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RichM

My Own Thoughts...

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This was originally posted on hpc.co.uk, but also on firstrung.co.uk (http://firstrung.co.uk/articles.asp?pageid=NEWS&articlekey=1220&cat=44-0-0). Incredibly when I typed in " 'housing market' psychology" it came out fifth!

Why This Crash Will Be Truly Horrific - P S Y C H O L O G Y, The view of an old hand

Readers contribution:

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

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

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

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

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

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

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

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

Quite apocalyptic really. It does sort of assume that we will a clear turning point as well, which some would argue will never happen...

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Quite apocalyptic really. It does sort of assume that we will a clear turning point as well, which some would argue will never happen...

hints of the Old Testament there, old bean!

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hints of the Old Testament there, old bean!

Possibly!

The OT does regularly come back to the "7 years of plenty, 7 years of famine" line of thought.

I am sure with our new-fangled technology and wisdom, we'll just have years and years of plenty... ;)

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Having read a lot of your other posts, RichM, and been amused, and having read the Farlow articles (they're great), I am a little bit confused what you're actually saying here.

I think you are right that it will be difficult to identify an actual 'trigger'. Rather a whole sequence of mini-triggers will combine to make residential property buying less attractive. Once prices stabilise or start to fall then there will be fewer newcomers (FTBs and BTL entrants) and people wanting to 'move up the ladder' will also hold off.

The virtuous circle of rising prices will be replaced by falling prices until people see property as good value again.

I think that even the least economically astute player in the market will realise when buying is a good move or not.

It feels to me that we are already at the point at which the market has stabilised (recent data showing rises about equivalent to putting your money in the bank).

Yet, the figures that are most frequently published are the national ones. Assuming that the quoted average (e.g. Nationwide this month at 0.1% in May 2006) means that as many areas will be seeing falls as rises. In other words, there are people seeing and experiencing falls in their neighbourhoods right now.

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Hi RW,

My line would probably be "when it comes it will be really bad, there's no grey area, no middle ground, no 'correction', it will be boom or crash".

It seems that people are still selling properties, sometimes at ludicrous prices. People haven't had their fill of debt, not yet anyway. Despite the IR moves and the stall of the market in late 2004, the buyers have come back in sufficient numbers to keep the market moving upwards.

In the above I just wanted to underline that psychology is all important, and that the madness we've seen over the years will be just as prevalent when things turn.

The present situation is boringly predictable, there's just nothing left to do but wait for it to unravel. Oh, and sell up if you haven't already.

Edited by RichM

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My line would probably be "when it comes it will be really bad, there's no grey area, no middle ground, no 'correction', it will be boom or crash".

...

The present situation is boringly predictable, there's just nothing left to do but wait for it to unravel. Oh, and sell up if you haven't already.

RichM,

Have you noticed how quickly the rhetoric is changing in the US?

On Ben Jones' blog today there is a thread referencing the NAR's David Lareah basically begging Ben Bernanke not to raise rates again because of the possible impact on major areas of the US housing market. The same guy was bragging about the robustness of the self same market less than a month ago.

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I think the mistake you make is to think people, the majority that is, buy property for any other reason than just wanting somewhere to live. When I bought, earlier this year, the word investment just wasnt an issue, the words that were important were family, home, stability. Im locked into a nice low interest mortgage so I know that place is mine at a nicely affordable rate (just over 20% monthly expenditure).

I know that my kids have a room each, access to schools, a garden, and I have access to job opportunities. Really, why would I care if the prices go up or down, I make a living from my day job, property investment just inst a consideration. What is important is that I have a roof over my head. If you think of bricks and morter as merely an investment, an opportunity to make money then fine, and I know people do. But most of us, as hard for this for you to believe as it may be, are just interested in buying homes and providing a stable environment for our little Timmys to grow up in. My retirment is handled by a pension scheme, and tbh many dont even think about retirment.

The idea that people will uproot their families for a few bucks is kinda out there imo, sure the single guy luxury flat market will prove volatile and ive no doubt the market will drop out of those, but there is always going to be a shortage of good family housing, and its one area that will only move slowly, because, as you say, there is strong psycology operating here, the psycology that insists parent nest and provide. If you cant relate to that, I suggest that you dont live with a woman, the idea of selling up the missus's family home for a quick profit - I can hear the words echoing now 'over my dead body'.

I look forward to seeing what happens, either way I cant lose - the prices fall, great it pushes bigger houses into my reach should we decide to have a bigger family, and if prices carry on up, well I can stay put, no probs, and when I come to emigrate in my retirement I'll cash in :). Im alright Jack, and so are the rest of us ;)!.

Edited by Orbital

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Im locked into a nice low interest mortgage so I know that place is mine at a nicely affordable rate (just over 20% monthly expenditure).

I'm a total newbie so please bear with me.

I thought that mortgages had a fixed rate for a short duration (e.g: 2 years), and that after that it was variable.

How can you be "locked" in a low interest mortgage? Couldn't it change dramatically in 2 years time?

Isi

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I'm a total newbie so please bear with me.

I thought that mortgages had a fixed rate for a short duration (e.g: 2 years), and that after that it was variable.

How can you be "locked" in a low interest mortgage? Couldn't it change dramatically in 2 years time?

Isi

You could get fixed rate mortgages for 10 yeas I believe, but obviously they wouldn't want to offer this sort of deal to any tom dick or harry, only rock-solid bets, e.g. those with very small mortgages compared to the equity they have.

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Guest donall

I'm reading a book at the minute called "Market Panic" by Stephen Vines.

I thought that it would make interesting reading. And it certainly does.

Basically it says that if there is a change in an asset (e.g. a poor coffee bean barvest, change in interest rates, technological change) this changes the underlying value of an investment. Prices rise as people identify this change and the boom is unleashed. Then euphoria takes hold ('overtrading'), people become envious of their friends and relatives who are making loads on Starbuck's shares, Bulgarian villas or DotCom something. People who had previously never about (buying stocks) suddenly start to enter the market.

When the boom news moves from the property/business section to the front pages it's a danger sign.

At this point the market in inundated with inexperienced buyers (FTBers, BTLers) driven by the greed of repeating past performance or driven by the fear of missing out on the biggest thing ever.

Their very presence pushes up demand and leads to the opening of new equity issues (e.g. derivatives, or luxery apartments in Vladivostok)

At this point the price is detached from the underlying assets that they are supposed to represent (e.g. my friend has a BTL with a rental yield of 3.5% his mortgage is at ~5%, but thinks he's making the right move)

Savvy investors move out of this asset class - newer players are unsure of what to do and tend to stay put but the outward trend continues putting a brake to rapid upward movements of prices (sounds like now)

Next thing is panic - prices reduce, new supply comes online which isn't wanted (like 1 bed exec. flats)

Prices continue to fall in real terms, people are emotionally adverse.

When prices are sufficiently low enough people begin to see the value and begin to move back in again.

That is basically what he says - the book is mainly about stocks and shares but the principle is the same.

The biggest difference is perhaps that property is illiquid and is harder to get or get rid of. Shares can be traded quickly and cheaply - houses need months to sell and the transaction costs are significant.

That's more or less it. Let me know if you agree/disagree with this. I think that the DotCom boom and our current HPB are very similar and are connected to eachother.

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That's more or less it. Let me know if you agree/disagree with this. I think that the DotCom boom and our current HPB are very similar and are connected to eachother.

Yes, your bang on. A picture is a thousand words:

00a25wh.jpg

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You could get fixed rate mortgages for 10 yeas I believe, but obviously they wouldn't want to offer this sort of deal to any tom dick or harry, only rock-solid bets, e.g. those with very small mortgages compared to the equity they have.

I see. Well that's why for Orbital things are different then. Most of people wouldn't be able to get this kind of mortgage, so even investing in a house to live in it could end up being disastrous if the mortgage rate suddenly increases after a house price crash I suppose.

Thanks for the info RichM,

Isi

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I'm reading a book at the minute called "Market Panic" by Stephen Vines.

I thought that it would make interesting reading. And it certainly does.

Basically it says that if there is a change in an asset (e.g. a poor coffee bean barvest, change in interest rates, technological change) this changes the underlying value of an investment. Prices rise as people identify this change and the boom is unleashed. Then euphoria takes hold ('overtrading'), people become envious of their friends and relatives who are making loads on Starbuck's shares, Bulgarian villas or DotCom something. People who had previously never about (buying stocks) suddenly start to enter the market.

When the boom news moves from the property/business section to the front pages it's a danger sign.

At this point the market in inundated with inexperienced buyers (FTBers, BTLers) driven by the greed of repeating past performance or driven by the fear of missing out on the biggest thing ever.

Their very presence pushes up demand and leads to the opening of new equity issues (e.g. derivatives, or luxery apartments in Vladivostok)

At this point the price is detached from the underlying assets that they are supposed to represent (e.g. my friend has a BTL with a rental yield of 3.5% his mortgage is at ~5%, but thinks he's making the right move)

Savvy investors move out of this asset class - newer players are unsure of what to do and tend to stay put but the outward trend continues putting a brake to rapid upward movements of prices (sounds like now)

Next thing is panic - prices reduce, new supply comes online which isn't wanted (like 1 bed exec. flats)

Prices continue to fall in real terms, people are emotionally adverse.

When prices are sufficiently low enough people begin to see the value and begin to move back in again.

That is basically what he says - the book is mainly about stocks and shares but the principle is the same.

The biggest difference is perhaps that property is illiquid and is harder to get or get rid of. Shares can be traded quickly and cheaply - houses need months to sell and the transaction costs are significant.

That's more or less it. Let me know if you agree/disagree with this. I think that the DotCom boom and our current HPB are very similar and are connected to eachother.

Totally 100% agree, with the additional factor that houses, unlike shares, are invariably bought with loans and the effect of the gearing gains makes the tonic even more intoxicating and the hangover even worse!

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I think the mistake you make is to think people, the majority that is, buy property for any other reason than just wanting somewhere to live. When I bought, earlier this year, the word investment just wasnt an issue, the words that were important were family, home, stability.

I'm with you Orb, almost. But I cant bring myself to part with my deposit.

The house it could buy just dosent seem "worth" it to me.

What worries me is that everyone says the same, my parents who last bought in the 60's, my in-laws 80's sisters 90's, even the people we might buy off, 50's?

And although it pays the rent my deposit is surely being eaten by inflation.

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In many ways the housing market does resemble bubbles of the past. The .com bubble springs most immediately to mind with inexperienced investors entering the market towards the end and driving prices higher but as others have pointed out there are some differences in that there is an underlying need for houses as accommodation whether bought or rented. I AM NOT SAYING "ITS DIFFERENT THIS TIME" but noone 'needs' .com shares, tulips or ostrich eggs (remember those?).

Separating the genuine need for houses as homes to raise a family and the speculation of the BTL is very difficult.

If IR's rise a few more times i expect the BTL's to exit the market either for better returns elsewhere or by force, and once prices go south i expect it could turn into a stampede.

The crash will however be limited due to underlying need for accomodation.

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But everyone needs more money, it is the underlying effect in a debt based economy. People in the UK aren't fixated by property because they see it as a place to live, but because it is an easy way to make more money. If I was selling £10 notes for £5, how much demand do you think there would be?

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Orbital,

I think the mistake you make is to think people, the majority that is, buy property for any other reason than just wanting somewhere to live.
What is important is that I have a roof over my head.
But most of us, as hard for this for you to believe as it may be, are just interested in buying homes and providing a stable environment for our little Timmys to grow up in.

I agree and would categorise my self as such a person. However, I'm left wondering if things were any different in the late eighties. Did the need for a place to live and call home stop the crash back then? Why not? What has changed?

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"I agree and would categorise my self as such a person. However, I'm left wondering if things were any different in the late eighties. Did the need for a place to live and call home stop the crash back then? Why not? What has changed?"

In my opinion there are a great deal of similarities between this market and the eighties. Home ownership in this country runs at about 90% and has done for many years so it could be argued that the actual market for 'needing a place to live' is about 10%. Market demand today, as in the eighties, has been driven not by the 10% that need somewhere to live but by a herd mentality that has said:

i) Renting is dead money (when clearly, as other posts have shown it ain't necessarily so)

ii) If I don't buy now I never will be able to afford it

iii) BTL can make you rich overnight or, at the very least is your new pension plan

iv) I can become a part time property developer

v) I can use the equity in my HOME to finance my new car, property abroad, boob job, whatever

vi) The government won't let prices crash (how the government is going to stop a market crash is beyond me)

vii) Property prices never fall

Like the 80's as long as there are banks willing to lend the money this continues but as soon as the availability of cash dries up (as it has done now and did so back in the late 80's though for different reasons) and mortgages can't be had the herd can no longer function and the demand falls back resulting in a re-adjustment of prices.

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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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