Why did the last house price crash happen?

fimonkey

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.

RH Hemmings... Sorry I don't quite get what you mean (my fault entirely). I don't understand why the market stabilising is such a bad thing, or will lead to house proces reducing (is this what you're saying)? I know ppl like to move up the housing ladder to bigger places etc etc, but surely if all property prices stabilise then that's OK?

Generali

According to my maths, increasing house prices make it harder to buy a news place.

E.g 2 bed flat costs £100k, 3 bed semi costs £150k (incl taxes and fees).

You put down £10k on the 2 bed flat and get an I/O mortgage (easier maths) for 5 years. You decide to move to the larger place after 5 years.

Scenario 1: HPI = 0% pa. You need to find £150k to buy the new place, sell your flat for £100k and take back your £10k equity. You need to borrow an additional £50k

Scenario 2: HPI = 10% pa. You need to find £241,567.50 to buy the new place. Your existing flat is now worth £161,051. When you sell you realise £71,051 in equity so need to borrow a total of £170,516.50 or an extra £80k odd.

As you can see, in the 1st example it is much cheaper to move up the property ladder. And you don't have to put up with those terrible property programs on the TV.

Alan_M_2

However the second scenario actually makes it easier to borrow the money as in scenario 1, even though you're required to borrow more.

Scenario 1 you will only have a little under 7% deposit on the new larger property, yet in scenario 2 with all the increases you now have nearly 30% deposit.

The fire becomes self fuelling.

Generali

Alan_M wrote:

However the second scenario actually makes it easier to borrow the money as in scenario 1, even though you're required to borrow more.

Scenario 1 you will only have a little under 7% deposit on the new larger property, yet in scenario 2 with all the increases you now have nearly 30% deposit.

The fire becomes self fuelling.

Hadn't thought of it like that (and I really should have). No wonder people are racing to borrow so much! This really is all going to end in tears one way or another.

Generali

fimonkey wrote:

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)?

The stock and housing markets have a lose link with each other in that when the economy is doing well, the value of the assets in each will tend to rise. However, people buy houses and shares for different reasons - people will always buy houses because people will always need somewhere to live, that isn't true with shares. There have been stock market booms without house price booms (e.g. late 1920s) and housing booms without stock market booms (e.g. early 2000-2002).

fimonkey wrote:

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?)

As interest rates rise, stock markets tend to fall. At it's most simple this is for 2 reasons: firstly, you can earn more by just putting your money in the bank so share prices fall (dividend yields rise) as yields have to compete with 'risk free' cash deposits. Also, companies will have to pay a higher rate of interest on their borrowing, suppressing profits, thus dividends and thus share prices.

fimonkey wrote:

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?

A stock market crash can cause unemployment by making it harder and more expensive for companies to invest so they don't need so many staff. I don't think the one in 1987 did though as the market bounced back quickly from what I recall. Interest rate rises took money out of the economy, reduced investment, sent companies bust and increased mortgage payments. This was a lethal combination to a inflated house market. It was all 4 effects plus a change in sentiment (i.e. the amount that people were prepared to pay for houses) that caused price falls.

fimonkey wrote:

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)?

Stock markets across the world are riding high due to high commodity prices pushing up the value of mining and oil companies, mergers and takeovers pushing up prices generally, low interest rates making investors seek riskier assets to keep their yields high, a repricing of utility and infrastructure firms and record levels of corporate profitability. In Anglo Saxon countries, unemployment is pretty low although rising slightly. Interestingly in the UK both employment and unemployment are rising due to immigration. It is worth

The cloud on the horizon is inflation - it appears to be rising and there are good reasons to think that governments are underepresenting the true level of inflation. There is a lot of debt out there and if interest rates have to rise rapidly there'll be a lot of pain.

F_T_Buyer

Alan_M wrote:

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.

I do agree, HPC is totally the other side of the coin. But there is no forum on the internet where you can get a ballanced view. The only place I would of said is here, but they are clearly two camps and it usually results in silly arguments.

There is a whole host of information posted on HPC and other places, but most people with pre-emptive conclusions that come from the media, and which bank/economist are they quoting? That's right, those with a vested interest who benefits from HPI.

You don't see HPC saying "this is the last chance to sell your home before it crashes" do you. But you do get comments on primetime TV (BBC) with comments like "last chance saloon" (recently) portraying if you don't buy now you never will.

The media, as fimonkey says, has alot to answer for. In 5, 10, 15 years we will all look back and be baffled how we fell for it. The problem being, is those who will lose the most are those jumping in now.

lipidicman

I guess I am lucky being in a situation that I dont need to buy (GF owns her house outright, bought at the last trough in 1997). So I am saving a pretend mortgage payment every month. When the crash comes I will be the one snapping up a lovely place for cash. Saving on the reduction, saving from the interest I have earned and saving on mortgage interest repayments.

Or have I got it wrong?

Alan_M_2

Sounds like a plan to me, just remember that if and when a crash does occur it takes some time to bottom out as crashes don't occur all at once. There's kind of a ripple effect around the country, (normally emanating from the south east outwards).

pioneer

lipidicman wrote:

I guess I am lucky being in a situation that I dont need to buy (GF owns her house outright, bought at the last trough in 1997). So I am saving a pretend mortgage payment every month. When the crash comes I will be the one snapping up a lovely place for cash. Saving on the reduction, saving from the interest I have earned and saving on mortgage interest repayments.

Or have I got it wrong?

Take a look at this http://www.in2perspective.com/nr/2007/01/more-fuel-for-the-buy-to-let-bonfire.jsp

How many are thinking the same as you; from what I read into this http://www.in2perspective.com/nr/2006/11/landlords-buying-cheap-theory-wishful-thinking-.jsp the big boys certainly are.

Hope you find it useful.

lipidicman

Hmm, not sure I followed those links very well. Anyway, as I dont need to buy I wont (even as others tell me I'm missing the boat). Being in the South doesn't help as, like you say, the trends start here. Still, observing is more fun than buying, I think