Crowley wrote:
> Mel Rowing wrote:
So you don't find everything I write boring.
> 'Rabbie' Pfeffers was wrong. The real root cause of the current housing
> bubble is the era of cheap and easy available credit we have been
> living through particularly in the past 4/5 years. The credit cycle is
> now turning, cheap and easy borrowing is coming to an end and there
> will be nothing left to prop up this bubble for much longer.
Of course you weaken your arguments through your penchant for
flamboyant language. Whatever the housing market is or is not the term
bubble is not appropriate. Markets in general are characterised by
variations in the prices of their underlying securities. In bubble
markets prices rise sky high from a low base over a relatively short
time and then crash back to their original base or even lower in
shorter time still.
Bubbles happen always because investors/speculators initially become
persuaded that a security has more substance than in fact it has. For
instance the fabled South Sea Bubble was based on nothing more
substantial than a rumour. The more recent high tech bubble was based
upon investment in projects that were often little more than ideas on
paper housed in rented offices.
I put it to you that your "housing bubble" shows neither of these
charateristics.
There can be surely no doubt as to the substance and utility value of a
house.
I suggest that if you look back to the late 50's when houses commonly
changed hands for a few hundred pounds and owner occupancy began to
become feasible for increasing numbers of ordinary people, that since
then the price trend has been upwards. Of course there have been times
when prices have fallen and will be again. It is rare however if it has
ever happened at all that any price trough has been deeper than the
previous one or that any peak is lower than any previous peak.
Now to your point regarding interest rates. Credit usually in the form
of mortgages enable most house sales. That is beyond argument.
This being the case then clearly changes in mortgage rates are going to
be reflected in house prices generally. Therefore if you are right in
asserting that interest rates are about to rise, then it follows that
there will be a downward pressure on prices.
Where we argue is over extent. You seem to discount entirely mitigating
factors that come into play given any fall in house prices.
Sure, recent buyers are likely to find themselves in negative equity.
So what?
First consider the size of the owner occupied section of the national
housing stock at around 70%. Negative equities will only make up a tiny
proportion of these.
In any case, being in negative equity does not mean you lose your
house. So long as you maintain the payments on your mortgage, a roof
remains over your head. Indeed negative equity can be seen as a
disincentive to selling thus reducing supply of properties to the
market. There would, on the face of it, seem no advantage in selling
the roof over your head and still leave yourself with a portion of the
original debt still to pay.
These considerations of course don't apply to the rental sector. A
renter might well decide to cut his losses and run.
For every rented house there are 2 owner occupied properties. This
includes local authority and housing association properties that are
unlikely to be affected by these considerations. Disenchanted private
renters would lose not only any possible equity loss but also rental
income during the time the property stood, by your scenario, on a
market depreciating in value.
> > So long as these tendancies continue, there will always be an upward
> > pressure on house prices. In the meantime, to be sure, there will be
> > peaks and troughs as economic conditons change so that more or fewer of
> > us,as the case may be, can realise our aspirations in this respect.
> Long term the trend for prices is up of course but after the boom comes
> the bust and the next 5 years or so will see heavy downward pressure on
> prices which will have a severe knock-on effect on the rest of the
> economy particularly retail.
There does seem a mood around that folk have been drawing on the
enhanced value of their houses to find cash for purchases. Whether this
is generally real or apparent is another matter. Let's assume for the
sake of argument that the impression is true.
Initially it makes no difference. The borrower has taken on his new and
increased commitment and his presumably happy and comfortable with his
new outgoings on the assumption that there will be no change in
cirumstances. It therefore all depends upon how an economic downturn
will effect employment.
Unemployment tends to hit disproportionately the young (who are
entering employment or completing training programmes) and the old (who
are reaching the ends of careers and are more amenable to redundancy
offers, early retirement etc.) It is less likely to hit the skilled,
the better paid who are half way through their careers. The very people
who tend to be mortgagees. Even if they are unfortunate, redundancy
payments coupled with welfare benefits tide most of them over for quite
a while. Such people tend not to remain unemployed for ever.
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