Monday, Oct 12, 2009

Still in an Unhealthy Bubble

Times Online: Housing Market Why the Downturn's Not Over Yet

"George Buckley, chief economist at Deutsche Bank, declared the market was “still in a bubble”.
The panel raised concerns that the strength of the house price recovery could provoke the Bank into raising interest rates to contain inflation — precipitating a “double dip”. ....."
I like Buckley's short termism, with his comments of housing currently being affordable, whilst also saying, "As soon as interest rates go back to normality or somewhere near normality, house prices will not look at their right level". So doesn't that mean they are not at the right level NOW if those buying will not be able to afford them when things get back to NORMAL?

Posted by sybil13 @ 07:41 AM (1765 views)
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9 Comments

1. crunchy said...

sybil13

The exact same thinking that got us here is still alive and well.

Reasonable house prices higher rates. DOES NOT COMPUTE??? DOES NOT COMPUTE!!????**

Monday, October 12, 2009 08:16AM Report Comment
 

2. cynicalsoothsayer said...

Their comments about future house prices generally look pretty negative to me. The direction will be down, not up from here.

Monday, October 12, 2009 10:06AM Report Comment
 

3. mark wadsworth said...

The "entirely independent" MPC will do "whatever it takes" to keep the bubble going.

OT1H, lending banks live in the real world and actual mortgage interest rates have little to do with base rate (unless you have a legally binding tracker mortgage). As do nervous potential FTB's.

OTOH, we have a post-modern tax/economic system where the only thing that counts is the house price bubble, i.e. sucking money out of the productive economy and into speculating on the same old pre-existing assets.

So we'll see who gets the upper hand, the iron laws of economics or the Large State Home-Owner-Ist Party.

Monday, October 12, 2009 10:34AM Report Comment
 

4. tenant super said...

I was most concerned by Seemah Shah's comments. She has, as a potential first time buyer, an interest in lower house prices; but she has always been very sound in her analyses.

She seems to have moved from comments which suggest big falls are inevitable, to comments like "I would want to see what happens over the next year; if it means that I missed the bottom of the market, so be it." This suggests she is thinking along the same lines as me - that fundamentals point to further falls but we can't be sure of that and it won't be 'off a cliff' falls.

People keep quoting long term price to earnings ratios as indication that further falls are inevitable. But prices were historically 3.5 earnings because historically, that was the sum a bank would lend a household. There has been some confusion over what that 3.5 multiple really means. It was only a benchmark of affordability because it represented maximum finance available. If people can borrow 4x joint salary they will, even though it means they have far less money to spend on other things. Unless banks return to 2.5 single + 1 salary, I am unsure that unemployment and other downward pressures will be enough to depress prices to a level I am prepared to pay.

Monday, October 12, 2009 01:14PM Report Comment
 

5. shipbuilder said...

tenant super - My guess is that banks are only still lending at higher multiple levels because -

- They would have practically zero business if they didn't as prices are still high.
- The small volumes of business allow them to be more generous with their meagre funds. (Not sure about this one really)
- The large deposit reduces the real risk by effectively reducing the monthly payments instead of reducing them via lower multiples, allowing point 1 to happen.

Which means that by my guessing, with available mortgage funds no longer available at boom levels, when mortgage volumes and/or interest rates increase, the multiples will have to come down.
Yes, historically houses were 3.5x wages because that was the maximum finance, but turn that round for a minute - that was the maximum finance because it represented the 'correct' amount of risk for the banks, given the availability of money to lend and long-term interest rates. Rates will only go up and the fantasy 'risk-free' ability to sell debt has disappeared.

Monday, October 12, 2009 01:50PM Report Comment
 

6. tenant super said...

I do hope you're right shipbuilder.

I still worry though, because perhaps 3.5 x wages was the right risk level in an era where women would give up jobs to have babies and only return part time when the children start school. As was discussed last week, now more women seem to be happy to dump the kids in day-care. Still, as has been pointed out to me by a friend who has just given up work; once baby two came along, it was cheaper for him not to work than put the two children into full-time nursery. They both earned around the average wage so it seems that average earners with children in nursery have a similar amount of disposable income to a single wage household.

Where I live, in one of the poorer parts of the borough, for an average house to be 3.5 x average income, they would have to fall around 60% from current levels and it is hard to see this happening. Even commuter towns I am looking at would have to see falls of 40-50% to reach this multiple.

Monday, October 12, 2009 03:57PM Report Comment
 

7. shipbuilder said...

tenant super - remember that house prices were at a reasonable level only 6 or 7 years ago - the working mother era certainly didn't start then, which is why I think this justification for higher multiples is always overplayed.
The reality is that we have a level of prices built solely on the ability of a number of people in the UK to pay deposits from savings and combined with low interest rates, mortgages look cheap to them. The level of prices determined by a 'normal' market, with real FTBs, realistic interest rates and higher volumes will be much lower.

Monday, October 12, 2009 06:02PM Report Comment
 

8. shipbuilder said...

The real question for anyone wanting to buy a house is how many people with the wealth to put down a deposit (and are willing to buy) are there left to continue supporting prices?

Monday, October 12, 2009 06:10PM Report Comment
 

9. letthemfall said...

I think it's important to bear in mind that the house price boom was caused by availability of cheap credit (just as the last one was), which had a lot to do with big savings from the Far East. This is a relatively recent phenomenon, whereas working couples have been around rather longer. How long the economic pressures are held back by buyers' psychology remains to be seen. Economic pressures mostly surely win out given that we haven't actually recovered from the problems that brought about the worst financial crisis in history.

Monday, October 12, 2009 08:12PM Report Comment
 

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