Long Term and Short Term - Expectations

nickmason

I've been thinking about the mechanics of price changes.

First of all (unlike Gordon Brown) I recognise that "boom and bust" cycles are unavoidable components of markets for a product that contains an investment, and where there is market sentiment. However...

There's no doubt that we are seeing prices drop, but there are also a whole heap of people looking to pounce once they sense a decent price. At the moment, many of them are going to struggle to find the finance, and so reduced numbers of buyers (with probably reduced funds available, but these aren't necessarily the same) will likely see the price drop.

Indeed, as many have pointed out, the price will continue to drop until the property becomes a good long term investment or "affordably-attractive" to a home-buyer.

The bit I'm interested in is the "good long term investment". Because that probably involves some expectation of future capital growth.

"In the long run prices go up". Most people - even the bears - seem to think this; that we are just in a bear stage of a cycle. I'm not sure where the "productivity" that allows equity markets to grow in the long run exists in the housing market. But in any event as long as that premise is held to be true, then the acceptable price point to constitute a good long term investment will be higher than if the premise is cast in doubt.

What this means is that if/when people stop thinking of this as a low in the cycle that is a good opportunity, but start instead to doubt the above premise, then all this pent-up (investment) demand that we hear about will evaporate.

The question is which will happen first. Will people forget the era of "earning more money from your house than from your job" [sic] more quickly than the market will drop? I think (backed up by the venom on this board) that the concept has cut deep into people's psyches, and will be around for some time. In which case the investors have it...

There is a rather nasty self-fulfilling aspect to this. But then of course I would say that, because I don't own a house (yet?).

dopester

nickmason wrote: »

Will people forget the era of "earning more money from your house than from your job" [sic] more quickly than the market will drop? I think (backed up by the venom on this board) that the concept has cut deep into people's psyches, and will be around for some time.

When the unemployment contagion starts hitting sectors close to their own, or seeing friends take forced pay-cuts or less hours available, and the bills start stacking up....

.. I think you'll find this crash beats the HPI out of most people. The numbers involved with the $trillions that came in from CDO sales and such instruments pretty much ensures this will be a very deep and very prolonged crash. And I don't want a "recovery" of prices anyway.

nickmason

dopester wrote: »

And I don't want a "recovery" of prices anyway.

Absolutely - I have not really understood who high prices benefit, apart from the businesses involved (builders, banks, EAs, etc) - and of course those who bought high....but if prices were low, it would surely be better for all.

nickmason

The other point I missed is that as long as long term expectations are positive, then people will "hang on in there", trying to ensure they don't sell at a low. Especially if we don't have high inflation to hide the losses.

I hope you're right that the HPI mindset will be shot - I'm just not convinced. Maybe some structural changes are required; restoration of pension fund tax breaks, and removal of BTL tax breaks. Something to encourage money back into investment areas that don't have such social costs.

carolt

Can't say definitely - but if the future is any guide to the past - in the last crash, attitudes towards house buying changed rapidly as prices fell.

Admittedly, there had been less of a cult of property speculation, eg no property !!!!!! shows that I recall in the 80's - but equally, prices fell much less and much slower in the last crash - current falls this time around already equal total falls from the last crash, recent figures show.

So I'd expect equal revulsion towards property as an 'investment' this time around, on balance.