BoldAsBrass

That would tend to be the case for the vast majority of Brits.

 

I even see the BoE warning people not to go chasing higher returns in emerging markets (I suppose they would be daft not to say that at present though)

Yes, Brazil is into double figures now. But would it be risk-free saving your money in a Brazilian bank?

I just looked at Persimmon's web site. Maybe there is scope for a 50% fall in prices.

The site I looked at is in Sidmouth. I have to say I was almost shocked at what was on offer. A 3 bed semi is offered at just under a quarter of a million pounds. It's internal floor area is about 750 square feet. It is TINY. I think this house could fall by 50% without affecting property prices in my part of Surrey one jot.

I'm close to London, motorways, industry, beautiful countryside etc etc - and my house is about 3 times the size - detached, 4 big beds, double detached garage and a half decent garden. Yet my house is only worth about 60% more than that sardine tin in Devon.

When the crash comes - if it does - it's going to affect some places a lot more than others.

Bold,

 

If savers cannot earn a real rate of interest on their savings, they will shift their money elsewhere...

I would have thought that was clearly not the case. Of course some savers will move their money elsewhere. I would suggest the vast majority do not. They just leave the money in the bank muttering darkly about deserving much higher (risk-free) returns on their 'investment'.

Since when was there a 10% risk free return on savings?

1970s and 1980s

You need to compare rates to inflation.

Why? Whatever you invest in you have to compare your return with inflation - to see if you've made any 'real' money. So, whether you stick your money in a bank for a risk-free return of 2% or invest in a business for a risky return of anything from 'lose your capital' to 'the sky's the limit' - whether you compare rates with inflation, or not, is surely irrelevant. You need to compare one investment with another - and compare them all to inflation, or not, depending on whether you want to know real return or are just interested in relative return.

And do not forget that many savers pay tax.

Again, what is the relevance? You pay tax on any investment. I was making the point that savers don't have a divine right to high rates of interest on their savings with no risk to their capital. What's whether they pay tax or not got to do do with it?

If savers want/expect high rates of risk free returns on their savings, they must understand that borrowers must pay even higher rates of interest on their borrowings - which means that businesses will have more difficulty borrowing money to expand etc. etc.

I think low saving and borrowing rates are a good idea - as long as you don't have a bunch of half-wits in government who allow banks to lend an infinite amount of non-existent money into a housing market.

I don't get this 'I'm a saver and I have a divine right to X% risk free interest on my savings.'

If you put your money in a bank - you know the only way you get a return is if the bank lends your money out - so, checks out the borrower, arranges security, collects the monthly interest, pays you your interest etc. - and, of course, takes a risk the borrower may default.

I think people's attitudes in this country have been distorted by interest rates that were way too high for decades. Why on earth should someone get (for example) 10% risk free return on their savings?

Maybe people who want good returns on their savings should invest their money and take a bit of risk.

A strange conclusion to reach - I would have said that there is simply too much money lent into overvalued housing for a collapse not to occur.

I don't think it's a strange conclusion. Surely it's the same thing as 'you owe the bank £100, you're at risk ... you owe the bank £1,000,000 - the bank's at risk.

Bank lends 50% LTV mortgages into a housing market - the borrowers are at risk.

Bank lends 100% LTV mortgage into a housing market - ignoring capital adequacy rules by use of the 'shadow banking system' (packaging debt into MBS's and CDO's etc - effectively lending the same money over and over again) - the bank is at risk. Isn't that why RBS and HBOS had to be bailed out?

Unfortunately for you and your argument the base rate does not necessarily determine mortgage rates. And it is these that determine the cost of the credit that flows into the UK property market. Swap rates are rising regardless of an ultra low base rate, and this is having a knock effect on mortgage rates for new lending.

You may remender that the correlation between swap rates and the base rate was also broken after the Lehman crisis, although I can't recall exactly when.

 

See the following article

 

 

 

So. you see that the cost new lending, which is what will ultimately drive the market, is under considerable upward pressure. When new lending is squeezed then this must put downward pressure on prices. Although you don't state it, I think what you mean is that existing mortgage holders on tracker mortgages must, and will be protected at all costs. I disagree. ZIRP served to prevent mass defaults when the financial crisis hit. Continuing it depends on what proportion of the banks total loan book consists of these kind of mortgages. When this proportion falls to a low enough percentage and the bank have enough capital to withstand the commensurate losses, it will be safe to raise rates and let some debtors sink underwater. People should be preparing for this event. Anyway, the rates on new loans is rising.

Okay, I'll rephrase - I think we will have low mortgage rates for years. Because higher mortgage rates will cause mass defaults and repossessions and will cause banks to have to revalue the assets against which their loans are secured - causing the bank that raises its mortgage rates too high - to fail.

I don't disagree with what you say - it is patently true. I just wouldn't describe rates as being under 'considerable' upward pressure. Some upward pressure - sure - but current SVRs are in the range of 4% to 6%, and I think they'll stay that way for years. Tracker rates may well move back up - but most people on a tracker for the last couple of years who have been paying some daft amount of interest like 2% - were previously paying in the 4% to 6% range and will, presumably, be able to cope if mortgage interest rates return to where they were a few years ago.

The extremely complacent scenario you describe along with the social shift to neo feudalism (property haves verses have-nots) you mentioned in earlier posts requires IRs to stay where they are for at least 5 years (and that is not just base rates but domestic mortgage rates too). Also required is a sustained economic recovery that allows wage inflation to match core inflation and the creation of a significant number of non public sector jobs.

 

However, five years of weak, sub-trend growth, rising employment and high energy and commodity price inflation along with a banking sector that remains crippled in terms of funding itself at non-punitive rates simply will not deliver this. High inflation without commensurate wage inflation will not enable further debt creation, in fact it will result in the exact opposite.

 

There is an almost complete mismatch between what governments and central banks want the cost of credit to be (this is what you seem to believe it really is, btw) and what banks have to pay to raise the funds to grant new loans.

 

Debtors have a big shock in store. Either that or, as I've previously mentioned, they must be subsidised, at steadily increasing levels -- for ever -- and at the cost of the productive economy.

At the moment banks seem to be successfully paying 2% to savers and charging borrowers anything between 4% and 20% depending whether they are lending to a mortgagee or a credit card user.

Bank margins at the moment are very high. Base rate could go up quite a bit and banks would not have to raise interest rates. Margins would fall - but they've had a couple of years of high margins now to boost their capital positions.

Using interest rates to control inflation caused primarily by rises in global commodity prices will have no affect whatsoever - apart from a minor decrease in commodity prices as the currency rises. (As I said before, saving £10 a week on commodity prices will be more than offset (for most people) by paying £50 a week more on their mortgage ... so - no good to anyone).

And, of course, if interest rates rise, relatively speaking, in concert around the world - currency relationships will stay broadly the same. So, the only affect of raising interest rates will be to make sure that people have less money to spend. This will depress demand but it won't depress prices - because the price increases are caused by increases in global commodity prices. So we'll end up buying less stuff but at higher prices - which sounds deflationary in terms of jobs and economic activity but not in terms of prices.

I think we'll have close to zero base rate for years to come. One of the factors in play these days, as opposed to previous recessions / crises - is that all the developed economies are in the same boat.

From the Daily Telegraph today:

"Three million people would struggle to pay their mortgage if interest rates rose by just 1 per cent, new research has disclosed."

So, raising interest rates by 1% would cause, over a period of time, mass repossessions - a huge drain on the public purse as people have to be housed - and would expose banks' capital positions and force another bank bail out or a collapse of the banking system.

Which is my point - there is simply too much money lent into the housing market now (the boom is 10 years old in my area) for a collapse to be thinkable. Base rates are going to be low for years.

I am not interested in constructing "rosy scenarios" - I want realistic ones.

 

Under my scenario, and most scenarios I believe are realistic, the UK property bubble bursts, as it has in virtually all other Western countries.

The losers will be those who were too optimistic (believing in rosy scenarios), and failed to prepare and took on too much risk.

As I see it the losers will be everybody. You seem to think the 10 year old UK property bubble will 'burst' and that the only people who will 'lose' are those who took on too much risk.

Well, there's all sorts of scenarios. On the one hand people who took on too much risk - as long as they keep paying their mortgages - will be unaffected - apart from being unable to move house. On the other the major UK housebuilders go bust - who will be around to hoover up the land at lower prices and build. Where will the money come from to build with?

On the other hand, a property bubble 'bursting' along with mass repossessions etc. - will cause a banking system collapse and - not to put too fine a point on it - chaos.

I think the global inflation scenario is a hundred times more likely than the 10 year old property bubble bursting scenario. Where I live we've had stagnant house prices for about 7 years now. Which, set against inflation, means we have already had nominal falls. Give it another 20 years and property will become affordable again.

Or will it? As long as people pay daft rents, there will always come a point where someone will plunge in and buy to let out. Part of the structural shift in property ownership that is going on now.

So which part of the country you from then, maybe i can post a thread on there asking if it's booming there and when i get conformation i can jump on the train with my bags packed and earn a fortune.

You are deliberately misreading what I said. I didn't say anything about making a fortune. I did say people are busy, but not so busy they are turning work down. Rates have gone down - no doubt about that. I'm in Surrey - Guildford is probably the nearest town you will know of. I wouldn't have thought there was enough work around here for people to start moving from other parts of the country to do it. As ever in the building game, it seems to be who you know.

The point I was trying to make was that, like house prices, 'the economy' varies by a huge amount regionally.

I went for a meal on Saturday night with my wife in our local town. I keep reading about this slow down, the problems, the debt etc. - yet you go into my local town on a Saturday night and the pubs and restaurants are heaving.

I read somewhere this morning that house prices are at 2004 levels. Not a surprise to me. They have flat lined around here for years. Which is one of my basic points - the boom happened here best part of 10 years ago. Over the last 10 years a huge number of people have bought houses at, roughly, current market levels. There is a lot of money lent into the housing market now. This 'boom' has been going on for a decade now - certainly in the South and South West of the country.

I am not a troll. I'd like to see house prices halve - to give my kids, and yours, a chance of a decent life spent without massive debts making bankers rich.

However, I'm not under any illusion that they can halve - without taking the banking system and economy with them. I'm not sure that that is a price worth paying. Maybe it is. Just as the current house price 'correction' is now mainstream as far as the media is concerned - the idea of moderate inflation being highly desirable is also getting aired more and more often.

Which is more likely? 10 years of moderate (global) inflation - or a 50% house price correction that will take the banking system and economy down with it?

Why would a builder pay for your son, the labourer to do a degree when he can take his pick for free of already trained + experienced people?

I must admit it surprised me - and I was equally dubious about it when my son told me about it. My son has proved himself to be a reliable and trustworthy employee - and his boss seems to have taken a shine to him. The deal is unwritten - my son has agreed to pay him back if he leaves within 2 years of completing his course. The cheque his boss gave him to pay for the first year of the course looked pretty real to me.

My son - 'the labourer' - has other skills too. As well as overhauling the web site, he's also refining the way the busine

Being my profession, I frequent a forum for bricklayers, which covers the whole of the UK.

I left the industry 20 years ago. I'm trying to visualise the sort of blokes I knew who were bricklayers - sat at a computer - adding posts to a forum. No, it just won't come. You sure you're not in a forum of one?

Maybe you live in a parallel universe though.

No, just a different part of the country. Had a plumber my son knows around a month before Christmas - wanted a radiator moved (and changed for a bigger one) in one of the bedrooms. Wanted £300 to do the job and 'no chance this side of Christmas' - haven't heard from him since.

2 big 5 bed new builds the other side of the golf course - going up at a very fast rate. Lads working all over Christmas I noticed. Attic conversion on the go on a house about 10 away from mine. Big estate (1500 homes in total) - a few miles from me - 4 or 5 of the big builders building steadily there. Another development in a local market town - visited the show home one Saturday before Christmas (bored and happened to be passing). 1st phase all sold - 2nd phase under construction. Unbelievably (given the amount of empty office space) - couple of big new office developments on the go a few miles away too.

Son's friend is a trainee QS - company he works for is very busy.

Apart from war/plague/total-worldwide-financial-collaps etc, the only thing I can see causing nominal falls of that magnitude would be a massive, sudden rise in rates (>8%).

 

With the UK debt structured as it is, that remains a very faint possibility.

 

PS I'm hoping for everyones sake that your (or mine for that matter) "worse case" doesn't arrive

It surprises me the number of people that think interest rates are going to go up soon - and by a large amount. People are criticising the BOE for ignoring inflation etc. Which baffles me. Of course you use interest rates to try to tackle inflation caused by consumer demand. But when inflation is primarily caused by increases in global commodity prices - what earthly use would it be to raise interest rates? Okay, global commodities would become a bit cheaper as the pound rose - but, for the average Joe - £10 a week saved on the food/petrol bills would be wiped out by an extra £50 a week on the mortgage.

I think Mervyn King understands this - but those journalists who parade themselves as economics experts do not.

Went for a job interview today, 'all round builder' the guy said he had about 70 applicants as far afield as Chester, the job being in Birmingham Not exactly good pay either.

 

Applied for another position of bricklayer/all rounder sent of my CV yesterday saying that i would do a 1 week work trial without pay to show my skills set and work ethic. This just to try and get ahead of the hundreds that will apply no doubt.

 

The point i'm making it's grim out there. Even worse than the papers or figures are saying.

 

Now just noticed a house in my target area come up today, needs complete renovation, it still has an outside toilet so will be viewing tommorrow if not sold already and almost certain of a cash offer going in. With this thinking i can at least keep active and spend my time doing the house up.

Like house prices themselves, this varies hugely from region to region. My eldest son is working for a small builder at the moment - he (the builder) does mainly extensions and the odd new build. My son was working for him as a labour only subcontractor as a sort of cross between a labourer and a right-hand man - but, luckily, the builder has so much work on that he has taken my son on full time and is paying for him to do a foundation course for a degree. (He wants to move more into development rather than building and wants my son, in the future, to take much bigger role in the business).

And, being in the building game, he now has a wide network of contacts - roofers, brickies, tilers, sparks etc. etc. - and they're all busy. Not flat out (turning work down) but definitely with plenty of work on. Why, how and where the money is coming from baffles me - but there does seem to be a lot of money floating around in my area.

Whereas, when my wife was looking for a job (office - sales - admin - crappo stuff), she was finding that most jobs had over a 100 applicants.

Thanks for drawing up this scenario...

 

 

Happy or not, it may come.

 

Here's what I suggest, let the old banks crash and burn. (But give depositors 95-98% of their money back)

Set up new banks, with better management and more prudent lending policies.

 

Most people will be happy with a maximum of 50-60% LTV if house prices are cheap enough to start with.

 

"who is going to give them the 80k mortgage they now need to buy the 100k property."

 

Post crash, there will be plenty of cheap properties, and even a few surviving landlords, who can then rebuild.

The landlords should be maybe 50%LTV maximum, and FTBers maybe 60%LTV maximum.

 

The problem will not be: how can FTBers afford the properties, it will be who can the banks find to take the unwanted properties off their hands. The FTBers will set the prices, not the BTL kings or the vendors.

An FTB can't set the price if there is no-one around to lend money to him.

Thanks for drawing up this scenario...

 

Happy or not, it may come.

 

Here's what I suggest, let the old banks crash and burn. (But give depositors 95-98% of their money back)

Where would the money come from to give depositors their money back? With all the banks underwater to the tune of billions each - how could you let them crash and burn? Someone would have to take over the debts - and they would be in the same position. Loan book of 2x secured against assets of 1x. Still bankrupt and, most importantly, still unable to lend money.

House cost 200,000, person had 20,000 cash deposit. Person has loan of 180,000 with a LTV of 90%.

First, let's think about how many loans like this have been taken out over the last 10 years. Millions? And a lot of them were for 95%, 100% or, in some truly insane cases, 125%.

So, bank has lent 180k secured against an asset 'worth' 200k.

Now HPs crash 50%.

Suddenly bank has lent 180k secured against an asset now 'worth' 100k. The economy is in a tail spin because house prices are falling and people are not spending money and unemployment and repossessions stalk the land.

The bank repossesses a house originally valued at 200k and sells it at auction for 100k. Apart from the 80k loss (which it may take forever to recover from the repossessed mortgagee) - it now has to acknowledge that its entire loan book is underwater - perhaps by as much as an average of 25% (who knows?)

One thing is certain - the bank is now flouting all the capital adequacy rules and must rebuild its capital base. How would it do that? Who is going to buy bank shares in this situation? We've already had one banking crisis and bail out. I can't see people queuing up to buy bank shares in the next crisis.

Waiting in the wings, of course, are the priced out younger generation. But, in the situation above, who is going to give them the 80k mortgage they now need to buy the 100k property. The banks sure as hell won't have the money to lend.

Conclusion: a HPC of 50% would make everyone UNhappy!

The pathetic attempts to put a positive spin on the figures sums up this joke of a government perfectly. I wonder what the bovine excrement being fed to the masses in 12 months will be?

Would you prefer a government that said ....'Look chaps, the last lot made a right mess and let house prices get completely out of control. So we are going to do everything we can to get them back down again.'

Electoral suicide apart, what would the consequences be of a 50% fall in the price of property?

Well any repossessions would force banks to re-value the assets against which their loans are secured. Which would mean every bank and building society becoming technically insolvent. There would probably be bank runs as savers raced to get their money out and the banking system would collapse.

This didn't happen in the late 80s/early 90s because the amount of money lent into the property market then was a mere bagatelle compared to the amount lent to fuel this 10 year old bubble.

So, no banking system. How would the economy function without banks? The goverment would have to run a clearance system - to enable money to continue to be moved electronically - but, there wouldn't be any lending - the savers will have taken their toys home.

The present government's duty and intention is to get out the hole dug by the last government - without an economic crisis. Which is why what we are going to get is inflation and real terms reductions in house prices over a very extended period.