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mikefluk

The Uk Property Bubble Is Explainable

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I am a firm believer that everything that happens is explainable; you just have to search out the key cuases and contibutors. The causes are the triggers and the contributors add to the effect.

Taking the current UK property bubble...I would say its origins could be traced back directly to Lamont's decision to withdraw from the ERM back in September 1992. Up until then we had been locked into the ERM which forced us to mainatain high interest rates to support sterling. This suppressed property prices considerably. Once we withdrew from the ERM monetary policy loosened considerably and in the space of a few years interest rates fell from 15% to less than 5%

This had a massive effect on reducing the servicing cost of the asset and not surprisingly its price increased accordingly.

The next cause was Gordon Brown taxing pension funds - He directly caused a mass exodus from pensions as an investment vehicle and into BTL; a factor still prevalent today.

The third key cause was the drops in world wide equities. This again led to investment in property, propelling the bubble even further

The fourth key cause arose in 2001 after 9/11 when the world was swamped with cheap liquidity that needed a home and found it quite literally in property. This is the key fundamental keeping the bubble afloat.

Of course there have also been contributors adding to the effect. These include bandwagon investors, desperate FTB's sucked into the market and continued strong economic growth.

So much for the past and the present; but where do we go from here ?

In the short term (less than 6 months) I don't think we go anywhere far. At this moment in time there are several contibutors that in my view are only sufficient to keep prices stable but there are no key causes that will bring about a real drop in values.

On the horizon, however, there are some key causes brewing up. In no particular order these are :

Massive explosion of debt - Some way down the line this will bite !

US property crash - The sooner this happens the quicker the ripple effect over here

Tightening of liquidity - At the margins at the moment and not sufficient to have a major impact; but from here every extra bit of tightening has a marginally greater impact

Diminshing returns from BTL's and lack of capital growth. This for me will be the trigger. Sooner but probably later the BTLr will tire of the poor returns on their BTL investment. In time they will wake up to the fact that the contribution they are making to their mortgage due to the yield shortfall is greater than their capital growth and they will become disillusioned. They will then switch their investment elsewhere; either property overseas, Gold or even back to equities. It only takes for this to happen at the margins to boost supply and suppress prices. Remember even though there may be 30 million homes in the UK there are less than 200,000 on sale at any moment in time and it is these 200,0000 transactions that set market price not the 30 miliion

What is currenly lacking is some form of restraint on the UK that forces interest rates to be raised significantly higher. I don't subscribe to the idea that 0.5% here or there is significant. I think the inter-relationship between interest rates and house prices is similar to that of a house brick suspended from a thick elastic band. Each 0.25% expands the elastic but it holds and keeps holding until it can't hold any more and finally snaps !! Matter of opinion when this point will be reached.

Watch this space everyone

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I am a firm believer that everything that happens is explainable; you just have to search out the key cuases and contibutors. The causes are the triggers and the contributors add to the effect.

Hmmm, ok. Your list of 'causes' looks a lot like a list of things that may have happened along the way rather than an explanation of anything. You want to understand in a linear cause-effect model but this is probably not adequate. I'm not sure Lamont decided to do anything, I think his hand was forced when he was in the bath singing.

If you want an explanation, you need look no further than the post-war baby boomers working their way through the system.

JY

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I'm not sure Lamont decided to do anything, I think his hand was forced when he was in the bath singing.

Correct. Interest rates didn't go as high as they did purely because Sterling was in the ERM. In fact, interest rates went where they did to try to keep Sterling in the ERM when George Soros and his mates started selling the pound. In the end the pound had to be devalued, but not before it had cost £24 for every living human being in the UK at that point. Granted Lamont left Sterling prone to this type of attack by putting it in the ERM, but I'm sure his intention wasn't for what actually happened.

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Splendid post mikefluk. It deserves a few comments after it! The only really disputable point in it, to me, is the statement that it was Lamont's decision to leave the ERM. You might as well argue that it's now Blair's own decision to leave No. 10 on 31 May 2007....

In particular I agree with the key determinant of the crash when it comes (when all see that it has come): loss of investment confidence on the part of the BTL crowd. You'd think that we'd had enough very low growth by now for that to have happened, but I remember what another poster said about the oil tanker turning in the ocean....

Another point worth noting is that even after Black Wednesday it took years for things to pick up properly - at least five years in fact. That I put down primarily, once again, to the oil tanker factor - how long it takes to rebuild confidence after the harrowing time Britain had just gone through economically. However one would think that it would be rather easier and quicker to destroy confidence than to build it up....

Granted Lamont left Sterling prone to this type of attack by putting it in the ERM....

As Norman Tebbit noted at the party conference three weeks later, it wasn't Lamont wot dunnit. The look on Major's face as the camera panned to him at that moment would have frozen even his hot ex-chick.

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I would like to add a number of points here, but due to the call of the local pub I must be brief...

Statutory interventionism re: rent controls had stifled rental market, hence the high levels of owner occupation in UK, this is still re-adjusting after being disposed of as we speak

Financial liberalisation of lending policies in 1980's and opening up of competitive lendingmarkets & lending vehicles , i.e builing society act 1986 ( i think)

...got to go, will come back

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Interesting thread.

Most of it can be summed up in a few words - MONEY SUPPLY GROWTH EXPLOSION

Money supply does not even feature in official Bank of England models but EVENUTALLY more money leads to more inflation. That's why interest rates are going up. The level of monetary stimulus needs to be removed.

The ECB for all it's gaffs understands this point quite well and they are far from being done hiking rates. The Fed also understands this point but HOPES they've hiked enough already. The BOE is just stupid.

Edited by spoon

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Guest mattsta1964

I am a firm believer that everything that happens is explainable; you just have to search out the key cuases and contibutors. The causes are the triggers and the contributors add to the effect.

Taking the current UK property bubble...I would say its origins could be traced back directly to Lamont's decision to withdraw from the ERM back in September 1992. Up until then we had been locked into the ERM which forced us to mainatain high interest rates to support sterling. This suppressed property prices considerably. Once we withdrew from the ERM monetary policy loosened considerably and in the space of a few years interest rates fell from 15% to less than 5%

This had a massive effect on reducing the servicing cost of the asset and not surprisingly its price increased accordingly.

The next cause was Gordon Brown taxing pension funds - He directly caused a mass exodus from pensions as an investment vehicle and into BTL; a factor still prevalent today.

The third key cause was the drops in world wide equities. This again led to investment in property, propelling the bubble even further

The fourth key cause arose in 2001 after 9/11 when the world was swamped with cheap liquidity that needed a home and found it quite literally in property. This is the key fundamental keeping the bubble afloat.

Of course there have also been contributors adding to the effect. These include bandwagon investors, desperate FTB's sucked into the market and continued strong economic growth.

So much for the past and the present; but where do we go from here ?

In the short term (less than 6 months) I don't think we go anywhere far. At this moment in time there are several contibutors that in my view are only sufficient to keep prices stable but there are no key causes that will bring about a real drop in values.

On the horizon, however, there are some key causes brewing up. In no particular order these are :

Massive explosion of debt - Some way down the line this will bite !

US property crash - The sooner this happens the quicker the ripple effect over here

Tightening of liquidity - At the margins at the moment and not sufficient to have a major impact; but from here every extra bit of tightening has a marginally greater impact

Diminshing returns from BTL's and lack of capital growth. This for me will be the trigger. Sooner but probably later the BTLr will tire of the poor returns on their BTL investment. In time they will wake up to the fact that the contribution they are making to their mortgage due to the yield shortfall is greater than their capital growth and they will become disillusioned. They will then switch their investment elsewhere; either property overseas, Gold or even back to equities. It only takes for this to happen at the margins to boost supply and suppress prices. Remember even though there may be 30 million homes in the UK there are less than 200,000 on sale at any moment in time and it is these 200,0000 transactions that set market price not the 30 miliion

What is currenly lacking is some form of restraint on the UK that forces interest rates to be raised significantly higher. I don't subscribe to the idea that 0.5% here or there is significant. I think the inter-relationship between interest rates and house prices is similar to that of a house brick suspended from a thick elastic band. Each 0.25% expands the elastic but it holds and keeps holding until it can't hold any more and finally snaps !! Matter of opinion when this point will be reached.

Watch this space everyone

My own assessment of the current housing market runs along slightly different lines.

I believe that the spikes we have seen in the housing market over the last 30 years (we are into the 3rd and by far largest asset bubble in this period) are caused by an ever decreasing creation of 'real' wealth. There is very little 'real' wealth creation in any of the western economies but things are especially grim in the UK and USA because people (And governments) have borrowed ABSOLUTELY VAST sums of money to keep up a life style which is now unsustainable in the global, low wage, low cost economy. We are quite simply living in denial. Our taxes rise, our pensions and savings are raided by desperate politicians, our real wealth melts away and is squandered on bureaucrats, improperly managed public expenditure etc etc and people (and governments again) are forced to borrow ever increasing sums of money just to survive. There are people borrowing money for a new sofa, a new car, a washing machine, for their holidays, their kids' higher education and for hospital treatments no longer deemed cost effective within the NHS. Governments are cutting deals with PFI to pay for schools and hospitals and even for their own political expenditure because (incredibly) there ain't no money in the piggy bank to pay for it all up front. But nevermind eh! They can always install a few hundred more speed cameras or give your local council a few more powers to rob you for some minor indiscretion. Every penny counts in the numpy fekkwit society we live in. A society where people quite happily let the NuLab robber barons steal their future and disenfranchise their shamefully uneducated children.

And then of course there's the housing market....the last refuge for people desperate for a safe asset, something in a world of low wages vanishing pensions and savings which they perceive will guarantee a return no matter what. (The ultimate naivety!!)

The astounding thing, in our supposedly wealthy society, the 4th largest economy in the world we are told, is that there is actually very very little 'real' 'earned through hard work and enterprise' money in the economy. That must sound odd in a time of such profligacy, but it is true. There is very very little 'REAL' money in the economy. Virtually all our money is 'virtual'. Our money is created out of thin air by banks and lent into the economy and you can bet your life that a vast percentage of the economic activity we see in the UK is funded ultimately by that very same 'virtual money' All is well until the economy runs into trouble and then our 'virtual wealth' will disappear. Our house values will crash because the only thing keeping their value high in the first place is the magic word 'confidence!' And all of a sudden, when things turn bad, and banks start to panic, almost all the real wealth in the economy disappears together with the 'numpty' money created by the banks and in no time at, all economic activity grinds to a halt and we are in recession.

So to cut this from getting even more long winded, the asset spikes in the housing market and money markets are indicative of an underlying malaise in the debt based economies of the 1st world economy

And I'm afraid....it's too late to do anything about it and we are totally FEKKED! So you might as well borrow as much money as you can now and enjoy every last minute of it before the whole rotten system falls to shit.

Cos that's what's in the post.

Yours cheerfully and exceedingly optimistic for our future

Matt

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The bubble is very easy to explain.

The early 90's recession meant that by 1996 properties were ridiculously cheap, over the next 4-5 years you then saw strong growth as they returned to a fair value.

Post 2000/01 (aided by liquidity etc) buyers seeing the massive gains over the last 4 years adopt a bubble mindset, expecting massive growth to continue ad infinitum. The result: a self perpetuating cycle of rising prices prompting buyers to pay ever higher prices on the back of expected growth.

The bubble ends when growth stops (now). Speculators leave the market and the downward slide begins.

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Great Post. But a couple of points:

The great wave of liquidity came from the BoJ lowering their rates to effectively zero NOT a consequence of 9/11 as you suggest.

There are nearly 1M properties for sale at any one time MUCH MORE than the 200K you suggest. 200K is possibly about how many are actually sold/annum but I reckon it more than that.

;)

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Correct. Interest rates didn't go as high as they did purely because Sterling was in the ERM. In fact, interest rates went where they did to try to keep Sterling in the ERM when George Soros and his mates started selling the pound. In the end the pound had to be devalued, but not before it had cost £24 for every living human being in the UK at that point. Granted Lamont left Sterling prone to this type of attack by putting it in the ERM, but I'm sure his intention wasn't for what actually happened.

No I know it wasn't intentional, his hand was forced by Soros. Even though it was unitentional it still did cause the turnaround in property prices as interest rates were allowed to ease, thats the only point was making

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My own assessment of the current housing market runs along slightly different lines.

I believe that the spikes we have seen in the housing market over the last 30 years (we are into the 3rd and by far largest asset bubble in this period) are caused by an ever decreasing creation of 'real' wealth. There is very little 'real' wealth creation in any of the western economies but things are especially grim in the UK and USA because people (And governments) have borrowed ABSOLUTELY VAST sums of money to keep up a life style which is now unsustainable in the global, low wage, low cost economy. We are quite simply living in denial. Our taxes rise, our pensions and savings are raided by desperate politicians, our real wealth melts away and is squandered on bureaucrats, improperly managed public expenditure etc etc and people (and governments again) are forced to borrow ever increasing sums of money just to survive. There are people borrowing money for a new sofa, a new car, a washing machine, for their holidays, their kids' higher education and for hospital treatments no longer deemed cost effective within the NHS. Governments are cutting deals with PFI to pay for schools and hospitals and even for their own political expenditure because (incredibly) there ain't no money in the piggy bank to pay for it all up front. But nevermind eh! They can always install a few hundred more speed cameras or give your local council a few more powers to rob you for some minor indiscretion. Every penny counts in the numpy fekkwit society we live in. A society where people quite happily let the NuLab robber barons steal their future and disenfranchise their shamefully uneducated children.

And then of course there's the housing market....the last refuge for people desperate for a safe asset, something in a world of low wages vanishing pensions and savings which they perceive will guarantee a return no matter what. (The ultimate naivety!!)

The astounding thing, in our supposedly wealthy society, the 4th largest economy in the world we are told, is that there is actually very very little 'real' 'earned through hard work and enterprise' money in the economy. That must sound odd in a time of such profligacy, but it is true. There is very very little 'REAL' money in the economy. Virtually all our money is 'virtual'. Our money is created out of thin air by banks and lent into the economy and you can bet your life that a vast percentage of the economic activity we see in the UK is funded ultimately by that very same 'virtual money' All is well until the economy runs into trouble and then our 'virtual wealth' will disappear. Our house values will crash because the only thing keeping their value high in the first place is the magic word 'confidence!' And all of a sudden, when things turn bad, and banks start to panic, almost all the real wealth in the economy disappears together with the 'numpty' money created by the banks and in no time at, all economic activity grinds to a halt and we are in recession.

So to cut this from getting even more long winded, the asset spikes in the housing market and money markets are indicative of an underlying malaise in the debt based economies of the 1st world economy

And I'm afraid....it's too late to do anything about it and we are totally FEKKED! So you might as well borrow as much money as you can now and enjoy every last minute of it before the whole rotten system falls to shit.

Cos that's what's in the post.

Yours cheerfully and exceedingly optimistic for our future

Matt

This means only one thing Matt! War!

We must grab those foreign resources and the means of enhancing our own wealth, by force which we cannot gain by trade. And when we can no longer afford to trade for these things, due to our enormous debts, we have to fight to gain these things..............

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Guest mattsta1964

This means only one thing Matt! War!

We must grab those foreign resources and the means of enhancing our own wealth, by force which we cannot gain by trade. And when we can no longer afford to trade for these things, due to our enormous debts, we have to fight to gain these things..............

Not quite what I had in mind I must say but the reason why countries go to war is very interesting when you get under the skin and see what's really going on.

Why did the US go to such enormous expense to fight a war in Iraq for example?

To get rid of Saddam? Hmmmm. I think pretty everyone will agrees, that ain't the reason.

Weapons of Mass Destruction? Nope. That was a fantasy too. Saddams nuclear ambitions in particular were destroyed by Isreal back in the 80's and his capability to enrich uranium was also pretty well gone by the time of the first Gulf War. Would you invade a country the size of Iraq to find a few canisters of mustard gas? No. No sane country would.

Oil? Seems like the most obvious answer doesn't it, but there is a deeper and more interesting reason why Bush invaded Iraq and that is that Saddam was selling his oil for Euros, not dollars. That set an extremenly important precedent because the dollar has been the favoured global reserve currency for most of this century. But with the USA's dire deficit problems, it's economy is being largely propped up by confidence in its currency. As long as Iraq, Iran, and Russia sell their oil for dollars, it will keep their currency strong but when Saddam decided to sell his oil for Euros that really got the alarm bells ringing in Washington. Now Syria and Iran are also starting to sell their oil for Euros. No doubt, the recent sabre rattling by Bush against Syria and Iran is another veiled threat not to dump the dollar.

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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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