It's a bubble silly!

rizla01

If the old rules still apply then increases in amounts of ANYTHING, including money will render that commodity weaker than before.

More money, yes, but watered down in it's potency, surely.

If everyone has got more of it then it'll carry less weight with regards to buying power Etc.

Now imagine the result of this happening?

Product prices will shoot sky high but quality will drop to an all time low. The resulting value of money will be a lot lower as a consequence.

Or is that a too-simplistic view.

nelly_2

rizla01 wrote: »

If the old rules still apply then increases in amounts of ANYTHING, including money will render that commodity weaker than before.

More money, yes, but watered down in it's potency, surely.

If everyone has got more of it then it'll carry less weight with regards to buying power Etc.

Now imagine the result of this happening?

Product prices will shoot sky high but quality will drop to an all time low. The resulting value of money will be a lot lower as a consequence.

Or is that a too-simplistic view.

Thats basically what inflation is isnt it?

Melissa177

kingkano wrote: »

yet

Id be seriously concerned for people taking on higher multiples on a single income. And for anyone who hasnt made a decent plan taking on 5x joint and more.

I think about this a lot - I'm a single income person, living on my own, with a 4.6x mortgage. But, I've rented for 2 1/2 years paying the same amount in rent that I am now on mortgage... I coped then, so I'm not too worried now. I am very lucky I have a good secure job (although never say never!) and I've fixed for five years.

Before the bubble bursts (going back to original pt lol) its going to take some kind of trigger.... Much higher int rates, limiting of the amount available to people (although then people will just move further from their ideal locations - like I am), a recession.... Something is gonna have to happen to equalise it all.

I agree, there needs to be a trigger. Higher interest rates, an economic slump, 100,000 houses being built overnight in the remaining green spaces in the South East .

But what will the trigger be? I'm not sure I see circumstances in the *immediate* future that will force this.

Melissa177

mystic_trev wrote: »

........and who's going to pay for their 'Final salary' Pensions?

You and me, I expect!

Generali

rawhide88 wrote: »

I'm not an economist but I think an argument might go along the lines of;
'There is a finite amount of money available in a system' ( I think it's named after a motorway, the M1 or somethng like it!)

If we're borrowing what are we borrowing? Where is all the money coming from? The banks? You mean to say they've been sat on it for years and have just decided to lend it to us?

It has to be lent against a net value somewhere and the mechanism that will increase that value is inflation. Therefore rising house prices are necessary so that the banks can keep on lending us money so that we can afford to buy them. Obscure rational I know, but try the veiw through the other side of the looking glass.

The money is coming from 2 places:

1. Fractional reserve banking. The banks can lend their reserves many times over. I read something recently claiming that the Nationwide had lent 547% (from memory) of their reserves. This increases the bit of the money supply called M4. M4 is rising at 10%+ pa worldwide.

As there isn't an extra 10% of stuff to buy, the prices of some things will be bid higher (as we're seeing with houses, emerging mkt bonds and modern art for example).

2. Central banks printing money. The Chinese are printing huge quantities of money. They are buying huge numbers of UK and US government bonds with this money and the money created (effectively) is being used to buy plastic tat and cheap T-shirts in Tescos.

rawhide88 wrote: »

Have you noticed we all suddenly got rich? And bought loads of stuff. Its woven into our social fabric. Excuss me I couldn't help but notice, but I appear to have considerably more stuff than you! This stuff eventually needs replacing.

So we all got rich, we had choice, we had power, and then we used this to borrow money. And then we all serviced debt. I wonder if history will judge this period in our time as one in which saw the biggest migration of money and assets and ultimately power back into the hands of the banks?

We've had the good bit about inflation - increasing asset prices has made us feel richer (if we own assets anyway) and we can, spend that with wild abandon. We're going to get the bad bit at some point IMO - high interest rates, people on fixed incomes getting poor quickly, depreciating currency reducing our buying power.

Eventually, presumably, the Chinese will have enough foreign government bonds and will look to actually spend the cash. At that point we'll discover that not only have we all hocked ourselves up to the eyeballs individually, our government has done us the favour of doing the same thing with our national economy.

rawhide88 wrote: »

Anyway must dash I'm off out shopping. Think I'll take the Porsche.

It's no good, the boot's tiny. Take the people carrier. You can't afford to fill it with kids anyway at current house prices.

nelly_2

Generali wrote: »

The money is coming from 2 places:

1. Fractional reserve banking. The banks can lend their reserves many times over. I read something recently claiming that the Nationwide had lent 547% (from memory) of their reserves. This increases the bit of the money supply called M4. M4 is rising at 10%+ pa worldwide.

.

how does that work though?

Surely the people who are recieving the borrowed money cant all actually get it if it is non existant?

Generali

nelly wrote: »

how does that work though?

Surely the people who are recieving the borrowed money cant all actually get it if it is non existant?

It's hard to get your head around but that is really how it works.

An example (with 10% reserves):

1. You win £10,000 on a horse (from a bet you made using a free introductory offer - this is MSE after all) and put that money in your savings account.

2. The bank then lends £9,000 to someone wanting to build an extension on their house. The builder puts that money into his bank account.

3. The builder's bank can then lend £8,100 of the £9,000 to someone (keeping 10% in their reserves).

And so it goes on. In just 2 loans, the £10k you earned has become £17,100 in debt and you've still 'got' your £10k!

Fractional reserve banking is viewed by some people as a massive fraud perpetrated by the government and banks on their own people. I see that as a little strong, personally.

Generali

Melissa177 wrote: »

I agree, there needs to be a trigger. Higher interest rates, an economic slump, 100,000 houses being built overnight in the remaining green spaces in the South East .

But what will the trigger be? I'm not sure I see circumstances in the *immediate* future that will force this.

I disagree personally. There doesn't have to be a trigger. There wasn't one when the dot com bubble burst (BTW 9/11 wasn't the trigger: stock prices and US growth were both falling before that happened) nor when the Florida land boom turned bust. Ditto tulip bulbs, the South Sea fiasco.

All that needs to happen is for a few investors to think, 'Hmm, if I sell my BTLs, I can retire. I can't even steal my tenants' deposits any more. The fun's gone out of it.' and for prices to fall just a bit. If that happens people start trying to sell before prices fall any further.

Then comes the nasty bit where people that have overextended themselves can't borrow to shore up their financial position, they are forced to sell at any price they can take. That's the point at which banks stop lending on daft multiples and start to raise their interest rates (regardless of what happens to the base rate) to reflect higher risk. The whole thing then goes into reverse very quickly (that entire process would take about 9 months I reckon).

jamesd

They can't all get it. What would they do with it if they tried? Put it in their bank, which would lend it to the bank which people were trying to withdraw money from... and on goes the circle until the other banks decide that the bank the money is being taken from can't pay its debts (which implies that the people it's lending money to can't pay theirs).

Talk of people (in general) getting mortgages at 6x salary is ridiculous if you look at the real lending; most people are not newly qualified lawyers and doctors. For first time buyers the average income multiple in 2006 was 3.21 with interest being 16.8% of income and the average advance was at 90% LTV, a loan of 109,000.

For home movers it was 2.95 income multiple, interest 14.8% of income and an average advance of 126,000 at 72% LTV.

For all mortgages, back in 1990 the income multiple was 2.2 but that led to interest being 26.5% of income. In 2006 it was 3.05 but just 15.6% of income.

Over the last 32 years the average amount of income spent on interest when the loan was taken out was 15.7%. We haven't even reached the average yet.

I'll save my own talk of this being a bubble for a time when interest is at least above the long-term average portion of income.

rizla01

Generali wrote: »

All that needs to happen is for a few investors to think, 'Hmm, if I sell my BTLs, I can retire. I can't even steal my tenants' deposits any more. The fun's gone out of it.' and for prices to fall just a bit. If that happens people start trying to sell before prices fall any further.

Then comes the nasty bit where people that have overextended themselves can't borrow to shore up their financial position, they are forced to sell at any price they can take. That's the point at which banks stop lending on daft multiples and start to raise their interest rates (regardless of what happens to the base rate) to reflect higher risk. The whole thing then goes into reverse very quickly (that entire process would take about 9 months I reckon).

But recently (over the last 18 Mths) many BTL'ers have been getting rid and cashing in on the raised value of their portfoilio.

2nd time round BTL'ers are now emerging in the belief that they will make a lot of money in the distant future but their stock has not increased much in value, has it? They can't afford to sell up.

House prices have not gone up, in real terms, for about 2 years now.

Great thread BTW Generalli.