Boom - bust - boom When didn't it ?

Pal

Deemy

While I am beginning to agree with your overall conclusion I am not convinced by the way you reach it.

Your arguement is based on perceived wealth: If perceived wealth falls then people stop spending. This might be true, but personally I am not so sure. My theory is that it is an individual's ability to obtain and service mortgage credit that dictates their spending patterns. A 30% drop in house prices will only impact those people who bought or remortgaged in the last three years. The vast majority of the UK population will be totally unaffected.

It is not the drop in relative house prices that causes the problems, but the interest rate rises that cause the drop in the first place. If house prices fall without interest rate rises then most people's day to day finances will be largely unaffected.

The end result would probably be the same but not really for the reasons you describe. A 10-20% drop in house prices means that anyone who moved in the last three years will not be able to move because of negative equity. This closes down the housing market further and will push house prices even lower as those who have to sell are forced to lower prices in order to do so. Given that in 2001 many first time buyers could not afford to buy, and those that could (and did) would be the ones who are in negative equity, the housing market could collapse even further. 50% does not seem unreasonable to me, frightening though it might be.

The only people buying near the bottom would be BTL landlords and people with very small mortgages buying second homes. I can see the housing market becoming the next arena for the "rich are getting richer" argument.

Predicting a 5% drop in house prices is a bit daft IMHO. 5% is a statistical variation, not an indication of real house price movements.

deemy2004

Okay, I'll agree to differ on the above.

Percieved wealth has fueld the consumer boom and I expect percieved fall in wealth will reduce consumer spending to as far back as the early 1990's levels

Which means a similar sized recession..

Anyway we shall find out over the course of the next year or so Once a trend gains momentumn its pretty much unstoppable....

The 5% level will be enough to trigger the chain of events necessary to bring about a recession and likely further price drops. Offcourse it does not sound like much, but it IS enough to do the job....

The key thing to watch is the previous gains moving out of the indices so we slowly move towards 0% house price inflation and as soon as it goes negatives, it will be a BIG shock to the housing market and consumers.. I mean they have grown used to house price inflation of 10 to 20%.
Imagine when its -4 ot -5% ...

Infact even I, may be under-estimating the impact on the consumer spending... Give it another 6 months or so, i.e. when the rises pf 2004 have been filitered out and then lets see what the mood of the market is as a portent of whats to follow........... When it actually hits home that annual house price inflation is NEGATIVE.

ducky2004

With a 0.25 point interest rise being expected in coming few months, down seemed to be the only way to go.. The sign that investors are trying to get out is aleady there..look at primcelocation, vebra and you see how many starter flats (investor's favorutie) are there in the market...

dippy

If you want to know more about asset economies, that totally relies on credit to keep on going, as opposed to real economies that relies on good ole' productivity, have a look at Stephen Roach's piece (thanks to calcaria on the motley fool board):

The Test
Stephen Roach (from Hong Kong)
http://www.morganstanley.com/GEFdata/digests/20050325-fri.html#anchor0


Asset markets around the world are now quivering at just the hint of an unwinding of this house of cards. And they quiver with the real federal funds rate barely above zero. What happens to these markets and to an asset-dependent US economy should the Fed actually complete its nasty task of taking its policy rate into the restrictive zone? It wouldn't be at all pretty, in my view. The main reason is that the Fed and its reckless monetary accommodation have fueled multiple carry trades for all too long. And those trades are now starting to unwind, as spreads widen in investment-grade corporates, high-yield bonds, and emerging-market debt (see Joachim Fels' March 23 dispatch, “The Party's Over”). Can an ever-frothy US housing market be too far behind? The optimists tell me not to worry -- that the real side of the US economy barely skipped a beat in the face of wrenching unwinding of carry trades in 1994. That's apples and oranges, in my view. America was much more of a normal economy in 1994 -- with a personal saving rate of 4.8%. It had yet to experience the joys of consuming and saving out of assets. The equity bubble of the late 1990s and the property bubble of the early 2000s -- both outgrowths of extraordinary monetary accommodation, in my view -- changed everything. Now it is a very different animal -- the Asset Economy -- that must come to grips with monetary tightening. ...

It didn't have to be this way. The big mistake, in my view, came when the Fed condoned the equity bubble in the late 1990s. It has been playing post-bubble defense ever since, fostering an unusually low real interest rate climate that has led to one bubble after another. And that has given rise to the real monster -- the asset-dependent American consumer and a co-dependent global economy that can't live without excess US consumption. The real test was always the exit strategy.

deemy2004

The carry trades have been unwinding since March 2004 (sharply), when it became apparent that the fed was going to taken an more aggressive rate rising stance.

As ever the market moves first then the government.

Yeh, I basically agree with much of the rest, that its not going to take much to have a major effect on both the consumer and economies, as we are so used to price asset inflation that even zero growth will be a big hit, let alone a drop of 10 or more % ! It will be quite shocking and people have not woken upto that fact YET !

Where America goes, Britain MUST follow... (ignoring that damn fool blair in iraq for a moment)..... For high US interest rates will mean even higher interest rates in the UK, as the USA attempts to export its inflation abroad.

As interest rates inch higher and house prices lower... exactly who is going to want to hold an asset (houses) that are falling by say 7% a year when they can MAKE 5%, 6% or EVEN 7% on cash !

debpike

Pal wrote:

Personally I believe a house price crash in the order of 50% is entirely possible, and it might even be greater. While I do not believe we will reach 1993 levels again, house prices around the 1996/97 level are entirely possible.

I remember being warned off buying in 1997 because house prices had been rising for 4 years and were now overpriced!

My husband and I were going to buy in `97 as I was expecting, but he thought the market was high and so we swapped our council flat for a house! Could say that I am gutted - but in reality I wouldn't have made anything anyway. As it is we now own our council house and so regardless of what property prices do will still have the entire equity of this house to put down on our next house - question is when to move?

I really have had it with the titchy 3-bed, but it seems quite apparent that prices are likely to fall over next few years, but hubby's salary won't so guess its worth hanging on in there and upgrading to "executive 4-bed with en-suite" when it comes into our price bracket???

deemy2004

Yeh it will be a buyers market... That is cash rich buyers market.

Those looking to sell and move up. Or those wanting a big mortgage i.e. in % of salary terms are goign to find it tough.

The mortgage companies main aim will be to limit risk and reduce their exposure to bad debts

Ken_Livingstone

With interest rates rises expected shortly after the next election, I just cannot see how house prices will rise..

Nor with so much demand , I cannot see how house prices will crash, so like Deemy maybe they will fall 10% or so over coming years.

So not that much of a fall given the rise over the last 5 years.

Pal

debpike wrote:

I really have had it with the titchy 3-bed, but it seems quite apparent that prices are likely to fall over next few years, but hubby's salary won't so guess its worth hanging on in there and upgrading to "executive 4-bed with en-suite" when it comes into our price bracket???

We have just sold our flat and are now renting for a while to see what happens. "Worst" case scenario for us is that houses go up by 5%-10% over a few years. We might jump back on the bankwagon having "lost" £20k of equity that we never did anything to earn in the first place. "Best" case scenario (housing wise anyway) is that prices fall by up to 50% over 3-4 years and we buy back in as cash buyers at the low point, picking up a few BTL investments on the way.

While it could go either way, I think the upside for us now significantly outweights the downside.

P.s. Remember that if you are a homeowner, a house price crash may not help you buy that "executive 4-bed" if no-one is willing to buy your house first. That is why we have sold our flat now rather than waiting for things to get worse.

debpike

Is that the best move at the moment then? Sell up, get high interest on the cash in the bank, and rent until house prices drop to a reasonable level?

I've always been told that renting is "dead" money, but surely if I sell my house while its at its peak and then house prices fall by £5,000 - £10,000 this would pay for a years rental. Add to that the savings on a bigger house and interest payments it wouldn't need to be much of a drop to make this worthwhile doing? Or have I missed some very important factor that should also be taken into account?