House Crash

mustrum_ridcully

Unless you have a really long term fixed rate mortgage you will feel the effect perhaps even more than someone on a tracker.

Trouble is they are typically fixed for no more than 3/4years. IR's were at there lowest in 2003 (3.50%), so if someone bought a place in the summer of 2003 on a 4 year fixed rate they may be in for a surprise this summer as rates have increased by 150% since then.

People have mentioned 1992 - in that year IRs went down from 10% to 7%.

One interesting thing is that the media in recent months has been mentioning the possibility of house prices going down (even in The Sun). I guess some people remember the dot-com bubble "buy amazon.com shares, they'll never release any more so they'll never go down in value" - POP!

bclark

Greenstuff wrote: »

The problem is, if they go up of course, I know a lot of people say they wont go to the 15% they were (I don't know why not), but mortgages were so much smaller, look at the examples on here, people were loosing houses at 30k odd.

I think thew simple reason that many people are confident in saying that interestbrates won't go up to 15% again is that the economy would be on its knees long before they reached that level. As someone else said on here if rates got up to 8% ish then a massive amount of people would not be able to afford their mortgage and the economy as a whole would suffer massively.

With the sort of mortgage multiples and cost of an average houe today 8% is the new 15%.

ruggerboy

pollyanna24 wrote: »

No, not another one of those doom threads, but just a general query about it.

When the last one happened, I was too young to take any notice of what was going on, and my parents have never owned their own house.

It's easy enough to look back at the graphs and the historical interest rates, but what was the actual feeling back then about what was going on? Was it a crash overnight? Were newspeople reporting on and on about houses and crashes? Did nobody see it coming? How long did interest rates stay high? etc. etc.

I agree that house prices can't go up forever, but do people not learn from mistakes? We are constantly going on about a crash now, but did people talk about one all those years ago? One point that I read on a thread somewhere, is that these days everyone is more clued up about crashes and house prices etc. cos of the power of the web.

Hi pollyanna

You may find this recent article from the "The Motley Fool" website interesting, as it comments on whether we are in a situation similar to 1989. It also answers some of your technical questions on interest rates etc.

http://www.fool.co.uk/news/property-home/2007/04/13/housing-market-heads.aspx

FWIW, The Motley Fool article largely sums up my own view of the housing market - ie. I don't see a crash coming. That's because it is hard to contrast today's situation with that of 1989, mainly because the economy is very different to what it was back then. In my opinion, we need to keep our eyes peeled on 3 key economic factors to determine whether a housing crash is in the pipeline:

*GDP - currently at 3% pa, and needs to go down if one wishes a housing crash

*Inflation - currently at 2.8%, and needs to continue rising so as to trigger further interest rate rises and cause a sharp rise in defaults and repossessions. (But, as far as I know, inflation is due to fall sharply later on in the year once last year's energy price hikes fall out of the statistics. So, prospects of further interest rate rises are, at the moment, unlikely.)

Interest rates - currently at 5.25% and, as just discussed, need to rise sharpish to cause repossessions. But with inflation due to fall sharply later this year, they are not likely to rise.

Despite the ratio between earnings and house prices being and remaining at historic highs, the underlying economics just doesn't point to a crash at the moment.

Hope this is helpful.

Regards

Chris

bclark

mustrum_ridcully wrote: »

Unless you have a really long term fixed rate mortgage you will feel the effect perhaps even more than someone on a tracker.

Trouble is they are typically fixed for no more than 3/4years. IR's were at there lowest in 2003 (3.50%), so if someone bought a place in the summer of 2003 on a 4 year fixed rate they may be in for a surprise this summer as rates have increased by 150% since then.

I think this is spot on. A couple of friends of mine bought their back when interest rates were 3.5% and they had a fixed mortgage. They could pretty much just afford the repayments. The problem is their deal finishes in a couple of months and they are going to have find a deal paying significantly more. The thing is that their situation has virtually not changed in the last few years and their pay has not risen much at all. To top it off she is due to give birth to their firstborn in two months. They are pretty worried about how they are going to cope.

King_Of_Fools

ruggerboy wrote: »

You may find this recent article from the "The Motley Fool" website interesting, as it comments on whether we are in a situation similar to 1989.

For balance, it is also worth reading this other article from the same site:
http://www.fool.co.uk/news/property-home/2006/09/28/why-the-next-housing-crash-will-be-worse.aspx

Sisyphus

ruggerboy wrote: »

Hi pollyanna
...

*GDP - currently at 3% pa, and needs to go down if one wishes a housing crash

that GDP growth is down to HPI imho - you don't get those levels of growth in Germany, France and Italy but those countries don't have HPI either.

ruggerboy wrote: »

*Inflation - currently at 2.8%, and needs to continue rising so as to trigger further interest rate rises and cause a sharp rise in defaults and repossessions. (But, as far as I know, inflation is due to fall sharply later on in the year once last year's energy price hikes fall out of the statistics. So, prospects of further interest rate rises are, at the moment, unlikely.)

Interest rates - currently at 5.25% and, as just discussed, need to rise sharpish to cause repossessions. But with inflation due to fall sharply later this year, they are not likely to rise.

I think your reasoning is not up to date. Inflation is rising as tomorrow's and next month's CPI numbers will likely show. Oil has risen a lot higher than it was when the BoE made those falling inflation predictions. Economists and money market predict a rate hike in May. A second hike is already priced into Libor futures for year end. If the BoE can't even predict next months CPI (hence their surprise with Jan's numbers) how can they know inflation will drop later in the year?

ruggerboy wrote: »

Despite the ratio between earnings and house prices being and remaining at historic highs, the underlying economics just doesn't point to a crash at the moment.

There are no fundamentals other than the ready availability of credit that can justify current prices. That credit can dry up quickly as witnessed in the US.
I would suggest the fundamentals are pointing to a crash. The buying frenzy continues unabated but it not necessary to try and justify it.

Generali

There are no fundamentals other than the ready availability of credit that can justify current prices. That credit can dry up quickly as witnessed in the US.
I would suggest the fundamentals are pointing to a crash. The buying frenzy continues unabated but it not necessary to try and justify it.[/QUOTE]

The supply of credit doesn't even have to dry up for a crash to happen. All that is necessary is for sentiment to change. Nothing really hapenned to end the dot com boom as far as I can recall, nor the tulip bulb frenzy. People just seemed to come to their senses.

ruggerboy

Hi Sisyphus

Thanks for this. Just to respond to a some of your points:

Oil has risen a lot higher than it was when the BoE made those falling inflation predictions.

It's certainly true that oil prices have perked up in the last few months and since the BoE made their falling inflation predictions. But, crucially, oil has not perked up sufficiently to impact CPI on an annualised basis. Consider this chart from the BBC which shows the price of Brent Oil over the last 12 months. http://newsvote.bbc.co.uk/1/shared/fds/hi/business/market_data/commodities/28696/twelve_month.stm

12 months ago, the price of Brent was over $70 a barrel. Today, it's trading at $68. So, on an annualised basis, the price of oil has fallen which is deflationary on the CPI.

Economists and money market predict a rate hike in May. A second hike is already priced into Libor futures for year end.

Again, it is certainly true that the markets are forever pricing in rate hikes. But it doesn't mean to say that those rate hikes will actually materialise. I've lost count of the number of times the markets have predicted rate hikes, only to be confounded when the BoE doesn't follow it through.

There are no fundamentals other than the ready availability of credit that can justify current prices. That credit can dry up quickly as witnessed in the US.

I agree that the supply of credit will dry up if interest rates rise. However, I think it's important to note that the US credit that you cite dried up after their interest rates effectively quadrupled over a 3 year period - from 1% in 2003 to 5.25% in 2006 (or a stomach-churning % increase of 425%!).

We, on the other hand, have not witnessed such a sharp rise in interest rates (3.5% in 2003 to 5.25% today = a percentage increase of 50%!), which helps explain why there is still a ready supply of credit available in the UK and not in the USA. The questions begs whether we're in for further interest rate rises to cause the supply of credit to dry up. As I've articulated above, in my opinion, the CPI figures do not support a case for further increases in interest rates.

Best regards

Chris

Greenstuff_2

Hi everyone,
This is what I mean, you seem to know so much interesting stuff about the economy and how it affects the housing market, but for instance, that motley fool article says the interest rates went up from 10% in 1988 to 15% in 1989, a 5% rise that caused the crash, surely 3% to 8% is the same thing and if mortgages are 10x bigger now surely thats 10x worse?
Or is that too simple a way of looking at it?
Also, there is a shortages of houses? why? we are having babies later and less of them, immigration aparantly has no impact, historically people couldnt afford houses they lived with parents, my parents never owned their own home ever.
Aparantly it's because we cant build on green belt land?
never have before, why do we need to now?
What's the truth?
One article will say prices are down, the same day another says they are up, there is s housing shortage? so why have the same houses been on rightmove since last summer?
Some are on at 100k higher than the latest sold prices, who says they are worth that much?
Sorry if I'm being stupid but I just dont get it!

wolvoman

ruggerboy wrote: »

In my opinion, we need to keep our eyes peeled on 3 key economic factors to determine whether a housing crash is in the pipeline:

*GDP - currently at 3% pa, and needs to go down if one wishes a housing crash

*Inflation - currently at 2.8%, and needs to continue rising so as to trigger further interest rate rises and cause a sharp rise in defaults and repossessions. (But, as far as I know, inflation is due to fall sharply later on in the year once last year's energy price hikes fall out of the statistics. So, prospects of further interest rate rises are, at the moment, unlikely.)

Interest rates - currently at 5.25% and, as just discussed, need to rise sharpish to cause repossessions. But with inflation due to fall sharply later this year, they are not likely to rise.

Despite the ratio between earnings and house prices being and remaining at historic highs, the underlying economics just doesn't point to a crash at the moment.

Hope this is helpful.

Regards

Chris

What about sentiment? Do you not think that plays a part? I don't hear of anyone buying property at the moment on the basis of economic fundamentals. It's either because they physically need to move or because they want to get on the ladder (a ladder which is resembling a bandwagon as each day passes). It's the bandwagon that is based entirely on sentiment - a belief that house just HAVE to go up in value.

Sentiment works both ways of course.