Why did the last house price crash happen?

Generali

lipidicman wrote:

OOh, can you suggest a reading list (no, I am serious, really)
Do you look at the UK market or other historical economic bubbles from around the globe?

Can do. A Random Walk Down Wall Street has a great chapter on crashes and is a good starting point. It's also good on investment and the shysters that work on Wall Street/The City. Edit: Popular Delusions and the Madness of Crowds is a good one too. So is The Wall Street Crash by GK Galbraith (as long as you don't mind American left wingers).

There have been all sorts of bubbles. The best has to be Tulip Mania in C17th Holland although the Florida Real Estate Boom from the early C20th is a cracker too. They always throw up great annecdotes and the people buying into them look very silly in hindsight. A the time it is perfectly rational of course.

mystic_trev

Generali wrote:

I am something of a student of bubbles (everyone needs a hobby) and this is a classic sign of one.

I'm somewhat an expert on tulips...

....and this is classic tulipmania!

http://en.wikipedia.org/wiki/Tulip_mania

scrummy_mummy_2

Does this mean we'll all die of bubonic plague now????
Flee....fleeeeeeeee!!!!
Perhaps we should all flee to our portfolio of properties in the Bulgarian ski resport of Bansko....must have one! must have one.......everyone is buying them off plan, it has to be the next great thing!!

AAAHHHHH....

OK.....one, two, threee, back in the room.

smreynard

Guy_Montag wrote:

What would be the point of rushing to buy before the end of double tax relief, at best you would get 5 months tax relief? Hardly enough to justify paying double for a house, I should think.

The double tax relief wasn't just for 5 months. It was only abolished for new mortgages after August. That's why there was a rush!
MIRAS was eventually phased out gradually over the years but during that time the double relief still applied to those mortgages already taken out before it was abolished.

Generali

mystic_trev wrote:

I'm somewhat an expert on tulips...

....and this is classic tulipmania!

http://en.wikipedia.org/wiki/Tulip_mania

There's a great story about Tulipmania about a ship's Captain who brought bulbs back (from Turkey?) and a feast was held in his honour by the King. He mistook the bulb in the centre of the table for an onion, ate it and was put to death.

fimonkey

hmm, so then Generali, was it all really Norman Lamonts fault? Was he completely short sighted in
1a) creating the credit boom (was this to make ppl feel good in terms of what they materially owned? I was a youngster in the eighties, but remember it as the time of yuppies).
1b) Linking the pound to the deutschmark? (Why this particular currency and not the French Franc for instance)? Why DID he link the pound to another currency?

2.Does this also mean then that Germany's economy influenced our own? (What was happening in Germany at this time)?

3.In terms of the present day (2007) I think that imported goods are now immensley cheap (I'm thinking Primark for clothes and tv set top boxes £20) whereas our vhs video player in the 80's cost us £100's) so if inflation is linked to these goods, why has our inflation rate gone up recently. (And this is why interest rates have risen, to curb this right?)

4. Finally, if imported goods are so cheap in this country, isn't that worrying for our own home made goods? Surely we can't produce them as cheaply (minimum wage etc) so what's that doing to our own economy, is it likely to lead to huge unemployment again?

HEAPS OF THANKS FOR THE KNOWLEDGE SO FAR! Wish I'd have had the chance to study economics at school!

fimonkey

Forgot to add, .. what was happening on the stock market at this same time (and before and afterwards). Was it (is it) related??

I like the bubble stuff, never heard of it before now but get the idea.

Guy_Montag

skipping to
3)If DVD players drop from £100 to £20 in one year that means that DVD deflation is running at 500% (I think), but the following year DVD players cost £21, that means that DVD inflation is running at 5%!!

Anyway once prices have been reset to a lower level & start creeping up we start seeing inflation again.


Hmmm, at least you got a VHS video player, we got a Betamax

Generali

fimonkey wrote:

hmm, so then Generali, was it all really Norman Lamonts fault? Was he completely short sighted in
1a) creating the credit boom (was this to make ppl feel good in terms of what they materially owned? I was a youngster in the eighties, but remember it as the time of yuppies).

At the time it was normal to cut interest rates before elections (local or national) to make people feel richer and so vote for the incumbent party.

fimonkey wrote:

1b) Linking the pound to the deutschmark? (Why this particular currency and not the French Franc for instance)? Why DID he link the pound to another currency?

The DM was effectively the currency in Europe. The ECU (sort of forerunner to the Euro) was a basket of currencies dominated by the DM. Also, I seem to recall (dimly) that Germany was our biggest trading partner at the time.

fimonkey wrote:

2.Does this also mean then that Germany's economy influenced our own? (What was happening in Germany at this time)?

Did and still does. In 1987, the German economy was seen as a model example of how to run things with state owned (or controlled) savings banks channeling money into middle sized enterprises thus providing high and stable employment, low inflation and high growth. It's not seen in quite the same way now!

fimonkey wrote:

3.In terms of the present day (2007) I think that imported goods are now immensley cheap (I'm thinking Primark for clothes and tv set top boxes £20) whereas our vhs video player in the 80's cost us £100's) so if inflation is linked to these goods, why has our inflation rate gone up recently. (And this is why interest rates have risen, to curb this right?)

Not everything can be imported - haircuts and restaurant meals for example. Also, rising energy prices (and most other commodities too) have been a big push behind rising inflation. There's also a theory that goes that import prices have reached a floor, that they can't go any lower so will stop keeping inflation low. There's another theory that goes that inflation is way higher than official figures state - perhaps is my reply to that.

fimonkey wrote:

4. Finally, if imported goods are so cheap in this country, isn't that worrying for our own home made goods? Surely we can't produce them as cheaply (minimum wage etc) so what's that doing to our own economy, is it likely to lead to huge unemployment again?

The theory (according to C19th economist Riccardo) is that trade makes us all richer. We specialise in what we have a 'comparative advantage' in (e.g. financial services, advertising) and then use that money to buy what other people are good at (e.g. we buy chinese t-shirts and Chillean wine). If we didn't, people in Iceland would have to drink Icelandic wine and the poor old French would be stuck with French cars!

Generali

fimonkey wrote:

Forgot to add, .. what was happening on the stock market at this same time (and before and afterwards). Was it (is it) related??

I like the bubble stuff, never heard of it before now but get the idea.

Stock market crashed in Oct 1987. Interest rates were cut worldwide (probably by too much) This stoked the credit boom.