Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
US Housing Market House Prices Momentum Analysis - 26th Feb 21
FOMC Minutes Disappoint Gold Bulls - 26th Feb 21
Kiss of Life for Gold - 26th Feb 21
Congress May Increase The Moral Hazard Building In The Stock Market - 26th Feb 21
The “Oil Of The Future” Is Set To Soar In 2021 - 26th Feb 21
The Everything Stock Market Rally Continues - 25th Feb 21
Vaccine inequality: A new beginning or another missed opportunity? - 25th Feb 21
What's Next Move For Silver, Gold? Follow US Treasuries and Commodities To Find Out - 25th Feb 21
Warren Buffett Buys a Copper Stock! - 25th Feb 21
Work From Home Inflationary US House Prices BOOM! - 25th Feb 21
Man Takes First Steps Towards Colonising Mars - Nasa Perseverance Rover in Jezero Crater - 25th Feb 21
Musk, Bezos And Cook Are Rushing To Lock In New Lithium Supply - 25th Feb 21
US Debt and Yield Curve (Spread between 2 year and 10 year US bonds) - 24th Feb 21
Should You Buy a Landrover Discovery Sport in 2021? - 24th Feb 21
US Housing Market 2021 and the Inflation Mega-trend - QE4EVER! - 24th Feb 21
M&A Most Commonly Used Software - 24th Feb 21
Is More Stock Market Correction Needed? - 24th Feb 21
VUZE XR Camera 180 3D VR Example Footage Video Image quality - 24th Feb 21
How to Protect Your Positions From A Stock Market Sell-Off Using Options - 24th Feb 21
Why Isn’t Retail Demand for Silver Pushing Up Prices? - 24th Feb 21
2 Stocks That Could Win Big In The Trillion Dollar Battery War - 24th Feb 21
US Economic Trends - GDP, Inflation and Unemployment Impact on House Prices 2021 - 23rd Feb 21
Why the Sky Is Not Falling in Precious Metals - 23rd Feb 21
7 Things Every Businessman Should Know - 23rd Feb 21
For Stocks, has the “Rational Bubble” Popped? - 23rd Feb 21
Will Biden Overheat the Economy and Gold? - 23rd Feb 21
Precious Metals Under Seige? - 23rd Feb 21
US House Prices Trend Forecast Review - 23rd Feb 21
Lithium Prices Soar As Tesla, Apple And Google Fight For Supply - 23rd Feb 21
Stock Markets Discounting Post Covid Economic Boom - 22nd Feb 21
Economics Is Why Vaccination Is So Hard - 22nd Feb 21
Pivotal Session In Stocks Bull Bear Battle - 22nd Feb 21
Gold’s Downtrend: Is This Just the Beginning? - 22nd Feb 21
The Most Exciting Commodities Play Of 2021? - 22nd Feb 21
How to Test NEW and Used GPU, and Benchmark to Make sure it is Working Properly - 22nd Feb 21
US House Prices Vaccinations Indicator - 21st Feb 21
S&P 500 Correction – No Need to Hold Onto Your Hat - 21st Feb 21
Gold Setting Up Major Bottom So Could We See A Breakout Rally Begin Soon? - 21st Feb 21
Owning Real Assets Amid Surreal Financial Markets - 21st Feb 21
Great Investment Ideas For 2021 - 21st Feb 21
US House Prices Momentum Analysis - 20th Feb 21
The Most Important Chart in Housing Right Now - 20th Feb 21
Gold Is the Ultimate Reserve Asset - 20th Feb 21
Is That the S&P 500 And Gold Correction Finally? - 20th Feb 21
Technical Analysis of EUR/USD - 20th Feb 21
The Stock Market Big Picture - 19th Feb 21
Could Silver "Do a Palladium"? - 19th Feb 21
Three More Reasons We Love To Trade Options! - 19th Feb 21
Here’s What’s Eating Away at Gold - 19th Feb 21
Stock Market March Melt-Up Madness - 19th Feb 21
Land Rover Discovery Sport Extreme Ice and Snow vs Windscreen Wipers Test - 19th Feb 21
Real Reason Why Black and Asian BAME are NOT Getting Vaccinated - NHS Covid-19 Vaccinations - 19th Feb 21
New BNPL Regulations Leave Zilch Leading the Way - 19th Feb 21
Work From Home Inflationary House Prices BOOM! - 18th Feb 21
Why This "Excellent" Stock Market Indicator Should Be on Your Radar Screen Now - 18th Feb 21
The Commodity Cycle - 18th Feb 21
Silver Backwardation and Other Evidence of a Silver Supply Squeeze - 18th Feb 21
Why I’m Avoiding These “Bottle Rocket” Stocks Like GameStop - 18th Feb 21
S&P 500 Correction Delayed Again While Silver Runs - 18th Feb 21
Silver Prices Are About to Explode as Stars are Lining up Like Never Before! - 18th Feb 21
Cannabis, Alternative Agra, Mushrooms, and Cryptos – Everything ALT is HOT - 18th Feb 21
Crypto Mining Craze, How We Mined 6 Bitcoins with a PS4 Gaming Console - 18th Feb 21
Stock Market Trend Forecasts Analysis Review - 17th Feb 21
Vaccine Nationalism Is a Multilateral, Neocolonial Failure - 17th Feb 21
First year of a Stocks bull market, or End of a Bubble? - 17th Feb 21
5 Reasons Why People Prefer to Trade Options Over Stocks - 17th Feb 21
The Gold & Gold Stock Corrections Are Normal - 17th Feb 21
WARNING Oculus Quest 2 Update v25 BROKE My VR Headset! - 17th Feb 21
UK Covid-19 Parks PACKED During Lockdown Despite "Stay at Home" Message - Endcliffe Park Sheffield - 17th Feb 21
How to Invest in ETFs in the UK - 17th Feb 21
Real Reason Why Black and Asian Ethnic minorities are NOT Getting Vaccinated - NHS Covid-19 Vaccinations - 16th Feb 21
THE INFLATION MEGA-TREND QE4EVER! - 16th Feb 21
Gold / Silver: What This "Large Non-Confirmation" May Mean - 16th Feb 21
Major Optimism for Platinum, Silver, and Copper - 16th Feb 21
S&P 500 Correction Looming, Just as in Gold – Or Not? - 16th Feb 21
Stock Market Last pull-back before intermediate top? - 16th Feb 21
GAMESTOP MANIA BUBBLE BURSTS! Investing Newbs Pump and Dump Roller coaster Ride - 16th Feb 21
Thinking About Starting to Trade This Year? Here Are Some Things to Keep in Mind - 16th Feb 21
US House Prices Real Estate Trend Forecast Review - 15th Feb 21
Will Tesla Charge Gold With Energy? - 15th Feb 21
Feeling the Growing Heat and Tensions in Stocks? - 15th Feb 21
Morgan Stanley Warns Gasoline Industry Is About to Become Totally Worthless - 15th Feb 21
Debts Lift Gold - Precious Metal Prices Will Rise on a Deluge of Red Ink - 15th Feb 21
Platinum Begins Big Breakout Rally - 15th Feb 21
How to Change Car Battery Without Losing Power, Memory, Radio Code Settings - 15th Feb 21
Five reasons why a financial advisor can make a big difference to your small business - 15th Feb 21

Market Oracle FREE Newsletter

FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

Could U.K. House Prices Fall Again By Another 20%?

Housing-Market / UK Housing Apr 13, 2012 - 09:15 AM GMT

By: Andrew_Butter

Housing-Market

Diamond Rated - Best Financial Markets Analysis ArticlePersonally, I thought the bounce of house prices in UK starting April 2009 was an illusion. Three years later, they still didn’t go down so I started to think I obviously got that wrong, although there is still a niggling doubt in the back of my head.


http://www.marketoracle.co.uk/Article10895.html

Quite recently The Economist put out a piece saying house prices in UK and in some other parts of Europe, were still too high. That’s significant because although they have been wrong on a lot of things, for example the intelligence of invading Iraq in 2003, which they championed vociferously, they were right on house prices before the crash.

Back then they had an issue with a brick on it warning of what might happen, although in retrospect they were partially wrong, what happened was much worse than they had imagined. But this time around, did Gordon Brown save the world banks, and can we all live happily ever after, or not?

This is a chart of the progression of U.K. house prices compared to U.S. prices:

I’m not talking rocket science here, just eyeballing. But even if I close one eye and squint, either U.S. house prices got unfairly hammered or perhaps something unpleasant is coming to UK house prices that the fairy-godmother-of-last-resort managed to forestall, only temporarily.

Or perhaps I’m being alarmist, it happens.

After all, there are big differences between UK and USA which is where the same model on which I based the article on UK house prices worked perfectly.

http://www.marketoracle.co.uk/Article6250.html

First of all, in USA they build houses, or they used to, in UK they haven’t built any since Harold Wilson was caught taking kickbacks from real estate developers. Which is why dollar for dollar you can buy a five-bedroom mansion in Orlando complete with pool and a hot line to Dominoes Pizza for what it will cost you to buy a damp, energy inefficient shoebox in Neasden.

Another thing the Brits didn’t do sub-prime, OK they had Northern Rock, but the mortgages are recourse, not like USA where you can just jingle-mail.

Plus most mortgages in UK are adjustable whereas in USA they are fixed; so if Fairy-Godmother pushes down interest rates, every homeowner in UK gets a break whereas in USA you got to re-finance to tap into that gravy-train, and you can’t because your LTV got blown to smithereens and the mortgage providers are belatedly trying to impose rational lending standards…after the horse bolted.

And another thing…it’s a long list; most mortgages in USA were part of a pool put into a residential mortgage backed security, and they got servicers who have to follow the rules of the thing they are administering, plus the servicers personally make more money foreclosing (even if the pool doesn’t).  In UK the big mortgage companies have flexibility so they don’t have to kick you out on the street if it doesn’t suit them, and well, if they can hold the loan on their books at par by re-negotiating the re-payment part to 120-years, so long as you promise to pay your installments, that’s what they will do.

On top of all that UK is a lot more hospitable to foreigners than the Americans are; for example to Russians and people whose names set off alarms at Kennedy Airport; particularly those who have suitcases full of oil-money, and other sorts of money too, all lined up so they can slap a one-time-payment on a little pad just off the Edgware Road. In America they call people like that “Aliens”… in UK they call them…”Customers”.

So OK, perhaps thanks to the skillful management by the UK fairy-godmother plus of course, don’t forget the steady hand on the tiller deftly steering our blessed little island through the choppy patch created by those socialist spendthrifts; and on that note Three-Cheers for the jolly-good-chaps in the yuppie crowd who all went to Eton, which proves that nothing can beat a private (public school) education.

But…I don’t know; there is something in there that just doesn’t feel right. I can’t put my finger on it; of course that could be coz I didn’t get to go to Eton or Oxford neither, so perhaps I got a chip on my shoulder?

Be that as it may, my theory which I put out first in September-2008, was that for house prices the “fundamental” or what International Valuation Standards calls the other than market value, was a function of nominal GDP per house, which could equally be disposable income but the important thing is I used per house because apart from anything else that’s dimensionally correct.

Divide that number by a function of the trend-line long-term risk-free-rate and you get to what the price “ought” to be.

http://www.marketoracle.co.uk/Article6250.html

The next thing was I had this other brainwave about how when you throw a pebble in a pond, there is an up wave, then there is a down wave, but net-net you don’t change the equilibrium level of the pond.

Like it’s zero-sum, I figured that’s perhaps how it works with financial bubbles and busts, as in water is incompressible, so is money, and so for everyone who sold at a price more than the “fundamental” … they were the “winners”, there had to be someone who paid too much, they were the losers, net-net that whole process is zero sum, on average, no one wins and no one loses, just like after the ripples flow out on a pond you throw a pebble in, the level of the pond does not go up.

And don’t say, “Oh but the bankers were winners”. Sure they were, but some losers had to empty their pockets to pay the bankers their index-linked mammoth retirement settlements, net-net, no one made any money, all that happened is money got re-arranged, like the molecules in the pond did. That’s the thing, for economies to flourish both sides of the transactions have to win.

So the Big Idea was that the amount of disequilibrium in the bubble, like it’s `140% has, at some point to get ‘paid-back”, so that means the bust will be 1/140% of the “fundamental”.

So anyway, I got this model that said UK prices “ought” to have gone down by 40% before they turned, in fact they only went down 20% and then they bounced, real sweet.

So that could mean…the model was wrong?

That’s absolutely possible. It wouldn’t be the first time with my models, particularly where waves are concerned; I remember once I built a model for pipeline surges for a nine kilometer long 1000 mm main line working at 6-bar; which worked great until the day a Black Swan blew a four ton pump two meters off it’s mounting, which was quite exciting.

So my model says the Equilibrium line still didn’t get breached, but there again perhaps that was in the wrong place and from E2 = MC you get the pink-dot, in which case house prices are set to surge back to the equilibrium.

That’s plausible, but a few things made me think that perhaps it wasn’t my model that was wrong…for a change?

First, like I said, the model was pretty accurate for the US housing market although it’s bit difficult to be 100% sure because predictions depend on where nominal GDP plus the long-term interest rates goes and that’s not all that predictable these days, plus in 2008 I wasn’t really thinking and I thought yields would go up a bit. I just looked up what the economists were saying on the internet, which in retrospect was pretty silly given that the people who made those forecasts also said the US housing bubble was a bit of froth

Second, since I started messing around with the model in early 2009, it made spectacularly accurate predictions where the US Stock-market would go, and oil, and when I thought about it, US Treasuries. So the model does seem to work sometimes, and even though the UK model is not as good as the US one for explaining the past, and even with my spotty track record, I find it hard to believe I could have got it THAT wrong!!

The third thing, which I took some time to get my head around, is that it looks like sometimes Fairy-Godmother does indeed have the power to turn back the tide, temporarily, like King Canute tried to do and failed.

But, and this is the big thing, perhaps all that does is forestall the inevitable; that’s what got me confused the first time I used the model to predict the bottom of the S&P 500 in early 2009, that was eerily correct at 675, but the timing was completely out the window…in my defense I did come to my senses a month later.

http://www.marketoracle.co.uk/Article9131.html

The reason, I think, which it took me a while to twig, was that before 9/11 Alan Greenspan was going to start raising the base rate to cool things down after he had done with his damage control after the dot.com. What that would have done is make sure that the “curing” got fully expressed, as in the S&P 500 would have gone down to the place where what Ludwig von Mises called the mal-investments, got washed-clean.

But then…and I’m not making this up, it’s all in his book…then there was 9/11, and Greenspan figured he should do his bit for Mission Accomplished; which is why (according to him) he kept rates down for so long so as to save America from terrorists, which had the effect of forestalling the clearing of the US Stock Markets until 2008 after the cancer had spread everywhere.

See how there was like a pause; this is from an article I put out last August saying the S&P 500 was heading up from 1,100 or so towards 1,400.

The same thing happened after the 1929 crash.

So if that’s what’s happening to UK housing, then this is how the model says it will go down, assuming, for the sake of argument 10-year-yields start to creep upwards towards 5% and nominal GDP growth averages 4.5%

Mm…that looks pretty scary; actually I was quite surprised when the model spat that one out. Thing is it looks like perhaps the low interest rates helped contain the pain, but one day what went around, comes around. That’s a Law of Nature I think, like what happens when you try and mess with nature by throwing a pebble in a pond, sometimes something nasty slithers out and bites you.

Lets see, perhaps the model is wrong this time, which wouldn’t be the first time…but all the same I think I’ll keep my depressingly small wad of petrodollars in my back pocket, along with a fag packet (there is room)…before I buy my dream-shoebox in Neasden. At least until I get a better idea which way the wind’s blowing.

On that score, it is of course possible for the fairy-godmother-of-last resort to inflate away all pain.

But that only works so long as there is anyone left who will pay the inflated prices, its one thing to have a big price on the sticker, it’s another to do a transaction. There appears to be increasing evidence that no matter how much credit you thrust down peoples’ throats, they still won’t spend.

By Andrew Butter

Twenty years doing market analysis and valuations for investors in the Middle East, USA, and Europe. Ex-Toxic-Asset assembly-line worker; lives in Dubai.

© 2012 Copyright Andrew Butter- All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Andrew Butter Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Joey Barton
14 Apr 12, 08:15
Don't forget the natives

"Thing is it looks like perhaps the low interest rates helped contain the pain"

you reckon? If the BoE hadn't started printing to buy our own debt interest rates would have gone up which would have created a positive feedback loop into an almighty crash.

But never underestimate the British love of leveraged debt through housing, which they see as a one-way bet. And in a closed system of lunatics they will be right for a long time - until they are wrong.

The UK is a basket case.


Colin Sutcliffe
03 Jun 12, 08:05
UK housing bugs

Remember the early and mid 90s?

Property was still a dirty word - the 18 yr property cycle hasn't gone away, it's just hibernating the same as UK debt. It will bite again and housing will become a dirty word again. 20% down from here is easily achievable.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules