UK house prices

[AlexAndrews]

Shouldn't the Bank of England recognise that house prices are at/near their peak and are unlikely to stretch much further, given the huge difference between average national salary and average national house price. Therefore, they should not raise interest rates in an attempt to hault further price gains and wait for the market to stop rising/level out/start falling - naturally - in order to ensure that those people buying houses at the market peak do not end up with growing debts alongside negative equity - which would obviously happen if interest rates go up?

jtrader, the MPC's mandate is to target inflation. I must admit that when Mr Prudence formed an independent rate-setting committee I thought it was a big mistake, but I now consider it to have been something of a master stroke for the country's economy. I think the US could do a lot worse than adopt a similar system, rather than leave the policy to the dictates of a single person. Anyway, getting back to the subject at hand, the MPC have recently been stating their concern over the runaway housing market because they consider that continued soaring house prices will have a significant impact on the rate of inflation in the future.

Some of the posts subsequent to yours are quite right in the fact that the housing market is unlikely to mimic exactly what happened in the 1980's. To quote Mark Twain: history does not repeat itself, but it does rhyme.

Alex

 

[stevet]

mmmm - history not repeat itself - hope someone reminds the public of that when they stop buying again just after buying up everything they can get their hands on!

is that tulips i can smell!

 

[chump]

"is that tulips i can smell"..well if your only approach is to sit on the sidelines you won't be short of time to smell them.....

 

[stevet]

sit on the sidelines? well you cant short property but you can lay some nice bets on interest rates!

 

[AlexAndrews]

mmmm - history not repeat itself - hope someone reminds the public of that when they stop buying again just after buying up everything they can get their hands on!

The quote is "history does not repeat itself, but it does rhyme". I think you missed the point.

Alex

 

[stevet]

yep

 

[JTrader]

Thanks Alex.

I have found out exactly what the terms inflation and interest rates actually mean and so now have a firmer grasp on the concepts being discussed.

Inflation is a general rise in prices across the economy. This is distinct from a rise in the price of a particular good or service. Individual prices rise and fall all the time in a market economy, reflecting consumer choices and preferences, and changing costs. If the price of one item - say a particular model of car - increases because demand for it is high, we do not think of this as inflation. Inflation occurs when most prices are rising by some degree across the whole economy.

The Bank of England base rate is a special rate of interest that is set by the Bank of England. This is the amount of interest that the Bank of England charges to large banks when it loans them money. This rate, which is also used to help control inflation within the UK economy, is reviewed every month by a committee at the Bank of England.
Since the UK economy is based on the Bank of England, the base rate is the basic interest rate that is charged for all loans. Any higher rate of interest that is charged to borrow money from a bank reflects this base rate, and often bank loans and mortgages will be advertised at a certain number of percentage points ‘above the base rate’.


Cheers

jtrader.

 

[AlexAndrews]

That's a fairly good real-world definition of inflation; personally I prefer the more abstract definition that it is the devaluation (destruction of value) of a currency. It has been postulated that all fiat currencies are destined for such self-destruction.

Alex

 

[JTrader]

Hi Alex

what is a fiat currency?

Cheers.

 

[AlexAndrews]

A fiat currency is basically one that is not backed by any hard asset - there used to be the Gold Standard which linked the value of the US dollar to that of gold. Without any asset-backing, central banks have unrestricted power to create as much of their currency as and when they like. I Googled "fiat currency" and the second link (http://www.halexandria.org/dward297.htm) carried the following definition:

Black’s Law Dictionary [Sixth Edition, 1991] defines “fiat” as an “A command or order to act. Arbitrary or authoritative order or decision.” “Fiat money” is likewise defined as, “inconvertible paper money made legal tender by a government decree.” Inconvertible to, for example, gold or silver. Made legal only by government decree. “Colored money”, i.e. money with the “deceptive appearance, assumed exterior, concealing a lack of reality.”

(Actually, I thought "fiat" came from the Latin for the verb "to trust", as in trusting to the statement "I promise to pay the bearer on demand...", but there you go.)

In fact, it's worth visiting that link and reading the transcript of the telephone conversation with a member of the San Francisco Federal Reserve Bank - I should probably cross-post it to "The American Meltdown" thread!

Alex

 

[AlexAndrews]

Sorry, just had to post this from another link (http://www.fact-index.com/f/fi/fiat_money.html) thrown up from Googling "fiat money":

The first historical examples of fiat money was that of China. Although paper fiat money was associated with China through the writings of Marco Polo, Chinese dynasties resorted to fiat money only in extremely desperate situations, and Chinese experiences with fiat money were that it tended to result in hyperinflation.

Alex

 

[cj12]

"Bubbles are invisible to those inside the bubbles" and we have been through
one of the biggest economic bubble in history, but none of us saw it because
we were inside that bubble. After the "Tech Wreck" of 2000 and other chaotic
events, it's important to be aware of "Bubbles" and the "Stage of the Bubble"
in order to get on the right side of the equation and to profit.

Previous Bubbles have included:

· The Japanese "Take Over the World" Bubble of the late 1980's
· The Asian Currency Bubble of the mid 1990's
· The Internet/High Tech Bubble of the late 1990's ·
· The coming Inflationary Bubble caused by the U.S. Government's
attempt to mitigate the effects of the crash of these Bubbles and 9/11.
The Residential Real Estate Bubble of 2000-2003 ?????


How to Use this InformationWhenever you are involved in owning, investing or trading anything, review these macro-economic lessons. They may save you TONS of money and make you a TON of money in the long run. All stocks, commodities, technologies, currencies and real estate are subject
to local, national and international Bubble Behavior. Whenever you hear the phrase
"you can"t lose on this...." Remember to start running the other direction.

CJ

 

[chump]

CJ,
If only it was that simple , but of course if it were who would be losing ? Trading and investing successfully are not that different in core terms IMO..the differences arise in terms of expectations and how these relate to the inividuals specific position..and out of the latter arises the mass of so called misselling we have seen in recent years..much of this is to do with the notions of wealth creation to accumulate and wealth protection to safeguard the wealth you have accumulated.....but I can almost guarantee you that a lot of people will run in the right direction ,but at the wrong time....

Edit....just realised I left this hanging which tell no one anything that could be useful to them..so here you are...it's called managing your position..the most important thing you can do as an investor..and unless I miss my guess still the most important thing you can do as a trader...hope this is more helpful.

Cheers

 

[cj12]

If one was looking to buy a house, one could give 100 reasons why it would not go down.

If one was selling a house for profit, one could give 100 reasons why it would not go up.

How Bubbles Grow

The crowd imitates the leader. All Aboard! Even the gardener has a tip!?
Prices fluctuate from traditional level to overvalued level, THEN to all new ground and all time highs.
New levels are sanctioned by experts. "We are in a new Paradigm!"
Fear of missing the boat takes over. .
Money flows like water to anything or anyone with a new idea. Cult figures emerge for the new paradigm. The media promotes lifestyles, not substance.
The Bubble lasts longer than expected. Critics are dismissed. The last suckers are sucked in.
Fraud emerges as partly responsible for the bubble as the first cracks show in the bubble.
Finally, everyone has a reason why it cannot continue. But nobody dumps, and all hold
onto their profits. No new buyers. Market stalls..

CJ

 

[zambuck]

....indeed....

when more than 50% of crowd in pub starts talking about how much they made in last year...it is time to sell...

always sell when people will take it without asking...or thinking..

always buy when people are trying to get rid of - for any price......

 

[User]

'Trader 333; We do not need interest rates to reach 17% your forgetting that back in that crash people weren't borrowing ridiculous sums of money and secondly people weren't being forced into taking out 100% mortgages. Another issue is more people own cars now and more and more people are buying cars on finance. Lets not forget the credit card industry I don't really need to elaborate on that lol. Basically we're spending more then saving. Earnings are not in line with house prices.

Why buy-to-let investors and estate agents will say that studio apartments and 1 bedroom flats achieve better rentals is due to a better demand. A contributing factor of this is 'MARRIAGE'. Less people get married more people get divorced hence people living on their own.

20% correction will occur definitely and as always we'll be following America to lead us to this bubble busting crash. Anyone thinking of buying property, be vary. Sell and rent. Look around you in your areas. How many TOM, Dick and harrys are opening up estate agencies and mortgage company's. Interest rates even at current levels are still symbolically low and are already beginning to make payments tight for people. 6% could be a prospect for 2005 next year which could no doubt trigger panic in the market. It's not a overnight process. 1-2years.

If you have a property portfolio don't get excited about your paper gains until you cash out of them otherwise negative equity awaits for many investors.

 

[Trader333]

User,

Sorry I dont agree, when the last crash happened virtually everyone I knew was on 100% or 105% mortgage and had loans out for cars etc including myself. It was primarily interest rate changes that caught them out and forced selling because people could not afford the mortagage payments. I havent said that 17% rates are needed but these rates will have a very large impact on starting a crash if it happens.

Your quote:

20% correction will occur definitely and as always we'll be following America to lead us to this bubble busting crash. Anyone thinking of buying property, be vary. Sell and rent. Look around you in your areas

You are the latest in a long line of "Experts" saying this with the first saying it in May of 2003 and guess what they were totally wrong. One lesson that is easily learnt from all of this and that is that the economic experts cant predict markets so I have no doubt that you cant either. Just for your own interest house prices went up again in July.

At some point things will correct because they always do and those who just happen to have guessed it correctly at the time will be all singing "I told you so". However, it will be just a matter of luck as I have seen time and again predictions of what markets will do and every reason under the Sun for why it will do it but almost without exception it is wrong.


Paul

 

[cj12]

Trader333 have you got an interest in the housing market,it cant keep on going up 30% a year with inflation at just under 3%.

This is a trend of interest rates in the late 80s



1986 Jan 12.50 +1.0
Mar 11.50 -1.0
Apr 10.50 -1.0
May10.00 -0.5
Oct 11.00 +1.0

1987 Mar 10.00 -1.0
Apr 9.50 -0.5
Ma 9.00 -0.5
Aug10.00 +1.0
Oct 9.50 -0.5
Nov 9.00 -0.5
Dec8.50 -0.5

1988 Feb 9.00 +0.5
Mar 8.50 -0.5
Apr 8.00 -0.5
May7.50 -0.5
Jun 9.50 +2.0
Jul 10.50 -1.0
Aug12.00 +1.5
Nov 13.00 +1.0

1989 May14.00 +1.0
Oct 15.00 +1.0

1990 Oct 14.00 -1.0

1991 Feb 13.00 -1.0



CJ

 

[Trader333]

CJ12,

All I have really indicated is that, in my view, interest rates will have the largest single influence for causing a price collapse because debt is so high that even small increases in interest rates will cause quite large increases in monthly repayment requirements and many people are in situations with little or no disposable income. So far every expert on this subject to date has been wrong in their prediction of the collapse. We see it time and again not just in house prices but on almost every market where people make predictions that are invariably wrong. It doesnt matter that people can spout all sorts of data for why the collapse is imminent as they have done now for the last 16 months. The market will correct or collapse when it does so and as I have already said, when it does those that just happen to have said it will (by pure luck and not judgement) will no doubt gloat in the fact that they got it right on that particular occasion.

In my view markets are notorious for not being able to be accurately predicted.


Paul

 

[donaldduke]

The crash has started, in London at least (and London leads the way).
In Kensington and Chelsea asking prices are down 15% in two months.
The rest of london shows about a 5% average fall in prices since July.

A few more rate increases will really get the momentum going..