'We've reached a tipping point' Signs of house price weakness

hpc_troll

ukcarper wrote: »

Do you think all those things happened solely to protect house prices and what do you think would have happened if those banks had been allowed to fail.

Look, fair is fair, I'm prepared to debate my opinion as to why I think that UK prices today are fragile, because that is the thread title.

However, as you ask, and hoping that it's not bad form to go off topic, responses of monetary authorities all over the world have repeatedly demonstrated that after Lehman's there was no appetite for letting banks flat out fail - as in fall into insolvency, leading to frozen accounts whilst the administrators settled competing creditors' claims. Therefore what I think might have happened if in 2008 the Bank of England had just told RBS "Well if you're broke, you're broke" and let them fall into administration is irrelevant because it was never going to happen. But the banks did fail. That's why we own a number of them.

Also, the wording that you choose:

ukcarper wrote: »

Do you think all those things happened solely to protect house prices and what do you think would have happened if those banks had been allowed to fail.

(Emphasis added)

I'm not sure that any of them happened to protect house prices. I don't believe in the whole "protecting house prices" myth. Personally, I think that the banks were almost the sole focus of monetary intervention. House prices are just tagging along for the ride*

I raised these matters because I think they are pertinent. I think that house prices are largely determined by the availability of credit, and how cheap that credit is. If you have a market that has been buoyed by intervention then, regardless of the intention of the monetary authority in making that intervention, the presence of that intervention is relevant to future prices because the possibility exists that elements of the intervention may be withdrawn at some point.

If you want to pick this apart ukcarper , or anyone else I'm still talking to, work away, but I'm only coming back on the stuff relevant to future prices.

*(As an aside, I'm not sure that Carney is ecstatic about the fact house prices are tagging along for the ride - I'm inclined to agree with wotsthat that if it was up to the Bank of England and the Treasury, they'd give us "increasing nominal prices and falling real prices" - I'm just a little dubious as to how they'll manage it, and as we presently have rising real prices in CPI terms, it's not working at the moment. I think we really need falling real prices discounted by earnings growth, and we definitely don't have that.)

hpc_troll

Jack_Johnson_the_acorn wrote: »

You'll be sorely missed, after all you answered all questions posed and definitely didn't assert an opinion as fact without providing evidence......... Oh wait:D

I didn't say I was leaving, I said I was done 'debating' Hamish, for the reasons I gave. If you want to debate the future path of house prices on the evidence and the numbers, I'm game. But easy on the insults.

HAMISH_MCTAVISH

hpc_troll wrote: »

I think that house prices are largely determined by the availability of credit, and how cheap that credit is.

House prices, like all other asset prices, are determined by supply and demand.

The availability of finance is a component of demand.

If you have a market that has been buoyed by intervention then, regardless of the intention of the monetary authority in making that intervention, the presence of that intervention is relevant to future prices because the possibility exists that elements of the intervention may be withdrawn at some point.

And if you have a market that has been suppressed by an ongoing state of dysfunction in credit markets, and the intervention of the monetary authority is seeking only to restore some semblance of functionality, then it would be imprudent to assume a premature withdrawal is likely to happen.

Or that a withdrawal post the resumption of normal functioning would lead to adverse effects on asset prices.

If you want to pick this apart ukcarper , or anyone else I'm still talking to, work away, but I'm only coming back on the stuff relevant to future prices.

You'll be talking to yourself soon if you keep that up.... In which case you might as well go back to a site like HPC that hardly anyone visits.

However there is nothing, I repeat, nothing, more relevant to future prices than supply and demand.

Which in the case of the UK, means the severe and unprecedented shortage of housing.

The shortage of housing that forces millions of people to share flats, to live in HMO's, and to be "cooped up" in starter homes and unable to move.

The shortage of housing that is the cause.... Rather than the price of housing which is the symptom.

And this is the bit that the shortage deniers can never, ever, adequately answer.......

Many millions of adults are living with parents, or lodging, or in HMO's, or flatshares, or what have you.

But the point we are trying to make, is that if prices were to halve, where would the millions of houses suddenly appear from for these people to go and live in?

They don't exist.... Which is why prices are expensive.

The market is rationing goods in scarce supply through price, exactly as it should.

Millions of people are forced to share, through high prices and high rents, that would otherwise want to have a place of their own, if they could only afford it.

But if they could afford it...... if you could wave a magic wand and drop prices and rents far enough so that these millions of people could now afford their own place, it would make no difference at all.

Because there simply aren't enough spare houses.

They would still have to live at home, to share, to live in HMO's, etc.

Only now we'd have to find some other way of rationing the limited properties.

Perhaps waiting lists, or lotteries.....

Libber

hpc_troll wrote: »

The importance of MEW to the UK economy is set out clearly in Engelen et al After the Great Complacence (Oxford University Press, 2011). Stick that into google books and the read pages 208 and 209 paying particular attention to Figure 7.2 and Table 7.1...

Thanks for this and the WSJ article you linked earlier - both interesting. However, the Bank of England's most recent data on housing equity withdrawal indicate that approximately £240bn of withdrawn equity has been paid down since 2008 on a seasonally-adjusted basis (look for the LPQBE92 data set at the BoE's statistical interactive database), implying that much of the MEWing done since 1997 has been paid back. In addition, household debt has been falling steadily since 2008 (OBR Economic & Fiscal Outlook report March 2014, p. 69), so it seems that deleveraging hasn't prevented the GDP growth or mini house price boom we've seen over the last year or so.

hpc_troll

Libber wrote: »

Thanks for this and the WSJ article you linked earlier - both interesting. However, the Bank of England's most recent data on housing equity withdrawal indicate that approximately £240bn of withdrawn equity has been paid down since 2008 on a seasonally-adjusted basis (look for the LPQBE92 data set at the BoE's statistical interactive database), implying that much of the MEWing done since 1997 has been paid back. In addition, household debt has been falling steadily since 2008 (OBR Economic & Fiscal Outlook report March 2014, p. 69), so it seems that deleveraging hasn't prevented the GDP growth or mini house price boom we've seen over the last year or so.

You're most welcome. That all sounds fair enough to me. If today's borrowers are willing to pay higher prices with money they borrow today, prices can rise. Historical MEW trends would not be expected to have any great bearing on their ability to pay or the price they are willing to pay.

Actually it is now called Housing Equity Withdrawal these days, (HEW).

I think that you've slightly misinterpreted what HEW is

From the BoE page "Explanatory Notes - The Bank's Estimate of Housing Equity Withdrawal" - sorry, can't paste links

The stock of housing equity can change in three main ways:
1. Changes in the stock of secured lending when households take out or repay debt;
2. Changes in the stock of housing wealth, e.g. when new properties are built or improvements are made to existing properties,
3. Revaluations of the stock of housing wealth due to changes in house prices.

The balance of the first two ways of changing equity, i.e. excluding revaluations, in each period is classed as housing equity withdrawal (HEW).

The idea "that much of the MEWing done since 1997 has been paid back" is possible, but there isn't the detail in the data to support your precise claim and other mechanisms could have produced the same effect. It probably deserves a thread of its own

To address growth, I am not suggesting that mortgage equity withdrawal is the only source of growth or that the economy can't grow if there is no HEW, (and neither do the sources at links).

If the topic is the future path of house prices old MEW/HEW is only relevant to the extent that 1997-2007 rates of house price inflation (HPI) may have been influenced by assessments of GDP growth. If that was the case and if a material component of GDP growth span out of demand from unsustainable levels of HEW, then we might anticipate that the economy will not grow as rapidly during during the continuing deleveraging as it did in the credit boom and thus levels of nominal HPI may be appreciably lower to reflect that.

I'm being slightly disingenuous of course, I really believe that the driver of the 1997-2008 HPI was credit growth and without comparable credit growth we are unlikely to see comparable HPI on a continued basis.

One other element of HEW which I also believe is relevant to future prices is how some past prices were set. I would argue is that if in 2005 I can refinance from a repayment mortgage to an interest only mortgage then I might find that I can move to a slightly bigger house and take out £10,000 of equity to blow on a holiday and end up with a smaller monthly repayment. That would probably impact my assessment of the price I was willing to pay for that house.

In fact if I'd seen five years of 10%-20% per annum HPI I might also think that I need not worry about not making repayments of capital because the HPI would replenish my equity. A mortgage broker might even reassure me that exactly such a thing was the case. When I decide what I am prepared to pay, all these beliefs might influence my assessment.

Of course, if in 2014 I'm asked to pay that price on a repayment basis at a time when interest rates can only rise, well, that might give me a reason to think differently.

hpc_troll

Jack_Johnson_the_acorn wrote: »

Supply and demand dictates who can afford to buy.

Not everyone can afford to purchase a house. This has always been the case. Are you claiming that the average house buyer is now having to earn more in real terms than previously?

Sorry, missed this earlier. No, I am not claiming that. Perhaps the analogy was ill chosen. I was trying to point out that there was a self-selection effect in the CML data which meant that by definition (on a narrow definition) the people buying houses could "afford" the houses.

I agree 100% with your post. Anything else would be ridiculous.

However, the idea that sellers of housing always allow actual demand to determine prices, is clearly false. "I'm not giving it away". This phenomenon can occur at every level of the market, leading to low transaction volumes, which is what we presently have.

Likewise demand is informed by credit availability, which can change. If I have access to very high loan to value interest only mortgages then what I can afford is much greater than if they are withdrawn from the mortgage market place, as indeed they were, for owner-occupiers, though not for buy to let mortgages.

What would have happened to prices if interest only was regulated out of the buy to let market as it has been from the the owner-occupier marketplace?

wotsthat

hpc_troll wrote: »

What would have happened to prices if interest only was regulated out of the buy to let market as it has been from the the owner-occupier marketplace?

We all know that restricting credit would put downwards pressure on prices - whether prices actually go up down or sideways though is crystal ball stuff.

Wouldn't it be more interesting to, instead of thinking only of price, to think about what might actually happen in those circumstances?

As credit was restricted for owner occupiers there were some price falls but transactions fell off a cliff. Only the wealthy with big deposits or their offspring were able to become owner occupiers. BTL's were big winners - they were able to buy cheaper houses without the nuisance of competing with FTB's and the like and credit restrictions (and a housing shortage) ensured an immediate demand for their product. Credit restrictions concentrated housing wealth amongst the rich and accelerated the flow of wealth from poor to rich.

If you removed IO from BTL there would likely be a further concentration of wealth and the flow of wealth from poor to rich would become steeper. Of course, BTL's would adapt - maybe using repayment mortgages and mewing to remove yield - probably cost additive.

If you really wanted to deter people from getting into BTL the best thing to do would be build a million houses instead and let the market decide. Seems a better idea than arbitrarily picking the 'bad guys' and dreaming up methods by which they can be excluded - the 'unforeseen' outcomes would be oh so predictable.

Price is a function of many things but some perspective is needed to be able to determine which of those things is having most impact - BTL's on IO or a chronic shortage of housing - I know where I'd be focusing.

Blooloo

There is no right or wrong to the buy v sell debate.

There is however a time to buy and a time to rent...If your soul aim is to save money over your lifetime, buying right now may not be good, renting might be the best choice.

Few have the luxury of this type of long term choice...most have a housing need and a number of £££s to spend on this...thus they either rent, or if they can get finance at all, look to buy.

So for most, the argument is not about choice, it is about what is possible in their own individual circumstances.

Further financialisation of this asset reduces the choice for more and more possible entrants.

Jason74

Jack_Johnson_the_acorn wrote: »

Supply and demand dictates who can afford to buy.

Not everyone can afford to purchase a house. This has always been the case. Are you claiming that the average house buyer is now having to earn more in real terms than previously?

Well in London of course, it's absolutely the case that a much higher real household income is required to purchase a given property now compared to previous times. I've often used the example of my Dad buying a three bed terraced in an unfashionable but pleasant London suburb in 1976 on a neqly qualified electrician's wage. A newly qualified electrician today would not be able to afford a 1 bed flat in the same area.

Rota

Blooloo wrote: »

There is no right or wrong to the buy v sell debate.

There is however a time to buy and a time to rent...If your soul aim is to save money over your lifetime, buying right now may not be good, renting might be the best choice.

Few have the luxury of this type of long term choice...most have a housing need and a number of £££s to spend on this...thus they either rent, or if they can get finance at all, look to buy.

So for most, the argument is not about choice, it is about what is possible in their own individual circumstances.

Further financialisation of this asset reduces the choice for more and more possible entrants.

Welcome, There is a right and a wrong choice. One choice ends with you having a house to live in when you retire. Played smart, you will have an income from other properties too. The other sees you struggling to get social housing in your 60's, while spending more money on rent when you could of avoided it.

Can you tell us how long you have been on the wrong side of the market? Would be nice to see Bruce, Venger and TheCount join up here. Would be great to debate them in a forum where you can give an opinion without being banned.