Housing Bubble Bursting

Dalfiatach

nesf wrote: »

And we're going to return to the interest rate regime of the 80s?

Why not?

All the ducks are lining up and the global financial picture is starting to look like a repeat of stagflation. Let me explain.

Interest rates were moderate in the 90s. This was due to a number of factors, most importantly in no particular order:

The deflationary impact of vast amounts of cheap Chinese goods
The demand-reduction (deflationary) impact in Germany of the costs of Unification
The Great Japanese Deflation
Low food prices
The taming of the stagflation of the 70s and 80s
And in Ireland, the preparations for EMU tying ourselves to German rates

This environment created an asset bubble in stocks, tech stocks particularly. This burst in 2000. In order to prevent the bubble-burst from destabilising the US economy, Greenspan dropped US rates to near-zero and the ECB was panicked into following them down. This then led to a vast liquidity splurge, as the huge amounts of liquidity already emanating from Japan China and Germany was joined by Western banks going nuts on lending (and the whole CDO carry-on). This liquidity had to find a home, and created a global asset boom primarily in property but also in stocks.

It is now 2007, and every single one of the macro factors feeding liquidity and deflation into the global system has come to an end. Germany has recovered, Japan has stabilised, Chinese factory prices are rising, food prices are soaring, and we've had 2 years of tightening on interest rates to somewhere just below neutral levels. Liquidity is being destroyed in the derivatives markets and asset bubbles are deflating. Inflation risks are on the upside, everywhere. Welcome to the credit crunch.

IMO interest rates are nowhere near a peak. The US is facing a stark choice of deflation or stagflation, and my bet is that Helicopter Ben will chose the stagflation route. The ECB, dominated by the Germans, would rather opt for mild deflation. The Bank of Japan is finally starting to realise that in the modern globalised world of finance a ZIRP policy is ineffective and actively feeds deflation, via the Yen carry trade.

We'll never see 2% ECB rates in our lifetimes ever again.

You can forget about private sector wage inflation in Ireland over the next few years. It's belt-tightening time all round, folks. Get used to it.

And even if the ECB hold rates around the 4-5% mark, the banks will have no choice but to severely restrict the availability of credit. In terms of the property market, over the next 18 months we will see minimum deposit requirements, maximum income ratios, shorter maximum mortgage terms and especially huge curbs on BTL lending re-emerging.

Doesn't matter a damn what you paid for your house in 2005 if in 2009 banks will only lend 90% value, 3X combined salary, over 25 years, on a repayment basis, to the next generation of FTBs. Prices are set at the margin in any market.

This bubble has a long long way to fall yet.

nesf

Victor wrote: »

And we're going to return to the interest rate regime of the early 00s?

Hopefully not.

Dalfiatach wrote: »

Why not?

You've given me plenty of reasons why our interests rates will go up (or at least not go down) and plenty about a credit crunch. Neither equals a return to the same conditions as the 80s for the market.

I'm not arguing that we'll go back to a 2% ECB base rate and the market will take off again, or even stabilise in real terms any time soon, I'm saying that blandly gesturing to historical data and saying that's where we're headed or where we should be is open to reasonable debate.

daveirl

This post has been deleted.

Dalfiatach

nesf wrote: »

You've given me plenty of reasons why our interests rates will go up (or at least not go down) and plenty about a credit crunch. Neither equals a return to the same conditions as the 80s for the market.

I'm not arguing that we'll go back to a 2% ECB base rate and the market will take off again, or even stabilise in real terms any time soon, I'm saying that blandly gesturing to historical data and saying that's where we're headed or where we should be is open to reasonable debate.

Every property bubble in history has done exactly that, returned to historical means. And in Ireland, for decades, 4X income was the way it was. 8-9% gross yields was the way it was. And that's where it'll go back to. Every bubble everywhere does that.

The process will be helped along by the interest rate rises and general credit crunch, but quite simply our house prices are insanely high by any rational measure. The numbers just don't stack up. It's a speculative bubble, plain and simple.

People can't afford their mortgages now FFS. How exactly do you expect house prices to remain at anywhere near current levels when the process of withdrawing easy credit and tightening mortgage terms has already started?

There's just no point expecting a house to fetch €400K when no bank in the land will lend more than €250K to the average earning couple.

Banking practices in the last 6 years were a blip, a once-in-a-lifetime never-to-be-repeated event. Remove the access to huge (unpayable) loans and house prices inevitably drop - hard. Even if interest rates stay at current levels and employment levels (and incomes) stay steady, house prices will fall, and fall a long way, because jumbo mortgages simply will not be available any more.

It's all about access to easy credit.

miju

theres no way ECB rates are going to hit any where remotely near the interest rates of the 80s simply because of the nature of the supposed i size fits all interest rate. at the uppermost you'd see would be about 7% IMHO but it's not even going to get near that

daveirl

This post has been deleted.

Pa ElGrande

Dalfiatach wrote: »

It's all about access to easy credit.

That's exactly it, if we see 2% interest rates again in the near future, it will be because we are in a full economic depression.

The Credit Cycle Peaks
Dr. William R. Swagell
November 5, 2007

To get some idea of the extent of the “lending bubble” that has developed over recent decades let’s compare it to two previous notable credit expansions. In the 1890’s the ratio of credit growth to Gross Domestic Product jumped from 25% to almost 75% of GDP. While in the Roaring Twenties the best the credit cycle could manage was to approach 50% of GDP.

These figures are totally overshadowed by the present credit expansion which has occurred in the world’s leading fifteen industrialized countries. Credit has leapt from 25% of GDP in the mid-1960’s, to around 60% of GDP in the mid-1970’s, to a staggering 135% of GDP in 2007 (Australia has the dubious distinction of being top of the group at more than 150% of GDP).

A credit expansion of this length and magnitude is unprecedented. Moreover, of greater concern this time around is the disturbing fact that unlike in the past (where business borrowing accounted for the lion’s share of the credit growth), 85% of the rise in credit ratio to GDP over the past fifteen years has been in household credit accounts.

What is different this time is that the financial deregulation which began in the 1980’s has increased the ability to borrow and coaxed households away from a situation of being very lowly geared and owning much of their assets outright, to the current situation where many are cash poor and reliant on inflated property and equity prices and low interest rates to carry the extra debt. Such a household balance sheet is a gamble and a disaster waiting to happen should the world economy suddenly turn down into recession and financial shocks cause asset prices to fall or interest rates to rise.

And we all know that the two previous credit expansions ended very badly indeed. They ended in the devastating global depressions of the 1890s and 1930s that saw property and equity prices decimated and unemployment soar to thirty per cent in some regions.
<snip>
Paulson has corralled together some of the financial industry’s largest players to form a rescue fund, the Master Liquidity Enhancement Conduit, consisting mainly of Citigroup (the most exposed to toxic Structured Investment Vehicles), JPMorgan and Bank of America…”to establish a $100 billion fund to provide liquidity to those of their brethren caught off-guard by the market’s reluctance to trade in certain types of asset-backed securities.”

Seems the idea is to buy up and quarantine all the toxic-debt SIVs, ABCP, CDOs, etc that no one wants and hide them away in the hope that they can be off-loaded quietly later on. The banks want to avoid at all cost having to try to liquidate these “assets” in today’s tough environment as this would further crunch prices down and force institutions to mark down their value on balance sheets.

SimpleSam06

Dalfiatach wrote: »

3X combined salary

I'd be amazed if the banks continue to use combined salary as a measure of repayment ability as well. The use of two incomes to cover mortgages is a relatively recent development, historically banks would have refused that, and for good reasons. These include the chances of one partner losing their job, the chances of one partner getting sick, marital difficulties, children being born (!), the list goes on and on. At best we'll see much increased interest rates for couples to cover the increased risk involved in long terms loans.

iguana

Victor wrote: »

Property tax. It would shove up the outgoings on property and people's repayment abilities would drop, reducing what the banks will loan, reducing the prices paid to sellers. It should have been introduced 5 years ago when interest rates headed for 2%.

I meant how could they stop the bubble from deflating. There were a number of things they could have done to stop prices going up, but eventually they will come down and if they allowed it to go up they become powerless to stop prices reducing.

Kipperhell

SimpleSam06 wrote: »

I'd be amazed if the banks continue to use combined salary as a measure of repayment ability as well. The use of two incomes to cover mortgages is a relatively recent development, historically banks would have refused that, and for good reasons. These include the chances of one partner losing their job, the chances of one partner getting sick, marital difficulties, children being born (!), the list goes on and on. At best we'll see much increased interest rates for couples to cover the increased risk involved in long terms loans.

That has got to be the strangest logic I have heard in a long time.
Society changed so it is common for a double working couple. Relatively recent doesn't come into it as it is here now. All the reasons bar having a child were and are much worse for single income families as if the main income earner no longer has an income.
As for children being born people manage and have been in other countries for years. Marriages break up but how that is so radically different on your mortgage with two wages is a mystery to me.
As home ownership is so high here I would say that is the thing that will change. Property could easily become a long term investment again while less people buy.

faceman

SimpleSam06 wrote: »

I'd be amazed if the banks continue to use combined salary as a measure of repayment ability as well. The use of two incomes to cover mortgages is a relatively recent development, historically banks would have refused that, and for good reasons. These include the chances of one partner losing their job, the chances of one partner getting sick, marital difficulties, children being born (!), the list goes on and on. At best we'll see much increased interest rates for couples to cover the increased risk involved in long terms loans.

in the past, only one partner in the relationship would be working as the wife would be a hosuewife. Considerably more risk when you consider that if hte hubby loses his/her job, there is no income in the household.

gurramok

faceman wrote: »

in the past, only one partner in the relationship would be working as the wife would be a hosuewife. Considerably more risk when you consider that if hte hubby loses his/her job, there is no income in the household.

Risk depends on how much they are exposed to servicing that debt.

Speaking of risk, just look at what happens when a partner is laid off, it ain't pleasant for home finances: http://www.askaboutmoney.com/showthread.php?t=67042

If its an extreme situation or more common down the line, we just don't know.

PS - welcome back

ambro25

gurramok wrote:

Speaking of risk, just look at what happens when a partner is laid off, it ain't pleasant for home finances

Well, they still got 2 incomes, so really can't see why they're crying in their soup - only as they now come to realise that they should live within their means and not beyond.

If you want an example of home painful finance and sleepless nights, you want to try both partners laid off at same time, with a kid on the way (;))

faceman

gurramok wrote: »

Risk depends on how much they are exposed to servicing that debt.

Speaking of risk, just look at what happens when a partner is laid off, it ain't pleasant for home finances: http://www.askaboutmoney.com/showthread.php?t=67042

If its an extreme situation or more common down the line, we just don't know.

PS - welcome back

Thanks Gurramok!

Correct, risk depends on exposure. The examples cited is extreme. They were in debt upto their eyes. 31k for 2 cars, 20k credit union loan, and couple of thousand on their credit card. in all fairness, WTF!?!? seems to be big spenders, possibly reckless altho its hard to say without knowing the full facts. Short term they need to downgrade their cars and possibly sell one. also consolidated loan may give them breathing space in the short term. They seem to be currently living beyond their means. We dont know if the mortgage was given to them prior to them bein givin the car and CU loans but i suspect it was.

Do-more

faceman wrote: »

The examples cited is extreme. They were in debt upto their eyes. 31k for 2 cars, 20k credit union loan, and couple of thousand on their credit card. in all fairness, WTF!?!? seems to be big spenders, possibly reckless altho its hard to say without knowing the full facts.

Probably not the most extreme at all and far from unusual. There does seem to be a section of our society who believe they are just not living unless they are living beyond their means!

I could certainly point you to people living in new 3-bed semis with a '06 or '07 Range Rover or BMW X5 in the drive all on credit.

I filled out an opinion poll the other day (probably comissioned by one of the banks) and one telling question was along the lines of "are Irish people more obsessed with the trappings of wealth rather than actually accumulating wealth?"

For many who have been living at the extent of, or beyond their means the next year is going find more and more of them in a similar position to "cashless1"

faceman

Do-more wrote: »

Probably not the most extreme at all and far from unusual. There does seem to be a section of our society who believe they are just not living unless they are living beyond their means!

I could certainly point you to people living in new 3-bed semis with a '06 or '07 Range Rover or BMW X5 in the drive all on credit.

I filled out an opinion poll the other day (probably comissioned by one of the banks) and one telling question was along the lines of "are Irish people more obsessed with the trappings of wealth rather than actually accumulating wealth?"

For many who have been living at the extent of, or beyond their means the next year is going find more and more of them in a similar position to "cashless1"

i would like to see some figures around that. No im not being smart here, but we often here the argument about people living beyond their means, but we have yet to see stats.

Re repossesions: This was posted many moons ago but i was involved in some debate with some of you on home repossessions in ireland. I finally managed to get some figures behind it and i was surprised at the numbers. plus its on the increase. I can post details if anyone is interested.

ambro25

faceman wrote:

(...) we often here the argument about people living beyond their means, but we have yet to see stats.

Re repossesions: (...) I finally managed to get some figures behind it and i was surprised at the numbers. plus its on the increase.

Do your figures/numbers accord with the supposition that one may well be a symptom of the other?

getfit

I would like to see the repo numbers please.

Do-more

faceman wrote: »

i would like to see some figures around that.

CSO figures would have us believe that 70% of the population are living beyond their means! But that's such a wild figure that you would have to question the basis on which it has been calculated.

Regarding the figures on repossesions please do post them. If you scan back about 5 pages you will find there has been some discussion on the subject again lately.

ambro25

What I'd be interested in finding out, is the proportion of people who actually believe they are "home owners" (and assume their net worth accordingly) and not just "home buyers" until such time as their mortgage is repaid in full :cool:

faceman

no probs, i will get the repo figs and post them later on

ambro25 wrote: »

Do your figures/numbers accord with the supposition that one may well be a symptom of the other?

the volume of repo's may be higher than i expected but not high enough to call it an epidemic!

I remember the days when tellys were repo'd. Nowadays its just gaffs and cars! ahhhh those were the days! not!

ambro25

faceman wrote:

the volume of repo's may be higher than i expected but not high enough to call it an epidemic!

Ah well, there was never any question of it being an epidemic, now, was there?

Because if it was an epidemic, then it would most definitely be a crash and that would be the end of the enjoyable semantics playfights in here...

nesf

ambro25 wrote: »

Because if it was an epidemic, then it would most definitely be a crash and that would be the end of the enjoyable semantics playfights in here...

lol

gsxr1

I am a carpenter and will probably be out of work after Christmas.

Unless people start buying houses.

Our company has 7 houses sitting vacant for the last 3 months.

this time 18 months ago there was a line of people camping out side the site for 3 frosty nights to get one.
the boss held back 7. bad move.


so the morel of my story is.

go out and buy a house .

if construction stops, the knock on effect will reach everyone

SkepticOne

House prices need to come down dramatically in price before people start buying. Builders need to cut their prices by 30% or more immediately (they will have to eventually) and give up these "incentives" that everyone sees through. Then and only then will people start buying houses again.

The_Conductor

SkepticOne wrote:

House prices need to come down dramatically in price before people start buying. Builders need to cut their prices by 30% or more immediately (they will have to eventually) and give up these "incentives" that everyone sees through. Then and only then will people start buying houses again.

By my reckoning- prices will have to fall by in excess of 50% just to get back to historic norms (historic norms defined as 5 times the average industrial wage). The entire business model of the building trade has to be rethought. The average carpenter or electrician over the past 3 years had a take home pay greater than a GP? (CSO figures)

miju

gsxr1 wrote: »

I am a carpenter and will probably be out of work after Christmas.

feel for you man I really do but chin up theres plenty of work out there in house modifications. my best mate is an apprentice carpent working with his brother who is a well qaulified carpenter. He is currently making an absolute killing doing attic conversions / decking and so on.

might be something you wanna look into

gsxr1 wrote: »

so the morel of my story is.

go out and buy a house .

if construction stops, the knock on effect will reach everyone

No the moral of the story is that your company were being out and out greedy ****ers by holding onto the houses and as a result have now been stung with 7 unsold houses.

If / When construction stops the economy will still tick over (as can be seen now) just wont be anywhere near as bouyant. Builders made a fortune during the boom and now are resorted "buy a house support your country" type comments :rolleyes:

whats good for the goose etc

miju

smccarrick wrote: »

The entire business model of the building trade has to be rethought. The average carpenter or electrician over the past 3 years had a take home pay greater than a GP? (CSO figures)

more demand than supply caused this (the irony is not lost on me). in hindsight though isn't it crazy to think a brickie , chippy or a spark were earning more than doctors

Firetrap

gsxr1 wrote: »

I am a carpenter and will probably be out of work after Christmas.

Unless people start buying houses.

Our company has 7 houses sitting vacant for the last 3 months.

this time 18 months ago there was a line of people camping out side the site for 3 frosty nights to get one.
the boss held back 7. bad move.


so the morel of my story is.

go out and buy a house .

if construction stops, the knock on effect will reach everyone

That's a nice simplistic way of looking at things. Your boss got too greedy and held out on selling the last 7 houses, hoping to make an even bigger buck because he thought their value would continue to rise.

On the other hand, there are people out there (including yours truly) who would love to buy a house but can't afford to because they've got too darned expensive. I laugh when I hear all this nonsense about "affordability". I'm not going to go out and put myself to the pin of my collar for many years just because builders are desperate and want to keep the thing going. I'm more than happy to sit back and watch house prices fall some more before I commit to buying. If your company dropped the prices of those vacant houses, they might have some luck in shifting them. They'll have to drop a lot before ye make a loss on them.

faceman

SkepticOne wrote: »

House prices need to come down dramatically in price before people start buying. Builders need to cut their prices by 30% or more immediately (they will have to eventually) and give up these "incentives" that everyone sees through. Then and only then will people start buying houses again.

I cant believe you still throw that 30% amount out there after all this time! Didnt you say the same last year when prices were 20% higher? Where do you get the 30% from????

Regard the repossessions figures i promised.
2001 - 25 homes repossessed
2006 - 50 homes

Might now sound crazy but its the applications for repossesion this year that are more worrying:
1 day alone in the last week of October of this year saw a court received 17 new repossession applications. Thats one court.
In september in one day's sitting relating to repossessions (heard in the high court), over a 2 hour period, 45 cases were put forward!

Unfortunately i dont have the stats yet and successful repossessions so far this year nor do i have the stats on applications in previous years but its food for thought.