Past Performance Is No Indication... But...

[wickywackywoo]

if we follow Japan's lead it is bad news for those desperate to buy at a big discount

it took nearly 10 years to drop 25% and continued dropping from there until recently

I think many people currently desperate to buy will face a situation in a few years where prices have certainly fallen and are now much better value, but where sentiment has changed and it's very clear that prices are likely to continue to fall.

People will then need to weigh up the cost of renting against owning, the likely extent of further falls etc in order to decide whether to buy. Many people will not want to rent for over a decade just to get a house at the best possible price but don't want to pay todays silly prices either.

[drminky]

thanks, I should have worked it our for myself.

rampant inflation=raise IR's= slow the economy

deflation=raise IR's= stimulate the economy.

Before you write this opinion off, it could well actually be true! (to an extent)

Because ecoonomic theory is all about closed systems. But a country is not a closed system anymore, so it is entirely possible that the inverse is almost as true.

lower interest rates= create carry trade= slow the domestic economy (Japan, Switzerland)

higher interest rates = carry trade recipient = easy credit and rapant inflation (New Zealand, for example)

[Kingmaker]

In a deflationary period rates go lower to stimulate money supply and demand within an economy. IRs go up in an inflationary environment.

Basically in Japan house prices collapsed for so long no one wanted to get a mortgage and the money supply plummetted. Even rates of 0% couldn't coax people to buy a home that is falling in price.

I disagree with the causality in the second paragraph there. The Japanese situation was aggravated by monetary policy that was too tight - several false dawns where IRs were raised in a belief they were out of it, only for them to have to pull them lower again.

[Guest grumpy-old-man]

Before you write this opinion off, it could well actually be true! (to an extent)

Because ecoonomic theory is all about closed systems. But a country is not a closed system anymore, so it is entirely possible that the inverse is almost as true.

lower interest rates= create carry trade= slow the domestic economy (Japan, Switzerland)

higher interest rates = carry trade recipient = easy credit and rapant inflation (New Zealand, for example)

cheers drminky,

but I don't think I dare comment on this subject again today.

but I do know 1 thing for sure. We have a big recession coming or poss worse.

[Fancypants]

But I'm 33 and I don't want to wait until I'm 46 (the next low) until I buy!

Sadly, I think your graph is correct.

don't sweat it! Think of it this way - in such a scenario, it is by no means inconceivable that (with preparation, intelligence, and luck) you could save £80k in the interim 13 years. Then, you buy for cash, and can retire by 50, if you so desire.

[Starcrossed]

I'm with Fancypants on this one.

With constant employment, 13 years is a long time to be able to save. If each month sees money saved while the price of property is falling, by the bottom you could be wealthy and own a house outright.

[Fancypants]

I'm with Fancypants on this one.

With constant employment, 13 years is a long time to be able to save. If each month sees money saved while the price of property is falling, by the bottom you could be wealthy and own a house outright.

forgot to mention before Starcrossed - tis good to have you back!

[TTID]

I'm with Fancypants on this one.

With constant employment, 13 years is a long time to be able to save. If each month sees money saved while the price of property is falling, by the bottom you could be wealthy and own a house outright.

Also, because the bottom runs shallow for a very long time, if you just want a reasonably priced home, they will start to turn up quite some time earlier. You'll just have to rely on repayments to build up equity, that's all.

[Jonnybegood]

I don't know if I fully understand your graph but I assume your saying that by 2020 prices will be around £90,000 in real terms and around £110,000 nominal (50% real fall and almost 40% nominal).

Well look at IR data over the same period, We have never had such a long period of low IR (15 years ago was the last time rates hit 8%). Except for a short period in the late 70s rates have always been above 8% but for large parts 10% +.

Now IR are rising but I don't think it will be a trend over the longer (4+ years) term, 8% they will peak.

I can then see rates being kept around the 6% mark for the longer period and when looking at the rates below is still a low IR in comparison.

So when talking about affordability, A key driver in any HPI highish prices may be more sustainable than many think.

Take 1988 on your graph, Nominal price was £45,000 at 10.5% IR = £429pm Repayment mortgage rising to 15% IR by 1989 = £580pm. and most were on a SVR which was probably far higher than 15%

Just for comparison inflation adjusted repayments £90,000 = £858pm @10.5% or £1160pm @ 15%

If inflation continues to run at 2.5% on average (In the current climate is about right) for the next 13 years as per your graph that alone will bring an average prices house back to £127,000 in real terms (almost 30% real fall) with no nominal falls, Almost in line with the real falls in the last crash but over a longer period.

So falls would be the same but the time it takes to bottom out and then recover will be far longer than all previous crashes.

Plus there have been alot of changes since the last crashes, mass immigration being just one of them

Thu, 11 Jan 2007 5.25

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Edited April 27, 2007 by Jonnybegood

[TTID]

I don't know if I fully understand your graph but I assume your saying that by 2020 prices will be around £90,000 in real terms and around £110,000 nominal (50% real fall and almost 40% nominal).

I think the graph shows about £80K real. I'm not drawing any conclusions about nominal from the graph. I threw on a support line for interest only. The relationship between real and nominal going back has depended upon inflation. The relationship between real and nominal going forward will be similarly affected. Severe inflation will moderate nominal falls. The real falls, though, will be catastrophic.

[TTID]

Had another look at the chart, because the 13 year period was bugging me.

I noticed that, whereas the previous two crashes had a similar descent rate, their ascent and descent was also symmetrical. I then noticed that the ascent of the current boom has been much greater in severity and rate. If history does not suggest constant rate of descent wrt real prices, but a symmetrical boom/bust relationship, the graph points forward to a quicker response.

Looking at the last crash, also, there is an inner cone of symmetry, at the final boom and initial crash. It falls at the same rate as the final boom, as far as the inflation adjusted trend line, then falls progressively slowly to the symmetrical trough.

Projecting this activity onto our current boom, the prediction is as shown. An initial plunge of 23% over 21 months, followed by a mellowing curve to a final bottom (in real terms) of 54% down after 8 years.

The difference between the real prices and the nominal prices historically has been caused by inflation. The same will be true going forward. Because this is a real terms curve projection, inflation over the intervening 8 years will moderate the magnitude and duration of this down curve, so we shouldn't have to wait much more than 4-5 years for a nominal bottom, give or take a couple of percent.

Not that I know. It's just a picture.

[Disillusioned]

at least I admit when I am wrong & I'm not afraid to ask. It's a sign of inner strength & confidence.

any newbies watching, feel free to ask stoopid questions like what I does. it's the only way to learn. Could be worse, you coluld be in a class of 1000 people & do it, at least here it's all virtual people, however some talk virtual b0ll0x as well of course, but you have to put up with that.

Thanks grumpy-old-man. You’ve opened the door for me to step in with some stupid questions!

I’m sorry if these have been asked before. I’ve tried using the search engine on some of them with moderate success.

1. Financially, I know in my heart that I’m in a better position than if I were mortgaged to the hilt. I do have a student loan to deal with, which is gradually being paid off through PAYE. What would a crash do to my finances? In the event of HPC and rising interest rates (would they go hand in hand?) should I pay off the loan in order to avoid being stung by the interest rates? I'm guessing not, because my savings interest rates will always be higher than my student loan (which follows the RPI) and, therefore, I'm making more money than I’m losing. In short, is it best to stay as I am, with savings and student loans, or would it be better to pay off the loans (which would reduce the savings) to ensure that we have absolutely no debts to clobber me?

2. All savings are in cash at the moment. Is that a bad idea? How much do you think one has to have in savings (ball park figure) to make it worthwhile diversifying away from cash? Which currency would be best? I’m thinking sterling would be best, since the savings are intended for a deposit at some point.

3. Here’s a big question for ya! - What's to stop our friend Gordie and the BoE etc from continuing to wreck the economy and continuing to prevent a crash? (like I think they did in 2005). If they allow inflation to continue, surely being in debt is better as the debt is gradually eroded away…

4. Finally, what was being said before the last crash? Was it the same old ‘supply and demand’ cr*p etc?

All answers gratefully received.

D

[drrayjo]

Thanks grumpy-old-man. You’ve opened the door for me to step in with some stupid questions!

I’m sorry if these have been asked before. I’ve tried using the search engine on some of them with moderate success.

1. Financially, I know in my heart that I’m in a better position than if I were mortgaged to the hilt. I do have a student loan to deal with, which is gradually being paid off through PAYE. What would a crash do to my finances? In the event of HPC and rising interest rates (would they go hand in hand?) should I pay off the loan in order to avoid being stung by the interest rates? I'm guessing not, because my savings interest rates will always be higher than my student loan (which follows the RPI) and, therefore, I'm making more money than I’m losing. In short, is it best to stay as I am, with savings and student loans, or would it be better to pay off the loans (which would reduce the savings) to ensure that we have absolutely no debts to clobber me?

2. All savings are in cash at the moment. Is that a bad idea? How much do you think one has to have in savings (ball park figure) to make it worthwhile diversifying away from cash? Which currency would be best? I’m thinking sterling would be best, since the savings are intended for a deposit at some point.

3. Here’s a big question for ya! - What's to stop our friend Gordie and the BoE etc from continuing to wreck the economy and continuing to prevent a crash? (like I think they did in 2005). If they allow inflation to continue, surely being in debt is better as the debt is gradually eroded away…

4. Finally, what was being said before the last crash? Was it the same old ‘supply and demand’ cr*p etc?

All answers gratefully received.

D

No-one has anything for the Disillusioned?!

[huw]

Thanks grumpy-old-man. You’ve opened the door for me to step in with some stupid questions!

I’m sorry if these have been asked before. I’ve tried using the search engine on some of them with moderate success.

1. Financially, I know in my heart that I’m in a better position than if I were mortgaged to the hilt. I do have a student loan to deal with, which is gradually being paid off through PAYE. What would a crash do to my finances? In the event of HPC and rising interest rates (would they go hand in hand?) should I pay off the loan in order to avoid being stung by the interest rates? I'm guessing not, because my savings interest rates will always be higher than my student loan (which follows the RPI) and, therefore, I'm making more money than I’m losing. In short, is it best to stay as I am, with savings and student loans, or would it be better to pay off the loans (which would reduce the savings) to ensure that we have absolutely no debts to clobber me?

2. All savings are in cash at the moment. Is that a bad idea? How much do you think one has to have in savings (ball park figure) to make it worthwhile diversifying away from cash? Which currency would be best? I’m thinking sterling would be best, since the savings are intended for a deposit at some point.

3. Here’s a big question for ya! - What's to stop our friend Gordie and the BoE etc from continuing to wreck the economy and continuing to prevent a crash? (like I think they did in 2005). If they allow inflation to continue, surely being in debt is better as the debt is gradually eroded away…

4. Finally, what was being said before the last crash? Was it the same old ‘supply and demand’ cr*p etc?

All answers gratefully received.

D

1. I would keep the student loan. Once you've paid it it's gone and you're unlikely to be able to borrow on those terms again. AIUI, student loan repayments are suspended if your income falls below a certain level (?) so the debt is kind of recession-proof. And if you ever decide to emigrate...I'm sure there are some forms you're supposed to fill in

2. Not sure what you mean by diversifying away from cash, since you then mention currencies as alternatives. Personally I think it's worth holding some precious metals. In some ways I'm fonder of silver than of gold, because an ounce of silver is actually spendable as day-to-day money; who's going to make change on a krugerand? Plus, silver is more affordable for those of modest means and it's definitely more fun to hold £1000 worth of silver in your hands than £1000 of gold! Silver's value may also be underpinned by industrial demand for a limited world supply. On the down-side, silver attracts VAT in the UK whereas gold is VAT free, and silver is less portable. You might also look at shares in companies that are likely to prosper from coming conditions (don't ask me which ones those might be!)

3. If they cut interest rates they could sustain the housing boom for a while, but other factors would soon kick in (such as a sterling collapse). This is one reason to have some precious metals or other inflation-proof assets.

4. No clue, I was out of the country at the time.

Edited May 14, 2007 by huw

[christhpc]

should I pay off the loan in order to avoid being stung by the interest rates? I'm guessing not, because my savings interest rates will always be higher than my student loan (which follows the RPI)

Just to be clear, and you probably know this, but for others reading that may have a student loan - the current student loan interest rate is 2.4%. So you're better off keeping the money in a high interest savings account rather than making extra repayments. However, if increases in inflation were such that the student loan interest rate began encroaching on my savings account interest rates I wouldn't hesistate to repay the balance off in full and be done with the blasted thing.

In fact now the Student Loans Company has been sold off to the private sector I doubt the new owners will be quite so lenient with borrowers. SLC loans may be linked to inflation right now but who knows what will happen in the future...

[Flat Bear]

I had a mess around with the figures at the Nationwide.

The magenta line is the same data on the hpc front page. The blue line is the nominal prices. The yellow line is the trend of the inflation adjusted prices. The other lines are mine.

Some observations:

We are now at historic resistance at the top of the wave. The curve has previously touched this resistance briefly, before motoring away quite briskly. The last time, the curve went off a cliff until it hit the trend, then began to shallow out.

The mean rate of descent from peak to trough of the inflation adjusted prices has been similar in the last two crashes.

If the next crash behaves the same way, it will fall in excess of 50% in real terms. To prevent this being a bloodbath in nominal terms, inflation will have to be in the cartoon category for quite some time.

If, if, if, it goes this way, the average home in the UK will cost £80K at today's prices.

OK, so these are just lines on paper and we've got all of these other arguments about martians needing houses when they land and how all of the UK is now concrete so that we've started filling in the Solent, but whatever the inflationary pressures may be in the housing market going forward, they're really going to be swimming up Niagara.

Edited to add: tidy up graph

I have looked at the same graphs and have come to similar concludsions patterns

BUT remember all the other things that can have influences on this pattern including current unpresidented demand due to immigration, continued cheap money, and continued global economic expansion with deinflationary pressures originating from the far east.

BUT all these things can go into reverse and cause the opposite effect which could make the correction even greater.

Good observations TTID

Edited May 14, 2007 by Flat Bear

[Tommy]

I had a mess around with the figures at the Nationwide.

The magenta line is the same data on the hpc front page. The blue line is the nominal prices. The yellow line is the trend of the inflation adjusted prices. The other lines are mine.

Some observations:

We are now at historic resistance at the top of the wave. The curve has previously touched this resistance briefly, before motoring away quite briskly. The last time, the curve went off a cliff until it hit the trend, then began to shallow out.

The mean rate of descent from peak to trough of the inflation adjusted prices has been similar in the last two crashes.

If the next crash behaves the same way, it will fall in excess of 50% in real terms. To prevent this being a bloodbath in nominal terms, inflation will have to be in the cartoon category for quite some time.

If, if, if, it goes this way, the average home in the UK will cost £80K at today's prices.

OK, so these are just lines on paper and we've got all of these other arguments about martians needing houses when they land and how all of the UK is now concrete so that we've started filling in the Solent, but whatever the inflationary pressures may be in the housing market going forward, they're really going to be swimming up Niagara.

Edited to add: tidy up graph

Well, you have used the graph which shows house prices adjusted for inflation. This is not really an indication of how affordable a house is as the affordability does not just depend on "real house prices" but also on the interest rate (and also other things like consumer price inflation is not necessarily too similar to wage inflation, lenght of mortgage, etc...)

Why don't you draw the same thing using the Affordability Indices from nationwide ( Mortgage payments as a percentage of take home pay ) ?

For example the FTB affordability index is 121.3 in Q1 2007 and was 147.6 in Q2 1989. I am sure the last rate hike as put the index up a bit more though, but we are certainly far from 147.6.

So houses are still not at their peak in terms of affordability, the only thing that could make affordability worse than 1989 at current house price levels is a few more rises in interest rates (which might actually happen) (Note that Northern Ireland is already worse than 1989!)

In my opinion even this graph is not too reliable because the trend is that over time houses will be less and less affordable anyway, we have to accept this fact. Also, affordability is not all, demand and offer is king (but demand mainly driven by affordability of course).

In other words there is still room for a few more rate hikes or for some more HPI above RPI-X (but not for both really, at least not for long).

[TTID]

For example the FTB affordability index is 121.3 in Q1 2007 and was 147.6 in Q2 1989. I am sure the last rate hike as put the index up a bit more though, but we are certainly far from 147.6.

So houses are still not at their peak in terms of affordability, the only thing that could make affordability worse than 1989 at current house price levels is a few more rises in interest rates (which might actually happen) (Note that Northern Ireland is already worse than 1989!)

There is no requirement for affordability to reach the Q3 1989 peak to trigger another crash. The spike in interest rates was so extreme then that we can't really say that the crash wouldn't have happened because of the previous rate hike, or the one before it.

It is significant, IMO, that we are at a worse level of affordability as immediately prior to the 89 crash, while the bubble was being completed, and at the same degree of overshoot, with respect to the trend.

There are also many more potential triggers than simple rate hikes, today. The last crash was based entirely on forced sales, due to lowered affordability of existing loans. They had no BTL back then. We are about to discover what negative real terms HPI, coupled with negative rental yield does to the speculative property investor.

This is saying nothing about the effects of a credit crunch, should the Yen carry trade significantly unwind, or a major hedge fund manager do a Nick Leeson.

[Tommy]

There is no requirement for affordability to reach the Q3 1989 peak to trigger another crash.

true, I agree, but the whole point about your graph was to show that we have reached the peak point (like in 1989). My point was to show you that in terms of affordability we have not. I agree we do not have to reach the peak for a crash to occur.

There are also many more potential triggers than simple rate hikes, today. The last crash was based entirely on forced sales, due to lowered affordability of existing loans. They had no BTL back then. We are about to discover what negative real terms HPI, coupled with negative rental yield does to the speculative property investor.

I agree we are most likely going to experience negative "real terms" HPI, I do not agree with you this is necessarily so bad for BTL investors...

If I buy a house for 100k, I put 15k deposit and get a loan for 85k. I then have my tenant pay the interest only mortgage on the 85k (I might just break even). Then I get my 2% HPI (let's say inflation is 2.6%).

Well, I am getting 2% on 85k : 1.7k which considering my initial investment of 15k is 11.3% and not just 2%. Of course things are slightly more complicated (you have agency fees if you are using an agency, you have capital gain tax in most circumstances although you can have the usual relief, etc..).

Also when house prices are falling rents are usually increasing.

Of course 20% HPI is much better for BTL than 2% HPI, but if you do the right investment and do your calculations right even 2% is not that bad after all.

[TTID]

Of course 20% HPI is much better for BTL than 2% HPI, but if you do the right investment and do your calculations right even 2% is not that bad after all.

Is this the same British public we're talking about?

[TTID]

If I buy a house for 100k, I put 15k deposit and get a loan for 85k. I then have my tenant pay the interest only mortgage on the 85k (I might just break even). Then I get my 2% HPI (let's say inflation is 2.6%).

Well, I am getting 2% on 85k : 1.7k which considering my initial investment of 15k is 11.3% and not just 2%. Of course things are slightly more complicated (you have agency fees if you are using an agency, you have capital gain tax in most circumstances although you can have the usual relief, etc..).

This illustration demonstrates the rationale for getting into the market now, assuming 2% HPI.

The BTL that I referred to are people who are already in the market and have been for some time, so they're not going to be getting 11.3% on £15K, because that £15k, as a principal stake, is accompanied, in every daily consideration of whether to close their position or continue the play, by the equity that they have amassed since purchase.

By comparison, they could sell up and put their £15K plus equity into another investment. At 2% HPI, the margins may be slightly in favour of continuing, assuming that rent is covering the mortgage entirely and there are no maintenance charges or voids, etc.

The problem arises, though, when a small downtick in HPI is geared against this scenario to produce disproportionate hardship for the investors. At 1.5% HPI, the negative outcome for them is massively magnified by the gearing in the Loan to Value, with Equity ratio.

The question is really how many of them understand the intricacies of this to be able to accurately ascertain the level of HPI that is their baseline, and how many of them are prepared to shoulder the risks, rather than cash in their gains and go and play a safer game.

The big attraction of BTL, for the bulk of the latecomers, is that you can't go wrong with bricks and mortar. This is a classic bubble scenario. Once the legend of massive gains is established, the rank and file ignorancia pile in, only to see their investments lining the pockets of the professionals who are using this rush of euphoria to close their own positions and lock in their profits. In the BTL market, that has already passed.

Now it's just a question of the greater fools waking, sweating, in the night. One by one, that is manifesting as we speak.

Edited May 15, 2007 by TTID