It is Obvious

Chris Rick has got altogether too much to say

Tiger country

Posted by chrisrick13 on January 25, 2011

It is obvious: house prices are interesting

1.  House prices track the average wage.  The lines diverge during bubbles and slumps.  But long term there is a strong relationship.  This relationship is defined by the rate of interest on borrowed money.  However this is easily normalised.  At the moment house prices are a long way high of the long term line…about 30%.  A full correction or the usual over-correction is unlikely any time soon, but 10% looks promising.

2.  The average wage is falling.  Not many people are getting pay rises that even beat inflation.  A lot of people have lost jobs, moved to lower paying jobs, taken to working part time.

3.  There is a shortage of supply.  In any market demand that exceeds supply resolves to higher prices.  Trouble is that there may not be enough houses to put all exisiting families/people into their own houses but that is not where the shortage lies.

4.  Banks are not lending to people.  They are, but only where the lender can service the loan now and be in a group that is likely to be able to service it at interest rates many times the current one.  So the shortage in the market is buyers not houses.  This is the other side of the market: if there are no buyers then prices go down.  This is a slow response as people hang on as long as they can but there are those that have to sell.  This is a case of banks only lending money to people who don’t need it.  Who can blame them with the amount of potentially defaulting mortgages already on their books.

5.  The rental market runs alongside the homebuying market.  If it is a lot cheaper to rent than buy then rent a place and save.  If buying is cheaper than renting then borrow and buy.  Landlords also run in this market with similar equations.  However they are mainly interested in timing, buying when prices are low, servicing the loan on rental income and selling when prices are high.  Except that the major payer of rents is HMG with housing benefit.  This is about to be reduced (with lots of spin).  This will depress the rental market and house prices will follow.

6.  We are in uncertain times.  We are always in uncertain times but they are more uncertain now than they have been for a while.  We are at risk to a number of global factors that we can do little about…at least now.  We do not have the export industry that we had in the past.  The pound has been reduced to make us more competitive (but not necessarily competitive).  However the people that might like to buy our goods and services are not in expansive mood.  Europe consists of basket cases and thriving economies.  The thrivers are exporters.  So our biggest market is not buying much.  In particular Ireland.  Places such as India and china and even the US do not buy much from us though the US through its buying does drive others to buy.  So exports are not likely to help us for some time.

7.  We are fast running out of oil.  We are a net importer.  Our alternative fuel strategy is poor and the provision is derisory.  We are at the mercy of  oil prices.  This is a market and prices will rise.

8.  To say that we suffer from government debt and deficit is maybe just another expression of the factors above.  If the deficit is not removed then it will increase our debt to the point where we get into a debt/default cycle.  Default becomes inevitable.  If we default then we will suffer much more than if we suffer to cut the deficit and it will be over a much longer timescale.  The Conservatives are cutting the deficit relying on pain over a short term and then recovery in time for the election.  Labour want to cut it slowly and have us suffer over a very long period.  Indeed their ‘scorched earth’ policy in the days leading up to the election looked like an attempt to maximise our suffering either way.  So the government, for right or wrong, must be working to a, now, four and a bit year timescale.  Putting uncertainty over whether they can get it right to one side, they clearly intend us all to suffer to get the economy into ‘health’ over at least two and probably three years.  You can go to the bank on that one (sic).

9.  Completely ‘out the box’ and already running screaming over the horizon what about birth rates?  I wonder how our population is doing?  This has to  be something that lags, but if it is in place then it sits there and waits for a generation.  We are at the end of the baby-boomers.  There are a lot of people stopping working and dying.  We are rapidly approaching the middle of the bell-curve.  I have just sold my mums house.  One group of my baby-boomer friends consists of 4 early retirers and myself about to.  Houses are coming on to the market in increasing numbers and the spending patterns of the baby-boomers are changing radically.

10.  There are monsters under the bed.  I am always moaning about bad information and missing information.  These have two close relatives: rumour and speculation.  I hinted above that there is a lot of rumour and speculation that the bad news that we know about banks and even nations is nowhere near all of it.  Banks are still reluctant to lend to each other…because they each know how bad things are for themselves.

11.  Blast: I have more than 10.  Inflation is at 5% ish.  Ignore the new versions.  Something will be done about it as it rises and that will be to increase interest rates.  As economic news gets worse so does the proximity of interest rate increases.  There will be a balance point where the wisdom of those in charge will be that the damage from not doing it will be worse than that of doing it.  The consensus is that that point has moved closer on recent economic news.

All a bit circular but it illustrates my thinking.  There is little to push house prices up and much that could and will push them down.

It is obvious: house prices are interesting but I want them to be boring.

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