Tuesday, July 14, 2009

Deleveraging

UK house prices: history suggests it won't be until 2016 that they recover to pre-boom level

This article draws comparisons with the 1992 crash and suggests that the current UK saving rate of 3% will rise to 10-12%. I am guessing that a consumer led recovery is off the menu. Even the UK government is on a timer before frantically deleveraging, when they will attempt to sell BoE debt, their banking shares, the Royal Mail and probably anything not nailed down. Cash is king. A savings rate of 10-12% is uncharted water with this much debt and falling wages/rising unemployment. 2016 is mooted as the trough. If this isn't the start of a deflationary spir al then what on earth do they look like?

Posted by stillthinking @ 11:37 AM (1441 views)
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11 thoughts on “Deleveraging

  • Too simplistic.

    Misses the point that that the Lawson boom was intense, but of much shorter duration, so there was much less debt built up; moreover, the last housing market bubble was cut short by rapid increases in interest rates and changes to tax relief; that created a mad dash to complete purchases before it’s Aug 1st 1988 implementation date. Lawson made some incredibly stupid errors as chancellor.

    The important difference is that the last boom ended with a slump. The market stalled, fell sharply, then slowly levelled out. A lot of people were briefly in negative equity, but through inflation and debt repayment, a great many of them were back in the black within a year or so.

    This time the market has climbed much higher, has much further to fall, and the consequences are much more serious. This is a real crash, and I doubt we will ever see prices get so high again in real terms. If inflation takes off, then prices will go with the flow, but the high interest rates would crucify many.

    If inflation stays low, then we have the prospect of a large number of people being in negative equity for upwards of a decade – it is hard to know whether they would accept that situation, or default en masse.

    I have said before that an inflation rate of 5% would be the best solution; but whether it would be possible to maintain such a rate in the wake of the QE program is hard to say.

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  • Isn’t raging inflation going to be a consequence of QE?

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  • mark wadsworth says:

    Doth not compute. Are they saying 2016 is “the trough” or that’s when prices achieve crazy peak levels of 2007 again? (which, going by historical precent, is quite possible, actually).

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  • Mark,

    I think we need to look beyond the recent historical precedent, and look at the housing market over the last sixty years – first stable, and then indulging a series of oscillations, each greater than the one before.

    From here, there are three theoretical ways ahead – one would suggest an even bigger oscillation to follow, another that the market will continue to oscillate, but to a lesser degree, or that is that this is the end of a sixty year cycle, the bust, the big bang..

    A further oscillation requires the downslope of the current one to be relatively painless for the majority of players – a loss of paper wealth, but not deep financial hardship. I don’t believe that is possible, as the market peaked far too high.

    Not only did house prices go way beyond the means of a substantial proportion of the population, it also came to feed the economy, and indirectly, tax revenues.

    For every person who signed his life away on a massive mortgage, there was someone getting a windfall – money to spend. UK savings did not rise in line with the borrowing, so money was spent that is now owed to overseas lenders – some £400bn.

    This source of funds is not going to suddenly inflate again. Nor is the bonanza of spending housing related wealth from the boom years fully played out; yet the government is already obligated to borrow on a stupendous scale, and unemployment is climbing relentlessly.

    Housing wealth fed on itself – one person got a windfall, so spent money on an expensive new kitchen, so the guy who fits kitchens began to feel flush, and took out a big mortgage on a new home, so another person got a windfall – and so on..

    We are now moving into the reverse effect – fewer people are getting windfalls, so the kitchen fitter is short of work, and can’t pay his mortgage. The mortgage company will eventually repo his home, selling it at a loss that other mortgage lenders, or the taxpayer, will have to fund. Meanwhile the kitchen fitter is now claiming housing benefit, so the taxpayer gets hit again..

    ..the government is already borrowing £7,000 p.a. per household, and that figure (I believe) will rise further. This is far more than they can possibly attempt to recover through tax rises, so there will have to be major spending cuts in the public sector, or the continued printing of money, (or both) – with obvious consequences..

    So I reckon this is the end of the sixty cycle, the bust, the big bang…

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  • @4 uncle tom… If history repeats itself the current readjustment will take approximately as long to unwind as it did to wind up in the first place. So in approximately 10 years from now we should be at the next houseprice trough. Give or take a couple of “green shoots of recovery” along the way.

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  • Very difficult to project the post-bust timeline. I would not be surprised if economic contraction ground on as a series of on-going consequences for two or three more years, and that recovery, when it arrives, will be very slow.

    With so much of the UK workforce engaged in non-productive labour at present, a dramatic re-construction of the economy seems inevitable, and the next government will need to entertain quick and effective measures to combat unemployment.

    In the 1930’s depression, with the ascent of motoring very apparent; it was an easy decision to put thousands to work building roads; indeed many other countries did the same.

    I am hoping that the next government will see the benefits of accelerated home building as a being a key part of the recovery program, so that when confidence finally returns to the economy, there will be an ample supply of living space, thereby depriving any emergent property bubble of its life-blood.

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  • UT

    Re: your mention of a house building programme

    (You guys may have coverd this already) But on the news today they were talking of a plan to allow the elderly to hang onto their homes when they need to pay for full time care. Another ruse by vested interests to keep house prices high.

    I don’t know the full implications of this but IMO would only put upward pressure on prices due to the fact there would be that many fewer for sale. (until numbers caught up with themselves and the people in nursing homes passed on).

    At least if they did start a significant building programme that would put money back into the economy as I’ve been advocating, as opposed to new buyers simply taking on another persons home for an even bigger mortgage (and series of commission payouts).

    I am surprised though how long this ‘BIG BANG’ is taking to play out.

    I’ve been out of action for a couple of months, but speaking to a couple of suppliers today things are apparently picking up a bit in the ‘office fit-out’ market place.

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  • there wont be any recoveryuntil 2030!

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  • Maccagrabme says:

    Why the obsession with a ‘recovery’ to insanity? This country has an illness.

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  • Str,

    When old people go into full time care, their families usually waste little time sorting their old home out and flogging it – I wouldn’t worry much about that one.

    Nearly 60 years ago, a wartime slogan took hold – “dig for victory”

    My slogan for the next government is simple – “building for recovery”

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  • UT

    Lets hope they do Build for Recovery, but build decent things and not just fill the gaps with hutches as they have been doing.

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