House Crash

ruggerboy

Hi Greenstuff

Just to respond to a couple of your points:

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?

FWIW, I've read somewhere (but can't immediately find the source - sorry!) that the Bank of England believes that interest rates would only have to rise to 6.5% to start having a negative impact on the housing market. So, in answer to your central point - you are correct to assume that it won't take such a hefty rise in interest rates to 15% to cause a housing crash this time around.

The question begs however - will interest rates rise to that trigger point of 6.5% as defined by the Bank of England? In my opinion, no!

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?

Can't immediately answer all the points you raise but, in general terms, the whole problem with British housing revolves around supply/demand economic theory. Forgive me if I'm telling you things that you are already know but, in simple terms, if there is a shortage of something but great demand for it, then prices naturally rise. That is the nature of economics, and there is no conspiracy behind this.

Two key questions need to be asked when determining the future health of the housing market -

1) Is supply likely to remain constricted? Answer, yes because, basically, rigorous planning laws prevent houses being built.

2) Is demand likely to continue being strong? Answer, yes due to demographics. But it's important to determine what we mean here. Instead of looking at population trends, we should look at the trend in numbers of households - and this is a crucial distinction to make. Some people argue (correctly) that the long-term population trend in the UK will go down - that's because there are insufficient young people compared to the older "baby-boomer" generation. So, the logical argument to make is that, eventually, demand for housing will fall as the population declines! Unfortunately, not so! That's because, despite the population falling, the number of households (and therefore the number of houses demanded) can continue growing. And that's because we currently have a trend where more and more people are either choosing to live as singletons, or divorcing and living separately in their own properties. Ultimately, there will come a tipping point where demand does start to fall but, if current trends continue, it won't be when the population starts falling.

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?

In my opinion, I would ignore the vast majority of housing reports as they just serve to bamboozle and confuse! The key ones to focus on are as follows:

Halifax and Nationwide House Price charts - they give a consistent and historic running commentary on the true monthly price of housing.

BoE mortgage approvals data - gives a forward indication of how healthy the medium-term market will be. For example, if approvals data is strong today, it indicates that demand is strong which will feed into strong prices as reported by Halifax and Nationwide six months later. Conversely, weak approvals data indicates weak demand, which will translate into possible falling house prices as reported by Halifax and Nationwide in six months time.

Hope this helps.

Regards

Chris

mystic_trev

ruggerboy wrote: »

Can't immediately answer all the points you raise but, in general terms, the whole problem with British housing revolves around supply/demand economic theory.

That's what people were saying before the last Crash, I remember it well. Sentiment changed very quickly and within months there was plenty of Supply but no demand!

ruggerboy

wolvoman wrote: »

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.

Hi

Yes, I do believe that sentiment plays an important role, as people have to feel confident that they feel financially secure enough to service the mortgage debt that they are taking on.

I'm not sure all people buy on the premise that property must always go up! People buy for different reasons. Some buy for investment purposes (ie a buy-to-let). Others, like me, buy for emotional reasons - ie. I bought last year as an FTB (at arguably the height of the boom?) because I wanted somewhere to live which I could call my own! And, trust me, there are still people out there who are motivated by this seemingly old-fashioned trait!

But, I am firmly of the opinion that a person's decision to buy a property (for whatever reason) will be based on whether there is a positive or negative "sentiment" prevalent in the economy. And that's where the economic fundamentals play such a crucial role. At the moment, the economic fundamentals underpin a positive "sentiment" -unemployment is low, interest rates are low-ish and GDP growth prospects (and therefore the prospect for future job prospects) are healthy. Hence, people feel confident in being able to afford and service their mortgage debt - hence the boom in house prices.

However, sentiment will change if the economic fundamentals change - ie. if unemployment rockets, then people may worry about their own job prospects and therefore be concerned whether they can service mortgage debt. So, conceivably, demand for housing would then fall.

But, as I said earlier, the underlying economics do not yet point to negative sentiment developing.

Regards

Chris

Greenstuff_2

Hi Chris,

Thanks for that, yes it does make sense, this is so interesting, I did read somewhere that getting a new prime minister or is it election sends interest rates up?
Why do you think IR wont get to 6.5%?

ruggerboy

Why do you think IR wont get to 6.5%?

Hi Greenstuff

Basically, because the UK has just weathered some severe inflationary pressure, and the outlook from now on looks fairly benign. (And, just to repeat, for interest rates to rise, CPI inflation needs to rise. But, at the current time, I don't see any immediate inflationary threats.

FWIW, here are the key inflationary events that the UK has just weathered:

Wage inflation - This year's wage round did not produce the feared wage-price spiral. Basically, that's because, despite RPI being 4.5% (which is the economic indicator used to gauge the level of wage settlements), actual pay settlements have averaged 3.5%. see: http://news.bbc.co.uk/1/hi/business/6551829.stm

This equates to an income squeeze for individuals, which is deflationary. In my opinion, the Bank of England has done a good job to contain wage expectations, and can now breathe a sigh of relief having won that battle. (NB. At one point in January this year, it looked that wages might spiral upwards - but they haven't!).

Energy prices As you may have noticed, gas prices have fallen sharply following last year's price hikes. The CPI inflation figures will shortly show this when high prices registered this time last year fall out of the inflation calculations.

So, at the present time, things are now looking fairly benign on the inflation front. There are a couple of things though that might flare up in the future which may cause me to change this assessment - these are:

oil prices Oil prices are notoriously volatile and, as has been already pointed out, they've been on the rise again. Could another spat with Iran cause them to sky-rocket? Who knows? It's certainly possible but, at the moment, the oil prices are at such a level as to not cause any inflationary danger for now.

Corporate pricing There has been an argument circulating recently that retailers on the high street have been able to get away with inflationary price rises, due to a lack of competitiveness on the high street. It is possible that this inflation will counter-act slightly the fall in CPI expected thanks to falling gas prices. Intriguingly, it is also possible that the BoE might use this as an excuse to raise interest rates in May - more as a psychological shot-across-the-bows to industry to behave, rather than it being indicative of an economy in inflationary trouble. But, for now, it is my view that the threat from corporate pricing is not at the moment sufficient in itself to cause interest rates to go up.

So there you have it! These are the main factors I'm keeping an eye on at the moment. Of course, if there is any change to them, then my assessment on interest rate prospects will change accordingly. But, for now, I'm content to say that interest rates will not rise further.

Regards

Chris

ManAtHome

A slighly different view:

Interest Rates - the BoE has been keeping these artificially low (as stated by "Charlie" George and others fairly recently). Hasn't even constrained unrepresentative inflation to target, just keep saying it's going to fall "real soon now" (we've been 30-50% over target for almost a year now).

Inflation - re my earlier comment, CPI may be representative if you're earning over £30k and have paid your morgage off. General estimates of inflation from non-govt economists seem to range between 5 and 9% (average earnings with mortgage to pensioners/fixed-income persons). "Factory" output prices are on the up - this will either translate into rising prices or failing companies.

GDP - a substantial part of this is dependent on govt spending and HPI-mewing, both likely to slow down this year (for different reasons).

Oil - not sure about this as petrol prices seem to have been moving independently of oil (more of us are affected by petrol/diesel than oil).

The housing market may be the least of our worries..?

Rick62

Interest rates, remember back in 1989 you used to get tax relief on these, so 10% was more like 7.5% and 15% was more like 11%. The money market swap rates are currently about 5.85% for 1 year money, meaning they expect 2 or even 3 quarter point rises. The BofE has been consistantly increasing the rate (any votes not to raise rates have only been to do with the timing of the increases.

Inflation is starting to go out of control. Wage inflation officially 3.5% and rising, CPI 4.6% (officially - I just saw that Aston Martin workers, if they are representative, have negotiated about 10% over 2 years) and oil going back up, remember this was blair and browns justification that inflation would come back under control, that oil prices had been falling, so by their own assertion inflation will now start to spiral up again.

GDP, HPI-mewing has been running about 5 to 7% of the economy, this will stop very quickly if prices stop rising. Already, just last week a major sofa and major carpet retailer both reported reduced sales.

Sentiment - this has dramatically changed in the last couple of months.

All in we are at an interesting time, I certainly would not want to be highly geared in property right now.

Gorgeous_George

bclark wrote: »

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.

If prices fall, people like your friends could be in negative equity and unable to pick and choose a new deal. Being limited to the lender's SVR is not a good position to be in.

Also, people in negative equity find it more difficult to move to a bigger house when the family starts to increase.



GG

A_Fool_&_His_Borrowed_Mon

seven-day-weekend wrote: »

I think really the moral should be - don't have 100% mortgage, don't have interest-only mortgage, and don't bite off more than you can chew.

If you can't afford to buy at the moment,don't overcommit yourself

That rules out 99% of today's buyers then.

Know anyone who can buy a house on a prudent 3.5 X salary basis?

Amitoocautious

A_Fool_&_His_Borrowed_Mon wrote: »

That rules out 99% of today's buyers then.

Know anyone who can buy a house on a prudent 3.5 X salary basis?

Well we are buying as FTB on less than 2.5 times joint income which has been standard for years. In fact we have worked out that we could still afford it one one salary so there are some of us still out there