Apom Wrote This..

[apom]

Inflation, house prices and the greater Economy.

It is obvious that property cannot make money.

Controversial statement. And I know that you are all very rich. You are.

Not in itself, it is an inanimate pile of bricks, wood slate and metal. We can build them faster and cheaper then at any time in the past and we inhabit only a fraction of this green and pleasant land. A house is built, it stands and provides shelter it is repaired and looked after but it does not generate any money.

You can rent it out, and as long as the rent coming in covers the cost of owning it then you will have made a good investment.

Capital growth in housing has followed inflation, but it is cyclical and you may find that it has gained faster then inflation, but then in a few years it may have dropped back, property could be a good investment, but its cycle is slow and you may find yourself in a decade where selling it would "loose" you money.

Its price is governed by two things:

1: How much people are prepared to pay.

2: How much people are able to pay.

So, house price are a matter of opinion, debt is real, but house prices are only a matter of opinion.

So imagine what would happen if people became convinced that house prices could treble, that they were so undervalued before that they could treble. That they could do this and be sustained, that people would ignore what had happened three times before.

Imagine if you added to this a belief that entering into the huge debt required to buy a property was making them richer.

Imagine a point in time where someone earning perhaps £25,000 would think that a debt of £180,000 was a good idea.

Imagine that someone taking on an interest only mortgage for a capital amount that would take them over a decade to earn (after tax), imagine them doing this on the belief that they were on a path to riches.

It seems like madness, if you have the mental agility to step back from what is happening around you right now it would seem to be madness.

There are now more houses per head of capita then at any time in history.

The last 8 years has seen the fastest growth in the "Perceived Value" of the housing stock within the UK in History, but this has not been a unique event. Infact the UK housing market can be seen to have been cycling between Boom and Bust since the Second World War.

So what happened? In 1989, with inflation managed by the conservative government we saw the selling price of housing plummet, up to 50% in some areas. The crash ran until 1994 where prices plateau for a few years.

So how did this crash turn again to a boom market?

The bottom of the preceding crash had undervalued property and with the economic growth in the country people began to see that they had more money to spend. Confidence in the economy was returning after the recession.

What begun as a growing faith in property and a realisation that it was extremely affordable resulted in a renewed boost to the housing market. As has happened every time with the housing market people saw moderate growths when perceived as a percentage turn into thousands of pounds in real money, money that they had only borrowed and never seen suddenly started to show returns they had not expected, people speculating that profit could be made generated a demand, generated the profit and the boom began.

To speculate was easy, the tightening reins that low inflation would have on the real cost of borrowing would take years to bite and with low interest rates borrowing seemed cheaper and easier then at any time in history.

What happened next was years of un-restrained growth, the speculation became almost crazed and the lessons learnt from the previous collapse seeming dim and distant.

New build property began to be thrown up, flats appearing the most unlikely areas, fuel to the speculation people saw 20% returns in a year against money that they had only ever borrowed..

When questioned that we now had more houses per-head of capita then at any time in history the lenders would reply that in the last 10 years people had decided to live alone… They wouldn't even pause for breath… any explanation was lapped up by people punch drunk on the money that property was making.. To add to this the Interest Rates were dropped further and further.. Repeated warnings by economists such as Mervin King were not reported in mainstream press. People began to see property as the golden calf, in an era where the UK struggled to compete globally here was the answer. Your home would make you money and more so then you could believe. For many the only access to this money was to borrow into the increased equity of the property and although this increased their debt the perception was that they were growing wealthier.

Property was god, as long as people believed that houses were worth more and more the banks were prepared to lend more.

To the banks it was irrelevant that it was housing, the boom market was credit, many Billions of pounds worth of credit… and in a period of such low inflation that they knew that they had never made so much money..

For seeing the new policy, seeing that the government was to control inflation the banks new that it was up to them to supply the money. That they could do so in the security that the value of this loaned money would not be inflated away. That Inflation is an enemy to the money lenders is undeniable and to suddenly have the economic policy of the UK focussed on controlling inflation the banks came into their age.

If they could ever understand their luck when new governmental measures dropped property, dropped house hold bills dropped these spiralling costs from inflationary measures, I can not say. If they had any idea or part of this it will be up to history to judge..

For the start of a new Millennium would show that man, despite his science, his understanding of the Universe in which he existed growing year on year, his achievements in science and medicine out-stripping any period that came before.. Despite all this, we are from an era that will be remembered for crushing an economy under the weight of unbelievable personal debt built under the belief that not only are we getting richer as we pile up our debt, but that a simple house can treble in value and do so and be sustained. Sustained when if history has taught us anything it has taught us that nothing like this has ever even approached sustainability before.

Not once since the human race has developed writing and begun to chart its history has anyone written of a market with the characteristics of the UK housing market that had not collapsed. Not once. Not ever.

That the economic cycle exists only while people are unaware of it is established fact, but levels of such blind faith in a boom market that had so recently collapsed can only be perceived as group hysteria.

We are not becoming richer as we pay more for housing, but we are humiliating ourselves that we believe that we are.

So with low inflation and an obvious increase in available money the question begging to be answered is where does this new money now come from? We are not earning it, either as individuals or as a country.

We are exporting less as our trade deficit becomes greater and greater.. So we are not bringing money into the country… We are not printing more (Low inflation remember) so where does this booming economy and money appear from.

Who is printing the money?

By printing the money I mean inflation, Inflation is not actually things getting more expensive, it’s the supply of money increasing to pay for these more expensive things.

Two sources:

1: The government can "Print more money" essentially allowing pay rises to increase the amount people have to spend, this sort of inflation decreases the value of the pound and has been prevalent throughout history. It is more complicated then this brief explanation.

2: The banks can increase the amount of available money by drawing it from the future. This is not a time machine, this is simply a loan.

The amount of money around at the point of the loan will increase, the amount in available in the future will shrink as the loans are repaid. This will have massive pressure on the inflation that the MPC are charged with controlling and shows that any control that they seek to have over inflation is only for the moment, the future be damned. That they have allowed this level of borrowing to continue is treasonous in its neglect.

In 2003 8.9% of all post tax money spent in the UK was generated by people increasing the amount of money borrowed against their existing mortgages. This 8.9% had the effect of giving the economy as massive cash injection. It is still going on today, lesser amount but just shy of 6%

Why is this a problem?

Danger of increased borrowing:

As borrowing is increased the amounts required to service the loans increases also this tightens the spending into the economy from a "false peak” an economic boom as borrowed money is pumped into the economy.. Essentially it will be "Better now then it should be, but worse in the future then it could have been.”

What to look for:

Danger Signs:

1: Look for reports as to any increase in the debt burden of the country. If the debt burden increases above inflation there will be a form of correction in the future, the level of correction will be relative to how far borrowing outstripped inflation.

2: Look out for reports on struggling high street and "unexpected" off season sales. 2/3rds of the Economy is made up from high street spending and if the money supply decreases here then the impact to the economy will create a correction.

3: When and if either of these things happens you must immediately research very strongly the comments made by the Chancellor the BOE and the MPC as to how they are going to re-act to inflationary pressures. This will show you the form that the correction will take.

So House Prices:

Argument: House prices have always gone up, on average 8% a year.

Factual answer: Yes that is true, but if you chart the average rise in house prices against the underlying inflation you will see that it is cyclical.

Explain: To have asked if house prices had always gone up a decade ago you would have been told "No, they were actually less "expensive" after reaching a peak in the late eighties. Although you can say that they are more expensive then they were years before that this would have been expected. A loaf of bread is more expensive now then it was in the 50's, as are cars as is everything. This is inflation, the money supply has increased, and we are paid more.

A house, when charted against inflation will show that it has moved up in value along with inflation, but swinging around the average, sometimes dropping, sometime rising. 8% a year? Yes, on average it is as we have seen years of 20% and higher inflation, but a decade ago the same comment would have shown that house prices had lost ground to inflation.

So is housing good long term inflation ?

Yes, but very importantly it depends when you eventually can (or plan to) sell the property, for the market is cyclical and can spend a decade at a point where a high interest bank account would have been a better investment and then another decade where it would make more.

The average house price has always been four times the average salary, just if you break it down to the years sometime is more, sometimes it is less.

This has been clearly charted. (See included image)

Short term investment?

Yes, if you get your timing right.

Devastating loss if you get it wrong.

Don't forget that from peak about 50% of Britain (by area) would now be in negative equity (if bought at peak) this is according to the Land Registry. And new builds are all reporting losses. (This is the association of house builders

Negative Equity, we would hear this in the press, surely?

Well we know prices are dropping over a good part of the UK, and although I have had a Housing Bull wave a paper with a "House Prices Rising" headline I would be staggered if many educated adults would do the same without delving deeper into the report to see that infact house prices in their area had been dropping. Or at least question why a market which has shown double digit drops in some areas would be reported as still being strong.

The Halifax may tell you that it is a good idea to borrow money from them to invest in property, But they would, a car salesman would tell you that a new car would be "just the thing" Would he have more trouble selling you a car if they had trebled in price in less then a decade? Would he have an easier job if you were convince they may treble again and you could sell it for much more? Where does common sense come in.. Herd mentality makes a great deal of money for some, but to not get burnt you have to understand the herd.

But the IMF, Mervin King and others will tell you that it could be a catastrophic mistake. Comments backed up by the market itself.

Remember that a pin lies in wait for every bubble and when the two meet a lot of new investors will then learn some very old lessons.

And as for the Halifax, would you ask a barber if you needed a haircut?

And as for the IMF, if the worlds top economic powers look at the housing market in the UK and say it is the greatest danger facing our economy. Why on gods green earth would you not listen? Your own Chief of the Bank of England has stated now that the prices cannot be sustained. The Land registry shows now that the greater chunk of Britain is dropping and has been for quite some time.

And history has charted how this market behaves.

So could an educated man say that buying property in the UK now is a good investment?

Only if he was educated at a clown school for economic fools.

The below charts the market

http://www.mjdazeley.com/ODPM_581.html

This charts it over the years

http://img80.imageshack.us/img80/7379/recessionsgraph4bk.gif

if you can look at either and still want to invest.. carry on

Edited July 11, 2006 by apom

[gfromls]

quite outstanding.

[apom]

shameless self serving bump to the top of the topic list

Edited July 11, 2006 by apom

[jenko3000]

*stands and applauds*

[Te Mata]

*stands and applauds*

ditto

Bravo!

[Impartial]

Not once since the human race has developed writing and begun to chart its history has anyone written of a market with the characteristics of the UK housing market that had not collapsed. Not once. Not ever.

This is my favourite bit and something i have challenged the believers and even economist students when they praise brown and what he has done for the economy and housing market. The young fools actually think he is the great man he self proclaims to be.

If there is any economist or bull or human that can dispute apoms above statement i would love to hear about it.

Well done Apom i would like to see this pinned, excellent read.

[OnlyMe]

Apom, great post.

Despite all this, we are from an era that will be remembered for crushing an economy under the weight of unbelievable personal debt

Crushing inflation too, even the companies that could do well becuase of their product/skills base cannot afford to expand or cannot afford extra staff. In a global economy the mantra is expand or die, we've taken the die route. A total misallocation of the best part of £1/2 Trillion pounds that has been invested in effectively nothing productive.

Edited July 11, 2006 by OnlyMe

[Guest Alright Jack]

This is my favourite bit and something i have challenged the believers and even economist students when they praise brown and what he has done for the economy and housing market. The young fools actually think he is the great man he self proclaims to be.

If there is any economist or bull or human that can dispute apoms above statement i would love to hear about it.

Well done Apom i would like to see this pinned, excellent read.

I'm afraid it is not correct. Go back to Weimar Germany. The stock market went up and up and up and ...

Where do you think we're headed now?

People on this forum need to change their yardstick. And fast.

[cocacolalight]

Thanks for taking the time to post this apom

[The Plumber]

F**K ME

I did have to read it twice

[Dr Doom]

Good post, quite an epic read.

We are not printing more (Low inflation remember) so where does this booming economy and money appear from.

Who is printing the money?

By printing the money I mean inflation, Inflation is not actually things getting more expensive, it’s the supply of money increasing to pay for these more expensive things.

Two sources:

1: The government can "Print more money" essentially allowing pay rises to increase the amount people have to spend, this sort of inflation decreases the value of the pound and has been prevalent throughout history. It is more complicated then this brief explanation.

2: The banks can increase the amount of available money by drawing it from the future. This is not a time machine, this is simply a loan.

The amount of money around at the point of the loan will increase, the amount in available in the future will shrink as the loans are repaid. This will have massive pressure on the inflation that the MPC are charged with controlling and shows that any control that they seek to have over inflation is only for the moment, the future be damned. That they have allowed this level of borrowing to continue is treasonous in its neglect.

This issue of "who prints the money?" is I feel central to explaining why this situation has arisen in the first place.

1. "The government" can't print more money. It must borrow money from the central bank (BOE), which it creates by a simple bookkeeping entry (out of thin air). The taxes we pay contribute to servicing this "debt". Does that sound insane, it is, you will note that TPTB go to great lengths to make this simple fact as difficult as possible to figure out.

As Galbraith said "the method of money creation is so simple, the mind is repelled".

2. The banks are not drawing money from the future, they are drawing it out of thin air. Both central banks and commercial banks do this, unbelievable yes it is.

Why has the government done nothing. The banking cartel literally owns the government.

[isoprene]

Excellent article. I'm saving a copy of this for future reference.

Well done.

[Rachel]

So, house price are a matter of opinion, debt is real, but house prices are only a matter of opinion.

problem is, most people these days don't see debt as real, beause the money they use isn't real as it's all credit cards and loans...

i'm glad i've been brought up to not get into debt and believe debt is bad, but that view seems to get you nowhere these days

[apom]

thanks for taking the time to read this, and it is appreciated that people can over look the appalling grammar and sentence structure..

[Panda]

Thanks Apom,

Quite an outstanding post, maybe this would put the cat among the pigeons if certain daily rags were to put this in print on there sports back page

[since the beginning]

Few questions

1/ How can we have more houses per capita then ever before? when immigration (illegal + legal) is running at +£500,000 a year and we are only building 100,000 a year. Each year that passes must mean with those statistics that we are getting less homes per capita.

2/ The key point is that some people are getting alot richer through rising house prices. Namely the people that vote and run this country the people 40+. FTB's are paying for the older generations pensions and retirement. To say we are worse off is missing the point. The young are worse off but alot won't realise until their 40's!

[apom]

Few questions

1/ How can we have more houses per capita then ever before? when immigration (illegal + legal) is running at +£500,000 a year and we are only building 100,000 a year. Each year that passes must mean with those statistics that we are getting less homes per capita.

2/ The key point is that some people are getting alot richer through rising house prices. Namely the people that vote and run this country the people 40+. FTB's are paying for the older generations pensions and retirement. To say we are worse off is missing the point. The young are worse off but alot won't realise until their 40's!

We are building more then that and people are shuffling of fast enough to mean that we are building A new home for every 2.1 people that the population grows by.

At the start of the boom we had a home for every 2.76 people, last year that had dropped to 2.6 people per home..

Don't forget, we don't need anything approaching a home per person..

This is all spin to sell you into a market that is built on spin.

Very few are getting better of. that is the point.. many think that they are.

[MarkyB]

i love this thread!

Puts a huge smile on my face!

[Shaul]

good stuff.

[apom]

good stuff.

bump

[gfromls]

just read it again..... . .

and it's still good you know.

[apom]

just read it again..... . .

and it's still good you know.

Thank you, although my old English teacher would hunt me down like a dog for the grammar....