Massive news

[Adam Bear]

The bubble will run out of steam with or without IR rises. The rate rises may bring forward the timing of the crash, just as the MIRAS debacle did last time; equally when rates fell to 3.5% that seems to have prolonged the house price boom.

The whole situation has got to be pretty awful when people are saying that its OK so long as interest rates stay below 5%... historically, 5% is a bloody low interest rate!

Time will tell, of course.

[London-loser]

CBI cuts forecasts for UK growth

http://www.thisislondon.co.uk/news/busines...id81837?source=

I'm still no economist but I thought the UK's long-term rate of economic growth was ABOUT 2.5% (coincidentally roughly in line with the long term real return on property).

What I mean is, we ARE above trend and even if this fall occurs we will still be above trend - this is inflationary.

And that forecast assumes another 0.5% increase in interest rates.

Not to mention the fact that oil prices are running out of control and government spending is abnormally high (Merv has also warned about this remember - although he cannot change this and can only counter its effects by pushing up interest rates).

[Teddy Bear]

As has been stated many times before rates to do have to go that high as a) unlike the previous crash there is much more unsecured debt e.g. credit cards, store cards, personal loans, car loans, student loans, overdrafts, HP, etc...etc and low inflation - so the debt doesn't get eaten into c) no Mirras to cushion interest rates

[Time to raise the rents.]

Historically, 5% is about right.

There has been nothing to create a rush similar to the MIRAS rush and there is nothing on the horizon that is similar to the ERM caused rate movements.

I also believe the current urge to buy into this market will (and maybe has) run out of steam, but that doesn't mean it's automatically a prelude to a crash or crisis.

[king cobra]

If you were not worried about the potential for an abrupt correction in UK house prices before today, you should be now," said Malcolm Barr, economist at J.P. Morgan Chase in London

a interesting comment regarding the latest figures

[George Mainwaring]

Historically, 5% is about right.

Not in the UK it isn't. Historical average since the war is 7.5%. It was much higher through the 70's and 80's (peak at 17%?). I can remember in the late 80's that 9% was considered low.

[Adam Bear]

I have to admit, I was always under the impression that long run average IR was 7 to 8%.

[RJG18]

We're not talking Tulip Bulbs or dot com's here, we're talking roof's over peoples head.

No, in this current environment, at current prices, we're talking about an INVESTMENT for the majority of buyers in the past few years. The fact that it has a roof attached to the top of it is not significant.

If we were talking solely about "a roof over peoples heads" then pricing would be consistent with the price that average people are able to pay for an average roof over their heads.

As prices have vastly outstripped such a fundamental value, then we are clearly taking about curent property pricing being driven purely as an investment vehicle.

Talk of property priced as JUST a "roof over someones heads", on the whole supports a 40%-ish fall in prices.

[brainclamp]

Glad someone else follows Prof Pepper...

U.K. House Prices - Prof Gordon Pepper - Nov 1988

http://abacus.bates.edu/acad/depts/econ/fa...enwells/344.pdf

Before I go on to the rest of my reading of economic history, it is worth discussing another example of a financial bubble - house prices in the UK.

In Chart I the graph shows the annual rise in house prices in real terms, while the bar chart shows the annual rate of increase in mortgage lending, also in real terms. The chart is very similar to the ones for the equity markets in the UK and the US whicl: appeared in our August Bulletin.

Chart II shows the ratio of house prices to average earnings, which is a good measure of valuation.

It will be seen that house prices are almost as dear as they were in 1974. The classic Kindleberger pattern exists today, as it did in 1974.

When the bubble burst in 1974 house prices fell by more than 30% in real terms.

They did not, however, fall in nominal terms; the fall in real terms was almost exactly matched by inflation. Suppose this time that house prices again fall by 30% in real terms, but that inflation over the period of the fall amounts to 10%. House prices would then fall by 20% in nominal terms. Remembering that, according to the Building Societies Association, more than a quarter of the number of loans at the end of 1987 were taken out during 1987 and that almost a third of these were for a mortgage in excess of 95% of purchase price, the implication is that many houseowners would have a mortgage which is not covered by the open market value of their house.

If the above circumstances occur, people are likely to postpone selling their houses. They will try to sit it out, hoping that prices will eventually recover and that they will not incur a loss. Building societies and clearing banks are likely to give such people time in which to sort out their difficulties. In the last year or so the number of fringe lenders has, however, grown. These lenders may act much more quickly to protect their position if a .customer starts to fail to honour an obligation.

The result would be some forced selling of homes and the housing market would not be as "sticky" as it was in the mid-1970's. In short, a UK version of the current asset deficiency of US savings and loans organisations is not impossible. (The liabilities of US savings and loans organisations currently exceed assets by the huge amount of about $50bn. This is being covered by a levy on the industry lasting many years, the present value of which is equal to the deficiency.)

Even if an asset deficiency does not happen there would be a substantial impact on consumer demand.

During the last twelve months people moving house have used part of the capital appreciation on their old house to furnish, equip and enhance their new house. Such finance has added significantly to consumer demand. If the housing market freezes, let alone goes into reverse, the impact on demand would be considerable.

[brainclamp]

Obvoiusly the BTL boom means prices are a lot less 'sticky' than during the 1988 boom. Investors will quickly aim to preserve the real value of thier capital gains by trying to sell.

As you can see from my sig, even cashin in the extent of the rises over the past 9 months is fantastical amounts of money.

[Time to raise the rents.]

Why is that obvious?

[brainclamp]

Why is that obvious?

I would have thought that anyone sitting on low rental yields would not have much of a emotional attachment (i.e. like in the family home) to flog it as fast as possible and cash in thier gains? If property is treated like an investment then there is a time to buy and a time to sell.

There is nothing regarding a new paradigm theory in Prof Peppers analysis of the 1988 housing boom, MIRAS relief or anything else. He looked at the expansion of credit and raging price of property and predicted inflation of 10% followed by falls of 20% in nominal terms, pointing out the risks of negative equity on consumer spending based on historic long run multiples.

[SteveB]

I don’t agree with this theory that a price crash would mean lots of houses flooding the market. AS LONG AS INTEREST RATES REMAIN LOW.

Homeowners who make up the vast majority would still be able to afford mortgage repayments, so would not sell.

I think the majority of BTL investors are in it for the long term and again as long as the rent was covering the mortgage would not sell.

[how much...?? you must be joking]

I think the majority of BTL investors are in it for the long term

...what are you basing this assumption on..??

[Teddy Bear]

I don’t agree with this theory that a price crash would mean lots of houses flooding the market. AS LONG AS INTEREST RATES REMAIN LOW.

Homeowners who make up the vast majority would still be able to afford mortgage repayments, so would not sell.

I think the majority of BTL investors are in it for the long term and again as long as the rent was covering the mortgage would not sell.

House prices are set only by those who are actively partcipating in the buying/selling process. Therefore homeowners/btl's staying put won't prevent a fall in prices. A house only worth what someone is willing to pay for it. If people won't pay the price falls.

[SteveB]

I think the majority of BTL investors are in it for the long term

...what are you basing this assumption on..??

Just through the people I know who have bought investment properties. Despite what some people think on this forum, they are simply tring to secure a future where they don't have to work in B&Q to supplement their pension !

[brainclamp]

Maybe it's time to address what cause the 89-95 bust again:

The MIRA's rush bought forward every person and their dog who'd been considering buying, this inflated prices dramatically, regardless of rate rises which were used to try to stop the rush.

They kept buying until the date passed & suddenly they didn't want to buy anymore.

ALL of the buyers in the pipeline had bought, the remaining hopefuls, unable to buy because rates had shifted so hard, were out of the market.

This political mistake was compounded by efforts to keep Sterling in the ERM.

This created a situation where people were desperate to sell. This desperation is where the bust comes from, nothing else.

We're not talking Tulip Bulbs or dot com's here, we're talking roof's over peoples head. Nobody is desperate to be without one!

I see no evidence of anything resembling the last time round, which is why I repeatedly let people know they should look to OTHER markets as an example of what to expect. Not Japan, not Hong Kong, not Thailand. The UK's peers, Europe, America, Australia, NZ.

Clutching at straws? I think not and bet by livelyhood on it.

I believe your view of 1988 being a bubble caused by MIRAS is mistaken. Most of the data points to the sole cause of the bubble being very easy credit and artifically low interest rates caused by Lawson shadowing the DM BEFORE joinging the ERM.

These very low interest rates following the German economy, created a credit boom that lasted through much of the mid 1980's till 1988. Then credit was tightened - because it had to be as the credit was causing inflation.

[Time to raise the rents.]

There is nothing regarding a new paradigm theory in Prof Peppers analysis of the 1988 housing boom, MIRAS relief or anything else. He looked at the expansion of credit and raging price of property and predicted inflation of 10% followed by falls of 20% in nominal terms, pointing out the risks of negative equity on consumer spending based on historic long run multiples.

There was nothing of a new paradigm to talk of at the time. IMO recent history was therefore very relevant.

Did he predict the rates required to create so many desperate sellers?

[Time to raise the rents.]

Brainclamp, you're entitled to your opinion, but I think you're wrong and I believe I'd be in the majority there.

Despite this, your words are important and show that I am unable to write the entire story in 1 post.

I believe the MIRA's rush was the start of the end and there was no investment community like BTL to support the market when prices went silly.

[how much...?? you must be joking]

I think the majority of BTL investors are in it for the long term

...what are you basing this assumption on..??

Just through the people I know who have bought investment properties. Despite what some people think on this forum, they are simply tring to secure a future where they don't have to work in B&Q to supplement their pension !

...how many people do you know...??

...of the people i know with investment properties (10) 8 are looking to sell within the next 6 months....

..small samples can produce wildly differing results...

[SteveB]

House prices are set only by those who are actively partcipating in the buying/selling process. Therefore homeowners/btl's staying put won't prevent a fall in prices. A house only worth what someone is willing to pay for it. If people won't pay the price falls.

I totally agree.

Could a situation arise though that resulted in the house prices falling, but hardly any property to buy because as I stated people don't have to sell ?

[I Told You So]

TTRTR your talking gobbledydook

I get the feeling you cannot believe the news this week and have gone into a state of shock, leading to feelings of insecurity and irrational thought processes.

[London-loser]

I think the majority of BTL investors are in it for the long term

...what are you basing this assumption on..??

Just through the people I know who have bought investment properties. Despite what some people think on this forum, they are simply tring to secure a future where they don't have to work in B&Q to supplement their pension !

Steve,

You need to remember that MOST people who have BTL mortgages are NEWCOMERS (see the CML data), there has been exponential growth in recent years (at the end of June 2004 there were 473,000 BTL mortgages outstanding but almost 200,000 - more than 40% - of these had been taken out in the last two years and about 55,000 - more than 10% - in the last six months).

With interest rates likely to rise a further 0.5% or so (and people coming off short-term deals) there will be quite a lot of people who actually don't make net gains from their rent (or very little) AND they can see the value of their flat/house falling.

[brainclamp]

Yes - he predicted inflation of 10%, (implying interest rates about this), followed by 20% nominal falls. (Because monetary policy had changed since the 1970's boom.)

The steep rates were needed to take the excess credit from the economy and restore the value of peoples savings.

I believe a lot of credit has been extended which is not backed by real savings during this boom.

This implies a period of tighter interest rates, not lower interest rates. Regardless of BTL property investors.

We still have very very low interest rates and are not even back to the neutral level yet.

[SteveB]

...how many people do you know...??

...of the people i know with investment properties (10) 8 are looking to sell within the next 6 months....

..small samples can produce wildly differing results...

5 people.

Sure people are looking to sell now, but prices are still high. Will they still sell if there was a crash though or sit tight and ride it out ?