Monday, September 7, 2009

More words of wisdom from a true economics guru!

The impossible happens

We have become used to unusual things happening, but 2009 could see something many consider impossible. House prices could show an overall rise this year even as mortgage debt falls. When the norm has been for prices to rise only in tandem with increased borrowing, this would be a surprise.

Posted by flintster1994 @ 09:40 AM (1526 views)
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20 thoughts on “More words of wisdom from a true economics guru!

  • David Smith, as usual………………The mans a buffoon

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  • I’m only reading this Smith article if it comes with a free side of bacon…

    Talking of rising prices, I see ForexFactory has revised its Halifax estimate up from 0.5% to 1%.

    Housing isn’t something that can be shorted easily, but sure as anything it feels like it’s being fattened up for the kill to me…

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  • mark wadsworth says:

    DS is perpetuating another myth that is quite patently untrue, that borrowers are now overpaying on their mortgages.

    In approximate figures, from 2005-2008, gross lending was about £25 billion a month and net lending was £10 billion, so capital repayments/redemptions were about £15 billion per month.

    Gross lending is now down to £10 billion and net lending is down to £5 billion, so capital repayments/redemptions are down to £5 billion a month.

    It would be nice to nip this myth in the bud ASAP!

    (don’t quote me on the exact figures, I’m doing them from memory).

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  • Mark,

    I think the difference between gross and net lending stems from the fact that when a mortgaged person moves house, the old mortgage is paid off and counts as a redemption, while the gross lending figure includes the full value of the new mortgage.

    So with a reduction of activity in the housing market, the difference between gross and net lending will shrink.

    I think there is a very small amount of pay-down going on, but the numbers are hard to compute.

    I have never been entirely clear as to how the BoE (et al) have accounted for the old endowment mortgages, many of which are now coming to full term.

    Repayment mortgages giving way to interest only as the product of popular choice, also skews attempts to calculate paydown rates.

    My best guess is that those who got a windfall from tracker deals have not been that good at using the saved money to pay down their equity. Some have, but I suspect that most have not.

    A further complicating factor is the number of people who have inherited a house now choosing to let it rather than sell it – there is no hard data to identify how widespread this is, but from personal observation I have noticed a trend towards this over the last year.

    Those who sell an inherited house very often use the proceeds to pay down or pay off their mortgages.

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  • OK. So DS may be wrong about mortgage overpayment.

    So, let’s look at the skip index…….

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  • MW,

    Millions of existing borrows have had their mortgage payments reduced. If they are not spending the extra cash each month (which they clearly aren’t) they must be saving/investing it or reducing their debt. I don’t follow your figures but the other stats I’ve seen recently suggest that existing mortgage debt is falling more sharply now than before the rate cuts. Anecdotal evidence confirms this.

    The myth is the suggestion that this will have a negative effect on house prices. If people were blowing the extra monthly cash on holidays or new cars, rather than reducing their debt, would this make house prices more likely to rise?

    There is an argument that spending stimulates growth etc but I am talking about the direct effect on the housing market. People reducing their debt, and increasing their equity, does not put downward pressure on prices.

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  • @6. Agreed. If people have seized the opportunity to reduce their mortgage debt they are not going to rush back into MEW as soon as they start to feel comfortable again. And nobody is suggesting house prices are going to take off again, those days are gone for a long time.

    @2. mrflibble. “Talking of rising prices, I see ForexFactory has revised its Halifax estimate up from 0.5% to 1%.”

    “Housing isn’t something that can be shorted easily, but sure as anything it feels like it’s being fattened up for the kill to me…”

    These look like crucial and interesting points to me . . . but way over my head. I’d be really grateful for an explanation.

    It is really looking like the last chance saloon for anyone wanting to realise house price gains. Whadyamean VI!

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  • LJ,

    MEWing is now dead in the water, and is the root cause of the consumer spending squeeze. As the trackers reset, there will be a further squeeze on spending, although not as severe.

    More significant is likely to be the phenomenon of people running out of fat to live on. Last night I was talking to an old friend who has been an IT contractor for most of his career. He had kept a year’s salary put aside to compensate for the times when he was between contracts, but has now been out of work since last Xmas and is beginning to get worried. He is openly making himself available for any work he can get now, irrespective of income..

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  • mark wadsworth says:

    @ Unlce Tom, Lucky Jim.

    I accept that it is a dangerous practice trying to draw conclusions from changes in balancing figures between other figures. Even trying to distinguish between repayments, repayments and redemptions is tricky (i.e. a ‘portable’ mortgage doesn’t show up when people move home, but paying off one and taking out another does)

    Another way of looking at it is the supposed gross mortgage figures, which according to the article is still up slightly at £1,226 billion (which is what you’d expect).

    As to the argument that people aren’t spending the extra cash, well I think that ‘a lot’ (heck knows how many, of course) are – if your employment and interest income is down £1,000 a month and your mortgage repayments are down £1,000 a month, then people are likely to pay off as little as possible and maintain their existing spending level, rather than paying off an extra £1,000 a month and cutting back on proper expenditure.

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  • Nomad “It is really looking like the last chance saloon for anyone wanting to realise house price gains”

    I totally agree…. many more properties coming onto market here in North Wales, without that many buyers… this is good news.
    A glut will only speed up falls to sensible levels. That will be good news for everybody, even if they don’t realise it at present.

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  • mark wadsworth says:

    @ Lucky Jim (again)

    “The myth is the suggestion that [repaying mortgage debt] will have a negative effect on house prices.”

    I doubt it has any effect at all, taken in isolation and once you net everything off, but we’re confusing cause and effect. An increase in gross lending leads to rising prices (and vice versa), it’s called a credit/asset price bubble.

    If overall gross lending is going down (whether because they are lending less or people are repaying more is difficult to say) then inevitably this goes hand in hand with falling prices. Or maybe they are both caused by a third factor, i.e. The Recession/Deflation.

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  • MW,

    So if interest rates were 15% and existing borrowers were falling into arears this would cause house prices to rise?

    Yes, because “an increase in gross lending leads to risng prices”.

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  • “The myth is the suggestion that [repaying mortgage debt] will have a negative effect on house prices.”

    agreed. It is a chicken and egg scenario. People were borrowing more against the value of their houses because they could. As house prices fall they cannot do that. Meanwhile people who were all the while repaying a capital and insterestt mortgage continue to do so, but their repayments of capital now represent a higher proportion of an environment of reduced borrowing.

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  • LJ – “The myth is the suggestion that this will have a negative effect on house prices. If people were blowing the extra monthly cash on holidays or new cars, rather than reducing their debt, would this make house prices more likely to rise?”

    I would like to deal with the first part i agree there is no effect at all, but this misses the point. The question is why are people saving / paying down debt or not borrowing more (if you accept that they are).

    The issue is that they are scared. Scared of losing their jobs and scared of over consuming (which is why they are not blowing the money). Its not IMO a direct supply/demand argument. The pendulum has swung for expansion to contraction, thats the cause. What you allude to is the sympton. The fact is that change can happen like a flick of a switch makes it pretty difficult to forecast as to WHEN it will happen.

    Take a look at the video posted yesterday :http://www.housepricecrash.co.uk/newsblog/2009/09/blog-vince-cable-gillian-tett-and-paul-mason-invited-by-mark-darcy-25194.php – as i say below the last 3 minutes if of interest.

    and my comment at

    “4. techieman said…
    I should have waited for the last 3 minutes – that on its own is worth it – especially the bit about paying down debt. The issue in my view is this:

    The governments have spent $Bns trying to convince the people that the problems can be solved. Its now down to 2 things:

    1. Whether the people believe em… and 2. IF they do then will they stop believing pretty soon?

    No prize for guessing what i think

    Sunday, September 6, 2009 10:00PM”

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  • mark wadsworth says:

    @ LJ, “So if interest rates were 15% and existing borrowers were falling into arears this would cause house prices to rise?”

    As techie points out, it’s important not to confuse cause, effect and correlation.

    Higher interest rates would, all things being equal, cause prices to fall, but if that higher interest goes hand in hand with inflation, the overall effect is negligible (as inflation boost nominal house prices – hence the long run average house price to earnings ratio averages out at between three and six whether that’s the 1970s or now), if interest rates were the only driver, house prices would now be much higher than two years ago.

    The arrears would not cause prices to rise either, of course, but if banks allow owners to run up arrears without repossessing, then again, all things being equal, this has less of a downward effect on prices than if banks repossessed people as soon as this missed one monthly payment and then put the property up for auction.

    So, if you think it through, the scenario that you paint as implausible is not entirely impossible – it may be that prices are rising faster than 15%, so effectively the banks are happy to allow people to run up arrears (the alternative would be to demand every payment but be much more generous with MEWing).

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  • MW

    I’m not confusing cause and effect – I’m saying there is NO cause and effect relationship between existing mortgage debt and house prices. There are scenarios were existing mortgage debt can be falling and prices rising (as they are now) or where debt is rising but house prices falling.

    Techieman

    I agree but it is possible to overestimate the level of pessimism. Paying off debt is always an attractive option even in the good times.

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  • mark wadsworth says:

    @ LJ, ” I’m saying there is NO cause and effect relationship between existing mortgage debt and house prices”

    In that case we are more or less in agreement!

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  • “LJ – I agree but it is possible to overestimate the level of pessimism. Paying off debt is always an attractive option even in the good times”

    possibly …. but i would say not in the aggregate! I think we are currently in the twilight zone. People are in the main undecided but with a negative bias. It wont take much to upset the applecart IMO. But of course i could be wrong… interesting times.

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  • I don’t think you can look for clear correlations between house price movement and any single influence, as subjective factors such as confidence, fear and greed weigh very heavily.

    ~~~

    I’ve just been comparing the number of properties sold in a postcode area over the last year, with the number currently for sale on Rightmove; and there are some dramatic variations.

    In many areas the numbers sold over the last year and the number for sale are very similar; which firmly points to a stagnant market; but there are also some hotspots, which defy clear explanation.

    Take the central postcode areas of our our two principal universtiy cities, Oxford and Cambridge –

    In the OX1 postcode area, there are currently 140 properties for sale, and only 125 sold in the last year; suggesting a mean time on market of a mighty 409 days.

    But in the CB1 postcode area, there are 184 properties for sale, but no less than 535 sales in the last twelve months; indicating a time on market of 126 days – slow by historical standards, but dramatically faster than their old rivals.

    I’m wondering what is prompting this very patchy activity..

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  • 19. uncle tom said…

    “Take the central postcode areas of our our two principal universtiy cities, Oxford and Cambridge –

    In the OX1 postcode area, there are currently 140 properties for sale, and only 125 sold in the last year; suggesting a mean time on market of a mighty 409 days.

    But in the CB1 postcode area, there are 184 properties for sale, but no less than 535 sales in the last twelve months; indicating a time on market of 126 days – slow by historical standards, but dramatically faster than their old rivals.

    I’m wondering what is prompting this very patchy activity..”

    In NI, market activity is being spurred on by two things (which are connected) – new build prices being slashed by desperate developers and cash-rich buyers re-entering the market – either those who realised their equity during the boom, or investors. It could be that the new-build markets are very different in the two areas mentioned, or there was less equity created during the boom in one place or the other. In terms of investors, they seem to be re-entering the market when they believe that they see value i.e. when falls have been relatively high – perhaps this is the case in one area rather than another.

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