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BillyShears

Property Price Stagnation

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I've been thinking, and I am not sure that long term real property price stagnation is possible once prices reach a certain level.

Think of it this way, somebody buys a typical FTB house. In the next few years, there is considerable HPI. This person then decides to move up the ladder. The amount of money they can afford to pay for the next house is a function of money they have saved from their income, the equity they have in their previous house, and the amount they can pay out of their monthly income to service the debt they take on to afford the house. For a typical house bought, say, five years ago, there will be tens of thousands of pounds of additional equity due to HPI. The proverbial tens of thousands of pounds "earned" by a homeowner sitting on their *rs*.

Assume that this person has sold "at the top of the market" which then stagnates, what happens to the person who bought the house? Assume that they are on a similar salary and career projectory to the first person. When they decide to move up the ladder, what do they have. First, as the first rung property they bought would have been much more expensive as a proportion of their salary than it was for the first purchaser, they would have been able to save much less of their salary. Second, they wouldn't have benefitted from considerably increased equity in their home from rampant HPI. The third part of it, the amount they can afford to pay monthly, would not have changed much. Put it all together, and even without an economic downturn, the amount that purchasers of mid and high rung properties can afford to spend must drop. Assuming that affordability is stretched to the limit at the top of the bubble, then real prices must drop.

Any arguments pro or con my viewpoint?

Billy Shears

Edited by BillyShears

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I've been thinking, and I am not sure that long term real property price stagnation is possible once prices reach a certain level.

Think of it this way, somebody buys a typical FTB house. In the next few years, there is considerable HPI. This person then decides to move up the ladder. The amount of money they can afford to pay for the next house is a function of money they have saved from their income, the equity they have in their previous house, and the amount they can pay out of their monthly income to service the debt they take on to afford the house. For a typical house bought, say, five years ago, there will be tens of thousands of pounds of additional equity due to HPI. The proverbial tens of thousands of pounds "earned" by a homeowner sitting on their *rs*.

Assume that this person has sold "at the top of the market" which then stagnates, what happens to the person who bought the house? Assume that they are on a similar salary and career projectory to the first person. When they decide to move up the ladder, what do they have. First, as the first rung property they bought would have been much more expensive as a proportion of their salary than it was for the first purchaser, they would have been able to save much less of their salary. Second, they wouldn't have benefitted from considerably increased equity in their home from rampant HPI. The third part of it, the amount they can afford to pay monthly, would not have changed much. Put it all together, and even without an economic downturn, the amount that purchasers of mid and high rung properties can afford to spend must drop. Assuming that affordability is stretched to the limit at the top of the bubble, then real prices must drop.

Any arguments pro or con my viewpoint?

Billy Shears

I see HPI as a shark. It must keep moving forward and feeding itslef or it dies. Historically, the housing market is boom and bust. Especially where sepculation has taken over (markets where fundamentals are ignored) such as the UK and US Coastal markets. Speculators are not in it for stable prices but capital appreciation--get rich quick. Smart investors or BTLers have not been buying recently and without buyers the market must fall. IR will choke the shark along with some tasty morsels fo unemployment, negative sentiment and the loss of the feel good factor caused by stock market corrections and other investment turmoil.

THus, I do not see equity levels in the home as a relevant factor in moving the market. Its the speculative stuff that causes the booms and busts and this market is full of of speculation as Mervyn King has pointed out on many occasions. Opinion without the fundamentals shifts like the wind and right now there is a cold wind blowing from the East (Japan) and the West (The Fed).

I see HPI as a shark. It must keep moving forward and feeding itslef or it dies. Historically, the housing market is boom and bust. Especially where sepculation has taken over (markets where fundamentals are ignored) such as the UK and US Coastal markets. Speculators are not in it for stable prices but capital appreciation--get rich quick. Smart investors or BTLers have not been buying recently and without buyers the market must fall. IR will choke the shark along with some tasty morsels fo unemployment, negative sentiment and the loss of the feel good factor caused by stock market corrections and other investment turmoil.

THus, I do not see equity levels in the home as a relevant factor in moving the market. Its the speculative stuff that causes the booms and busts and this market is full of of speculation as Mervyn King has pointed out on many occasions. Opinion without the fundamentals shifts like the wind and right now there is a cold wind blowing from the East (Japan) and the West (The Fed).

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I see HPI as a shark. It must keep moving forward and feeding itslef or it dies. Historically, the housing market is boom and bust. Especially where sepculation has taken over (markets where fundamentals are ignored) such as the UK and US Coastal markets. Speculators are not in it for stable prices but capital appreciation--get rich quick. Smart investors or BTLers have not been buying recently and without buyers the market must fall. IR will choke the shark along with some tasty morsels fo unemployment, negative sentiment and the loss of the feel good factor caused by stock market corrections and other investment turmoil.

THus, I do not see equity levels in the home as a relevant factor in moving the market. Its the speculative stuff that causes the booms and busts and this market is full of of speculation as Mervyn King has pointed out on many occasions. Opinion without the fundamentals shifts like the wind and right now there is a cold wind blowing from the East (Japan) and the West (The Fed).

I don't see how you jump from the first paragraph to the second. Tens of thousands of pounds of additional equity earnt from HPI increases the size of the effective deposit that a buyer has when buying a second or higher rung house. Then they can afford more. I don't say that this increased deposit is what causes house prices to rise. That is mainly due to sentiment. But the increased deposit due to HPI makes it possible for people to buy second and third rung properties at higher prices than they would do otherwise. This will allow prices to rise higher when sentiment is not the limiting factor. Or, that house prices will sell for the lower of the two limits, sentiment or what people are prepared to pay, and affordability, what they can pay. I'd say that in the current bubble, particularly a year or more ago, that there was no limit to sentiment, and had there been no limits on affordability we would have seen £1 million studio flats in unemployment blackspots.

And I do agree about the other factors that will affect house prices in the future such as higher interest rates, bust due to speculators leaving the market, etc. I was not saying that reduced affordability would be the primary factor in the future correction, but that it was a "bottom line" factor such that even if interest rates didn't rise, even if unemployment doesn't drop, and even if sentiment doesn't turn, prices for those properties are still going to have to drop.

Also, again just looking at this factor in isolation. When prices do start going down, then the effect on affordability of second and higher rung properties will be even bigger. Because not only will people who buy FTB homes not have their deposits grown by capital appreciation, they'll actually lose equity, meaning much smaller effective deposits if they want to move "up".

Billy Shears

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I've been thinking, and I am not sure that long term real property price stagnation is possible once prices reach a certain level.

Think of it this way, somebody buys a typical FTB house. In the next few years, there is considerable HPI. This person then decides to move up the ladder. The amount of money they can afford to pay for the next house is a function of money they have saved from their income, the equity they have in their previous house, and the amount they can pay out of their monthly income to service the debt they take on to afford the house. For a typical house bought, say, five years ago, there will be tens of thousands of pounds of additional equity due to HPI. The proverbial tens of thousands of pounds "earned" by a homeowner sitting on their *rs*.

Assume that this person has sold "at the top of the market" which then stagnates, what happens to the person who bought the house? Assume that they are on a similar salary and career projectory to the first person. When they decide to move up the ladder, what do they have. First, as the first rung property they bought would have been much more expensive as a proportion of their salary than it was for the first purchaser, they would have been able to save much less of their salary. Second, they wouldn't have benefitted from considerably increased equity in their home from rampant HPI. The third part of it, the amount they can afford to pay monthly, would not have changed much. Put it all together, and even without an economic downturn, the amount that purchasers of mid and high rung properties can afford to spend must drop. Assuming that affordability is stretched to the limit at the top of the bubble, then real prices must drop.

Any arguments pro or con my viewpoint?

Billy Shears

There's a couple of things in this I'm not sure about:

1. I think you're right about the second person being unable to move up the ladder after a period of stagnation as you describe. But I don't think that it then follows that prices have to fall. What could happen instead is that people just don't move up the ladder. Expensive houses would go to people in very well paid professions. Cheaper houses would go to people who work in lower paid professions. There would be no "ladder" effect, whereby people on low salaries can have their mortgages inflated away, and buy a house on the basis of their lowly salary plus the equity in their existing house. So what you have is just continued stagnation, and no more social mobility up the ladder.

2. In your description of the first person when they come to move up the ladder: I don't agree that the equity increase in their own house gives them an advantage in contributing to the amount they can afford to move UP the ladder. All it has done is meant that it is possible for them to STAY at the SAME level on the ladder. It hasn't even kept up with the equivalent equity growth in the house up the ladder they want to buy. It doesn't contribute to the ability to move up, only to the ability to make sidesteps across the ladder.

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2. In your description of the first person when they come to move up the ladder: I don't agree that the equity increase in their own house gives them an advantage in contributing to the amount they can afford to move UP the ladder. All it has done is meant that it is possible for them to STAY at the SAME level on the ladder. It hasn't even kept up with the equivalent equity growth in the house up the ladder they want to buy. It doesn't contribute to the ability to move up, only to the ability to make sidesteps across the ladder.

I have to agree with Levy on this one. If an equity increase is evident in a property, it obviously means then the price/value of that property has increased. If it has increased for one property, then usually one can assume it will have also increased for the next property 'up the ladder'. Indeed this will only actually serve to make the next property up more expensive to afford than it was before...

If Property A starts out at £100,000 and Property B starts out at £150,000 the difference between them is then £50,000. If the price of both rises by 10%, Property A will then be valued at £110,000 and Property B at £165,000 ... a difference of £55,000 (an extra £5,000!).

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There's a couple of things in this I'm not sure about:

1. I think you're right about the second person being unable to move up the ladder after a period of stagnation as you describe. But I don't think that it then follows that prices have to fall. What could happen instead is that people just don't move up the ladder. Expensive houses would go to people in very well paid professions. Cheaper houses would go to people who work in lower paid professions. There would be no "ladder" effect, whereby people on low salaries can have their mortgages inflated away, and buy a house on the basis of their lowly salary plus the equity in their existing house. So what you have is just continued stagnation, and no more social mobility up the ladder.

But how many more expensive houses are bought by people who have not sold a cheaper house? Some, for sure. But I'd wager not many. If people can no longer move up the ladder, then there will eventually be an oversupply of mid-rung houses due to insufficient people able to buy them. There is not an infinite supply of buyers, so if the (I believe) majority of buyers disappear from one sector of the market, something has to happen.

2. In your description of the first person when they come to move up the ladder: I don't agree that the equity increase in their own house gives them an advantage in contributing to the amount they can afford to move UP the ladder. All it has done is meant that it is possible for them to STAY at the SAME level on the ladder. It hasn't even kept up with the equivalent equity growth in the house up the ladder they want to buy. It doesn't contribute to the ability to move up, only to the ability to make sidesteps across the ladder.

I'm not talking about relative prices, I'm talking about absolute prices. The more equity that someone has, the larger their deposit, the more expensive a house that they can afford. If someone can afford a mortgage of £150K, then if they have £10K deposit (including equity in another property), then they can afford a £160K property. If they have £60K deposit then they can afford a £210K property. Hence they can afford to pay more. If house prices rise to the limits of affordability due to a bubble, then when there is considerable HPI, the prices of mid rung properties can rise to consume this additional equity due to HPI. When HPI slows down or stops, this additional equity due to HPI increases, and people trying to move up the ladder cannot afford the previous prices. If houses are to sell, then prices must drop.

Billy Shears

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I think you are seeing why HPI benefits noone except those hopping off the ladder at the top or halfway up. It is not just FTB's priced out, people halfway up the ladder are discovering that the next rung up is well out of reach (despite diligently saving). The housing ladder is supported by fresh money coming in at the FTB level, which recently has included BTL money (some 6% of total sales?) and recycled equity from further up the ladder (misguided parents) - which is inherently unsustainable. Ergo, mobility up the ladder stalls until the ladder's rungs are once again properly spaced.

JY

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Perhaps one thing which would help to test the theory is to look at the number of people who might otherwise have traded up - say, from the 2 bed to the 3 bed - who are now staying put and putting in an extension instead.

I make the assumption that that action is cheaper and then they could potentially look forward to increasing the value of their home making a later move possible.

I'm not sure how you would get that data though :(

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I have to agree with Levy on this one. If an equity increase is evident in a property, it obviously means then the price/value of that property has increased. If it has increased for one property, then usually one can assume it will have also increased for the next property 'up the ladder'. Indeed this will only actually serve to make the next property up more expensive to afford than it was before...

If Property A starts out at £100,000 and Property B starts out at £150,000 the difference between them is then £50,000. If the price of both rises by 10%, Property A will then be valued at £110,000 and Property B at £165,000 ... a difference of £55,000 (an extra £5,000!).

I was talking about absolute prices, not relative prices. Levy's argument is correct, except that he's not discussing the same thing that I'm discussing. I'll try and explain myself better to hopefully solve the misunderstanding. The following example is all in "real £", i.e. i'm ignoring price and wage inflation, so for example the rise in the houses value from £60K to £120K is in real terms.

As for numbers, let's assume that person A buys a two bed terraced house for £60K with no deposit to keep it simple. Massive HPI follows, and the price of the terraced house rises to £120K. In the meantime, due to relatively lower mortgage interest payments, they have paid off £20K of the owed amount. They've also saved an additional £10K in the meantime. So the money that they have to spend on the next house is effectively £90K equity, plus whatever they can afford for mortgage payments. Let's say that's a £150K mortgage. So, they can afford to buy a £240K house.

Now let's consider the next family who buy the two bed terraced house for £120K. They cannot afford to pay off much repayment at all, so perhaps over the same time period as before, they only pay off only £5K of their mortgage. They haven't been able to save at all due to being totally stretched on the mortgage. Assume that the property market is stagnant, so they have made nothing by capital appreciation in real terms. So, the total equity they have to spend on the next property is only £5K, and with the affordable £150K mortgage, that's £155K they can afford to spend. A massive reduction in affordability for the second rung property in real terms.

The prices of second rung properties is irrelevant to what I'm discussing. I'm not discussing whether the original house purchaser is better off or worse off due to HPI. I'm solely talking about whether HPI increases the absolute amount that people can afford to spend on a second rung property.

The only part of Levy's argument that I can see as being relevant to what I wrote is the claim that if buyers of first rung properties are then unable to buy second rung properties at the "stagnant" (real) prices, then undefined other people will buy them at those prices. I don't believe that this is a valid counter-argument. Typically, in a market, if the majority of buyers disappear or even a sizeable proportion of buyers disappear, then this is a strong downward influence on prices.

Billy Shears

I think you are seeing why HPI benefits noone except those hopping off the ladder at the top or halfway up. It is not just FTB's priced out, people halfway up the ladder are discovering that the next rung up is well out of reach (despite diligently saving). The housing ladder is supported by fresh money coming in at the FTB level, which recently has included BTL money (some 6% of total sales?) and recycled equity from further up the ladder (misguided parents) - which is inherently unsustainable. Ergo, mobility up the ladder stalls until the ladder's rungs are once again properly spaced.

JY

*sigh*

Did anyone actually understand what I wrote in my original post? I agree with what JY says, but I was wondering if anyone wanted to discuss the point I raised. Does my attempt to clarify what I was talking about (posted after JY's followup) make things clearer?

Billy Shears

Edited by BillyShears

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It is clear that the more indebted people become the less mobility they will have and ultimately the whole thing will grind to a halt. One thing to remember is that not all the property in the UK has changed hands at the recent high prices (obvious point, but worth remembering!) so apart from the unfortunates who bought at the peak, the ladder could resume its normal function after a price correction and many people would suffer no harm from a correction.

JY

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i thought stagnation could be a possibility. its the best option for all those lucky winners to keep their profits.

BUT.

this consuming monster eats more that it produces. hence prices must rise continually or the beast will die.

if we stagnate the people whos outgoings are higher than the wage income (need mew to survive) will come crashing down first. IR will take care of any BTL for a long time burned. possibly bankrupted. this will put so many people off most will be happy to get out with a small loss.

stagnation wont save them.

they cant sell now.

they cant sell tomorrow.

they are trapped in debt.

its a slow burn, but from personal anecdotals - i know people who are now starting to feel the bite and begining to become VERY concerned about their personal situations as regards debt and income.

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Hi Billy,

I think your example does show that in a stagnant market following a period of boom there are increased problems for those wishing to move up the ladder.

But I don't see this makes stagnation impossible. It simply means fewer people are able to move and there is a sharply lower volume of sales. This could last for some years, after which time people's short term financial struggles start to be resolved by savings and/or wage inflation (talking theoretically - I'm not sure we're going to get significant wage inflation this time). Then the market can pick up again.

I'd say the clinching proof that it's not true that "stagnation is impossible" is that it has happened several times historically, for instance through most of the sixties and a good chunk of the seventies. If facts don't fit with a hypothesis, it's probably the hypothesis that's wrong...

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It is clear that the more indebted people become the less mobility they will have and ultimately the whole thing will grind to a halt. One thing to remember is that not all the property in the UK has changed hands at the recent high prices (obvious point, but worth remembering!) so apart from the unfortunates who bought at the peak, the ladder could resume its normal function after a price correction and many people would suffer no harm from a correction.

JY

Yes, but I'm arguing that it's more or less inevitable that not only will it grind to a halt, but that it can't stay at a halt but must reverse, that long term stagnation at real prices at the current top of the market is impossible. Over time the proportion of potential second rung buyers who can afford to buy at prices pushed up by additional equity due to HPI will fall, and the proportion that can't afford those prices will rise. It's only necessary for the number of buyers who can afford those prices to fall to below the number of sellers who want to sell at those prices, and then something has to give.

I'd agree that many home-owners wouldn't suffer, but would in fact benefit, from a correction, but that is not the point I am trying to discuss in this thread.

Billy Shears

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*sigh*

Did anyone actually understand what I wrote in my original post? I agree with what JY says, but I was wondering if anyone wanted to discuss the point I raised. Does my attempt to clarify what I was talking about (posted after JY's followup) make things clearer?

Billy Shears

Firstly, to my mind stagnation can mean two things (in this context):

1. prices plateau at some level (and stay there for a considerable time - several years)

2. transactions dry up to a trickle and no-one can move (chains can't form etc)

In Singapore private property plateaued at a lower level for several years following a 40% crash in 1998 and subsequent dead cat bounce in 2000-2001. Only now, with several quarters of strong GDP growth of around 5-10% p.a., are prices creeping up again some 8 years after the initial crash. So there was price stagnation combined with low volumes AFTER PRICES HAD CORRECTED.

See graph: SingProp.pdf

What happens is that people will not sell at the lower prices and stay put and the lower prices are set by those who have to move.

JY

SingProp.pdf

Edited by JustYield

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In a word No!

Increasing supply of new build flats and conversion flats will put pay to that, it will mean more competition and lower prices.

Decreasing rents of these types of properties (as is happening now) will cause this situation to play out much quicker than people expect.

Newbie investors will panic and offload property as quick as they can.

The difference between the FTBer flats and the next rung will contract so 2nd properties will become more affordable therefore having an effect on the other rungs further up.

-----------------

PS - The introduction of HIPs will probably add fuel to the fire in that more properties will be offloaded by investors in the latter half of this year.

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Hi Billy,

I think your example does show that in a stagnant market following a period of boom there are increased problems for those wishing to move up the ladder.

But I don't see this makes stagnation impossible. It simply means fewer people are able to move and there is a sharply lower volume of sales. This could last for some years, after which time people's short term financial struggles start to be resolved by savings and/or wage inflation (talking theoretically - I'm not sure we're going to get significant wage inflation this time). Then the market can pick up again.

But people have to sell houses. People die. People move to different parts of the country. People lose jobs. People go bankrupt. The housing market is a balance between those people who want to buy houses and can afford to do so at a particular price point, and those who want to sell. We often see this argument that if house prices fall, then people will just hold onto them until the market picks up again. But if that happens, that doesn't mean that the value of those houses doesn't go down. If there are ten people in an area who want to sell a particular type of house at the current market price, then if it turns out that houses are not going to sell at that price any more, what happens? Well, if nine of the ten decide to brazen it out, but one decides to (or is forced to) sell at the lower amount, the most recent price for that type of property in that area is now the cheaper one. One house sale won't set the benchmark price for the area, but assume that another five potential sellers join the throng. Then there are fourteen. They hold firm for a while, but then another one of them decides to, or is forced to, sell. And bit by bit, the market price is being set not by those who hold out, but by those who sell. It's starting to look like prices are going down. Do the home-owners then hold on, or do they see their paper wealth decreasing and decide to get out while they can? Even if only a small number decide to get out, it's they who set the price.

It's especially important to note that it's not the case that these homeowners are going to be accepting 50% of the previous market value. They might just accept two or three percent less than what the house would previously have sold for. Who is going to take a huge risk because they thought the house was worth £130K and they were offered £126K?

I'd say the clinching proof that it's not true that "stagnation is impossible" is that it has happened several times historically, for instance through most of the sixties and a good chunk of the seventies. If facts don't fit with a hypothesis, it's probably the hypothesis that's wrong...

But that's not my hypothesis. You've missed the detail that there has been a bubble, and house prices have risen to the limits of affordability at all levels. I'll try to explain further.

Stagnation is entirely possible as long as affordability has not been stretched to the absolute limit during a period of HPI. I'm claiming that at present the property bubble has pushed prices up to the limits of affordability at both FTB level and second and third rung level, and it is this which makes stagnation impossible. It would be very easy, and in my opinion extremely beneficial to all if prices stagnated at a lower level as I'll try to elaborate on.

As a quick example, assume that at the beginning, the terraced house was £60K, and the next house up was £110K. If no real HPI had occurred, then the original seller would have only the £20K in equity from paying off the mortgage, and the £10K they had saved. That would be a £30K deposit, and with £150K of affordable mortgage, they can afford a £180K house. The person who buys the terrace of them at the original (real) price of £60K can then pay off just as much of the mortgage as the first purchaser, save just as much, and then have the same (in real terms) £30K deposit as the first purchaser, and also be able to afford a £180K. And the person who buys the terrace off the second purchaser can do exactly the same thing. So, at this lower level, it is easily possible for prices to stagnate.

But in my example, the first purchaser received a "bonus" in terms of unsustainable HPI, so that the price of the terrace rose from £60K to £120K in real terms. Furthermore this HPI stretched affordability to the absolute limit, making the second purchaser unable to save a significant amount for a future deposit, or for them to pay off much of their debt. So, in this case the first purchaser ends up with £240K to spend at the second rung, while the second purchaser ends up with £155K. A very very different scenario from that of house prices stagnant at a more affordable level. When the second rung prices are pushed up to £240K by those who held FTB houses during a housing boom, then they can't stagnate at that level.

Billy Shears

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I don't know that if "real property price stagnation" actually happened the average person would be able to recognise it. They would think the value of their property's going up.

Likewise, they would be unlikely to realise that Actual Property Price Stagnation equates to a real fall in value.

I'd guess the chances of the Actual Price Stagnation are looking better now that inflation is starting up. It was rampant inflation in the 70s crash that made it less painful for home owners - no negative equity problems. But your wages grow relative to your debt making it more affordable in the long term (even if there is a bit of a hard time with higher interest rates in the meantime).

Could Inflation be the saviour of the bubble?

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Firstly, to my mind stagnation can mean two things (in this context):

1. prices plateau at some level (and stay there for a considerable time - several years)

2. transactions dry up to a trickle and no-one can move (chains can't form etc)

In Singapore private property plateaued at a lower level for several years following a 40% crash in 1998 and subsequent dead cat bounce in 2000-2001. Only now, with several quarters of strong GDP growth of around 5-10% p.a., are prices creeping up again some 8 years after the initial crash. So there was price stagnation combined with low volumes AFTER PRICES HAD CORRECTED.

See graph: SingProp.pdf

What happens is that people will not sell at the lower prices and stay put and the lower prices are set by those who have to move.

JY

As I have already posted (after you posted above), stagnation is entirely possible at lower levels. My argument is that stagnation is impossible if prices have been pushed to the limits of affordability during a period of HPI, and that second rung properties have been pushed to the limits of affordability, and the affordability of second rung properties includes the extra equity due to high HPI boosting equity in the first rung property.

Secondly, I don't believe that people will stop selling if prices fall. That's explained in an above reply as well. Some, maybe most, sellers may try to hold firm, but the market price will be set by the minority that do sell, are forclosed, etc. Why didn't people stop selling when house prices crashed in the early 90s? What is different this time?

As an example of this, look at Larchmont Road in Leicester. There are lots of 5 bed (or so) 3 story terraced houses for sale, mostly at the market top price of £175K or so. The last one to sell (as far as I'm aware) was a mortgage forclosure at £146K, discussed on this board at the time.

http://www.rightmove.co.uk/viewdetails-624...pa_n=1&tr_t=buy

So, what is the "market price" for these things now. And given that a few have been reduced to £160K or so, less than previous selling prices, and they're still not selling, what do you think is going to happen when the £146K appears on nethouseprices?

Billy Shears

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But how many more expensive houses are bought by people who have not sold a cheaper house? Some, for sure. But I'd wager not many. If people can no longer move up the ladder, then there will eventually be an oversupply of mid-rung houses due to insufficient people able to buy them. There is not an infinite supply of buyers, so if the (I believe) majority of buyers disappear from one sector of the market, something has to happen.

That appears to be happening around my neck of the woods, it all seems to be stalling like someone has thown a spnner in the works

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As I have already posted (after you posted above), stagnation is entirely possible at lower levels.

Right! Check out the graph I posted above.

What is your question then? By definition, prices cannot plateau at unaffordably high levels.

JY

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But that's not my hypothesis. You've missed the detail that there has been a bubble, and house prices have risen to the limits of affordability at all levels.

I take your point - I was arguing about stagnation in general rather than stagnation after a big bubble.

But I still think it may be possible. Increased equity isn't the only way people can afford to move up the ladder. For a certain proportion of the population there will be other financial factors that allow them to move. People die, people lose jobs, people go bankrupt. Other people inherit money from those who die, get bonuses or better jobs, gat payouts from insurance policies or whatever. So some houses have to be sold, and some people have some money. Not enough to sustain high volumes without transferrable equity, but maybe enough to sustain low-volume stagnation. (By this I do mean nominal stagnation = real falls incidentally).

The argument that stretched affordability forces falls doesn't seem to hold water. Presumably affordability was stretched in the early sixties and in 1974. If it wasn't people would presumably have been buying, because there wasn't any reason at that stage for them to expect a crash. So they couldn't afford to buy, the market stagnated, and eventually enough people were able to buy to sustain HPI again.

I'm not saying it will definitely happen, but I don't think your argument is conclusive.

PS I do also think that even if we get a kind of stagnation, there will be some corrections in differentials in the market - new-builds falling, traditionally good areas rising slightly while dodgy areas fall slightly etc. You could have localised falls while the overall picture is stagnated. I do wonder though if the size of the new-build sector is so large that the inevitable falls there will force the whole market into negative YOY territory...

Edited by Magpie

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I take your point - I was arguing about stagnation in general rather than stagnation after a big bubble.

But I still think it may be possible. Increased equity isn't the only way people can afford to move up the ladder. For a certain proportion of the population there will be other financial factors that allow them to move. People die, people lose jobs, people go bankrupt. Other people inherit money from those who die, get bonuses or better jobs, gat payouts from insurance policies or whatever. So some houses have to be sold, and some people have some money. Not enough to sustain high volumes without transferrable equity, but maybe enough to sustain low-volume stagnation. (By this I do mean nominal stagnation = real falls incidentally).

I've modified the topic of this thread to make it more obviously about stagnation at current price levels.

I'm not sure how "people die, people lose jobs, people go bankrupt" allows people to move up the ladder unless it's because house prices go down. If they go down, then prices have fallen and we don't have stagnation.

People inherit money from those who die, and get better jobs, etc. But that is the case now. So, unless inheritance somehow increases significantly across the population, or there is a similar input of money over and above what there is now, then there isn't any additional money coming into the market than there is now. Note that in my example I said that the person who bought the terraced house at the post-HPI amount was on a similar salary trajectory to the first person. All else being equal, there is still a very significant difference in affordability for the person who buys pre HPI, and the one who buys post HPI.

The argument that stretched affordability forces falls doesn't seem to hold water. Presumably affordability was stretched in the early sixties and in 1974. If it wasn't people would presumably have been buying, because there wasn't any reason at that stage for them to expect a crash. So they couldn't afford to buy, the market stagnated, and eventually enough people were able to buy to sustain HPI again.

Very different case from now. Mortgage lending was far more restricted in those days, meaning that prices never got to the salary multiplies they did now. My examples assume that affordability is stretched to the limit, so that families were not able to pay back a significant portion of their debt, and are not able to save for a bigger deposit. In a high inflation environment the real cost of mortgage payments will fall quickly, and they will be able to save a larger and larger deposit. If we return to a high inflation environment, particularly if house prices are not keeping up, then my example doesn't hold. But it wasn't meant to.

And did the market stagnate in real terms in the early 60s and 1974, or did it stagnate in nominal terms with real house prices falling? The graph on the HPC home page certainly shows prices in decline in 1975 and the next few years. So we didn't have real price stagnation at that point.

I'm not saying it will definitely happen, but I don't think your argument is conclusive.

PS I do also think that even if we get a kind of stagnation, there will be some corrections in differentials in the market - new-builds falling, traditionally good areas rising slightly while dodgy areas fall slightly etc. You could have localised falls while the overall picture is stagnated. I do wonder though if the size of the new-build sector is so large that the inevitable falls there will force the whole market into negative YOY territory...

If we go back to predicting what will actually happen, then I think the fall in speculative demand and BTL will be the primary factor once stagnation or even a slowly falling market is reached. My examples were meant to show what would happen in the (it seems) typical sheeple expectation that in the worst case house prices will stagnate, together with an expectation that interest rates (and presumably wage inflation) will stay low.

Billy Shears

Edited by BillyShears

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I'm not sure how "people die, people lose jobs, people go bankrupt" allows people to move up the ladder unless it's because house prices go down.

I was quoting you - I meant, yes there are these reasons you've given why you would have some sellers, but on the other hand there are also reasons other then equity why some people would be able to buy.

So, unless inheritance somehow increases significantly across the population, or there is a similar input of money over and above what there is now, then there isn't any additional money coming into the market than there is now.

No but you don't need that. You just need enough buyers to buy a good propertion of the forced sales / marginal sellers to keep prices fairly stable.

Very different case from now. Mortgage lending was far more restricted in those days, meaning that prices never got to the salary multiplies they did now.

Agreed, but the economy was in a far worse state in other respects. I still think buying would have continued if affordability wasn't stretched for the potential buyers.

And did the market stagnate in real terms in the early 60s and 1974, or did it stagnate in nominal terms with real house prices falling?

Wheb I make this argument, it is only to say that nominal stagnation is possible. I find it hard to see how the imbalances could come out except through rapid nominal falls, or nominal stagnation accompanied by saving and slow wage inflation. In some ways the latter is a more painful option as it's likely to be drawn-out without the rapid inflationof the seventies. But I don't think it's impossible.

Edited by Magpie

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I was quoting you - I meant, yes there are these reasons you've given why you would have some sellers, but on the other hand there are also reasons other then equity why some people would be able to buy.

But then affordability would not have been stretched to the limit. Once affordability is stretched to the limit, a big hole opens up that can't be filled.

No but you don't need that. You just need enough buyers to buy a good propertion of the forced sales / marginal sellers to keep prices fairly stable.

Markets tend to be rather sensitive to the numbers of sellers and buyers. To keep prices fairly stable, then the number of buyers and sellers at any particular price point would need to remain stable. If the number of buyers prepared to buy at a particular price level goes down, I think prices will adjust quite quickly. Remember that it's not a matter of the average number of buyers and sellers across the whole country, but the numbers in a huge number of small local areas where people actually want to buy.

Agreed, but the economy was in a far worse state in other respects. I still think buying would have continued if affordability wasn't stretched for the potential buyers.

Wheb I make this argument, it is only to say that nominal stagnation is possible. I find it hard to see how the imbalances could come out except through rapid nominal falls, or nominal stagnation accompanied by saving and slow wage inflation. In some ways the latter is a more painful option as it's likely to be drawn-out without the rapid inflationof the seventies. But I don't think it's impossible.

OK. I'm arguing that real stagnation is likely to be impossible at current price levels.

Billy Shears

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Property is affordable today, this can be seen by the takeoff and additional rises since December.

In addition creative lending has perpetuated the market, this can continue indefinately as Banks continue to vi for each others dwindling customer base.

That said common sense tells you that if you offer a rate of 2% fixed for two years to get someone hooked, and when they leave that rate it becomes 8% or even 12% then there is going to be a big problem.

Rate Rises are on the Horizon, its been muted several times before, they should have risen, but now they have to rise its the only way out.

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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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