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Myth-Busting. Proving Bears Wrong, again.
HAMISH_MCTAVISH
Posts: 28,592 Forumite
MYTH-BUSTING..... Time to deconstruct all those persistent bear myths, one at a time.....
The Supply and Demand myth.
The bears claim there is no shortage of housing. Except according to Nationwide, there are 270,000 households currently being created a year in the UK, 150,000 from the native population, and another 120,000 from migration, and that is forecast to continue until at least 2032. At the moment there are only 100,000 houses being built a year. Long term HPI is therefore inevitable, until house building exceeds population growth, which ain’t going to happen any time soon.
The “rising rates = falling prices myth”.
Rising rates, or the end of tracker deals this year, will trigger the "next leg down".... Well, there are more people by far on 5% plus fixes then on 1% trackers. Those people stand to benefit by reverting to lower SVR's at 3% or so. Whereas the people on +1% trackers were initially paying 6% plus back in 2007, so can surely pay 3%, or 4%, or 5% or 6%, when the tracker ends.
The “Repossessions will flood the market, then it's cheap houses for all, Woo Hoo!!!!!!” myth.
Except the great wave of repossessions the bears were calling for just hasn't happened, and in all probability, it's not going to happen now either. The forecasts have been revised downwards to 65K this year, little more than 1 months supply from an entire year of repo, as pressure on the downside for prices. Versus the 270k additional households that nationwide estimate will be created this year, and every year, for the next 30 years, as pressure on the upside for prices.
The “Unemployment leads to big falls” myth.
Always a red herring, this myth has proved surprisingly resilient. It was first surmised that this recession would hit middle class homeowners worse than blue collar or youth households due to the banking crisis. However, as with most recessions, this has turned out to be false. The worst hit sectors are blue collar workers and the young. Both of whom are amongst the lowest percentage of home owners. The reality is that only an additional 3 in 100 workers will be impacted by unemployment in this recession, and of that 3 in 100, most will not lose their house. Many do not own a house, many more will have a partner who is working, some will have good redundancy settlements, some more will be eligible for govt asistance, etc etc etc.
The real risk from unemployment is not the tiny number of people who lose a house from it, but rather the more general fear factor it raises, destroying consumer confidence. But the latest consumer confidence results show that is improving rapidly too.
I completely agree that there will be ups and downs over the short term. I am calling for further, although smaller, falls over next winter, as is the case in most years with any market that has seasonal influences.
But we have already reached the number of transactions needed for pricing neutrality, in fact at the moment we are slightly above that number leading to slight growth. In order for there to be a significant further leg down, there would need to be a significant change in the circumstances on the ground. Unemployment would have to increase by far more than projected, the recession would have to go on for longer than predicted, or there would need to be a very large number of houses coming onto the market at distressed prices, far more than the current 1 month supply estimated to be the case from repo's this year.
The "proper crash hasn’t happened yet” myth.
No, the proper crash HAS happened, and may well still be happening until early next year, but it was never going to be as big as the bears thought. There are too many underlying issues supporting price growth for prices to fall as far as many thought they would. We are now almost 2 years in, and the worst is now well behind us. One more year of "bumping along the bottom" with small falls and rises seems likely though.
The “this crash has years to run yet” myth.
Regarding historical crash timelines, if you look at the last 3 house price crashes you see 3 completely different timelines. In the last crash prices "bumped along the bottom" for several years, and of course the bears frequently use this as "proof" that there will be no rush to buy when the bottom is reached.
However in the crash before that prices only stayed at bottom for one year, from 1982-1983. Before climbing relentlessly for 7 years straight.
And in the time before that, prices only stayed at bottom for one year as well, from 1977-1978, before climbing sharply again.
In the 1990's crash it took 6 years for prices to fall from peak to trough.
In the 1970's crash it took 3 years for prices to fall from peak to trough.
In the 1980's crash it took just 2 years for prices to fall from peak to trough.
However in none of those crashes was the housing shortage as bad as it is today, and in none of those crashes were interest rates as low as they are today, and in all of those crashes, unemployment was far higher than it is today.
The assumptions of the bears, that prices will fall for many years yet, and then bump along the bottom for many more years, is based solely on the pattern of the last house price crash, whilst ignoring the patterns of the two crashes previous to that.
It is very much clutching at straws to assume that this crash will follow the precise timeline of the last. No two crashes have been alike in duration or timeline. It is unlikely to start now
The “earnings multiple” myth.
Bears look at earnings multiples within a very narrow time window and assume it backs up their case. It does not.
Earnings multiples in 1954 (when modern records began) were right around 4 times average wage. (male, full time, mean)
Earnings multiples today are right around 4 times average wage. (male, full time, mean)
So the worst that can be said about todays prices is they are at the same level of affordability as they were in 1954...... Not exactly indicative of an "affordability crisis". Yet bears persist in picking an arbitrary point in time in-between then and now, (usually around 3.5 times earnings), and claiming that is the "right" level for affordability.
But of course, earnings multiples at any point in a housing cycle will fluctuate as prices rise and fall. The important thing to note is that they have increased through time, with the average for each cycle increasing throughout the last few cycles. The average multiple a couple of decades ago may well have been 3 times earnings, and then for the last decade 4.5 times earnings, and into the future, who knows..... Except we all know that prices will continue to increase until there is no longer a shortage of housing, of the types people want, in the places people want to live, and where the employment exists to support them.
The “trees don’t grow to the sky, so prices must fall back now” myth.
Is there a theoretical upper limit to house prices?
Yes, of course.
That limit is reached when the cost of buying a house is more than the cost of renting for an adult lifetime. Prices today are less than one third of that amount. So plenty of scope for HPI yet, and those who choose to believe that picking a point in time from a moving target, such as earnings multiple averages, gives a definitive "right" level for house prices, are going to be disappointed.
100 years ago, 90% of houses were owned by 10% of people. Home ownership was unaffordable for 90% of the population. I doubt we will return to that point in my lifetime, but I believe we have reached the upper limits of home ownership in terms of population percentage. Today it is around 70%. In the future, this may well be 60%, or 50% or 40%. Having 30%, or 50% or even 60% of the population unable to buy a house in no way means prices cannot rise. It just means wealth will be consolidated in the hands of fewer people.
And no doubt there will be more, but I'll add them as we go.;)
The Supply and Demand myth.
The bears claim there is no shortage of housing. Except according to Nationwide, there are 270,000 households currently being created a year in the UK, 150,000 from the native population, and another 120,000 from migration, and that is forecast to continue until at least 2032. At the moment there are only 100,000 houses being built a year. Long term HPI is therefore inevitable, until house building exceeds population growth, which ain’t going to happen any time soon.
The “rising rates = falling prices myth”.
Rising rates, or the end of tracker deals this year, will trigger the "next leg down".... Well, there are more people by far on 5% plus fixes then on 1% trackers. Those people stand to benefit by reverting to lower SVR's at 3% or so. Whereas the people on +1% trackers were initially paying 6% plus back in 2007, so can surely pay 3%, or 4%, or 5% or 6%, when the tracker ends.
The “Repossessions will flood the market, then it's cheap houses for all, Woo Hoo!!!!!!” myth.
Except the great wave of repossessions the bears were calling for just hasn't happened, and in all probability, it's not going to happen now either. The forecasts have been revised downwards to 65K this year, little more than 1 months supply from an entire year of repo, as pressure on the downside for prices. Versus the 270k additional households that nationwide estimate will be created this year, and every year, for the next 30 years, as pressure on the upside for prices.
The “Unemployment leads to big falls” myth.
Always a red herring, this myth has proved surprisingly resilient. It was first surmised that this recession would hit middle class homeowners worse than blue collar or youth households due to the banking crisis. However, as with most recessions, this has turned out to be false. The worst hit sectors are blue collar workers and the young. Both of whom are amongst the lowest percentage of home owners. The reality is that only an additional 3 in 100 workers will be impacted by unemployment in this recession, and of that 3 in 100, most will not lose their house. Many do not own a house, many more will have a partner who is working, some will have good redundancy settlements, some more will be eligible for govt asistance, etc etc etc.
The real risk from unemployment is not the tiny number of people who lose a house from it, but rather the more general fear factor it raises, destroying consumer confidence. But the latest consumer confidence results show that is improving rapidly too.
I completely agree that there will be ups and downs over the short term. I am calling for further, although smaller, falls over next winter, as is the case in most years with any market that has seasonal influences.
But we have already reached the number of transactions needed for pricing neutrality, in fact at the moment we are slightly above that number leading to slight growth. In order for there to be a significant further leg down, there would need to be a significant change in the circumstances on the ground. Unemployment would have to increase by far more than projected, the recession would have to go on for longer than predicted, or there would need to be a very large number of houses coming onto the market at distressed prices, far more than the current 1 month supply estimated to be the case from repo's this year.
The "proper crash hasn’t happened yet” myth.
No, the proper crash HAS happened, and may well still be happening until early next year, but it was never going to be as big as the bears thought. There are too many underlying issues supporting price growth for prices to fall as far as many thought they would. We are now almost 2 years in, and the worst is now well behind us. One more year of "bumping along the bottom" with small falls and rises seems likely though.
The “this crash has years to run yet” myth.
Regarding historical crash timelines, if you look at the last 3 house price crashes you see 3 completely different timelines. In the last crash prices "bumped along the bottom" for several years, and of course the bears frequently use this as "proof" that there will be no rush to buy when the bottom is reached.
However in the crash before that prices only stayed at bottom for one year, from 1982-1983. Before climbing relentlessly for 7 years straight.
And in the time before that, prices only stayed at bottom for one year as well, from 1977-1978, before climbing sharply again.
In the 1990's crash it took 6 years for prices to fall from peak to trough.
In the 1970's crash it took 3 years for prices to fall from peak to trough.
In the 1980's crash it took just 2 years for prices to fall from peak to trough.
However in none of those crashes was the housing shortage as bad as it is today, and in none of those crashes were interest rates as low as they are today, and in all of those crashes, unemployment was far higher than it is today.
The assumptions of the bears, that prices will fall for many years yet, and then bump along the bottom for many more years, is based solely on the pattern of the last house price crash, whilst ignoring the patterns of the two crashes previous to that.
It is very much clutching at straws to assume that this crash will follow the precise timeline of the last. No two crashes have been alike in duration or timeline. It is unlikely to start now
The “earnings multiple” myth.
Bears look at earnings multiples within a very narrow time window and assume it backs up their case. It does not.
Earnings multiples in 1954 (when modern records began) were right around 4 times average wage. (male, full time, mean)
Earnings multiples today are right around 4 times average wage. (male, full time, mean)
So the worst that can be said about todays prices is they are at the same level of affordability as they were in 1954...... Not exactly indicative of an "affordability crisis". Yet bears persist in picking an arbitrary point in time in-between then and now, (usually around 3.5 times earnings), and claiming that is the "right" level for affordability.
But of course, earnings multiples at any point in a housing cycle will fluctuate as prices rise and fall. The important thing to note is that they have increased through time, with the average for each cycle increasing throughout the last few cycles. The average multiple a couple of decades ago may well have been 3 times earnings, and then for the last decade 4.5 times earnings, and into the future, who knows..... Except we all know that prices will continue to increase until there is no longer a shortage of housing, of the types people want, in the places people want to live, and where the employment exists to support them.
The “trees don’t grow to the sky, so prices must fall back now” myth.
Is there a theoretical upper limit to house prices?
Yes, of course.
That limit is reached when the cost of buying a house is more than the cost of renting for an adult lifetime. Prices today are less than one third of that amount. So plenty of scope for HPI yet, and those who choose to believe that picking a point in time from a moving target, such as earnings multiple averages, gives a definitive "right" level for house prices, are going to be disappointed.
100 years ago, 90% of houses were owned by 10% of people. Home ownership was unaffordable for 90% of the population. I doubt we will return to that point in my lifetime, but I believe we have reached the upper limits of home ownership in terms of population percentage. Today it is around 70%. In the future, this may well be 60%, or 50% or 40%. Having 30%, or 50% or even 60% of the population unable to buy a house in no way means prices cannot rise. It just means wealth will be consolidated in the hands of fewer people.
And no doubt there will be more, but I'll add them as we go.;)
“The great enemy of the truth is very often not the lie – deliberate, contrived, and dishonest – but the myth, persistent, persuasive, and unrealistic.
Belief in myths allows the comfort of opinion without the discomfort of thought.”
-- President John F. Kennedy”
Belief in myths allows the comfort of opinion without the discomfort of thought.”
-- President John F. Kennedy”
0
Comments
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:rotfl::rotfl::rotfl::rotfl::rotfl::rotfl:
R0 -
One thing that isn't a myth is the money no longer exists Hamish, and without money, transactions will be low. Even now, at the top of your new 'boom' transactions are half of what they were at the lowest point of the last crash.:D
Sorry to burst your mythical bubble, tee hee.0 -
You are a silly boy.
Did you just cut and paste that out of an old inside track brochure?
Come on McTittish. Own up.
Where does it come from?"The problem with quotes on the internet is that you never know whether they are genuine or not" -
Albert Einstein0 -
Household formation - notoriously difficult to forecast (hence always been wrong in the past) - with jobs much harder to come by I suspect net migration at the moment is not what has been extrapolated in the 'forecast'. However I agree that supply has been hit with newbuilds down and sellers putting off due to uncertainty - this is what is driving the current increases in my opinion.
Agree about affordability rather than multiples in fact I have argued frequently about income elasticity of demand (the richer you are the larger proportion of your income you are willing to commit to housing) however I think interest rate changes will impact affordability as the excessive govt borrowing will continue to push up the long end of the yield curve leading to higher fixed rates and I suspect the short end may follow either because the govt has to raise rates to attract lenders and/or commodity price inflation feeds in again - starting from a low base only small changes in the rate can hit affordability.
The other side of affordability is incomes - with gdp down 6% these will also fall (or be it more slowly than for example profits) but will eventually feed through for example via less overtime, smaller bonuses and even unemployment.
One point you don't mention is the lack of mortgage finance which as Generali would say turns desire in to demand. I posted yesterday about the possibility of a virtuous circle of rising prices increasing bank capital (lower than anticipated write-offs and even write-backs) and thus allowing more lending and hence higher prices but as yet conditions remain tighter especially for those without equity and for btl purchases.
Very much agree with you about not trying to extrapolate cycles from the past - efficient markets hypothesis says this is a mugs game.
Disagree that there needs to be any correlation between transactions and prices.
Not sure what the impact of negative equity is - obviously kills demand from some who can not move but potentially also kills supply. This seems to be a biggie based on the Lloyds numbers.I think....0 -
One thing that isn't a myth is the money no longer exists Hamish, and without money, transactions will be low. Even now, at the top of your new 'boom' transactions are half of what they were at the lowest point of the last crash.:D
Sorry to burst your mythical bubble, tee hee.
This is not a boom, and it's certainly not a bubble.
This is merely the first mild stirrings of an awakening housing market.
The boom will not start for many years yet, growth at first will be slow and erratic, like this year has been so far.
But 10 years from now prices will have doubled in real terms, and then they'll double again before the next peak.
Sorry to burst your bubble like that, but thats life.“The great enemy of the truth is very often not the lie – deliberate, contrived, and dishonest – but the myth, persistent, persuasive, and unrealistic.
Belief in myths allows the comfort of opinion without the discomfort of thought.”
-- President John F. Kennedy”0 -
HAMISH_MCTAVISH wrote: »But 10 years from now prices will have doubled in real terms, and then they'll double again before the next peak.
Sorry to burst your bubble like that, but thats life.
That's ok, I'll have bought way before then, outright too.
0 -
That's ok, I'll have bought way before then, outright too.
Possibly. But if so then you are an unusual case.
For most people, ANY reasonable amount of HPI ensures that prices rise faster than they can save.
Thats why the bear argument of "oh, but my rent is cheaper than a mortgage, so I'll just save the difference and buy in cash" is another myth.
Prices rise faster than most people can save, for at least 15 years out of 20 in every cycle.“The great enemy of the truth is very often not the lie – deliberate, contrived, and dishonest – but the myth, persistent, persuasive, and unrealistic.
Belief in myths allows the comfort of opinion without the discomfort of thought.”
-- President John F. Kennedy”0 -
I didn't read any of it. But I'm gonna call you deluded anyway, as I probably don't need to read all that waffle for me to be correct.0
-
HAMISH_MCTAVISH wrote: »Possibly. But if so then you are an unusual case.
For most people, ANY reasonable amount of HPI ensures that prices rise faster than they can save.
Thats why the bear argument of "oh, but my rent is cheaper than a mortgage, so I'll just save the difference and buy in cash" is another myth.
Prices rise faster than most people can save, for at least 15 years out of 20 in every cycle.
Yes, but savings is real money. House price rises are not.
Higher house prices translate into higher debt. And debt is not wealth.
You silly boy McTittish."The problem with quotes on the internet is that you never know whether they are genuine or not" -
Albert Einstein0 -
HAMISH_MCTAVISH wrote: »Possibly. But if so then you are an unusual case.
Not necesarily, people have short, or medium term investments that when mature significantly boost any savings.0
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