Why did the last house price crash happen?

Alan_M_2

Details of Black Monday (the '87 Crash)

Interestingly, nothing triggered it, I remember computers being blamed for a lot of it, not sure why though.

Also theories suggest the storm the previous week triggered it.

http://en.wikipedia.org/wiki/Black_Monday_%281987%29

meanmachine_2

What an interesting thread.

Basically, what I take from it is that "crowds are stupid" and "herds are extremely damaging".

I'd hate to be on the receiving end of the herd's wrath should they ever decide that property's got too expensive.

It really doesn't take much.

And MIRAS was a big trigger psychologically it seems, rather than in actual terms. Didn't MIRAS continue into Gordo's reign?

Makes today's daffy prices seem even more ridiculous.

desperadoV2

Very interesting thread. So all we are saying is, nobody knows whether house price correction will or won't happen! right?

F_T_Buyer

I suggest you read what the papers were saying during the last crash. Here's 9 years worth (1988 to 1996):

http://www.housepricecrash.co.uk/wiki/Read_what_the_Newspapers_were_saying_last_time_around

Alan_M_2

desperadoV2 wrote:

Very interesting thread. So all we are saying is, nobody knows whether house price correction will or won't happen! right?

What it really says is there is a cycle, always has been always will be, but each cycle has it's own set of parameters which bizarrely could fall under the heading of "It's different this time" - although not meant in the same manner in which it's often used by the bullish investors.

No one can predict with any definity when each cycle will peak and fall, but you can have an educated guess based on historic data, the current economic situation and most importantly historical evidence on how people react to various situations.

I'm bearish about the situation, but every event needs a trigger and I'm happy to admit that I'm scratching my head about what that trigger will be and when it will occur.

As long as affordability remains at reasonable levels (that's based on monthly payments alone) I don't see any slow down to the present situation.

The most likely cause that I can see is banks getting cold feet and tightening up lending criteria, but that alone won't be enough......

What we're in at present certainly seems to have all the hallmarks of a bubble, and bubbles tend to pop rather than deflate slowly in a controlled manner. What stage of the bubble are we at is the $64,000 question......you need a time machine to answer that I'm afraid.

Alan_M_2

F_T_Buyer wrote:

I suggest you read what the papers were saying during the last crash. Here's 9 years worth (1988 to 1996):

http://www.housepricecrash.co.uk/wiki/Read_what_the_Newspapers_were_saying_last_time_around

To be honest I generally steer clear of that site as it isn't exactly what you'd call a balanced point of view, however the newspaper information makes interesting reading. Throughout 4-5 years there are still agent and mortgage company headlines trying to talk it back up even though properties are hemorrhaging money before their very eyes.

Generali

Alan_M wrote:

Details of Black Monday (the '87 Crash)

Interestingly, nothing triggered it, I remember computers being blamed for a lot of it, not sure why though.

Also theories suggest the storm the previous week triggered it.

http://en.wikipedia.org/wiki/Black_Monday_%281987%29

From what I recall, there were some falls in stock prices (from profit taking?). This lead some banks' automated trading systems to sell automatically causing prices to fall further and other banks' auto trading systems to kick in and so on until trading was suspended. Tighter controls on auto trading systems and also on suspending trading were subsequently introduced.

RHemmings

Alan_M wrote:

What it really says is there is a cycle, always has been always will be, but each cycle has it's own set of parameters which bizarrely could fall under the heading of "It's different this time" - although not meant in the same manner in which it's often used by the bullish investors.

No one can predict with any definity when each cycle will peak and fall, but you can have an educated guess based on historic data, the current economic situation and most importantly historical evidence on how people react to various situations.

I'm bearish about the situation, but every event needs a trigger and I'm happy to admit that I'm scratching my head about what that trigger will be and when it will occur.

I think people put too much emphasis on what caused previous crashes, and then trying to predict whether there will be a crash or not this time based on those specific triggers. In my opinion, the property market is far too pumped up to be sustainable, and that a correction will happen at some time in some way. But predicting the timing or cause is very difficult, and there's no need for it to be the same cause or follow the same timeline as previous crashes.

As an analogy, imagine that you're inflating a balloon. If you keep pumping air into the balloon, eventually it will burst. If you start pumping up another balloon, then there's no need for the balloon to burst in the same way or with the same timing as the previous balloon. But, if you keep pumping air into it, it will burst. Let's say that the first balloon burst because the very top of it was weakest, and that tore first. Now imagine that the second balloon has a reinforced top. People could then claim "The only reason the first balloon burst was because the top was weak. This balloon has a stronger top, and therefore the balloon will never burst." That's about the level of logic of people who claim that because we're unlikely to see 15% interest rates again, that the housing bubble will not burst like it did last time. It may go higher than last time, which it has, but even if you have a stronger balloon, there will still come the time when too much air has been pumped in, and it will burst.

I think there are some effects of housing booms that people don't discuss sufficiently. Everyone agrees that prices can rise to the levels of affordability, but don't seem to consider that HPI itself can feed into this. Imagine a family who earn a certain amount of money, and buy a first rung house at a certain value. Say, £40,000. They have £5,000 deposit, and over the next three years pay off £10,000 of their mortgage. But their house has gone up to a value of £70,000. So the total equity they have to buy a second rung house is £45,000. If the value of their home had only gone up to £50,000, then they'd only have had £25,000 equity. This "free" equity allows them to pay more for their second rung house than they would otherwise have done.

But say we enter a period of price stability. The family that bought the previous "first rung" property at £70,000 find that three years later their house is still only worth £70,000. Assume they had their £5,000 deposit, and because of higher interest rate payments, they've only been able to pay off £5,000 of their mortgage. So their equity at this point is £10,000, much, much, less than the first family.

So in summary, HPI can boost affordability of second rung homes. But this boost disappears in a period of housing stability. If the prices of second rung homes had been pushed to the limits of affordability, and this affordability included free equity due to HPI, then even without wages decreasing, unemployment increasing, or other effects, affordability at later levels can decline. So a housing bubble that goes too high contains within itself some of the seeds of its own destruction.

And this ignores the proportion of housing demand that is due to speculative investment. As is frequently said, a lot of people are buying houses with the expectation of double-digit HPI. If this stops, and prices stabilise, then this proportion of the demand will disappear, changing the market itself. This is particularly important if typical FTB properties have been priced out of much of the typical FTB market by investors.

Generali

As I have posted elsewhere, I have an interest in bubbles. My experience is that there are lots of things that can start to deflate a bubble (probably as many causes as there are bubbles) but they really gather momentum once forced sellers enter the market. These tend to be people or companies that have bought on credit secured against the frothy asset.

Once the asset starts to fall in value, the security no longer adequately covers the loan so the lender will call for more security. As one feature of bubbles is a tendancy for the most leveraged to put all their eggs in one financial basket, this call canot be met without selling the security to pay back the loan. This pushes down values for other holders of that asset so more people get asked to put up more security. They become forced sellers too and so it goes on.

This was the fate of every crash I can think of although if someone can show me a bubble that didn't end like this I'd be very interested to look it up.

fimonkey

Thanks All, I'm learning heaps here. However I didn't ask the question in order to make any relationship with today's situation (I've kept my eye no the many threads here that discuss today's situation). I merely remember the crash of the late 80's as a 10 year old and remember the constant news reports of doom and gloom but never understood WHY!

F_T_buyer, re: the newspaper reports at the time... My personal opinion is that the media in this country are responsible for a lot of hype and pomp. they alone can make or break a person (and therefore to an extent a situation). If all media reports started saying they was about to be a crash, I believe they could induce one just by saying so (cos Mr + Mrs Average, i.e. Me, don't know enough about economics to make their own decision and rely on the mass effect, - or herd mentality - to make their financial decisions).
More questions if I may...

1. re: the sotck market...I understand then why there was a crash in 87 (my Dad lost a heap of money, I was 8 yrs old and remember the family stress). How much bearing did this have on the house price crash though? Did the stock market ever recover? Is the stock market and housing market always linked (i.e can both do well at the same time, or can one do well at the expense of the other)?

2. What relationship exists between the stock market and interest rates? (I'm taking from this thread that when house prices increase to the extent they have done, that means borrowing has increased, this is bad for the economy.. creates a credit boom, so interest rates rise to curb this. Have I understood?)

3. Did the stock maret crash cause unemployment too? Or was it merely the interest rate rise that hit small businesses, and then this unemployment caused ppl to not be able to afford their mortgages = repossessions = crash?

4. last question (for the moment)... What is the stock market doing now (is it good or bad) AND what is employment doing now (again good or bad)?

Many many thanks for this education!!