There will be a housing recovery

macaque_2

But what does the word recovery mean?

When a clinic treats an alcoholic, their aim is to get the individual off alcohol, not make well enough to start drinking again.

In the 10 years leading up to 2008, the economy became addicted to house price inflation. The result is that the nation has become too reliant on MEWing, rising debt and high taxes. The housing bubble has caused people to give up work or go on part time work. Productivity is falling and businesses are leaving the UK.

The idea that house prices will ever return to 2007 prices (corrected for inflation) is not going to happen for two reasons. Firstly 2007 prices were much higher than normal wage earners could afford. Secondly, the fallout from 2007 will stay in the minds of regulators, lenders and borrowers for hundreds of years. People are still talking about the Tulip bubble after 400 years.

The term housing recovery has no relevance to people who have borrowed too much. It is aimed at the organisations and professions who make their living from housing transactions. The housing recovery will be about sales volumes not prices. Prices will resume an upward trend to keep pace with inflation but only after a severe correction (between 30 and 70% lower than today's prices).

Oblivion

macaque wrote: »

People are still talking about the Tulip bubble after 400 years.

It's regularly the main topic of conversation in our house! :rotfl:

Seriously though, I agree with the thrust of your argument.

Dave.

gauly

To argue that "it's different this time" or there'll be "no more boom and bust" seems as unlikely to me on the way down as it did on the way up. House prices will return to 2007 levels (corrected for inflation) but it will take a long, long time. Enough time for everyone to forget about this boom and start on the next one.

If you look at house prices in the late 80s/early 90s, houses were more overpriced then than in 2007 by many measures. In absolute value they may have been less but the higher interest rates mean people were paying more for their housing than they do now. After that crash I thought, no-one will be daft enough to do that again, but here we almost 20 years later going through exactly the same thing.

I think that the lenders in particular have no incentive to learn lessons from the crash. People earned massive salaries and bonuses from the house price boom. If they hadn't joined in with the mad-cap lending then they would have been out of a job for not bringing in the money. The way salaries and bonuses are paid mean that there is no point in planning for a theoretical bust 15 years in the future. The regulators won't do much because the banks have too much power and can just leave and work from a different country if they don't like the rules. And as for the borrowers - do you really believe that people will suddenly not borrow too much money to buy that "dream house" they always wanted?

macaque_2

gauly

To argue that "it's different this time" or there'll be "no more boom and bust" seems as unlikely to me on the way down as it did on the way up.

This is not a debate about what might be different. Houses prices are dropping faster than at any time in recent history, house sales are the lowest on record and many banks are in severe difficulties. The government is spending hundreds of billions trying to prevent the financial system from falling off a cliff. These are unusual events by any measure.

House prices will return to 2007 levels (corrected for inflation) but it will take a long, long time. Enough time for everyone to forget about this boom and start on the next one.

Bubbles of this sort don't repeat themselves for lots of reasons.

If you look at house prices in the late 80s/early 90s, houses were more overpriced then than in 2007 by many measures.

House prices today are higher than they have been at any time in the past 2000 years by a very large margin. You are confusing interes payments with capital values.

After that crash I thought, no-one will be daft enough to do that again, but here we almost 20 years later going through exactly the same thing.

The house price correction of the early 90s was not a crash. What we seeing now is a crash.

I think that the lenders in particular have no incentive to learn lessons from the crash. People earned massive salaries and bonuses from the house price boom.

The lenders have clear incentives to learn from this crash. It is costing them billions and some are being sold off in distressed circumstances.

The regulators won't do much because the banks have too much power and can just leave and work from a different country if they don't like the rules.

Don't kid yourself.

And as for the borrowers - do you really believe that people will suddenly not borrow too much money to buy that "dream house" they always wanted?

Yes I do. Fear is a powerful emotion.

Are you an estate agent by any chance?

chartreuse_2

macaque wrote: »

House prices today are higher than they have been at any time in the past 2000 years by a very large margin.

How do you arrive at that conclusion? Seems to me that the medium of exchange has changed so often over that length of time that it would be difficult to make any meaningful comparisons.

neverdespairgirl

macaque wrote: »

People are still talking about the Tulip bubble after 400 years.

And the South Sea bubble, as well.

ad9898_3

One thing I find amazing is that Gordon Brown and his cronies have somehow managed to crash the housing market and the economy with interest rates at 5%, a truely amazing feat of economic mis-management.

Of course I applaud the crashing of the housing market but I'm certain this wasn't his intention.

You really must be able to look in Gordon Browns' ear and see straight through to the other side.

pawpurrs

ad9898 wrote: »

One thing I find amazing is that Gordon Brown and his cronies have somehow managed to crash the housing market and the economy with interest rates at 5%, a truely amazing feat of economic mis-management.

Of course I applaud the crashing of the housing market but I'm certain this wasn't his intention.

You really must be able to look in Gordon Browns' ear and see straight through to the other side.

:rotfl:

macaque_2

chartreuse wrote: »

How do you arrive at that conclusion? Seems to me that the medium of exchange has changed so often over that length of time that it would be difficult to make any meaningful comparisons.

The medium of exchange is irrelevant. The determining factor is the price earnings multiple. 2007 broke all records on this score. 2007 also broke all records for availability of loose credit.

chartreuse_2

macaque wrote: »

The medium of exchange is irrelevant. The determining factor is the price earnings multiple. 2007 broke all records on this score. 2007 also broke all records for availability of loose credit.

I guess I'm saying that I very much doubt that we have meaningful records (including price earnings multiple) dating back to 8AD. Or that the nature of property, ownership, transactions etc that far back is in any way directly comparable to today. If you'd said a couple of hundred years, it might have been more credible, but saying 2000 smacks of hyperbole.

Tim_L

Erm, the crash in the 1990s didn't seem to stick in many people's minds for very long, and the bubbles referenced are always talked about and ignored during the creation of new ones. Prices now in mid crash are well over three times what they were at the height of the property boom leading up to that, only about 20 years ago. Actually there's a structural ramp built into the housing market of about 3 times wage inflation because of the way mortgage multiples work, even when lenders are being prudent.

I'm not a fan of Nicholas van Hoogstraaten, but he was a successful property developer. I remember something he said during the crash in the 1990s: that the general public are very poor at reading markets, and tend to react at extreme points in the cycle, usually just as things are about to switch. His strategy was not to try to call the market at the absolute best or worst points but to understand the drivers and move quickly and decisively into and out of trends.

What the last crash did do was to fix the idea in the public's mind that housing can lose value rapidly - this wasn't quite believed last time round. Remember that for a house to lose value, a collection of people need to be persuaded that it is worth less - the seller, the estate agent, and a collective of potential buyers. If you can believe 20-30% corrections are possible in short order, then you don't make an offer 10% less than an asking price. From the moment you believe it you price the whole correction in immediately. So instead of a ramp down over some years as happened in the 1990s, the reduction can be brutal. It doesn't mean you can project it downwards at the same rate for years.

I've dealt with markets enough to know that they make your opinions look foolish with staggering regularity. You are dealing, in essence, with the results of collective behaviour of often very ill informed people, and greed or fear or very small shifts in sentiment one way or another can have very radical effects. But looking at this one, what you see is an economy that still has high employment, low interest rates which are likely to fall, and an increasing requirement for housing that won't be met by development for reasons first of the difficulty in obtaining planning permission, and now a hesitancy by builders to invest into a depressed market.

You also have financial companies who will have to generate growth in their own businesses and will be looking at how they can do that once the immediate fires are put out. We are probably close to the point where the defensive action currently underway in the industry will switch towards cautious positive action to acquire new business.

It's still true that most sellers are not forced to sell - having myself been looking at buying recently many sellers still have very optimistic assessments of the value of their house, and if challenged with a low offer will tend to halt the sale and remove themselves from the market rather than accept a lower valuation.

The funny thing is that this is one thing you can't really blame Gordon Brown for, but it's amusing that he's getting the flak because he did claim credit for the positive economic situation he inherited, and just about his first act was to remove the government from the loop on interest rates (which I'm guessing he did to ensure they had no adverse criticism if rates had to rise or there was a recession which has looked likely at various stages since 1997). But if you claim credit for the sun rising every day it's not surprising that people blame you when the sky falls on your heads.

I'm not saying that this is a temporary blip and we'll have strong growth starting from next Tuesday, but I do think that you have to be very cautious in extrapolating too far from what is currently happening in the way the OP is. Actually if it were so easy to call markets that random members of a bulletin board could do so, we'd all be rich.