Boom - bust - boom When didn't it ?

deemy2004

I remember on the news they had to give what a basket of food will buy this week...

Also there were the jobs losses, 10,000 here, 1000 there, 7000 everywhere.

Jobs created - Mrs Smith has got a cleanign job.

The 70's and 80's the bad old days.... definetly don't want to go down that road again !

deemy2004

Pal wrote:

I am curious as to how a 30% drop in house prices would be catastrophic. 30% would take us back to house prices in 2001, when everyone thought that houses were overpriced!

A 30% drop would be of catastophic proportions !
Its not that your going back to 2001, as time marches forward not back, but that house prices relative to everything else would be a much smaller %.... hmmmm I think Ive already posted all this before ......... :rolleyes:

Start £100,000 Inflation 3%, Interest rates 5%, mortgage payments as a % of house prices = £5000/£100,000 = 5%


Year 1 Drop 10% = £90,000, Value in real terms £87,000, mortgage payments as a % of house prices = £5000/£87,000 = 5.7%

Year 2 Drop 20% = £80,000, Value in real terms £74,000, , mortgage payments as a % of house prices = £5000/£74,000 = 6.8%

Year 3 Drop 30% = £70,000, Value in real terms £61,000, mortgage payments as a % of house prices = £5000/£61,000 = 8.2%
Thus mortgage payments as a % of house value would increase, even if interest rates stayed exactly the same.

Theres also the difference in perception of wealth i.e.
£100,000 Invested Risk free = 116,000 to £61,000 = 52%.

As on the way up people felt so much richer as each month house prices rose far more than the mortgage they paid, on the way down people will both be and feel so much poorer as the houses fell in value far more than the mortgage they are paying... Would be akin to throwing money into a black hole....

Why be a home owner, paying a mortgage when the value of the house is falling by a greater amount than your mortgage payments ? Who would want to hold property under such circumstances ? This is how it is during a housing bear market, where the response is not a rational, oh were just goign back to 2001 prices, but rather OH MY GAWD !!! I'm far better off renting ! At least then the money is earning interest and growing by 5% instead of losing value by 10% !!! leaving a 15% difference every year !

And more so for buy to letters. I mean yeh their rent covers the mortgage which is rationale for buy to letting, BUT if house prices are tumbling 10% per year, they are losing 10% a YEAR ! NO GAIN whatsover ! They will be the first to dash for the exit with a view to putting their funds into say savings accounts which would give them a 5% return with NO capital loss.

A 10% drop would result in a recession akin to the early 1990's (actual real drop then was about 12%)

A 20% drop would result in a recession akin to the early 80's

A 30% drop, would be catastrophic.... were talking 1930's style depression.

Given the likely damage, in all probability the real drop is unlikely to be much above 10% ..... though you never know !

Even a 5% drop is enough to squish the economy for a while.

Plasticman

deemy2004 wrote:

Given the likely damage, in all probability the real drop is unlikely to be much above 10% ..... though you never know !

but a 10% drop lasting how long? Will prices only start to rise when first time buyers can get on the bottom rung of the ladder again?

deemy2004

Plasticman wrote:

but a 10% drop lasting how long? Will prices only start to rise when first time buyers can get on the bottom rung of the ladder again?

Usually trends relate to the preceding trend -So given that the uptrend lasted some 10 years, the down trend is likely to be at LEAST 3 years So a minimum is likely to be a down trend of 10% over 3 years. By which time it will be known whether that is the end of the downtrend or just the end of the beginning

It all depends on how well the economy is managed during the bear market.

Were in the early stages of the bear market and its hard to guage its character at the moment, usually the first year or two is denial... i.e. denial that the housing bull is over... this is what happened last time where nearly 18 months into the bear market estate agents were still talking about rising prices.

I collated some news reports a while ago and posted them here... I will locate and bump that post up to the present.

Plasticman

deemy2004 wrote:

Were in the early stages of the bear market and its hard to guage its character at the moment, usually the first year or two is denial... i.e. denial that the housing bull is over... this is what happened last time where nearly 18 months into the bear market estate agents were still talking about rising prices.

Sounds very familiar!!!

Plasticman

So if we see a recession similar to the early 1990's what is likely to happen to interest rates and why?

deemy2004

Plasticman wrote:

So if we see a recession similar to the early 1990's what is likely to happen to interest rates and why?

That depends on what happens in the rest of the world...

If the recession is mainly localised to Britian, than that would be bad.... As then you would get higher interest rates, why ?

Inflation....

As the economy moves into recession, investors and speculators (including central banks) will sell British assets, i.e. who is going to hold loss making assets ?, this will lead to a fall in the exchange rate (usually the exchange rate moves well before the recession even starts appearing on the horizon). As the exchange rate falls then inflation will rise as goods and services would cost more to buy on the world markets. As inflation rises interest rates would rise to support the currency and suppress inflation.

Its happened before..... Its called stag-flation.

Now IF the world goes into recession roughly around the same time as Britian than that would be deflationary, and likely mean there may be some room for interest rate cuts, though this depends on how the credit markets respond to a global recession.... the financial markets can be very volatile and may force a rise interest rates as the risk of default would increase i.e. the risk of countries defaulting, or companies /banks going bust.

Its unknown until its nearer to the time.

Plasticman

Thanks Deemy. Having read this I'm now feeling rather depressed! I'm also wondering why I didn't choose a five year fixed rate mortgage when I had the chance!!!

deemy2004

Plasticman wrote:

Thanks Deemy. Having read this I'm now feeling rather depressed! I'm also wondering why I didn't choose a five year fixed rate mortgage when I had the chance!!!

Sorry for depressing you .....

I recommend a dose of Johnny Nash - I can see clearly now

:j

Plasticman

deemy2004 wrote:

Sorry for depressing you .....

I recommend a dose of Johnny Nash - I can see clearly now

:j

LOL :rotfl: