House Prices Bubble

I've said on other threads that I think there's an automatic assumption that lending against property assets is a necessarily safe. If a property backed term is more than a year or two then there's a pretty substantial risk of a property market correction before it is paid off - its going bonkers here in London and it can't last. Even with high LTV, during corrections, property can be impossible to sell even at a discount as we saw in Spain.

I also think as lenders pile into P2P as they are the high interest rates must fall to levels which are a bit more affordable for borrowers - we've been spoiled over the last year or two

For me a few hundred into handbags at 9% seems sensible

jack

I tend to hold a somewhat contrary view about house prices and the drivers behind the various bubbles we have had. The majority view is that prices rises are driven by the a lack of available property - supply and demand, my personal view is that whilst is some effect from supply issues they are very small and the key drivers come from the over availability of cheap money that has been lent with no real assessment of the borrower's ability to pay let alone pay through out the life of the mortgage with all the fluctuations in interest rates that that might bring, the view that property is more of an investment than it is a home and the drive from Estate Agents to push up prices ever higher combined with in house brokers. 

The conventional view to curing the issue of affordability has either been to build 'affordable' homes, distort the market by giving stamp duty holidays or as the government is currently doing underwriting 95% LTV mortgages (which is all very well if you don't think house prices are over inflated). None of these are anything more than short term sticking plasters that allow governments to appear to be doing something: affordable homes are only affordable the first time they are sold unless there are special terms in the deeds/leases that restrict the resale price or restrict the types of buyer  (nurses, teachers etc) the prices will increase in line with the rest of the market. Stamp duty holidays, underwriting of high LTV mortgages etc all have the reverse effect increasing prices rather than making properties more affordable.

There are inklings that the FCA is starting to share some of these views with their new mortgage tests but as yet these are still flawed and are geared to lending in order to allow people to afford a property, rather than letting people have a loan that they can afford to pay back.

Until we move to a position where Governments keep their hands off the housing market and concentrate on limiting mortgage lending to what people can practically and reasonably afford then we are going to get bubble after bubble.

As it stands we have a large number of people of have mortgages that they can barely afford and although lenders have not dropped their interest rates down to match the BoE base rate, you can pretty much guarantee that once the BoE rate starts to rise lenders will start to increase their rates, may be not in line with the BoE rates but there will be increases. It is at this point that we will start to see stresses with borrowers going into arrears and defaulting on their loans. How far the market will then fall back will very much depend on how much government start to lean on lenders in order to stop repossessions and how far the FCA go with their affordability tests and how rigorous they are in enforcing them.

Well I'm not sure that is the 'conventional' view of solving the issue of affordability: its certainly the view that would be held by those that think that political intervention is the answer. but it would hardly be the 'conventional' view of economics. I would fully agree that it is close to stark raving bonkers to think that the answer to a house price problem (if we agrees there is a house price problem) is 'meddling' measures which improve the ability of people to either secure higher borrowing or reduce cost of acquisition while not actually tackling price: all of these things will drive prices up not down. Its just another form of 'cheap money' or has the same impact as cheap money which just means more people chasing the price up.

However, I'm not sure how a government focus on "limiting mortgage lending" sits with the Govt "keeping their hands off the housing market". It is just another form of govt meddling/attempt to manipulate the demand side of the market. And ultimately will just freeze out more people.

There are surely two things which should be separated: long term trends, and short term bubbles. I'm afraid there is no getting away from the fact that in the UK the housing market has a supply/demand problem, caused by combination of demographics, geography, geographic distribution of opportunity/wealth, and joe publics "I'm alright jack" which politicians are too cowardly to face up to , and so prefer to cook up short termism populist policy instead of real long term strategy.

Geography: The UK is a relatively densly populated country compared to many (De, Fr, USA for example). Especially once you exclude building towns on top of the Scottish highlands.
Geographic distribution of opportunity: its a sad fact, though not unique to this country but probably exacerbated by the size of the UK, that the opportunity for jobs/wealth etc. is concentrated in a small number of areas e.g. south east
Demographics: at one end you have people staying single for longer, and at the other end people living for significantly longer occupying what were previously family homes. QED the demand for housing units increases.

In any normal market supply responds to demand, as much as external constraints allow. And yet house building in the UK is at a low level and behind the long term demand trend. And that's because of the external constraints which exist i.e. restrictions on where we allow development. If you are sitting pretty on the property ladder for sure you don't want a new housing development built on that field, and politicians will barely risk suggesting that the precious green belts should be reviewed, or even consider that they may be counter productive by forcing development on precious green space within existing urban areas. But if one is sitting pretty and arguing for 'not in my back yard', just bear in mind what one may be condemning others to by restricting their access to housing opportunity, and on ourselves in terms of a dysfunctional housing market.

Noone (well except developers perhaps) want the whole of the UK built on, but the fundamental result of the supply/demand imbalance cannot be dealt with without tackling the supply side.

Of course short term bubbles are also caused by both access to cheap money and the view of property as a significant asset class. But the latter is itself is made worse by expectations of the long term supply/demand balance.

No doubt someone will now come on here with quantitive facts that show my observations to be completely wrong.

All valid points but, take London for example, do you really think if you have an ltv of say 70% on a loan backed by a resi property, that [property could lose 30%+ of its value in a very short space of time? If memory serves right, when we had the adjustment after the 2008 crash, the only immune place was the capital & probably major cities. I'll happily be corrected, in which case I will seriously think of shifting some of the money into other non-prop assets as you've alluded to.

Are u taking offers on your business and cottage ? :-)

Well, yes. The impact of the 2008 crash on house prices was relatively mild. In the 1990s housing crash, the peak-to-trough fall in average prices was 37% in real terms, of which 20% took place in a single year (see here: www.housepricecrash.co.uk/indices-nationwide-national-inflation.php). And these are averages. In some locations, or for forced sales (as in the event of a foreclosure), falls were much higher. The falls were smaller in cash terms, but I think the real-terms fall is more relevant to today, when inflation is much lower.

London was not immune, although the crash was shorter and sharper there. I moved out of London in 1991. I had to take a 20% cut on the asking price (which was already well below the peak), and then saw the value of the house that I bought in Bedfordshire fall by a further 20% while London prices stabilised .

One of the triggers for the 1990s crash was rising interest rates caused by the sterling crisis. The crash began in 1989 when base rate hit 14% (nearly doubled from 12 months earlier). But it continued even after interest rates were cut to below-crisis levels, following sterling's exit from the ERM in September 1992.  There is no room to cut interest rates now, but plenty of room for them to rise!