Opinions on a possible perfect storm

hallmark

ColdIron said:

hallmark said:

grumiofoundation said:

hallmark said:

Re property: To give a simple real-world example, one of my pals is married, two kids. He works in a factory, wife works in a supermarket.  Total income is approx £40K.  Even the smallest house they could feasibly live in here (Essex) costs far far more than they can ever afford.  Even with a £100K deposit and the longest possible mortgage, they still can't afford to buy.  To me those are bubble prices.  If two people doing nothing-special but equally, perfectly normal jobs, cannot possibly afford a house, then house prices are unsustainably high and will at some point correct.   But just IMO.

Re everybody being an investor, you might think that's the case but when you ask around it's not.  I believe the stats suggest about a third of people are.

Re stoking fears, perhaps, and I'd like that to be the case, but it's only counter-arguments that'll convince me.

Does that 1/3 include all defined contribution pensions? 

To use your real world example 30 years ago what would have been their
salaries, what mortgage could they have got (bOE base rate was 10% in 1992) and therefore what could they have afforded? 

Quick right move search there are ~140 houses (haven’t looked in detail am sure many arrant suitable properties) costing 200k or less in Essex - that’s 180k mortgage (4.5x) plus 20k deposit.

I bought in '88 so not quite 30 years ago but a reasonable chunk. That house (3-bed in the same part of Essex they live now) was £76k.  Even allowing their combined £40k salary would have been a lot less, they'd have comfortably been able to afford to buy.

I bought in '89, a 2 bed flat for £66k. A 3 bed house was way beyond me. I stopped going out and didn't have a holiday for 10 years

At a 12% interest rate it was far from a comfortable buy

I wonder if time has softened your recollection of those times

Sorry, you're quite correct that was a typo, it was '98 not '88 (hence not quite 30 years).  My mortgage rate was about 6%.

shortseller09

Hallmark, your observations are valid. The recent minor correction is meaningless when you look at the level of US growth stocks compared to just before Covid, when valuations were already stretched. It's a game of musical chairs, fund managers have to be in the market because they're sh*t scared of underperforming the index, and when reality kicks in losses will look no worse than the competition. A decade of underperformance globally is probably the best we can hope for, preserving capital should be at the forefront of peoples' minds rather than trying to beat inflation. 

hallmark

masonic said:

hallmark said:

I guess I'm thinking more of "active" investors than people who belong to a pension scheme. Inasmuch as we're all very much active investors whether we like it or not.

Fair enough, well you can turn that on its head: 40% of people don't have enough saved to survive for a month without an income. None of those people need concern themselves with making investment returns; growing their employment income is the only way they'll lift themselves out of financial insecurity. The stat of 33% owning shares is going to be the majority of people who should, given 3-6 months living expenses really ought to be saved in cash before embarking on S&S investments.

hallmark said:

Re the counter arguments, in all cases I guess I'm thinking global rather than UK just because I don't really see any market (shares, bonds, property etc etc) rise or fall globally without the UK simply following.  That being said I prefer UK shares to the S&P just now and obvs as a UK investor there's a line of reasoning that says nailing your mast to UK-based stuff makes most sense.

Have you looked at valuations across global stockmarkets? For property, have you looked at the extent of such fluctuations as well as the direction? (there are good reasons why the UK market has been more constrained) For bond markets, do you understand how duration impacts bond prices, and have you compared average durations of different government bonds? (also worth comparing a global bond fund to a UK gilt fund, short dated vs long dated)

Shares listed in the UK may not be UK shares. The FTSE100 is not very UK based. The FTSE250 is a better UK-based index, but obviously is made up of smaller companies. Single sector investing, even in your home market, is high risk investing. There are several options for global multi-asset or global equities funds, which have varying degrees of home bias and even varying degrees of exposure to the expensive US market.

hallmark said:

Currency: I actually have zero faith that QT will happen to any real extent. I think the people making those decisions are not economists (that might be bad enough!!) they are politicians, appointed by politicians and the moment the politics tell them to return to QE they will.

If you really believe this then inflation linked bonds will be a good investment right now, because interest rates will have to collapse again and inflation will take off. You'll get a nice capital gain when this happens, plus inflation linking. It makes things really simple when you are so certain of a particular outcome. You also have the benefit of betting against most other market participants.

I'd say the answer to most questions is that I think I'm reasonably clued up, altho always more to learn and definitely in the keen amateur stakes, not a pro.

Re valuations, yes a fair bit. So as I move from saving to investing I'm currently favouring UK/EU and to an extent EM altho I'm wary of China, which is anything from screaming value (Munger) to uninvestable (Gundlach) depending on who you listen to. And I like both of them. By natural inclination I'd very much be value/hy as opposed to jam tomorrow and maybe that's coming back into fashion.  I prefer the ftse250 to the 100 as in general I think mid-caps will outperform large-caps, and the ftse100 can be very top heavy at times.  Effectively all of my investing is funds (99%) so 99% avoids single shares or sectors. I did that for awhile but altho I did OK it didn't suit my nature.

I believe I understand how duration affects bond markets i.e. IR raises are far worse for long duration bonds.  I agree on paper inflation-linked bonds should fit my bill but in practice that doesn't seem to be the case? (and IIUC for inflation-linked bonds to do well, there needs to be not just high inflation, but higher inflation than anybody expects).

grumiofoundation

hallmark said:

grumiofoundation said:

hallmark said:

Re property: To give a simple real-world example, one of my pals is married, two kids. He works in a factory, wife works in a supermarket.  Total income is approx £40K.  Even the smallest house they could feasibly live in here (Essex) costs far far more than they can ever afford.  Even with a £100K deposit and the longest possible mortgage, they still can't afford to buy.  To me those are bubble prices.  If two people doing nothing-special but equally, perfectly normal jobs, cannot possibly afford a house, then house prices are unsustainably high and will at some point correct.   But just IMO.

Re everybody being an investor, you might think that's the case but when you ask around it's not.  I believe the stats suggest about a third of people are.

Re stoking fears, perhaps, and I'd like that to be the case, but it's only counter-arguments that'll convince me.

Does that 1/3 include all defined contribution pensions? 

To use your real world example 30 years ago what would have been their
salaries, what mortgage could they have got (bOE base rate was 10% in 1992) and therefore what could they have afforded? 

Quick right move search there are ~140 houses (haven’t looked in detail am sure many arrant suitable properties) costing 200k or less in Essex - that’s 180k mortgage (4.5x) plus 20k deposit.

I bought in '88 so not quite 30 years ago but a reasonable chunk. That house (3-bed in the same part of Essex they live now) was £76k.  Even allowing their combined £40k salary would have been a lot less, they'd have comfortably been able to afford to buy.

The same 3-bed now costs nearer £400k and is way out of their reach.  The ~140 houses you're looking at are most probs in a different part of Essex.

There are houses here that cost not much more than £200k, but they are in really rough areas, far worse than where they currently rent.  With two youngish daughters they don't want to move to a far rougher area simply to get on the property ladder, which I don't blame them thinking.

If you want to actually make comparisons, either specific examples or using averages then actually making comparisons using data, rather than simply stating something as a fact will be more productive/useful.  

I did state that many of those properties might not be suitable but it does, as highlighted by a previous poster, highlight your use of exaggerative language. 

For 280k which includes the 100k deposit you mentioned there are 346 properties in Essex - I find it hard to believe none of these are feasible to live in (your original claim).

What percent will house prices have to drop by for you to view them as sustainable? 

hallmark

hallmark said:

I believe I understand how duration affects bond markets i.e. IR raises are far worse for long duration bonds.  I agree on paper inflation-linked bonds should fit my bill but in practice that doesn't seem to be the case? (and IIUC for inflation-linked bonds to do well, there needs to be not just high inflation, but higher inflation than anybody expects).

At the risk of mugging myself up, let me attempt to explain what I mean here:

If I Google "uk inflation linked bond" it'll show something like this:

https://www.hl.co.uk/shares/shares-search-results/t/treasury-0.125-index-linked-2036

Now I've been saying to anybody who'll listen that inflation will be far far worse than the MPC or the Fed or the markets predict, since a fair while back.  But if you look at the price of that bond over the last 12 months, since when we've had far higher inflation than apparently anybody expected, the price has gone DOWN?

Hence my point, unless I'm fundamentally misunderstanding something here? (In which case please educate me so I can invest approiately and relax )

hallmark

grumiofoundation said:

hallmark said:

grumiofoundation said:

hallmark said:

Re property: To give a simple real-world example, one of my pals is married, two kids. He works in a factory, wife works in a supermarket.  Total income is approx £40K.  Even the smallest house they could feasibly live in here (Essex) costs far far more than they can ever afford.  Even with a £100K deposit and the longest possible mortgage, they still can't afford to buy.  To me those are bubble prices.  If two people doing nothing-special but equally, perfectly normal jobs, cannot possibly afford a house, then house prices are unsustainably high and will at some point correct.   But just IMO.

Re everybody being an investor, you might think that's the case but when you ask around it's not.  I believe the stats suggest about a third of people are.

Re stoking fears, perhaps, and I'd like that to be the case, but it's only counter-arguments that'll convince me.

Does that 1/3 include all defined contribution pensions? 

To use your real world example 30 years ago what would have been their
salaries, what mortgage could they have got (bOE base rate was 10% in 1992) and therefore what could they have afforded? 

Quick right move search there are ~140 houses (haven’t looked in detail am sure many arrant suitable properties) costing 200k or less in Essex - that’s 180k mortgage (4.5x) plus 20k deposit.

I bought in '88 so not quite 30 years ago but a reasonable chunk. That house (3-bed in the same part of Essex they live now) was £76k.  Even allowing their combined £40k salary would have been a lot less, they'd have comfortably been able to afford to buy.

The same 3-bed now costs nearer £400k and is way out of their reach.  The ~140 houses you're looking at are most probs in a different part of Essex.

There are houses here that cost not much more than £200k, but they are in really rough areas, far worse than where they currently rent.  With two youngish daughters they don't want to move to a far rougher area simply to get on the property ladder, which I don't blame them thinking.

If you want to actually make comparisons, either specific examples or using averages then actually making comparisons using data, rather than simply stating something as a fact will be more productive/useful.  

I did state that many of those properties might not be suitable but it does, as highlighted by a previous poster, highlight your use of exaggerative language. 

For 280k which includes the 100k deposit you mentioned there are 346 properties in Essex - I find it hard to believe none of these are feasible to live in (your original claim).

What percent will house prices have to drop by for you to view them as sustainable? 

I've given you a specific example.    A 3-bed house in the part of Essex I live in cost £76k in 1998 and now costs nearly £400k. That's a very specific example, I bought it and I own it.

Essex is large.  I guarantee you none of the 346 properties you're looking at are in the part of Essex I or my friend live in.  The house next door to mine is a tiny 2-bed and currently selling for about £320k.

I'm not suggesting he couldn't do any number of things to get on the property ladder, if that was his sole objective.  Obviously he could.  However all of them would involve moving to a far rougher area and/or away from his and his wife's family, both their jobs and the schools their kids go to.

So yes, IMO those aren't feasible.  And obviously he doesn't believe them to be, or he would have.

Re house prices dropping, I'm far from convinced they ever will hence me saying it's not a market I'd like to bet against.  I'd view sustainable as eventually meaning "something normal people doing regular jobs can afford" but exactly how that'll be achieved is anybody's guess.  Perhaps prices will stay static and massive inflation / wage inflation will make them affordable.  I think that compared to wages houses will eventually return to something affordable without depending on an insanely high deposit.

masonic

hallmark said:

Re valuations, yes a fair bit. So as I move from saving to investing I'm currently favouring UK/EU and to an extent EM altho I'm wary of China, which is anything from screaming value (Munger) to uninvestable (Gundlach) depending on who you listen to. And I like both of them. By natural inclination I'd very much be value/hy as opposed to jam tomorrow and maybe that's coming back into fashion.  I prefer the ftse250 to the 100 as in general I think mid-caps will outperform large-caps, and the ftse100 can be very top heavy at times.  Effectively all of my investing is funds (99%) so 99% avoids single shares or sectors. I did that for awhile but altho I did OK it didn't suit my nature.

That all sounds quite reasonable, and a value/HYP bias would put you in a more defensive position anyway.

hallmark said:

I believe I understand how duration affects bond markets i.e. IR raises are far worse for long duration bonds.  I agree on paper inflation-linked bonds should fit my bill but in practice that doesn't seem to be the case? (and IIUC for inflation-linked bonds to do well, there needs to be not just high inflation, but higher inflation than anybody expects).

The rub is that inflation linked bonds are affected by interest rates, QE/QT and changes in inflation expectations. However, it is only really the first two that are going to have a long term impact on your investment. While there has been a nice capital gain to be had from linkers as inflation expectations rose in the latter part of last year, they've been subject to downward pressure from the other factors, and you can only underestimate inflation for so long. If you look to where capital preservation funds have been directing their assets, it has been mostly towards US TIPS rather than UK IL Gilts. They are favouring shorter dated ones to avoid being stuck with a low long-term yield in a normalising interest rate environment, and I expect they will make some changes as the situation develops. I'm content to get all of my exposure from such funds for now, but will return to a more traditional direct allocation to bonds in time. A key point to note is that a UK Gilt index fund (nominal or inflation linked) will have a strong bias towards longer dated bonds because we issue longer term debt in general, so UK government bond funds can be particularly volatile and sensitive to interest rate rises, while very short dated inflation linked Gilts have recently been available with yield to maturity values of RPI-4% or thereabouts. Not attractive in a scenario where inflation is linked to specific temporary events.

cheerfulcat

I’ll just leave these here

https://www.amazon.co.uk/End-Everything-Bubble-trillion-investor/dp/0857199641

https://moneyweek.com/investments/stockmarkets/604426/moneyweek-podcast-sandy-nairn-everything-bubble

https://www.theaic.co.uk/companydata/0P00008ZJY

I bought some EP Global after hearing an interview with Sandy Nairn

Thrugelmir

Greatest dangers come from what you cannot see. The GFC is a classic example of  throwing a pebble into a pond and watching the ripples fan out. Those who are over leveraged the most are likely to suffer the greatest pain. 

tebbins

What you don't know can't hurt you, it's what you know for that just ain't so.