Threat of fresh house price crisis dwells

Graham_Devon

Rather large article, but a good one.

I've taken an extract, likely not going to be extracts everyone likes, but full article can be read here: http://www.ft.com/cms/s/0/8d46f3f6-5712-11e0-9035-00144feab49a.html#axzz1HhXCDSYw

As for the UK, what is alarming is not the fall as such, but that the fall has not been much worse. Jeremy Grantham, co-founder of GMO, a large Boston-based fund manager, has tracked 34 historic asset price bubbles. All but two returned to their ongoing trend before the bubble took hold. Those two exceptions are UK and Australian housing at the current date.

Rather than recede to historic multiples of income or rents, house prices staged a 12 per cent rally, as measured by Nationwide, starting in the spring of 2009. That defied logic, and has now started to reverse, with prices down 3 per cent from their recent peak.

Anecdotal evidence shows that low rates are crimping supply, allowing people who would otherwise be forced to sell to stay on in their houses. Some time that supply will come to market – probably when rates are rising, making housing harder for buyers to afford.

No wonder the US Federal Reserve has continued with its bond

purchases, which keep mortgage rates down. And no wonder the UK Budget this week included subsidies for first-time buyers. Policymakers have no choice now but to press on with their attempts to keep house prices up.

The behaviour of the housing market suggests that this will be difficult. And so a return to severe problems for the banking sector looks hard to avoid.

Meanwhile, on a smaller scale, those of us who have long outgrown the renting lifestyle are stuck; while owners have to contend with the prospect of losses.

AndyGuil

Thanks for the article. Very interesting. House prices are going to continue downwards and the interest rates will be the catalyst. The rates are going up soon from what I last read in the news.

B_Blank

Very true. Once rates hit 2% there will be some serious downward pressure. I expect prices to stay stable untill mid 2012 when prices will start a decline.

I am amazed that despite record low rates + QE that house prices are currently coming down. That is truely amazing to me. The housing market must be primed for a large fall in such a case.

Graham_Devon

The impact of rate rises won't so much be how much rates rise, it will more than likely be the fact that many will be stuck on SVR and unable to move (due to equity etc).

julieq

There's a fundamental difference between this "bubble" and other asset bubbles, which is that there is an underlying ramp from the enormous imbalance between household creation and home building. That skews the trend upwards naturally over time - as supply is constrained the average income of those able to buy increases. Other asset bubbles - from houses in China to tech stocks to tulips or whatever you fancy - have very little constraining supply, and ultimately it's that which pops them. UK houses are different, and that will remain true until more of them get built. I don't know a great deal about Australia but I suspect there is something similar structurally going on there with clustering of housing into particular areas, maybe Gen can fill us in?

Anyway this is a sterile argument until rates actually rise because no amount of logic is going to shift what is essentially becoming an article of religious faith for the bears. The only thing that will prove the point is waiting for the outcome, and even then I'm sure diehards will be keeping the faith for the next coming of the next leg down well into the 2020s.

Actually I'm beginning to wish rates would rise because there is going to be a hell of a lot of bear side disappointment when precisely nothing happens. If you're in work, even on SVR you will be paying far less as a proportion of income than you would have been at other times in the fairly recent past. And of course most people aren't massively leveraged anyway, many people have fixed rates, a few people have benefitted enormously from very low rates over the past years. It will take a fair few years just to get back to pre crisis rates unless there's suddenly massive wage inflation.

geneer

julieq wrote: »

There's a fundamental difference between this "bubble" and other asset bubbles, which is that there is an underlying ramp from the enormous imbalance between household creation and home building. That skews the trend upwards naturally over time - as supply is constrained the average income of those able to buy increases. Other asset bubbles - from houses in China to tech stocks to tulips or whatever you fancy - have very little constraining supply, and ultimately it's that which pops them. UK houses are different, and that will remain true until more of them get built. I don't know a great deal about Australia but I suspect there is something similar structurally going on there with clustering of housing into particular areas, maybe Gen can fill us in?

Anyway this is a sterile argument until rates actually rise because no amount of logic is going to shift what is essentially becoming an article of religious faith for the bears. The only thing that will prove the point is waiting for the outcome, and even then I'm sure diehards will be keeping the faith for the next coming of the next leg down well into the 2020s.

Actually I'm beginning to wish rates would rise because there is going to be a hell of a lot of bear side disappointment when precisely nothing happens. If you're in work, even on SVR you will be paying far less as a proportion of income than you would have been at other times in the fairly recent past. And of course most people aren't massively leveraged anyway, many people have fixed rates, a few people have benefitted enormously from very low rates over the past years. It will take a fair few years just to get back to pre crisis rates unless there's suddenly massive wage inflation.

Oh look. It seems that not only are you able to speak for all bulls (despite your claims that they are not a single cohesive hive mind)
you're also apparently able to speak for all bears too.

You really are a wonderfully adaptable person.

B_Blank

julieq wrote: »

There's a fundamental difference between this "bubble" and other asset bubbles, which is that there is an underlying ramp from the enormous imbalance between household creation and home building. That skews the trend upwards naturally over time - as supply is constrained the average income of those able to buy increases. Other asset bubbles - from houses in China to tech stocks to tulips or whatever you fancy - have very little constraining supply, and ultimately it's that which pops them. UK houses are different, and that will remain true until more of them get built. I don't know a great deal about Australia but I suspect there is something similar structurally going on there with clustering of housing into particular areas, maybe Gen can fill us in?

Anyway this is a sterile argument until rates actually rise because no amount of logic is going to shift what is essentially becoming an article of religious faith for the bears. The only thing that will prove the point is waiting for the outcome, and even then I'm sure diehards will be keeping the faith for the next coming of the next leg down well into the 2020s.

Actually I'm beginning to wish rates would rise because there is going to be a hell of a lot of bear side disappointment when precisely nothing happens. If you're in work, even on SVR you will be paying far less as a proportion of income than you would have been at other times in the fairly recent past. And of course most people aren't massively leveraged anyway, many people have fixed rates, a few people have benefitted enormously from very low rates over the past years. It will take a fair few years just to get back to pre crisis rates unless there's suddenly massive wage inflation.

WHy are house prices still going down (last 6 months) even when IR are at record lows, QE is taking place, and the government is running at a 10% defecit then???????

There is unprecedented stimulus to the UK economy currently in place. That is going to end. Half of it goes on april 1st (gradually) and the other half should start to be withdrawn by summer (IR should go up)

MegaMiniMouse

Graham_Devon wrote: »

Rather large article, but a good one.

I've taken an extract, likely not going to be extracts everyone likes, but full article can be read here: http://www.ft.com/cms/s/0/8d46f3f6-5712-11e0-9035-00144feab49a.html#axzz1HhXCDSYw

It is the final two sentences/paragraphs of your extract which attracted my attention

I think that the banks have mostly removed themselves from investing in the housing market, and have taken steps to prevent their existing exposure from biting them (us?) in the bum for a second time around

People who thought that they they had 'grown out of' the rental market need to 'grow up' for a second time around. And the problems which now face existing home-owners are simply another result of the banks 'passing on' (wriggling out of?) the negative effects of their earlier miscalculations

MMM