Wednesday, February 27, 2008

It’s different this time

What we learned from the 80s crash

Are we heading for another recession? Four experts who survived the last big crash explain why 2008 should not be the year of a similar meltdown. The estate agent, Peter Bolton King: "I'm expecting a soft landing this time, rather than a crash, with zero price growth in 2008. There is a big difference between then and now. In the early 1990s there were high interest rates, high unemployment and high inflation. We have none of those three things now. I don't think we should panic." The mortgage lender, Mark Boleat: "The turn came fairly quickly, in 1988. There were clear reasons for it - rising interest rates and soaring unemployment levels. That's the big difference between then and now."

Posted by little professor @ 07:32 AM (1805 views)
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23 thoughts on “It’s different this time

  • Anglo-centric, worm’s-eye opinions. It was by far the biggest and most highly leveraged credit bubble ever and it requires a global perspective. It’s only just started to implode.

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  • I refuse to accept that we don’t have high inflation, we do. With regards to high unemployment, I am hearing – on a daily basis – more & more stories about people being made redundant. I think this will creep up throughout the year. High interest rates? Well not from BoE, but just look at the high street rates…….

    Those fools are in denial.

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  • and the people they interviewed? yes thats right they have a vested interest in high house prices….

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  • I’ll tell you one thing that’s different. Total UK personal debt has risen from £400 bn in 1993 to £1,409 bn – a rise of 250%.

    Just a bit of rough maths tells us that if we were to place the total debt (£1409 bn) equivalent in one pound coins (each 22.5 mm wide) around the entire UK coastline (17820 km), they would go around 1,800 times, or create a wall of coins (each 3.15 mm thick) that was 5.6 metres high. Talk about a nation surrounded by debt. Yes, things are different these days.

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  • Ooops – meant to include this chart ….

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  • Mark Wadsworth says:

    “It’s different this time”. Er … no it isn’t.

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  • “The mortgage lender, Mark Boleat: “The turn came fairly quickly, in 1988. There were clear reasons for it – rising interest rates and soaring unemployment levels. That’s the big difference between then and now.”

    What a load of [email protected] The reason for the rush to buy in 1988 was to beat the Lawson withdrawal of tax relief. Momentum carried things on a little further, but the high demand was essentially gone after July. High interest rates to stay in the ERM didn’t help, but I seem to remember that was 1992.

    “and high inflation. We have none of those three things now. ” yeah right!

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  • Low inflation – c’mon, who still believes that?

    Unemployment, two words “incapacity” and “benefit”. (More than half the 2.4 million people claiming incapacity benefit have been off work for more than five years. That in itself is a scandal).

    The VIs can lie through their teeth till the cows come home but it doesn’t matter because the game is up.

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  • [email protected]

    you are correct in what you say about the rush to buy in 1988,i know from bitter expierence because i was one of those suckers.At the time i was a niave 24 yr old and believed all the EA’s bulls#*t about not being able to get on the ladder.The other point is that the crash began in late 1988 just after the miras deadline created by lawson, i dont know for sure but i believe employment was high during that year and also during1989.It was the crash that caused the higher unemployment of the early nineties, and yet these foolish VI’s continue to repeat the same old line about the current employment situation, the redundancies have only just begun.I believe that Darlings CGT changes in April 08 are the equivalent of lawsons miras change in 1988.The carnage will begin after April 08,”The mortgage lender, Mark Boleat: “The turn came fairly quickly, in 1988” i say be patient Mark only 2 months to go.

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  • Sold out – that is right. I remember selling a place then (for the exact reasons you state – Fatty (as he was then) anounced it in the Budget so there was a rush for a few months. I remember “shaking hands” on a deal and being offered £4k extra which i didnt accept (morals and all that) and the EAs shaking of his head when i said i wasnt going to buy anything, at the time EVERYONE was repeating the same old mantras – HPs only ever rise – how will you get back on the ladder etc etc. It takes courage to go against the VIs and against the peeps I hope for your and my sakes we are right – in fact i’d put money on it!;-).

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  • As the other comments remark, we heard this same old rubbish from estate agents and others with a flimsy grasp of financial matters. All the arguments about interest rates are only relevant to debt levels and level of prices above trend: interest rates are lower but the situation is more extreme than in 1989. The important point is a withdrawal of credit following a period of plentiful cheap credit. In that respect the situation today is similar to 89, except conditions are more serious now. Credit crunches bring economic trouble – asset price falls, unemployment, etc. I just wish newspapers wouldn’t give quite so much column space to the blustering nonsense of the dimmer (or cynical) VIs.

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  • [email protected]

    was it you that sold me that bloody house?
    Seriously though i am a strong believer that if you are clued up you should learn by your mistakes.My expierences in the late 80,s early 90,s helped me make the decision to sell up in 06.I actually felt sorry for the young bloke who bought my place,because it was like looking back at myself.I also have friends now who are 6 or 7 years younger than me and therefore have no personal experience of the last crash having bought places in 95/96, who reckon i was mad to sell and start renting,however they are starting to look at the situation diffently now,however i think they still believe the soft landing bulls#*t coming from the VI,s.
    On a slightly differant subject what is your view on recent posts regarding the possibilty of the government and BOE allowing for runaway inflation to prevent a full scale crash?

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  • sold out – not if you bid me the extra £4k!!

    Its interesting Jack C just asked me about a rumour about an increase in the rate of .25%. I dont think that would be a good idea for the MPC themselves (whether or not it would be a good idea for the country is another thing). It sounds plausable (letting them “allow” inflation / devaluing the pound etc.) and that makes sense to create a dead cat bounce – although i think that will be at lower levels. So at the moment i think they leave rates unchanged, then later they lower but by then it may be too late to save HP. In the meantime i dont think they go higher. As i said to Jack I dont profess to be an expert in these matters, but these days nothing would surprise me. Ftse chart still looks bullish to me (and that wouldnt be the case if there was a rate increase on the cards) but really it needs to start pumping up soon. Lets see what Berny says!

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  • Housepricewatcher… Excellent comment, especially about inflation. I couldn’t agree more.

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  • Why is it so hard for people to understand that high levels of inflation are a good thing if you have a mortgage or are thinking about taking out a mortgage? Inflation = wage increases = reduction in debt payments as a percent of income. The fact that inflation is now lower than it was 15-20 years ago is a strong negative for the housing market. Who cares if FTBs are devoting 1/3 of their incomes to houses when wages are growing at 15% – 20% a year. They’ll buckle down for a year or two under a mortgage and then they’ll be fine. When wages are growing at 3% – 4% a year, on the other hand, and FTBs are spending a third of their income on a new mortgage, this equates to a lifetime of debt slavery. When you look at the price of houses over the lifetime of a mortgage and what percentage of average income will be consumed over the life of that mortgage, house prices have never been even remotely as expensive as they are right now. The only thing driving the increase in house prices lately has been the anticipation of further increases in prices and capital gains. Now that house price appreciation has stopped, and easy credit is drying up, there’s a long way for prices to fall before they reach levels justified by economic fundamentals.

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  • richi – which people?

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  • The mortgage lender: Mark Boleat said: “…a price downturn has nothing to do with whether or not people can afford to pay their mortgages.”

    Umm, really? So they won’t sell up cheaply, or offer less for a place, or cry it all off and go renting, or get repossessed (all of which increase supply or reduce demand?). Good grief, where do they find these people…?!?

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  • Last_days_of_disco says:

    The attitudes in this article are portentious, they reveal that we have actually entered the crash. Its happening now.
    The mainstream media only catch on after the fact. The point is over the last couple of days we have seen a number of article in this vein. Basically saying there will be a crash.

    Whatever happens the amount of credit out there is to contracting spectacularly.

    If you think about what credit is, its simple. Its the *belief* that someone will pay you back eventually. Once that
    *belief* is shattered, that credit effectively vanishes. That is what it means to “write down”. Credit has been dissappearing in enormous chunks.

    Credit *is* contracting. That means real things get worth more (oil, wheat, gold, silver). Whether your currency inflates or deflates makes no difference. What you are experiencing is a contraction or that dirty word *deflation*. The credit is still however gone because the *belief* is gone.

    Whether things inflate or deflate in pound terms is perhaps the hard question to predict and will depend on loads of things about the UK. Anyone willing to predict which way its going to go? Deflation would be horrible, because those who still have debt will experience it getting bigger and bigger. Whereas inflation has the consequences outlined earlier.

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  • The screaming difference (and the difference everyone is careful not to mention) is that this boom has only been made possible by tearing up the lending rules book. All of the people interviewed are funded directly by the housing market.

    It’s all very well a bunch of property pornstars saying “no-one should panic” and “its different this time” (with their fingers crossed behind their backs), but the truth is that the reality is very different these times.

    Try asking a non-VI like the one of the folks at Dresdner Kleinwort Benson. They’ll give a much more realistic picture,

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  • Some wise man once said “the greatest shortcoming of the human race is our inability to understand the exponential function” you only have to look at uncle chris post 5 with the statement “It’s different this time” to know we really are upto out eye balls.

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  • richc

    I would love to know who the he** is getting 15-20% wages increases.

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  • mark wadsworth says:

    Sold Out 11.32am, in the 1973-74 crash, nominal house prices stayed flat for two or three years while inflation was 20% plus per annum.

    In the 1989 – 95 crash (slide?), nominal prices were ‘only’ down 15% but RPI increased by 29%.

    So in each case, real fall was around 40%. So they’ve done it before and they’ll do it again.

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  • Last_days_of_disco says:

    @mark wadsworth, so having a mortgage you can afford is a good thing then.

    Maybe we should be buying sooner than we think?

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