Friday, March 20, 2009

30% falls becoming mainstream

2m homeowners to fall into negative equity, FSA warns

Remember when even mentioning a crash was rubbished - let alone the "lunacy" of JDs -35% prediction? If only 30% is more like it. Bear porn. Enjoy

Posted by growler @ 07:29 AM (1648 views)
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17 thoughts on “30% falls becoming mainstream

  • Thank you for the article growler. I’ve noticed a tentative bulls revival in the last couple of weeks, where they’ve tried to use the two factors in their favour, namely 0%return on savings and Spring factor, to try and sway prudent folks.
    In the last few days the FSA has been sending the messages of tougher regulations on Mortgage multiples, throwing in a bit of HPC, now the Crock story.
    This mog’s dead and it ain’t gonna bounce if you kick it.

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  • it_is_going_with_a_bang says:

    “Grant Shapps, the shadow housing minister”

    is shocked?

    Why where has he been??? It is about time the Shadow Cabinet stopped playing stupid games with comments such as this.
    It is a very very predictable result of excess – there is no element of shock whatsoever IMO – certainly not at this stage.
    It is not just a case of negative equity – add to that the ability to refinance with ‘some’ equity and get a reasonable rate and the figure no doubt is much higher. Add to that again the fact that now the homesellers/buyers cannot use ‘new’ equity to pay for the fees/moving and the problem get substantially worse again.

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  • So what is the FSA saying and why is ANYONE shocked! The report from the Halifax this week reported at Lovemoney spoke of the house price/earnings ratio. It said: this ratio compares the price of the average UK home to average earnings for full-time male employees.

    According to Halifax, the ratio has fallen from 5.56 a year ago to 4.42. In other words, the average home is now selling for 4.4 times average earnings.
    The long-term average for the house price/earnings ratio is 4.0, so even now house prices are at an above average level.

    What’s more, markets often ‘overshoot.’ In other words, prices can rise too high in a boom as excitement and a fear of ‘missing out’ causes some buyers to pay ridiculously high prices. And at the bottom of a bust, some terrified sellers will take whatever they’re offered.

    The report in the Guardian last weekend in relation to the FSA regulation spoke of 4x’s income being considered irrepsonsible. The FSA themselves said this week that they would use 3x’s income or maybe even 2.5 to ensure property prices did not inflate again. For them to use 3x’s then prices have to come down to 3x’s first do they not? So to whome is the FSA issuing a WARNING and what does he think they are going to do about it?

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  • We predicted this over four years ago, when the lending went over the top. Now it is happening and no-one saw it coming. I sold to rent because of the lunacy at that time. The Banks around the World forced house prices to rise, to lend ever higher amounts to people who shouldn’t have borrowed. Lending has dried up now because consumers are maxed out, so the Banks will force house prices lower by restricted lending practises and propoganda, so that borrowers will queue up once again when prices hit rock bottom. The Banks cannot be controlled by Governments as we are witnessing. This is our great Capitalist society working for us, or should I say ‘we are working for them’.

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  • Comment no2. Well Said. Grant Schnapps comments of late have made me wonder what difference the conservatives coming into office would make?

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  • mark wadsworth says:

    I love the smell of fresh bear porn in the morning!

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  • will – there is nothing forcing anyone to buy into an inevitable bubble, you do not have to ‘work for them’. Banks should not be controlled by government, that is part of the problem in my opinion – look to nature, there is no central planner there, competition rules, innovation thrives, bubbles occur (e.g. population explosions), hard times happen, but life goes on due to natural regulation.

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  • The trouble with the Darwinian approach is that it usually leads to deeply unpleasant consequences for society. Banks have received very little regulation of late, which has led, at least in part, to our current problems. The law of nature is the same as the law of the jungle.

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  • Yes letthemfall, the natural way can be harsh but it works. Banks have not just received little regulation, they have received light yet badly managed regulation, “better” regulation would be better for a while, but at some point the regulation itself is where the systemic failure finds it’s roots. Natural competition finds surprising solutions to system wide issues 🙂

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  • mark wadsworth says:

    @ Letthemfall – banks were undersupervised, that is clear, but the government encouraged them to do this, and the government stoked the bubble in house prices by a) not allowing any new ones to be built and b) by taxing property ownership and gains much more lightly than normal employment income (if at all).

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  • letthemfall says:

    I suppose it depends on how widely you wish to allow natural competition to have free rein. In many areas of commerce it is fine. In banking, and indeed other industries such as power generation, I suggest there needs to be limits to this. I do agree that the govt is at fault too, although as I’ve said before, govts tend to follow the wishes of the electorate (or some portion of it). I don’t whether anyone is advocating a broader application of free competition but I think this tends to lead to polarisation in society, social breakdown and more crime.

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  • 51ck/letthemfall

    If the product (houses) is artificially restricted in the first place (planning laws) then IMO you can’t have a ‘free’ market supplying finance for that particular product.
    Cars for example that can be produced at will to satisfy demand can have much less control to the flow of money towards them as the market is able to define the price.

    I believe we’ve just had a fairly good demonstration of restricted supply and ‘un’ restricted money flow in the housing market.

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  • letthemfall said “I don’t whether anyone is advocating a broader application of free competition” –
    Yeah I think I’m part of a tiny minority – but we know the other extreme definitely does not work – the problem is the freedom of markets is not just a product of lack of direct regulation – other factors such as taxation, tax breaks, subsides, incentives and trade barriers (yes str 2007 – planning laws!) also do the damage…

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  • Grant Shapps shouldn’t be shocked – I spoke to him in person a long time ago, and explained why a crash was ultimately inevitable.

    He didn’t seem able to get his head round the fact that there was no prospect of a soft landing for the property market.

    If he’d listened, understood, and spoken out; the prospects for his political career would now be much rosier..

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  • letthemfall says:

    51ck
    Well it’s an interesting point of view, though I can’t see for a moment how it would work in a large complex society like ours. In smaller societies, like for instance fairly isolated tribes in Africa or the Amazon, it perhaps could (and does?), although even there they tend to have a head honcho doing a bit of regulating. I imagine a completely free system here would be a nightmare for many, if not everyone. Arms dealers might do well.

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  • House prices are 50% overvalued anyway. All bank related loses will be underwritten anyway so is the wealth created artificially the problem?

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  • letthemfall –
    Some pretty insightful and respected people have claimed the same in varying angles of observation. Here is my Friday sign-off
    have a great weekend!

    “Many people want the government to protect the consumer. A much more urgent problem is to protect the consumer from the government. ” – Milton Friedman (a forefather of modern economic theories)

    “Underlying most arguments against the free market is a lack of belief in freedom itself.” – Milton Friedman

    “Capitalism is the astounding belief that the most wickedest of men will do the most wickedest of things for the greatest good of everyone. ” – John Maynard Keynes (The one and only!)

    “Capitalism and the market are presented as synonymous, but they are not. Capitalism is both the enemy of the market and democracy. ” – David Korten (Author & anti-corporate globalization proponent)

    “My claim is that we do not have a market economy, but a capitalist economy. ” – David Korten

    “To talk about planning an economic system is to talk in old terms, and I find myself sometimes having to teach Westerners about what the market really means. ” – Václav Klaus (Czech politician, not really so intellectual, but this quote seems insightful)

    “Even the striving for equality by means of a directed economy can result only in an officially enforced inequality – an authoritarian determination of the status of each individual in the new hierarchical order. ” – Friedrich August von Hayek (second generation Austrian economist)

    “I do not think it is an exaggeration to say history is largely a history of inflation, usually inflations engineered by governments for the gain of governments. ” – Friedrich August von Hayek

    “A consumer wastes on the enjoyment and unnecessary guilt that which could have served to heal the wounds of poverty.” – Friedrich von Wieser (early Austrian economist)

    “Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism but peace, easy taxes, and a tolerable administration of justice: all the rest being brought about by the natural course of things. ” – Adam Smith (the father of modern economics)

    Oh, and as a counter for humour value:
    “I have faith in the market when we get the rules right.” – Kenneth Lay (yes, of Enron fame)

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