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Tempest

Prolonged Debt Fuelled Hpi - What Are The Long Term Effects?

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Ok, this is not about whether bulls or bears are right. I am asking the question of what are the long term effects on UK growth, GDP, savings, pensions, ability to bear taxes etc etc as a result of this current run of HPI since 1998?

Assume it continues a little bit longer or stagnates but does not fall - rather than previous booms/crashes (as per 73/74 and 87-89) we would not have just a couple of years of huge (over trend HPs) and v high mortgage burden on buyers but perhaps up to 6 or 7 years or more of it.

The number of people taking out mortgages at very high levels which limit their disposable cash many years into the future has an effect on the money available to spend in the economy or fund taxes, savings etc. Bubbles with only a couple of years of people doing this may not have a material effect on the wider population/economy (although they say recession followed the 89-90 crash not pre-empted it) - but 7 years worth of people mortgaged to the hilt would surely mean a big lagging effect years down the line on what those people can spend in the "golden years".

IMO our generations have some of the toughest times ahead in next 20 years as we have to fund a bulging older demographic shift (ie tomorrows pensioners) , healthcare and higher taxes yet are gearing ourselves up to massive levels which will limit our ability to meet those costs.

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We can all guess, based on theories, experience, perhaps a bit of History and for some "gut feel".

Anyone with the real answer, if there is one, is probably keeping quiet and profiting or planning future profits.

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The number of people taking out mortgages at very high levels which limit their disposable cash many years into the future has an effect on the money available to spend in the economy or fund taxes, savings etc. Bubbles with only a couple of years of people doing this may not have a material effect on the wider population/economy (although they say recession followed the 89-90 crash not pre-empted it) - but 7 years worth of people mortgaged to the hilt would surely mean a big lagging effect years down the line on what those people can spend in the "golden years".

Quite, it's not even debt and interest repayments on assets or longterm investment, a lot has been irretrievably spent on holidays or the rusting BMW X5 now sitting on your drive and consuming petrol at £1.50 a litre... yet the debt still lingers, borrowing at 5% may seem like fun and a 'good deal', but spread over 25 years it really piles on the pressure.

Society will simply split between those paying down yesterday's excesses and those who directly benefit, obviously the banks will continue to do well provided they can handle the fall out, a lot of the credit risk has already been parcelled up and sold on to pension funds... so there goes another chunk of your future.

Real money from real production has to be sucked out of the economy in order to pay down the magic money that was created out of thin air.

Inflate or die.

Edited by BuyingBear

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The long term effects?

The inevitable house price correction being delayed by a decade.

Where's the money coming from? £3.6 trillion worth of unspent equity in houses ready to be spent.

And a government who will ruthlessly allow sterling to be trashed before interest rates rise. At least exports will become more competitive. Well worth the risks if it means being re-elected.

Anyway, any depreciation in Sterling will be incremental and gradual.

Long term effects: 30 years from now a bankrupt nation being bailed out by China and/or India. Ruination and bankruptcy is the inevitable consequence.

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Guest Charlie The Tramp

Where's the money coming from? £3.6 trillion worth of unspent equity in houses ready to be spent.

Should that not be £3.6 trillion borrowed ready to be spent ?

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The long term effects?

The inevitable house price correction being delayed by a decade.

Where's the money coming from? £3.6 trillion worth of unspent equity in houses ready to be spent.

Such borrowings could never be supported, even at Japanese style interest rates the principle couldn't even be paid back, even at today's debt ratio people are buckling under the strain. Once that sort of money has been spent repaying the debt would suck the economy dry.

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My own theory is that the government and the banks welcome people taking on large amounts of sensible debt, both in loans and mortgages, higher house prices are encouraged. Hopefully the more debt you have the more productive you are and the harder you have to work to pay for it. Good for GDP and profits.

Just think if we all owned our homes outright, would we need to work as hard as we do now?

It's all a con....don't fall for it. ;)

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I lived in California for a number of years including those during which the Great Crash affected. In the run up years of 1985-89 houses experienced double digit inflation while the local economy slowly became strangled. I saw people borrow everything they could to get in even if it meant foregoing furniture or a new car. Restaurants did badly as discretionary income was sucked into the property black hole. Sheets were used in the place of curtains, bean bags substituted for couches. Back gardens were left undeveloped etc. Businesses began moving out of the state as they could no longer afford to operate where overheads were so high--people had to make large incomes to feed the large mortgages. Recession eventually struck due to loss of jobs and confidence.

The turn happened almost overnight. A Realtor friend of mine with decades of experience described the change as "The day when the switchboard lights all went out." One day people were jostling to buy and the next nothing. Then from 1989 to 1996 things dropped and dropped. Vast tracts of new homes stood empty, banks repossessed many of them. Coastal homes dropped by as much as 40% from the peak to the trough. I sold my house in 1989 for $374k--within 2 years it was back on the market again at $100k less.

If the Great Crash is anything to go by the long term effects of HPI are unhealthy. They drain liquidity from other parts of the economy and create a bubble that eventually pops due to imbalances and loss of confidence that it can keep going. We are there again today. The only difference that I see is that this time it is far worse because low IR have increased higher absolute levels of indebtedness. Liquidity has not yet been sucked out of the economy because of MEW. But MEW is becoming more difficult in an increasing IR environment. Employment has proven to be vulnerable as the UK economy loses jobs to Asia. Oil is a problem far more so than it was during the Great Crash.

Bottom line: HPI is bad for any economy due to the imbalances it creates. The UK is HPI/MEW dependent for its prosperity and grossly overvalued currency. When it goes into reverse gear the pain will be sharp, long and devastating for many years to come.

Today's example of a crash in full swing, Colorado:

http://cbs4denver.com/consumer/local_story_126003313.html

CBS4) DENVER Foreclosures have had an impact on the home selling market by driving housing inventories up to record levels, meaning even with rising interest rates, it's a good time to buy.
By most accounts, it's a buyers market in metro Denver. There's a record 29,000 homes for sale which is a 19 percent increase since May of last year.
Edited by Realistbear

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house price inflation is like any other type of inflation-deflation cycle.

this was acutely demonstated to me in a trip to sunny las Vegas last week.

first trip down the casino.

I can do no wrong I hit when I should hit and stick when I should stick. I clean up I am ******ing rich man 1000$ an hour rich. I'm the man. my **** is 12 inches suddenly i'm the MAN ******ing A. I rock.

suddenly nothing is out of reach I can buy anything and anyone and do. drinks all round. down the strip club dances and dances

next visit to the casino the dealer is suddenly on fire every hand he hits a 21 or a blackjack. If I can bust I do every ******ing time. needless to say I loose i Looose Losoose Loose

I loose all the money I won on the first visit ( I broke even on my entire trip ). suddenly everything is looking real expensive. I start to eat in cheap places im not so eager to buy drinks etc etc. and this is a very small amount of money for me to loose!

so my winning and loosing a small amount of money at the blackjack table led me to greatly change my spending habits over the days I spent in Vegas even though the Net effect was that I broke even.

point is the psyhcological wealth effects from winning and loosing at a speculation are very very powerful do not underestimate them.

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house price inflation is like any other type of inflation-deflation cycle.

this was acutely demonstated to me in a trip to sunny las Vegas last week.

first trip down the casino.

I can do no wrong I hit when I should hit and stick when I should stick. I clean up I am ******ing rich man 1000$ an hour rich. I'm the man. my **** is 12 inches suddenly i'm the MAN ******ing A. I rock.

suddenly nothing is out of reach I can buy anything and anyone and do. drinks all round. down the strip club dances and dances

next visit to the casino the dealer is suddenly on fire every hand he hits a 21 or a blackjack. If I can bust I do every ******ing time. needless to say I loose i Looose Losoose Loose

I loose all the money I won on the first visit ( I broke even on my entire trip ). suddenly everything is looking real expensive. I start to eat in cheap places im not so eager to buy drinks etc etc. and this is a very small amount of money for me to loose!

so my winning and loosing a small amount of money at the blackjack table led me to greatly change my spending habits over the days I spent in Vegas even though the Net effect was that I broke even.

point is the psyhcological wealth effects from winning and loosing at a speculation are very very powerful do not underestimate them.

When you are winning walk away. ;)

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I did :) only problem is after seeing me win my freinds all wanted to play... I got bored watching them and decided to join in :) still like I said my net P&L was 0. the point was not to win or loose per say but more the thrill of playing (and also the fact that I was constantly plied with free alchol while I played) these second round effects meant that I left the casino with more than I entered (entertained and slightly intoxicated).

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I did :) only problem is after seeing me win my freinds all wanted to play... I got bored watching them and decided to join in :) still like I said my net P&L was 0. the point was not to win or loose per say but more the thrill of playing (and also the fact that I was constantly plied with free alchol while I played) these second round effects meant that I left the casino with more than I entered (entertained and slightly intoxicated).

Well at least you enjoyed yourself!

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I did :) only problem is after seeing me win my freinds all wanted to play... I got bored watching them and decided to join in :) still like I said my net P&L was 0. the point was not to win or loose per say but more the thrill of playing (and also the fact that I was constantly plied with free alchol while I played) these second round effects meant that I left the casino with more than I entered (entertained and slightly intoxicated).

Oh no, no. You were gambling, tut tut.

Now houses, that's "investing".

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as a rational risk neutral investor I shouldn't be near a casino. however these days behavioural economics looks at decisions people actually take rather than the purely theoretical. I might as well have fun as that is the only thing i know I can take away with me.

but housing markets are like a casino the only people who win are the EA's and the taxman. the rest is zero sum

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but housing markets are like a casino the only people who win are the EA's and the taxman. the rest is zero sum

Maybe the banks also win from the interest and fees they charge which IMO can only rise as all good waves/ cycles do.

Prepare yourselves. ;) Fore warned is fore armed. ;)

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Where's the money coming from? £3.6 trillion worth of unspent equity in houses ready to be spent.

LOL. Most of that 'unspent equity' can and will vanish overnight when people refuse to pay stupid amounts for housing.

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  • 302 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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