There will be a housing recovery

Gorgeous_George

macaque wrote: »

... 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).

That's quite a precise forecast.

Now for the weateher. The temperature today will be between -40 and +45 degrees Celcius.



GG

poppysarah

It is tragic that we're in such a state that the housing market is central (or perhaps the only bit of ) to our economy.

Are all our manufacturers really tied in to the housing market?
Wouldn't we be better off finding real jobs for people?

Tim_L

It's irrelevant what we would be "better off" doing collectively. The economy is not driven in those terms, it's about the aggregation of collective self interest. It's not tragic we have built a few years on the basis of over-inflated house prices, it's just what happened.

macaque_2

Tim_L wrote: »

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.

What a load of nonsense. In 1997, Gordon Brown stated in his budget:
"I will not allow house prices to get out of control and put at risk the sustainability of the recovery." He then allowed house prices to remain excluded from the inflation figures. This meant that interest rates remained artificially low. It was a very cynical move which won him short term political gains. Gordon also had it within his power to stop reckless lending but he sat on his hands and let borrowing get out of control.

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.

That is not only patronising but it suggests you did not understand the original post. The point of the orgininal post was that many people believe that recovery means house prices finding their way back to the bubble conditions of 2007. A recovery means getting house prices and housing transactions back to a healthy and sustainable level. Creating a new bubble does not qualify as a recovery. Neither borrowers, lenders or regulators will want to see a repeat of today's chaos.

For house prices to get back to long term norms will require a correction of over 30%. This is not extrapolation but simple maths based on house price earnings ratios. What is unclear is how prices will fall since people often over react on the way down as well as the way up.

Tim_L

It's one thing quoting what Gordon Brown said he was going to do and another thing altogether considering what he he was ever actually capable of achieving. My point is that financial markets are way beyond being controllable by governments. Claiming they can influence them in anything other than very minor ways is like claiming credit for the sun rising in the morning. Governments as a rule can't stop people lending to other people recklessly unless they engage in brutal regulation and credit controls which would have made the country uninvestible in other ways - there would have been a massive outflow of capital frankly.

I don't see how it's patronising to say that you have to be cautious extrapolating too far from past events, or to draw conclusions on what is morally or societally the right way for a market to behave (which others seem to be), because markets work as agents of greed and self interest, they don't try to do what people believe to be the right thing for everyone else.

The fact is that no-one ever actually knows how markets are going to go: if they were predictible any value you can obtain from anticipating their volatility would dissipate because everyone could have it at no cost. And we would all be rich (which of course we can't be).

The reason I posted in the first place was because I felt the OP was making a very positive set of assertions that aren't really borne out by analysis. I argued my case I think cogently, (and in particular the evidence is that that people WILL forget this crash quickly over time, and ignore the lessons of history, which is what the OP is saying won't happen) so make contrary arguments if you want, but please don't dismiss the arguments by what is in effect a selective ad hominem attack based on the closing paragraph alone.

There has already been at least a 20% correction in prices, incidentally, and it happened very fast, much faster than in the 1990s. That doesn't mean that there will be a further 20% in the next 6 months, or 10% or 30%, or whatever, or that there won't.

There is no law that says prices have to revert to the norm either, and there is pressure on housing stock availability, so by supply and demand rules there ought to be upwards pressure on prices so that they will not be held depressed below the trend arbitrarily, they will tend to increase to the point where they become unaffordable again. The only thing structurally holding back the market is the difficulty of obtaining credit, and to my mind we're already at the low point in that respect now. Banks will be looking at cautiously moving forward to increase their own business, because they can't contract a principal moneyspinner indefinitely.

I don't know what's going to happen, frankly. But neither does the OP.

macaque_2

Tim_L wrote: »

It's one thing quoting what Gordon Brown said he was going to do and another thing altogether considering what he he was ever actually capable of achieving. My point is that financial markets are way beyond being controllable by governments. Claiming they can influence them in anything other than very minor ways is like claiming credit for the sun rising in the morning. Governments as a rule can't stop people lending to other people recklessly unless they engage in brutal regulation and credit controls which would have made the country uninvestible in other ways - there would have been a massive outflow of capital frankly.

I don't see how it's patronising to say that you have to be cautious extrapolating too far from past events, or to draw conclusions on what is morally or societally the right way for a market to behave (which others seem to be), because markets work as agents of greed and self interest, they don't try to do what people believe to be the right thing for everyone else.

The fact is that no-one ever actually knows how markets are going to go: if they were predictible any value you can obtain from anticipating their volatility would dissipate because everyone could have it at no cost. And we would all be rich (which of course we can't be).

The reason I posted in the first place was because I felt the OP was making a very positive set of assertions that aren't really borne out by analysis. I argued my case I think cogently, (and in particular the evidence is that that people WILL forget this crash quickly over time, and ignore the lessons of history, which is what the OP is saying won't happen) so make contrary arguments if you want, but please don't dismiss the arguments by what is in effect a selective ad hominem attack based on the closing paragraph alone.

There has already been at least a 20% correction in prices, incidentally, and it happened very fast, much faster than in the 1990s. That doesn't mean that there will be a further 20% in the next 6 months, or 10% or 30%, or whatever, or that there won't.

There is no law that says prices have to revert to the norm either, and there is pressure on housing stock availability, so by supply and demand rules there ought to be upwards pressure on prices so that they will not be held depressed below the trend arbitrarily, they will tend to increase to the point where they become unaffordable again. The only thing structurally holding back the market is the difficulty of obtaining credit, and to my mind we're already at the low point in that respect now. Banks will be looking at cautiously moving forward to increase their own business, because they can't contract a principal moneyspinner indefinitely.

I don't know what's going to happen, frankly. But neither does the OP.

To suggest that Gordon did not have the levers to cool house prices is ridiculous.

On your final comment you are wrong again. We do know where we are going for the same reason we know where a stone will goes if we drop it from a bridge. There are realities about our current circumstances that cannot be ignored. Fresh money in the form MEWing has been feeding into the economy at a rate of £40-50 billion a year. When house prices stop rising (which I presume you agree with) a huge wad of cash dissapears from circulation. This translates into a lot of job losses. With an economy now so dependant on house sales, a stagnant housing market also translates into lost jobs in the building trade and high street. It also leads to lower tax takes which means job losses in the public sector (not such a bad thing) . What we don't yet know is where we will end up. Hence my very broad range of 30-70% (to which Gorgeous George gave a pithy response).

Remember the first law of holes; 'when you are in one, stop digging'

GDB2222

Tim_L wrote: »

The reason I posted in the first place was because I felt the OP was making a very positive set of assertions that aren't really borne out by analysis. I argued my case I think cogently, (and in particular the evidence is that that people WILL forget this crash quickly over time, and ignore the lessons of history, which is what the OP is saying won't happen) so make contrary arguments if you want, but please don't dismiss the arguments by what is in effect a selective ad hominem attack based on the closing paragraph alone.

There has already been at least a 20% correction in prices, incidentally, and it happened very fast, much faster than in the 1990s. That doesn't mean that there will be a further 20% in the next 6 months, or 10% or 30%, or whatever, or that there won't.

There is no law that says prices have to revert to the norm either, and there is pressure on housing stock availability, so by supply and demand rules there ought to be upwards pressure on prices so that they will not be held depressed below the trend arbitrarily, they will tend to increase to the point where they become unaffordable again. The only thing structurally holding back the market is the difficulty of obtaining credit, and to my mind we're already at the low point in that respect now. Banks will be looking at cautiously moving forward to increase their own business, because they can't contract a principal moneyspinner indefinitely.

There are a few facts you need to get straight, Tim.
1. The actual fall so far is 13%, not 20%, based on Halifax data.
2. The top of the market was last August. I'm surprised at that. I thought it was earlier in the year. A one year correction is quite short.
3. In the last crash, it took four years between prices stabilising (1992) and starting to grow again (1996).
4. The lack of mortgage finance is not going to end any time soon. HBOS suggested not for another 18 months, at least.

I am not sure what you mean by people forgetting this crash quickly? Whilst I agree that the herd mentality will eventually take over again, I think you have to allow several years for the crash to be forgotten.

I am not sure what would happen if the mortgage tap were turned on again full-blast today, with 100% mortgages becoming available again. As you suggest, the market might well pick up again. However, that is not going to happen (at least according to HBOS it isn't). So, I think you need to factor in another 18 months of the market going downwards, although probably not at the current 2% a month. You then need to ask yourself what will have happened to sentiment by the end of that 18 months? I think it is quite possible that, even if 100% mortgages became available again in 18 months time, people would not feel confident enough to buy them. It's all very well to note the shortage of housing, but unless people have both the means to finance their purchase and the confidence to do so, they will not buy.

In the meantime, there are a lot more potential sellers than buyers. In particular, BTL'ers who bought in the last few years are getting very low yields. If they cannot see any capital gains either, many will want to sell. A central London estate agent told me a couple of years ago that more than half his sales were to investors, so there are certainly plenty of stale bull BTL'ers around. Given another 18 months of falls, will they still be hanging on? Will they be able to meet their finance commitments?

I agree with you that there is no magic about a long-term house price to earnings ratio of 3. There's clearly a link between that and the traditional mortgage multiple of 3 times earnings. I would hope/expect that the FSA will put some pressure on lenders to limit finance to more traditional multiples of earnings in the future.

At the moment, I am not buying anything, and I think that it's much too early to expect a recovery either in volumes or prices.

Tim_L

I agree with most of what GDB2222 said.

If you look at the difference in selling prices like for like (which I have been, because I am looking at buying) there's easily a 20% fall since the peak mid last year. There's plenty of wriggle room in the building society figures anyway, but I think the point is that the fall was fast and brutal this time, because projections for the whole correction were priced in early as soon as the market looked like it was going to slide. I agree completely that one year is way too quick for a recovery, but really the question is the shape of the curve this time. I'd argue that a rapid fall followed by a period of stagnation is more likely, maybe 2 or 3 years.

I also agree that memories do linger and that confidence will take a while to come back. But you can be sure that conversations are taking place in boardrooms on the subject of how companies can find profitable mortgage business to resume growth. It is actually in the banks' interests not to clamp down too hard on credit, but I'm sure they will be cherry picking profitable customers rather than going for absolute market share as before.

What I am arguing against is the notion that prices can't ever recover in due course, which is what the OP was confidently asserting. Prices more than recovered from the last crash relatively quickly, within a few years. Even at 2.5x earnings as a multiple, you're looking at about 7% pa house price inflation built into the structure of the market, unless the amount of housing stock magically increases or people stop wanting to live in as nice a house as they can possibly buy.

You can spread bet housing price indexes anyway. So the OP could put his money where his mouth is with a stonking sell, if he thinks it's genuinely a one way bet. I don't, personally.

Jonbvn

Tim_L wrote: »

What I am arguing against is the notion that prices can't ever recover in due course, which is what the OP was confidently asserting.

Tim,

If you followed several threads on this forum, you will find several posters (mostly but not exclusively the uber bears) consider their opinions as undeniable facts.

Running_Horse

You build them a nice comfy padded cell...
http://forums.moneysavingexpert.com/forumdisplay.html?f=149
...but the lunatics keep trying to escape the asylum.