. I expect this to be driven largely by offloading of BTLs and slightly higher IRs.

The second crash will be long and drawn out. Demographics and a long economic recession will probably erode HPs over a long time. I can easily see a situation where HPs are lower in 20-30 years time.

Will I still buy, probably. But only as a home, not an investment.

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Interesting debate - lots of good point without any lunatics (so far...)

However, neither side has accounted for external shocks that may influence the economy.

Remember, for all the talk about the 1980s it was speculation against the pound which compounded the problem and that was not in anyones model.

At a very simple level, agitation in Nigeria, Venezuela, Russia or Iran could cause more problems.

Israeli and Italian elections could spook the market.

In extremis China, India, Japan could have an influence.

As they say, we live in interesting times.

I personally know one factory owner - chemicals since you ask - who is having huge difficulties with rising gas prices. He told me he simply has no "out". If prices continue to rise he'll close the factory.

This could be repeated thousands of times across the country.

I consider people to be blinkered when they declare "BTL yields up" or "the government wont let inflation rise".

The government and BOE have f*/! all influence on these matters.

Getting obsessed with the minutiae of the Halifax index is blinkered in the extreme.

The American debt still remains at record highs, oil and gas supplies are not secured and we operate a nominal currency.

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I think that the bubble is higher in some areas.

I expect two crashes.

A short sharp reversal of the bubble, but this will be sentiment driven and hasn't happened yet... but I still think it will. I expect this to be driven largely by offloading of BTLs and slightly higher IRs.

The second crash will be long and drawn out. Demographics and a long economic recession will probably erode HPs over a long time.

Yes, I agree – the bubble part goes fast on the usual timescales, but then the unwinding of the rest (interest rates, esp.) is likely to be very slow, drawn-out, and uncertain.

Edited by spline

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The second crash will be long and drawn out. Demographics and a long economic recession will probably erode HPs over a long time. I can easily see a situation where HPs are lower in 20-30 years time.

For that to be true the economy would have to be truly sh@gged for a very long time.

Either that or we get WW3.

Or maybe people will catch 'mad builder's flu' where just before they die, they build a house...

Edited by Without_a_Paddle

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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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