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House Prices As A Function Of Credit Availability

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The current house price bubble has been brought about by excessive lending on the part of the banks. So the banks dictated how much the bubble would inflate - so lending standards of the future will effect how much house prices come down. Won't they?

Is it possible to predict how tighter lending standards will become? How do we know that prices will come down to the long term average or even drop below it as, ultimately, this is all regulated by the banks willingness to lend (as demand is still strong). It may be worse than this and we see drops of greater than 50%.

There may be other factors that come into play. People may get so fed up with house prices dropping that sentiment/demand does fall and people don't want to even think about buying property. This may result in even lower property values.

Is there anything I have missed?

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If there is a significant under-shoot, this will be down to popular revulsion (and inability to crunch numbers - no surprise there!)

The politicians don't want a meltdown - so I anticipate that there will be an agreement about how lax lending can get. Until recently, I assumed that this would be the outcome of government advisers - but, recently, I've come to wonder if the Northern Rock might turn into the bank that sets the trends everyone else must follow. I understand that something a bit like this happened in Japan... banks nationalised - then the nationalised banks (free from short term profit motives) set the market.

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That sounds about right to me, on a whole.

Also, you have to remember that people have an appetite to borrow more than they can really afford, when they think the property prices "can only go up". Toss in the house price decreases and the spectre of negative equity and a lot of people may look to live more within their needs.

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Is there anything I have missed?

Falling demand from net emmigration. It could well happen when we go into recession.

I think you are missing something with your analysis. Badly informed investors decided how much the bubble would inflate, not the banks. The banks were just too slow in turning the taps off when investors got cold feet, so they got left holding a sizeable baby, with a nappy full of particularly unpleasant poo.

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The point Ben seems to miss everytime he drops IR to target the crashing housing market. IR have no impact of house prices in an economy where credit is free flowing and unlimited in quantity. I.e.: a "miracle economy."

Ben can drop IR all he likes, even to 0% and it will hardly dent the fall in the house market.

The more he drops the higher therates go because commercial rates are linked to the credit markets and when those markets become risk averse IR rise as they are doing now in the US. See the huge WoW hikes:

MortgageHome EquitySavingsAutoSee today's average mortgage rates across the country. Source: Bankrate.com
Loan Type Today Last Week
30 Year Fixed 6.10% 5.92%
15 Year Fixed 5.57% 5.37%
1 Year ARM 4.94% 4.99%
30 Year Fixed Jumbo 6.98% 6.87%
5/1 ARM 5.20% 5.11%
3/1 ARM 5.07% 5.00%

It will not be liong before our lenders do the same in the face of Merv's cuts. The more he cuts the higher the rates will go--unless and until the credit markets move in the opposite direction in which they are moving today.

Bottom Line: You cannot beat the marketplace.

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  • 298 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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