Wednesday, September 7, 2011

The crash word twice in the first six lines

Negative equity cases could hit 1.7m

Financial outsourcer HML warns a further drop in house prices could get the nation close to the record 1.8m negative equity cases seen during the crash of the early 1990s. HML has calculated if house prices fall by a further 10 per cent the number of households plunged into negative equity could double to 1.7m, just short of the peak that was witnessed during the recessions in the 1990s. Currently 827,321 homeowners - 7.3 per cent of all households with a mortgage - have a debt that is greater than the value of their property. If house prices fall by 10 per cent that number will double to 1.67m - 14.8 per cent - which is close to the record 1.8m negative equity cases seen in the house price crash of the early 1990s.

Posted by jack c @ 04:48 PM (2174 views)
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24 thoughts on “The crash word twice in the first six lines

  • Somebody’s got to say it. Tough.

    Perhaps it will be a learning curve for those foolish enough and, yet, young enough to learn.

    The easy solution (so that you still have a roof over your head, that you can afford – as you’re probably not trustworthy enough for private rental) is to keep servicing your debt. It seems that the Government will help you out, at the expense of tax paying renters, such as myself, so that you can keep your illusion of ‘property rights’. There are up to 4 million households susidising you, (and the immoral btl) in the private rental sector – just so that you can continue to feel that you have a stake in society. Either way, you and the other 300,000 which are presently defaulting, are not welcome.

    On the macro level – The folly of consumerism is being laid bare where there are precious few resources to back it up But that’s for another day.

    Time to correct.

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  • crash bandicoot says:

    Does anyone have an idea of how much this is affected by MEW’ing? It’s one thing when the papers start wheeling out the sob stories about Jack and Jill losing the family home but if they got there by borrowing £50k on the mortgage that’s what I’d call asking for it.

    Following this along, if there are a significant number of people who are in negative equity because of their MEW’ing then all of the bailouts, ZIRP and QE have not just been supporting overpriced houses but overblown borrowers. Fantastic.

    I’m not even going to speculate on why you’d want to do that without my tin foil hat on.

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  • @crash bandicoot – I dont currently have any hard numbers on the MEWing affect, however to perhaps put it into perspective InvescoPerpetual publicly stated in February of this year (at one of there investment intelligence seminars) that if you stripped out the MEWing factor there would have been no growth during Labours time in Government (I dont have anything at present to verify this but I tend to trust most of what they present to me). Hope this info helps.

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  • jackc

    Labour’s ‘strategy’ was an all encompassing virtuous wheel, which (unsurprisingly) failed. I can’t be bothered to illustrate it on a blog as it should be obvious to anyone who takes interest in these things, by now. Needless to say, there are lies, damned lies and statistics. Most of all are the one’s that come out of fickle and shape shifting financial entities.

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  • “investment intelligence” theres two word you dont see the general public or bankers using much.

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  • mark wadsworth says:

    Re what Jack C says at 3, the extra money that people spent via MEWing was staggering.

    From memory, between 2000 and 2007 it added something like 6% to disposable income, or alternatively, the increase in mortgage debt* every year (about £80 billion) was roughly equal to an extra 5% on GDP, which is also approx equal nominal GDP growth during that period.

    * It doesn’t make any difference whether it was MEW, upsizing or new buyers, it’s the same houses with more debt. And if an FTB takes out a big mortgage to buy a house of somebody with a mortgage who downsizes, that’s the same thing as the original owner staying put and MEWing.

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  • crash bandicoot says:

    Wow that’s worse than I thought but nevertheless I can still see a distinction between people who overpaid for their house and those who just borrowed more money against its imaginary value.

    Is MEW debt counted in these negative equity calculations or is that held separately? Complaining about your financial difficulties seems a little hollow to me if your “investment gains” have now turned into a mere secured loan.

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  • All an illusion. And a painful, though oft repeated, lesson. They never learn.

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  • …Do any of you?

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  • @Dill “…Do any of you?”

    Doubtful, most people won’t have read David Copperfield and therefore won’t have heard of Mr Micawber’s First Law:

    “Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”

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  • so to the article :

    “HML’s data shows that even if house prices dip by just 2.5 per cent, more than 1m UK households will have a mortgage debt that is larger than the value of their home.”

    Now that will be a tipping point i think. Headlines in the press about 1m in Nequity will cause some depression on the streets given ZIRP, people may cash in their chips. Having said that since we havent reached the prior lows yet per PHDs charts I wonder if this headline was puished under the carpet before? OR maybe more prople were sucked into the DCB and therefore more are at risk of Nequity??

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  • techie: Why would anyone cash in their chips if they can still afford their mortgage? Most of them will still be paying less than they would if they rented the same home, so there is absolutely no incentive to sell. People have a lot more invested in their homes, than the original deposit (buying fees, decorating, emotional attachment etc), and most would rather cut of their right arms than retreat to the murky world of renting. They also know that if they hang on, they will eventually own their homes outright. Repayments, time and inflation are the homeowner’s best friend

    Negative equity will not cause a tipping point unless interest rates rocket. Even then, history shows us that mortgage payers are remarkably resilient in the face of rising interest rates. People will always cut down on dining out, holidays and sky subscriptions before they renege on a mortgage.

    Unemployment is the only historically reliable cause of a house price tipping point. It might be different this time but I wouldn’t bet on it.

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  • Hello flashman, you have mentioned unemployment quite a few times as a tipping point, do you have a figure in mind as an absolute number of unemployed, or percentage? Do you think that will be a stronger driver than interest rates rising? It seems to me that as interest rates will affect a lot more people than job cuts that it would be more of a drink force, but I have no idea if that matches any historical data. Maybe it’s just wishful thinking, it seems a lot more palatable to cheer on interest rates an redundancies.

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  • Hey Flash. Actually i was referring to those people on the margins – i.e. they are struggling to keep up repayments etc.

    My point was people may think, that what we have been told is an illusion, that ZIRP doesnt stop prices going down, and therefore what is the point of carrying on this struggle. Im not talking about people going from owning to renting – im talking about people on the verge of repossession as is etc, those that have borrowed from family and those that cant afford to go anywhere else. Those that will throw in the towel.

    Im not talking about those who want to redocorate with some Laura Ashley but will have to settle for the Dulux dog instead. Those are unlikely to be in Nequity as is though. So a tipping pint for a homogeneous group. Those sucked in near the top, the johhny come latelies.

    Granted to the extent that spills over into the whole market is an arguable poiint, but headlines like that aint gonna help. Moreover its hardly going to encourage those to get on the “ladder” is it.

    Talking of correlations did you see my Keeno post? http://www.housepricecrash.co.uk/newsblog/2011/09/blog-macgooneconomics-34570.php

    Here is the vid:

    My comment at 6 : “All i would say is that Keeno doesnt deal directly wih unemployment in his analysis. He seems to be implying that both HPs and employment are a function of debt, or rather the acceleration of it. ” He has made the point that due to the measuring of unemployment in the US the real rate is closer to 16% than around 10%. http://www.shadowstats.com/alternate_data/unemployment-charts

    Also whats your view on his point that its the acceleration of debt that needs to be maintained? Since overall consumption is a function change in income + change in debt?

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  • bubba – I must say that Flash has ALWAYS maintained this “master” correlation, and has always given a specific number. However Flash I think the more interesting thing ios to what extent is a fall in employment and in what area (eg school leavers / executives / middle managment etc) is correlated the most highly – or is it just a blunt number?

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  • Surely if its just young people that become unemployed then they will just stop the rises, whereas if there is an executive that has to downsize and has a smaller pool of purchasers available to him, then wont that put more pressure on the HP indicies, as an actual sale is involved?

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  • techie: Once you’ve found a positive correlation, it’s best not to second-guess it. Intuition is a valid analysis method but it should never be mixed and matched with ‘harder’ methods’. As you know, it could always be different this time. Could i come back to your acceleration of debt another time? I’m a bit pressed

    bubba sparks: there is no positive correlation between interest rates and house prices but there is a very strong positive correlation between unemployment and house prices (data from 5 countries spanning 80 years). I’ve posted it here many times, so forgive me for not doing it again. I have to go out now but I’ll explain the reasons for the counterintuitive interest rate data, another time

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  • Flash – fair enough. i actually wasn’t second guessing the unemployment component itself, i was just wondering if it had been stratified and the correlation coefficient between the strata tested. eg. at age / gender etc.

    Yes no problem in terms of when or even if you have time to respond.

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  • Thanks for posting that video techieman, interesting content and a lovely fluent lecture. The general point about debt I think is sound and one made consistently by the quieter voices in economics (or the ones who make fewer headlines). As to correlations, I’m inclined to be intensely sceptical about them, and of course we have to always bear in mind that causation is something else. However, it clearly makes sense to equate house prices to debt, and the mechanism is pretty clear. Accelerating debt must depend, at least in part, on high employment, hence we may also expect a correlation between prices and unemployment, though debt is the underlying driver.

    The question why house prices have remained high despite the contraction in debt must have a lot to do with zirp, and to some extent the spare cash flowing into the market. But presumably this effect will be limited, unless we return to a Victorian economy, which does not seem plausible. As for mixing intuition and statistics, how else would we make any progress in understanding?

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  • LTF your Welcome. An abrasive / arrogant but clever aussie is always worth a listen IMO. Yes correlation and causation are not when and the same as you say, imperfect science. However i am eagerly awaiting Flash’s comments as to whether in fact debt/accel/deceleration might be the master factor which itself impacts employment which then impacts HPs.

    Maybe its because Unemployment being one number is probably easier to track, or maybe i am just barking up the wrong tree.

    As for contraction in debt, will the deleveraging need to undergo another leg? If so perhaps we have moved on to that being a general tipping point??. Im really just throwing it out into the debate.

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  • bubba here is something from Flash a while back:

    ” I ran an extensive series of correlation numbers from several markets. The positive correlation between unemployment and house prices is always extremely strong. However, the relationship between the two is non-linear and there always seems to be a tipping/acceleration point. The UKs tipping point appears to be 2.75 million to 2.8 million. I didn’t explain the 2.8 million reference because this unemployment tipping point is my HPC equivalent to mark Wadsworths LVT.

    Btw, it is counter intuitive to most people (me included) but the correlations are not there, with interest rates. It was the first thing I looked at and I was disappointed by the results. I originally ran the unemployment numbers as an afterthought”

    Tuesday, November 2, 2010 09:40AM – http://www.housepricecrash.co.uk/newsblog/2010/11/blog-knife-edge-numbers-31001.php

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  • general congreve says:

    I must say I’m with Flash on this one. If you have work and can afford the mortgage payments, which are probably cheaper than renting for nearly everyone at the moment, why would nequity force you to default and get a bad credit rating, without which renting cheaply could prove difficult too.

    We need outright job losses or higher interest rates, interest rates do not need to onerous to get the ball rolling, just enough for people to cut back on dining out and holidays (etc.) to be able to continue to afford the mortgage. That’s a few restaurants and holiday companies that will be shutting down or downsizing, and therefore a few more unemployed people who can’t pay their mortgages.

    However, do not despair in the face of the BoE not raising interest rates. The austerity they are forcing on the country as a whole, whereby, instead of cutting back spending, they are just creating inflation and devaluing the pound, so we can all afford to buy less with our pay, will do the job just as well in the end.

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  • general congreve says:

    Hi Bubba,

    Unfortunately it seems our conversation on the last thread we were on, and my final replies to you and TC, have disappeared into the ether, as is wont to happen here from time to time I’m afraid. It seems the higher power moves in mysterious ways indeed. I hope you had time to read my replies before they went to the big forum heaven in the sky.

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  • I guess higher interest rates are what comes about when the BoEs attempts to debase the currency work and wage inflation takes off. I guess that is the ultimate measure of debasement of currency becauuse it is internal to the uk and directly affects purchasing power. This is what really wipes out debt – so the value of property wont fall (except in terms relative to wages). High unemployment however would see real proce falls. So I agree with Flash

    and GC is right to be in gold. Covers the obvious outcome.

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