It is Obvious

Chris Rick has got altogether too much to say

Archive for the ‘Houses’ Category

The economy with particular reference to hosues

Owwww – that hurts

Posted by chrisrick13 on January 28, 2011

It is obvious: a lot of the obvious stuff isn’t

There seems to be two ‘truths’ about the economy at the moment that nobody questions.  The first is that increasing interest rates will be harmful to the UK economy and the second is that we can manage without the cuts/tax increases.  I wonder that the coalition has not done more to bring these ‘truths’ out into the open for a full examination.

I ground my teeth listening to the BBC, yet again, asking the man in the street rather than someone with deep knowledge.  They were asking about petrol prices.  The instant expert said that the government ought to cut the taxes on petrol.  I agree.  Not only do I drive a lot of miles but many of the goods and services that I use travel a long way, not least food.  The next question they didn’t ask our instant expert was that as the government is spending more than it gets, any taxes not gathered in from petrol have to be gathered in from somewhere else.  Where was he proposing that the income should come from?  Maybe close every second hospital?  Perhaps stop Motability for disabled people?  Kick half the prison poulation back out on the streets?  Not bother with police?  These bleats taken in isolation are really people saying that they don’t care how the government deals with the deficit as long as it does not affect them.  The coalition will cut and tax, on the whole, even handedly.  But there will be a bias towards the people who voted for them.  In a long term play for a lengthy period in power the Labour party has abandoned its voters.

The scenario is very simple.  The government has to cut the deficit.  The deficit is the overspending that is increasing the national debt.  If it gets too big then UK will default on its debt and a bunch of accountants at the IMF will be running the country.  If that happens the proposed cuts will look
like mild grazes compared to the slashing that the IMF will do.

Why would we want to increase interest rates?  This is how inflation is conquered.  What is wrong with a good dose of inflation?  For a start it makes our debts to the rest of the world disappear as if by magic.  The problem is that the rest of the world and in particular those that lent us money are not stupid and have long memories.  The other problem is that I am a net saver.  In common with all net savers, inflation makes my prudence a waste of time and rewards the profligate.  In common with all net savers I have a long memory and intend to  be around voting for some time to come.  But why will it hurt the economy?  Why will it ‘de-rail the fragile recovery’?  What recovery?

Suppose that interest rates were moved up with a clear intent from the MPC that they are on an upward trend.  The pound will rise and imports will get cheaper.  This will help inflation and balance of payments – foreign stuff gets cheaper.  It will handicap our exports…what exports?  Our cost of production is already so high that foreigners are only buying our stuff because there is no alternative.  Our exports are not sensitive to the value of the pound.

What else happens.  Borrowers have less money to spend in the economy.  But at the same time savers have more.  Rate increases will dampen the economy, but not much.  What happens to the extra interest payments?  they either trickle through to the people who lend money or they go to the banks as extra profit.  Where has the UK government ‘invested’ more money than a year’s GDP…the banks.  Maybe these investments will come closer to profitable liquidation?

What else?  A lot of people will default on their mortgages.  I cannot apply logic and work my way through that scenario.  There are too many branches of possibility.  A few things are predictable.  House prices will fall.  But if they do then perhaps a lot of people unable to afford houses now will be able to.  Maybe a proper market will develop as the prices reach the long term ration of wages to price?  One group of people will be kicked out their houses and suffer and another group will move in.  The banks will possibly be at the stage where the mortgagees have sufficient equity in their houses that on repossession they will make only small losses.

There lies the problem.  Between here and an economy that has few debts and is growing at sustainable rates with a manageable balance of payments, there is a period of pain, but that pain will not be evenly distributed.  The government has to create the pain, manage those who suffer and hope they can keep the country stable until the pain abates.

It is obvious: a lot of the obvious stuff isn’t, but it is inevitable.

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Trigger pulled?

Posted by chrisrick13 on January 25, 2011

It is obvious: don’t just do something

For people such as myself with a, to say the least, pessimistic view on the economy of this country, the GDP figures are an “I told you so” moment.  It is too early though.  There is plenty of bad news out there, but it is too uncertain to say that it is yet the beginning of the end.  I find it amusing that a bit of snow might be the trigger that I have been talking about though.

The spin is out on these figures.  They will be revised.  That is true.  Does not happen a lot but down is an option.  One month of bad weather will not cause a change in economic policy – quite right.  What happens if we have two?  February has had more bad snow than December over many years.  The most problematic part of the numbers is that the consensus was for GDP to go up by 0.5%.  So all the ‘experts’, in the full knowledge of the snow and its effects, with many retailers reporting already, were out by 1% in their estimates.  I suspect Paul the octopus could do better (RIP).

I find I am repeating myself a lot no matter where I start from.  I will not apologise for that and will issue two repeats here.  First is house prices.

The GDP number, if ignored for what it is but looked at for its unexpected nature, has made all economic forecasts more uncertain.  It has added uncertainty that will further mitigate against house price rises.  Taken for its actual value it will have made another group of people unwilling to commit to a mortgage thus reducing demand from where it was just yesterday.  It will also cause another group to act further to reduce its risk from mortgage lending: the banks.  Expect borrowing on a mortgage to get more expensive and more difficult to do.

I am repeating more than BBC1 and Dad’s Army with my second point.  The rule of 70.  All economics is based on running economies with growth.  We are relying on cuts, increased taxes and growth to get us out of our economic mess.  The IMF has predicted 4.4% global growth for this year.  Chinese growth at over 8% is considered too high. A shrinking economy is not good.  Something like 2% is considered optimal.  With growth at 8% an economy will be doing twice what it is doing now in a little over 8 years.  China will not manage that.  But what of 2% growth?  This is something we aspire to.  Were we to achieve it then in a little over 8 years the economy would be close to 25% bigger than it is now.  Tell me what is going to happen for us to be doing 25% more of anything in 8 years time.  It simply cannot happen.  Push out to 18 years for a 50% increase.  Simply, it cannot happen.  We have to get used to 1) a period of economic pain while the nation’s spending is cut to the point where the nation can reduce its debt burden 2) living in an economy that has low or no growth 3) finding a way to manage a zero growth economy.  The best answer that I can think of is that we improve the efficiency of everything we do rather than just trying to do more.  That needs the whole population to change the way it thinks.  Given that the evidence is that not many of us are thinking at all, that might be tricky.

How about a revision to 0.1% shrinkage and then GDP for the next quarter coming in below zero?  In case you didn’t realise, that is a double-dip recession.  We are half way there.  Start reading the words of people who have been predicting double-dip.  Then get yourself some strong sleeping tablets.

It is obvious: don’t just do something – sit there…

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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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This is interesting

Posted by chrisrick13 on January 14, 2011

It is obvious: I know little about economics.

The excellent website Notayesmanseconomics thundered in today on inflation.  He has been warning for a long time about inflation being a problem.  He has pointed out the moves in various futures contracts (which I don’t understand) that indicates that the financial markets (which I will carefully avoid having to define) have factored in an interest rate rise.

This is a problem for the UK.  There will come a point where the MPC cannot ignore inflation.  It seems to me that there is only one way to combat it and that is to raise interest rates.  This slows consumer led inflation and I assume that the consequent rise in the value of the pound will help with import led inflation.  Alas this is not the case if everyone else puts interest rates up.  I will carefully ignore the effect on export performance from increased interest rates and increases in the value of the pound.

If interest rates go up then I will be happy as my cash might start to retain its value under inflation.  Anyone with debts will be unhappy.  That implies a lot of people will not be able to service their mortgages.  This is mitigatged by many people having fixed rates for a number of years.  So any effect might be delayed.

This will be the big effect.  No small trigger.  If the cost of a mortgage rises to the long term average then house prices will fall to the long term average.  Versus salaries that average is 4 times and currently it is over 5 times.  House prices will drop 20% on that basis.  I will play silly games here, but suppose that the average salary of those with a mortgage drops by more than that due to some of them not having a job or moving to part time or lower paid work.  This might push the average mortgage back up to 5 times earnings.   So after the first 20% fall there might be another 20%.

I’m a pessimist so don’t listen to me.  If I put on my optimists grin can I see anything out there that is good enough news to make house prices increase?  Over the next year?  Over the next two years?  Don’t forget that interest rate rises are coming alongside the job cuts.  If you are thinking of buying wait if you can.  It will be clearer in a year and the money you have will go a lot further.

I also think it unlikely that there will be big drops.  There is too much working to counteract the cliff-edge effect.  What will happen is that homeowners will be ground down over a long period…but at nearly 5% inflation it is not that long, as, in real terms, the price of an average house has dropped by about £12,000 over the last year.  Roll in the rule of 70.  At last years rates the value of a house halves in under 10 years.  You need to be looking at that all the time.

To any first time buyer I would say: make sure you can afford the mortgage at 10 times the base rate, make sure that you have good prospects of retaining your job, be very sure that the house is somewhere that you would be happy to live for the next five to ten years.

Notayesman finishes today’s article with a good question.  The 0.5% interest rate was an emergency measure…introduced 22 months ago, so are we still in an emergency after all this time?  I would like to add my own: if we are in an emergency what has been done about it over that period?  If anyone feels equipped to answer I might then ask when will we see the results of that action.

It is obvious: I know little about economics and in common with a lot of people I seem to have a better grasp on reality than those who do know a lot and are in charge.

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I wanna, wanna house.

Posted by chrisrick13 on November 4, 2010

It is obvious: don’t just do something.

I am on the record as predicting a permanent house price crash for the last 30 years. I haven’t but it seems that way. If I had then I would have been right 4 times at least.

However at practically every point in time over the last 30 years I have seen house buying as a risky business. Practically everyone I talk to sees property as a sure one-way bet and the best possible place to invest their money. I direct those people to the long term average returns over as many years as you like of various investments and in particular the stock market with re-invested dividends.

However there is a difference between investing in a house and buying a house to live in. That one factor changes the equation hugely. So I am talking about buying a house to live in.

I had a discussion with someone about renting versus buying. They were not long out of university and had saved money. They also had loans to hand from parents so that they could put down a decent deposit. I suggested she keep on renting for a while and gave various reasons. Her response was that the rent was wasted money, whereas buying a house was investing in an asset. I asked what the interest payments on the loan were. She still bought and has a nice flat that suits her very well. However she now has no equity in it. In 10 or 20 years things will be different…but how different?

That discussion was before the credit crunch. What would I advise now? Exactly the same as I advised then. The pain of living in a rented house rather than one you own is not much. You can get somewhere that fits all your requirements renting or buying. About the only difference between renting and your own place is that you can’t paint the walls…I see that as a positive advantage for renting. If you rent then just treat it like a mortgage and save the part of the mortgage repayment that is for repayment into an ISA. The main difference between buying and renting and the great driver for buying is that in 30 years you will not have any payments to make each month if you buy. You can either save the money to pay rent or use it to buy.

So how do you decide when to switch to buying a house? This is so easy and is being done by a lot of people now. What is the likely direction of house prices over the next year? What is the likely direction of house prices in real terms? At best I see them staying as they are. I think there is a huge chance they will keep going down. I see the chances of a rise as so small as to be in the hit-by-lightning bracket. So there is an asset you are buying with a near guarantee of it going down in value. Not only that, a house is the only thing you buy that has leverage – whatever direction a house price goes he effect on you is magnified.

Can you afford to buy the house? Certainly the banks will now make sure you can pay the mortgage and will factor into that salary multiplier a considerable margin for increases in interest rates. Where do you think the next move will be considering the base rate is at 0.5%? Where will interest rates go to when the BoE eventually decides to act on inflation? The key question is how much? I can’t answer that…and neither can anyone else. It just represents a huge risk. (I paid 15% on my mortgage for a time.)

What if the market suddenly moves? Prices leap up and you are stuck with no house. In other words what if the next bubble starts and you are not in there? If you have saved you will have cash and no house to sell. You will be able to dive in quickly and play the bigger fool game. Do you really see a housing bubble starting any time soon?

Finally, for this rant, think about your income stream. For a lot of people there is no certainty of there being one. If you have done as I have advised in previous blogs and invested in yourself then you will have security. For many though that is not even an option. If it happens it is a disaster. However it is a much larger disaster losing your house (and owing the bank money) than having to move out of your rented place.

My advice remains as it has for 30 years. Do not buy a house as an investment. Do not buy a house to live in now.

It is obvious: don’t just do something – sit there.

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