Sunday, January 7, 2007

Good explanation of why HPI is rising

Supply and demand keeps house prices bubbling away

Wrong measure of affordability and demand exceeding supply are reasons for no crash yet.

Posted by sold 2 rent 1 @ 11:51 AM (557 views)
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34 thoughts on “Good explanation of why HPI is rising

  • Only a recession will cause a crash – high unemployment and higher IR

    The final phase of this expansion will see many a bear turn to being a bull.

    I had a decent chat with my accountant yesterday.

    He was arguing that stocks, houses and commodities will all continue to rise.
    China and the likes are such unique occurrences that the world has never seen before.

    It was difficult to put up a good counter argument as he is right.

    Then I said, “So things are different this time, hmmm, I’ve heard that before”

    There are 2 things that will return to long-term trend over the next 2-3 years

    Interest rates
    Profits as a share of GDP

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  • converted lurker says:

    What a useless piece of journalism, the same tired arguments, as a measure of affordability ‘average Joe’ is spending close on 40% of household income on the mortgage, the last time this was so rates WERE at 12-15% and inflation running amok (arguably, all relative) so the comparsion ( the authors) eats itself.
    There is no shortage of supply, if you strip out the 1mil BTL and investment property taken out of the system over the past 5 years as the BTL mania took a grip, there are close on 700K vacant properties as we speak, approx. 200K bright shiny new apartments built specifically for the ballooned investment market.
    I’ve never been a crash kinda guy, but I now accept that prices in this market can fall without any need for outside influences – interest rate increases, it has simply run out of price increase ‘space’ there is nothing left to accomodate further price increases IMHO and this has been the case for the past six months.
    Your accountant sounds like a Daily Express reader BTW, scans the paper down the pub, takes on the bits that fit his argument point of view, and moves on..

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  • During the dotcom boom all commentators were saying that underlying fundamentals could be ignored. This is exactly what many commentators are saying now i.e. fundamentals can be ignored e.g yields and earnings multiples.

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  • This does smack of a dot-com attempt to explain the affordability measure that mr joe average house purchaser is considering. If you expect houses “to always go up, ” and to receive a large return it makes sense to leverage yourself to the maximum you can. Subsequently, affordability is defined as the maximum amount that can be borrowed. No **** sherlock; I can’t argue with it.

    Of course the article pays no attention the repurcussions of this. It is heavily reliant on the economy remaining goldilocks so somebody else can pay more, and is absurd because it increases risk exposure to the 3 bears scenario for the economy, and is effectively undermining the economy. In a market with rational participants when speculation goes rampant, prices should really go parabolic as increasing return is needed to justify the additional risk and then collapse. I guess the house market just ain’t rational.

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  • “The price of housing is simply the price that makes the demand for housing equal to the stock of housing available”

    Isn’t that rather simplistic, there are many other factors in the equation. Personally I think that buying a house in this country is doctrine, and that inevitably creates inflationary pressure that cannot be measured by statistics of the economics of society alone. The desire to own a house pushes people harder and higher to pay for something that they consider a way to make there life more complete. This creates an unstable market place as the desire to purchase will always push people beyond there affordability comfort zones no leading to a bubble and inevitably to a crash, when economic conditions reel-in those that have gone far beyond there finacial comfort zone. I would love to see someone produce an equation that covers all of the factors.

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  • The hidden arguement in this article is that a raise in base rate IR on the 11th will increase the % monthly payment – and therefore be harmful.

    This is just a subtle VI spin in preparation for next week. Expect more articles like this until Thursday. I expect by Wednesday the articles will be more strident and predict economic collapse in IRs go up .25%.

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  • I too think this guys arguments are flawed, he doesn’t mention that house prices at current levels have a built in expectation of further rises and that rents are not really increasing. We have heard the x number of new housholds being formed argument for quite some time now, I’d be curious to know if this is still actually the case with house prices being what they are and people being forced to stay with parents and live in house shares etc. The other point he fails to mention is the difficulty in paying of the capital and trading up in a low inflation economy. Try moving from that £250k shoe box with a £250k ,which after three years you have paid off the grand total of £5k, before taking into account other fees such as stamp duty. Whats wrong with pointing out the obvious, the cost of houses is riduclous and something is going to give sooner or later (preferably sooner).

    PS I am an accountant, so obviously we dont all agree.

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  • He makes the fundamental error of believing that the property market involves the whole housing stock and all its occupants – it doesn’t – it’s those who are buying or selling at any one time, which is a very different thing. We all need to live somewhere and, in time, we’d all like to own our own home. But that doesn’t mean we are all out there buying. In the same way the demand is accelerated by speculation, it will be decelerated by doubts and that alone will be enough to push prices down.

    The other factor is expectations concerning interest rates – an intelligent person borrowing tens or maybe hundreds of thousands of pounds over 25 years will think ahead to ‘what if interest rates rise by a few percent?’ Short-termism has caused most people to put such thoughts to one side with the idea that they would simply sell for a profit and downsize if they had to – or remortgage to cover the additional costs… But if everyone thought about it, they would realise that this would be the very point when everyone else would be trying to do likewise, so the chances of them getting out unscathed are slim. Unfortunately, otherwise intelligent people seem to leave their brains at the door when they go into a mortgage lender…

    So if we’re talking fundamentals, the reason that prices have run away with themselves is not that borrowing costs are low (which undeniably they are) but that borrowers have assumed that they will stay low. It wont take too many more tiny rises to shake that belief and get people (including lenders, we can but hope..) building in the possibility of future rises into their calculations. Then prices will fall to a level which reflects the true long term cost of owning a house.

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  • It’s a big error to consider “affordability” the slice of money that one needs to spend in housing on a 25 mortgage. This idea promotes debt slavery as it encourages a very long financial commitment. An affordable house should be able to be paid in 4 to 5 years of hard work and or savings. Even with a 15% interest rate, that’s possible. With such a favorable interest rate one can even save and buy a house outright. This looks like a ploy to give even more power to the banks. It would be all right if the mortgage money came from local savers, but in reality, it’s foreign money where yields are lower (e.g. Japan). This availability of near free money has helped driving this mess to new heights.

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  • IMHO the indication by the Fed that US IRs are likely to rise again is significant in that other central banks – including, crucially, Japan – are likely to follow suit. Central bankers know that the world is still awash with liquidity and that this is extremely damaging as it creates inflation, unsettles currency markets and, in turn, exposes and accentuates glaring trade imbalances. The immediate effect of the Fed’s indication (which although dressed up as job-creation good-news is in fact an attempt to prop-up the dollar) has been a retreat in the Dow (ask yourself the question: why should the Dow retreat if jobs are being created) – it will be interesting to see how the Markets respond this coming week. Should stocks retreat (and IMHO the FTSE and Dow is way over) recession in the West will be unavoidable within 12 months, and as sold 2 rents 1 points out, HPC a natural consequence.

    In short, as the months pass I see nothing that makes HPC less likely.

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  • He is absolutely right. Look at supply (limited), demand (growing with strong financial markets, M&A, etc), and interest rates (historically low and stable) and you have the formula for stead appreciation in 2007.

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  • I disagree with the sentiment of this article.

    Supply and demand are not “bubbling along”. That’s BS. In London, the market is grinding to a dead stop right now. I just went from where I live in west London to look at Bethnal Green and the situation is the same – there are no properties on the market because as that estate agent said the market has topped out.

    No-one wants to sell, because no-one can buy. So the speculators are basically drying up. The next step (which could become apparent within less than 2 months) is that people start panicking.

    Ignore this article. Watch carefully over the next two months.

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  • I’m a confirmed Bear. However, I think the madness is yet to continue for a long time to come. HPI will continue through 2007-2008, probably by more than we realise. Lax lending criteria, self-cert, IO 50 year mortgages, mad multiples on fraudulent incomes, idiots who can’t see past next week, will all continue for some time. The only way the UK market will collapse is if the UK economy collapses (these go hand in hand as the housing market is the UK economy for most people). THIS WILL HAPPEN – BUT NOT YET! I go with Fred Harrison’s ‘Winner’s Curse’ predicted to spike through 2007/2008 leading to a crash and the ‘mother of all recessions’. The poor supply arguement is flawed. I read recently that 50% of new builds have been left empty by purchasers, this is a bubble but it is going to take a while to burst.

    Have a look at the affordability in other countries – you will be shocked. I feel for the Eastern Europeans. They maybe coming here to do damn awful, minimum wage jobs in the hope of a better life (back home). All the while the evil of BTL and ‘holiday homes’ in places like Bulgaria, Montenegro etc, purchased by Irish/British/German etc ‘investors’ is destroying their life oppourtunities. Time for massive tax on 2nd homes across the EU including UK otherwise the rich poor divide will continue to grow to the point of revolution.

    HPI is a global phenomena. It, along with the tax system continues to make the rich richer and the poor poorer. I’m not at all left-wing but my God I’m really starting to think capitalism is entering the end game of winner takes all.

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  • The basic indicators are :
    PER for shares, which is directly linked to the theoritical value of shares.
    (Yearly rent / houseprice) for Housing. which is very similar to the PER.

    These fundamental indicators give you the Yeld of your capital.

    Right now, PER are pretty close to historical mean values, whereas Housing’s PER is nowhere close to its historical value, it is abnormaly low.

    Now, the funny thing is that Housing ‘s PER is linked closely to the “multiple of income ratio”, (rents equals % of salaries…).

    All the rest is bullshit !!! 🙂 – I liked this one !

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  • i agree thats a BS article.

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  • THIS GUY HAS IT WRONG!!!!!

    It’s not just about mortgage outgoings as a percentage of income.

    IT’S TOTAL DEBT:INCOME

    this percentage has grown substantially in the last 10 years or so…..which explains why we are getting IVA’s/BANKRUPTCY at RECORD levels….when we have low interest rates….something which the journalist seems to believe has the same bearing on personal finances as it did years ago.Times have changed.

    The higher overall debt burden makes people more sensitive to small changes,simple.

    For more bad measure,inflation is back….the article on CPI earlier this week proved what we’ve known for years.

    ….so interest rates will be used to clobber it as it feeds through.

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  • Once property yields drop below 7.5%pa you will start to see the apartment speculators start to sell properties. Unfortunately apartments are not like houses in that once prices start falling they will be very difficult to sell because once FTBs cease to be desparate to just get on the property ladder they won’t want an appartment, especially outside London.

    P.S. I hate the word’s apartment and duplex as they are too american for this country, flats and tenements are much better, more down to earth and less bullshitty.

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  • The reason we are getting record numbers of IVAs is because of high debt but also because it is very easy to do. It is an easy way out for many people who did not have this possiblilty in the past so why not take it? I don’t think it necessarily shows us very much.

    I also don’t think the speculators will start to sell properties as the yield is only low for those who bought in the last few years. I do think there will be a huge decline in speculative BTL investors. It will be interesting to see the effect this has on the market. BTLs do not make that big a proportion of total buyers and I think them bailing out will not have the huge effect people think.

    Also, a recession is required to trigger HPC and if this happens interest rates will become low again making housing very affordable.

    And London may crash in the near term but I think it will more than make up for this coming up to the Olympics so probably still a good short term investment.

    If your HPC does not happen this year it won’t happen at all.

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  • Does this guy know anything about macro economics !

    I’m actually very impressed with all the above comments , it seems a lot of readers of this board have a very good grasp of the broader housing picture !

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  • Getting back to the first comment how does China help us economicaly? Cheap garments, bargain electronics, keeps inflation low? Apparently, but dont forget we have to buy all these items from abroad look around you, German cars, books printed in Italy, Imported foods of all kinds, sure some people will do well out of this , handling the money, processing the goods for sale here, ie the supermarket chains etc. but money is flowing out faster than it is coming in £5 billion a month seems about the average trade deficit these days. How long can this go on for? I dont know the awnser to that question, but we dont seem to be able to afford a quality health service decent state pensions or reasonably equiped armed forces, are our leaders running the country like a lot of people are running their households? Britain is booming!

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  • A recent post of mine copied below which will be reposted every time i hear anything about low interest rates or historically low interest rates…. Re; (Oracle) “when we have low interest rates” INTEREST RATES ARE NOT HISTORICALLY LOW IN REAL APPLIED TERMS!!!!!!!!!!!!!!!!!!!!!. No offence intended Oracle.

    —————————————————————————————————————————————————————————————————————————————————————–
    We are borrowing 3 times as much as we were back in the late 80’s. Quite simply this means 5.25% interest on a 150K is the same as 15.75% (3 X 5.25%) on 50K.

    A simple example;

    £50,000 @ 15.75% = £50,000 X 1.1575 = £57,875 or £7875 of interest

    £150,000 @ 5.25% = £150,000 X 1.0525 = £158,625 or £7875 of interest

    By the same token a 0.25% increase is much the same as a 0.75% increase back then.

    There are many other things at play such as inflation of wages etc… but interest rates mean nothing unless they are applied to the principle sum that is borrowed or the principle is that is invested. Dont be fooled by the current low numerical value of IR’s or very misleading quotes such as “historically low interest rates”, It is simply not true.

    —————————————————————————————————————————————————————————————————————————————————————–

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  • European-bear says:

    A few things missed in the article….capital repayments…imagine a world of 0% mortgage rates and a loan of £250,000. That take 250 months of £1000 a month to repay…i.e. nearly 21 years! And if you do not repay the loan you are merely renting off the bank. And with low interest rates, capital repayments (rather than interest) become ever bigger. Now if you are not repaying the capital, why the hell do you buy if renting off a landlord (who pays the repairs) is cheaper than renting off the bank (who does not)….only reason is sentiment and speculation, and if that is the only thing keeping HPI going then the end is nigh…..
    Leading up to the last crash, there was tax relief on interest repayments…therefore the interest rate was effectively 27% (the then basic rate of tax) lower than the headline rate!
    And rents (from private landlords) are not increasing, thus there is no supply restrictions on accomadation. It is only the supply restrictions on buying that is the problem….

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  • Good article. House price as a multiple of earnings is only a rule of thumb. A lender should be looking at income vs. outgoings. This makes the interest payable as a proportion of salary a far more accurate measure of how strapped people really are (or not) and how sensitive they will be to interest rate hikes.

    Some comments on comments:-

    sold2rent1 – interest rates are already at their long term average of 5%.

    paul said “there are no properties on the market because as that estate agent said the market has topped out.” Bunkum, by that argument the market should be flooded. There are fewer properties at the moment because any sensible sellers will be holding out for the traditional Spring/Summer market. It’s a great time for bargains as properties on the market are usually motivated sellers with altered cirstances.

    mjchum “read recently that 50% of new builds have been left empty by purchasers” – The article you are referring to from Inside Housing said that was the case in Leeds (40% in Salford and 30% in Hull.) I certainly hope you’re not implying this is the case in the rest of the country. “All the while the evil of BTL and ‘holiday homes’ in places like Bulgaria, Montenegro etc, purchased by Irish/British/German etc ‘investors’ is destroying their life oppourtunities.” Alternatively the amount of new build that’s going on in these formerly off-the-beaten-track countries is going to encourage building and tourism and boost the local economy. It’s not like a Bulgarian is being rendered homeless when a ski/golf chalet is built, is it? Same goes for villas in Spain.

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  • C'mon Correction says:

    Monty – your comment on mjchum comment – it is the case here too in south wales of huge numbers of new builds un-sold. In fact worse than 50% in some parts.

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  • Philip - Paris says:

    Pretty convincing arguments. The only dimension that seems to have been omitted in this cycle of considerable house incresaes is the creative role of the banks (and the lax attitude of the government towards banks) to come up with ever more creative means to increase affordability (ergo minimal monthly repaymnts). Could someone please explain to me what the longterm rationale is for someone to take out a 40 year interest-only mortgage?

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  • Unfortunately this article is probably right, house prices will rise by 15% this year easily.

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  • > Unfortunately this article is probably right, house prices will rise by 15% this year easily.

    Well seeing as the mortgage lenders are having to bring out 50 year mortgages, upping their multiples to 5x etc. and buy to let is not longer viable, where’s the money going to come from?

    If you look at the year on year rises since 2002, there’s a consistent trend down too. I don’t see why 2007 should buck the trend.

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  • C'mon Correction says:

    Unfortunately this article is probably wrong, house prices will drop by 15% this year easily.

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  • Your right Monty, there are some benefits to a housing boom, regeneration of derelict properties being one of them. Bottom of my road used to stand a glorious derelict Victorian Crescent, now stands a glorious fully refurbed Victoria Crescent. Probably would not have happened if there was no boom. My father did the same in the 80’s/90’s, but got burned so bad, never to really recover. That’s the downside of booms. Surely we can create a stable situation where prices just inflate at the CPI rate? No more fake millionaires and no more suicides!

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  • Monty, why have their been riots among the young recently in Spain protesting about the poor affordability of housing?

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  • The 15% rise year on year can only hold if we all agree never to pay the capital off.

    This is a classic game of “Hot potato”. You must ensure that you downsize just before the bust – as otherwise you are holding the debt that a chain of speculators have built up on you new property over the years from 2000 – 2006.

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  • tyrellcorporation says:

    Hot Potato! Priceless analogy! 🙂

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  • Monty – not quite.

    What happens after the speculators dry up because the promise of fast profits has gone? Who replaces the speculators?

    No-one.

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  • Dohousescrashinthewoods says:

    Britain: BOOM, BOOM, BOOM!

    aka: “bang, bang, bang you’re dead” (housing, inflation, the economy)

    (incidentally it’s “you’re” as in “you are” not “your” – sorry to be picky)

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