Credit deflation and the reflation cycle to come (part 2)

[Bricks & Mortar]

When labour is cheap and available, there's no incentive to change - either wages, or methods.

Meet Sam.  This guy, and others like him, could be coming here if labour rates rise and trade deals work out.
 

 

[Barnsey]

4 minutes ago, dgul said:

The problem is we still make houses like they did in 1900.  It is about time there was some proper innovation in the sector.

[I know, non-conventional construction / crappy fall-apart houses / etc -- the industry should just solve those problems.  To continue making houses (and other infrastructure) using labour-intensive methods is crazy]

No doubt prefab/modular will gain in popularity going forwards, but be careful what you wish for, better buy those beaten up Sainsburys shares before it's too late 

https://zedpods.com/sector/car-parks-new-revenue-streams/

[dgul]

13 minutes ago, Barnsey said:

No doubt prefab/modular will gain in popularity going forwards, but be careful what you wish for, better buy those beaten up Sainsburys shares before it's too late 

https://zedpods.com/sector/car-parks-new-revenue-streams/

The problem is non-conventional construction is mainly associated with crappy houses.  I'd have no problem living in a nice large steel framed house in a nice area with a big garden (for example).  

[Barnsey]

And yet...

 

[Napoleon Dynamite]

1 hour ago, Cattle Prod said:

What was the driver for those 70s pay increases? Unions? They have no power today. All I know is my employer with scream blue murder over a 1% increase, let alone inflation, currently.

Before my time too, but I think unions had a lot to do with it.  Government Policy to full employment too.  Productivity was high, so pay could be increased. 

5% inflation, leading to workers demanding a 7% payrise, leading to 8% inflation leading to workers demanding a 9% payrise.  Repeat adnauseum until productivity can no longer be improved at a sufficient rate.

This guy explains it well, watch for a minute or two from 15mins:

 

[dgul]

10 minutes ago, Cattle Prod said:

Agree the best time to buy is when you have to go cap in hand to the bank manager and beg him for a mortgage, as my Dad keeps reminding me.

That's a great line -- I'll remember that.

[Barnsey]

7 minutes ago, Cattle Prod said:

No worries! I've only had this burned in my brain because my Dad had to actually do this and keeps going on about it. As well as the interest rate. He misses the bit though where it got inflated away and basically turned out to be a free gaff

I remember my parents saying they had to walk up Union Street (Aberdeen) in it's entirety going into every single EA along the way, luckily the VERY last estate agent they went into gave them a mortgage after much hoop jumping.

[King Penda]

Well which is worst seeing your house drop in value by 40% but you have a 15 year fix at 2% or pay potentially 8-10% interest per year if rates shoot up em

[tio]

Dear Sirz,

I am interested in learning in how to pick up pennies in front of a steam roller, and by pennies I mean futures and by steam roller I mean you. BTFD because trust in spivs and maggots is forever. Amen.

https://www.newstatesman.com/life-and-society/2011/03/million-acres-land-ownership

[sancho panza]

6 hours ago, Cattle Prod said:

I hope those that have recenly bought Equinor gave enjoyed the last few days. For colour, here is a piece with some commercial information on Johan Sverdrup. When I said it is a dream field, I wasn't exxagerating as you can see!

https://www.energy-pedia.com/news/norway/equinor-accelerating-start-up-schedule-for-johan-sverdrup-177491

 

And 2 bucks a barrel opex holy moly, shows why the industry still keeps pumping at low oil prices (doesn't work for shale) And they got this developed during a very cheap capex window. It's planned to top out at 660,000 barrels a day, and produce for 40 years - cash machine.

Thanks for the insight CP.Wish I could say I foresaw this but I was jsut sprayin n prayin',caliming naything else would be a lie.

We started a weekly purchase plan last week that will last ten weeks or so.Having said that,with so many of the oilies/gas producers at or near 15 year lows,I'm tempted to reduce that

5 hours ago, Democorruptcy said:

Another thing to consider about share buy backs is that executives secure bonuses based on the performance of their shares. In the UK lots of companies have a share comparator group in their Annual Report. These are supposed to made up of similar firms by market cap, type business etc. The executives can get huge bonuses if the performance of their shares just beats the comparator group, not the market overall i.e. the more 'dogs' they put in their share comparator group, the more money they make. I haven't bothered for ages but I used to compare Annual Reports to see which 'dogs' kept cropping up the most. I always thought Next did well at putting 'dogs' in theirs, so when the dogs go down it's more bubbly in the Next boardroom.

Just had a quick look who Next compare their share performance with in 2018 (page 85)
 

 

Cheers for that DM,I was completely unaware of this.Got to laugh at who WOlfson is using for his pay day.....

4 hours ago, Cattle Prod said:

An important point to discuss I think. Houses are, to me, a long term inflation hedge, because along with the repairs you mention, the bricks and mortar ;-) themselves along with all the other building materials also inflate. I agree you have to maintain it, but if you can do this sensibly (like replace you boiler now while its cheap and make sure your roof and windows are tip top) it won't stay below replacement cost for long.

I'd say that interest rates dropping for the last 40 years are more responsible for house price rises in a low inflation environment than anything else.

Absent that crutch, I'd say house prices naturally inflate at the cost of the materials to build one (assuming land prices are more or less static). A few % a year. Thoughts?

Houses are an excellent inflation hedge if history is a decent guide.The only riders come from being able to be sure you either own outright or will be able to hold to term given that inflation can force IR's higher ahead of wages-which traditionally lag.

As ever,all the normal Shaun Ricards types warnings accompany regarding inflation calcs.

Hosue prices,like many markets are set at the margins,in this instance FTB's,second home owners etcWhat drives the prices of these new 'no chain' entrants is credit availability on the whole as most marginal purchasers are leveraged.What sets credit availability-risk weightings,capital ratios,banking rules and demand for debt.

I remember reading the excellent article by Steve Keen back in the say about how for many years,despite regulators thinking they controlled the banking system via the printing of reserves(during the era of cash reserve lending),there was a body of evidence that banks had been extending laons and then waiting for the CB's to catch up.

It's worth noting in terms of your last point I've put in bold,that if the banking system is in a deflationary stage then the price of most domestically produced things will be going down-input prices aside

The article is here but it's been years since I read it last

https://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/

4 hours ago, Barnsey said:

It's an interesting dilemma, I absolutely buy into the sideways theory after initial declines to come, losing their value in real terms just like the 1970s, but like you say, what's the timeframe? What happens to house prices at the end of the 2020's? What happens to rental prices until then?

The irony is that after commodities, REITs are the seen as the second (?) best inflation hedge, but i guess that's more the retail/commercial side?

Will we really not see wages keep up? Annual wage growth was above 10% for all of the 1970's, peaking at 29.4% (!) in 1975.

https://www.ons.gov.uk/economy/grossdomesticproductgdp/timeseries/kgq2/qna

It's also worth ntoing that that era coincided with a period of high immigration into the UK as labour was in short supply,automation hadn't really occured in many manufacturing companies and we weren't in the globalised economy we are now in.

I ahve my doubts we'll ever see that sort of wage inflation this side of free solar energy given how the worlds population has grown.

 

3 hours ago, UnconventionalWisdom said:

 

But, if we have the situation where credit has been so easy, there isn't correct price discovery. This pushes the price well above fair value as people are happy to extend themselves, or worst leverage up, the cycle become self-fulfilling  with people continuously bidding the prices up even further. Eventually, there is the realisation that theres not enough credit for future gains and people sell to ensure they get a sale. This leads to further declines as everyone is worried the prices will continue to decline. This reduces the available credit and leverage, leading to further price reductions. 

This could go on for years. Ultimately, if prices hadn't got so out of whack, I would expect them to increase as home materials increase.  

That's a super post UW.I read a Henry Pryor tweet the other day that the bank f Mum and Dad were effectively loaning thier kids the money so they could the prices they wanted for their hosues.

Our banking system has been in a virtuous circle of loan growth begetting asset growth begetting laon growth for two decades.At some point,bank bond holders will realsie they're the marks.

1 hour ago, Cattle Prod said:

I'd argue land prices are ultimately a function if demographics. They don't make any more of it, so increasing population puts price pressure on it. Decreasing population, which I think is coming to the UK (small families, reducting immigration) has the opposite effect (see Japan). And developers won't hoard land that is not appreciating. 

Static was a assumption to make my point, I agree it fluctuates. But I think prices will inch closer to cost of labour and materials with land inflating modestly.

I hope Im not repeating msyelf here but land prices are genereally a function of the loans extended to housebuilders.Over the years I've seen some plots drop 80% peak to trough.Apparently buidling land moves at 3 x the rate of change to residential hosue prices.But I don't have a link

I'm short hosuebuilders admittedly but I think that at some point it will become apparent that if the marginal buyers have left the field,then the hosue price might drop 20%,the building land 60% meaning those assets might not be worth what they thought.

[dgul]

Admittedly, this comes from ZH, but I found it interesting -- will it be true again this time...?

[JMD]

9 hours ago, Barnsey said:

I've got a huge amount of respect for him, and think he's ultimately right, but he's not great on detail and shorter term trends, he just keeps shouting about the eventual outcome. So yes, broken clock but ultimately right in the end. I'd possibly be able to take him more seriously if he wasn't in the gold business, but much of what he says is bang on. This is by far my favourite speech of his from 2006 just as US house prices started to tip downward, makes for great viewing and demonstrates his foresight, the guy has balls trolling 2000 mortgage bankers in the audience. The meaty housing stuff starts around the 28:00 mark:

 

Yes to be clear, i've been aware of him since his 'i'm the 1% talk to me' placard waving days, as you say he has balls. My clumsy stopped clock analogy about him was meant to convey, similar to the said stopped clock being correct only every 12 hours, perhaps in Schiff's case - but for him 12 years on - he is due his next prediction hit. 

[JMD]

19 minutes ago, Tdog said:

But its been a development land price bubble, development land prices have a long way to fall.

I agree but like most so-called free markets, the market for building land is heavily skewered/manipulated by the large home builders. Most building plots - more accurately building 'estates' - are owned, land-banked and 'rationed/drip-fed' onto the market, by the large house builders. In terms of business model, house builders are really land speculators. Its just that developers achieve highest return by obtaining planning consent for houses, if they could get more profit by building duck ponds, they would happily switch to squeezing 40 ponds per acre instead.

Perhaps government should begin reforming things by incentivising councils to plan their own local housing needs by working with not-for-profit companies to buy and release serviced plots to small builders / self-builders. Such schemes are common across Europe for people who want to own, although home ownership is generally lower in Europe, with for example, 25% of all Austrians living in social housing - of all different types, qualities, price ranges, etc. So its possible to do things differently, and moreover with less lending available to individuals in future perhaps this will become more the norm here in UK.    

[Castlevania]

8 hours ago, Cattle Prod said:

No worries! I've only had this burned in my brain because my Dad had to actually do this and keeps going on about it. As well as the interest rate. He misses the bit though where it got inflated away and basically turned out to be a free gaff

Yeah my old man tells me the same thing. You had to open a savings account with a building society, and show you could regularly save for 6-12 months before they’d even consider offering you a mortgage. He bought a house in the inflationary 70’s; took in two lodgers and did as much overtime as he could (he lived two streets away from his work so his commute was a few minutes each way which probably helped) and he paid off the mortgage in less than 4 years.

[MrXxxx]

18 hours ago, sancho panza said:

essence HM Treasury has wanted to scrap the RPI because it is expensive in terms of the interest paid on UK index linked Gilts and for various pensions. Of course those making such decisions often benefit from RPI linked pensions it is for others and particularly younger readers that they want it to go.

Even more reason to take a pension early if you can...ok, you may have to pay a penalty but this will be offset by pension increase for inflation (the change from RPI to CPI), especially as we move towards a high inflation economy.

[Bobthebuilder]

8 hours ago, stokiescum said:

Well which is worst seeing your house drop in value by 40% but you have a 15 year fix at 2% or pay potentially 8-10% interest per year if rates shoot up em

Good point, quick back of a fag packet calculations says the fix is better. Maybe someone more maths able can do the sums?

[Durabo]

200k at 2% for 15 years - £1285 a month, £231363 payable over the term.

120k (200k - 40%) at 10% for 15 years - £1285 a month, £226452 over the term

So the cheaper property at 10% saves you £4911

120k at 8% for 15 years - £1127 a month, £202945 over the term - a saving of £28418.

So it looks like a cheaper house at a higher interest rate is better - and this doesn't even factor in the size of the depost that you would need. Plus, if you already have a decent wedge of capital you could likely have a smaller mortgage - for example, a 25k depost makes a much bigger different to the length of the term you could go for at 120k compared to 200k. So I think the cheaper house at a lower rate is much more preferable, although a 40% drop is pretty chunky.

At 20%

160k at 10% for 15 years - £1677 a month, £301936 payable over the term - a chunky increase.

I use this website - https://www.thesalarycalculator.co.uk/mortgages.php - if anyone wants to play with the figures themselves. They have great salary/loan calculators too.

[dgul]

27 minutes ago, Durabo said:

200k at 2% for 15 years - £1285 a month, £231363 payable over the term.

120k (200k - 40%) at 10% for 15 years - £1285 a month, £226452 over the term

So the cheaper property at 10% saves you £4911

120k at 8% for 15 years - £1127 a month, £202945 over the term - a saving of £28418.

So it looks like a cheaper house at a higher interest rate is better - and this doesn't even factor in the size of the depost that you would need. Plus, if you already have a decent wedge of capital you could likely have a smaller mortgage - for example, a 25k depost makes a much bigger different to the length of the term you could go for at 120k compared to 200k. So I think the cheaper house at a lower rate is much more preferable, although a 40% drop is pretty chunky.

At 20%

160k at 10% for 15 years - £1677 a month, £301936 payable over the term - a chunky increase.

I use this website - https://www.thesalarycalculator.co.uk/mortgages.php - if anyone wants to play with the figures themselves. They have great salary/loan calculators too.

Your numbers are wrong (or, you're looking at it the wrong way).

The way it works out is, a given type of person, typical to buy that particular house, has £1,285 a month available.  As interest rates rise the price they can afford goes down so that £1285 stays as the monthly payment.  If you use the 'static' approach you've shown then there's never actually difference between the sums for any purchase.

But that is never the case -- the interesting factor is then 'ah, but what then?'.  Interest rates can go up and down, but are more likely to go down if they start high, and lower interest rates give more money to spend elsewhere once the house has actually been bought.  Also, the higher interest rate case is often associated with high inflation, in which case there's often higher wage increases, which again give more money to spend elsewhere given a static debt level (the house has already been bought).

I'd also note that the impact of deposit is different for the different cases -- the deposit starts to have a significant effect as interest rates go up (even if considering the 'value of money' of your deposit hanging around for the time before buying).

But there's also another factor -- the first guy has actually got a house, while the second (lower price, higher interest) hasn't.  Actually having a house might result in other savings, or may have lifestyle implications (children, no landlord headaches).

Finally, I think most could see that the worst situation is to buy at low interest rates with a variable loan --- the situation many seem to want to be in, for some reason.

[Barnsey]

1 hour ago, dgul said:

Your numbers are wrong (or, you're looking at it the wrong way).

The way it works out is, a given type of person, typical to buy that particular house, has £1,285 a month available.  As interest rates rise the price they can afford goes down so that £1285 stays as the monthly payment.  If you use the 'static' approach you've shown then there's never actually difference between the sums for any purchase.

But that is never the case -- the interesting factor is then 'ah, but what then?'.  Interest rates can go up and down, but are more likely to go down if they start high, and lower interest rates give more money to spend elsewhere once the house has actually been bought.  Also, the higher interest rate case is often associated with high inflation, in which case there's often higher wage increases, which again give more money to spend elsewhere given a static debt level (the house has already been bought).

I'd also note that the impact of deposit is different for the different cases -- the deposit starts to have a significant effect as interest rates go up (even if considering the 'value of money' of your deposit hanging around for the time before buying).

But there's also another factor -- the first guy has actually got a house, while the second (lower price, higher interest) hasn't.  Actually having a house might result in other savings, or may have lifestyle implications (children, no landlord headaches).

Finally, I think most could see that the worst situation is to buy at low interest rates with a variable loan --- the situation many seem to want to be in, for some reason.

Safe to say @dgul that there are just far too many variables which lead to a very personal choice to make, including timescale. Your last point is key, longer term fixes do seem more popular at the moment because folks are expecting 3% inflation.

When we have a deflationary bust next year and rates head to 0 pretty darn quickly, and funding for lending blasts off again (lesson learned with dithering after the last recession, Brexit contingency planning will greatly aid velocity and efficiency), many will fall into the trap of thinking low rates are here to stay, and will no doubt revert to variable/tracker mortgages. It's in this window of opportunity I intend to secure a long term (10-15 year) fix hopefully at a rate of around 1.5%.

Current best rates for 65% LTV first time buyer fixed mortgages - 5 yrs = 1.64%, 7yrs = 2.25%, 10yrs = 2.34%, 15 yrs = 2.79%

On a £200k house over 15 years, currently about £70 a month difference between 5 and 15 year fix.

[Durabo]

2 hours ago, dgul said:

Your numbers are wrong (or, you're looking at it the wrong way).

The way it works out is, a given type of person, typical to buy that particular house, has £1,285 a month available.  As interest rates rise the price they can afford goes down so that £1285 stays as the monthly payment.  If you use the 'static' approach you've shown then there's never actually difference between the sums for any purchase.

But that is never the case -- the interesting factor is then 'ah, but what then?'.  Interest rates can go up and down, but are more likely to go down if they start high, and lower interest rates give more money to spend elsewhere once the house has actually been bought.  Also, the higher interest rate case is often associated with high inflation, in which case there's often higher wage increases, which again give more money to spend elsewhere given a static debt level (the house has already been bought).

I'd also note that the impact of deposit is different for the different cases -- the deposit starts to have a significant effect as interest rates go up (even if considering the 'value of money' of your deposit hanging around for the time before buying).

But there's also another factor -- the first guy has actually got a house, while the second (lower price, higher interest) hasn't.  Actually having a house might result in other savings, or may have lifestyle implications (children, no landlord headaches).

Finally, I think most could see that the worst situation is to buy at low interest rates with a variable loan --- the situation many seem to want to be in, for some reason.

The numbers are correct - it's basic maths! Stokie asked for a breakdown of buying a house on a 15 year fixed at different interest rates/discount levels and I provided that. Keep in mind these numbers represent a 15 year fix so interest rate movements during that time aren't really relevant to the calculations. Admittedly, I'm not sure how to model in the impact of inflation during that period.

I completely agree that wider economic/personal considerations can impact the overall situations, and I did mention the impact of the deposit. We could alter the variables until the cows come home, but I think what I provided is a good illustration considering the question asked.

Sorry - just re-read this and I don't want to come across as a pretentious cunt. Just making the point that the numbers I gave answered Stokies question, but I completely agree that you could war game the shit out of it and change the numbers based on loads of different factors.

[Barnsey]

BREAKING NEWS!!!

BoE researchers discover that their own policy has caused the housing bubble (along with the last one)

Quote

We find that the rise in real house prices since 2000 can be explained almost entirely by lower interest rates. Increasing scarcity of housing, evidenced by real rental prices and their expected growth, has played a negligible role at the national level.

https://bankunderground.co.uk/2019/09/06/houses-are-assets-not-goods-taking-the-theory-to-the-uk-data/

[dgul]

45 minutes ago, Durabo said:

The numbers are correct - it's basic maths! Stokie asked for a breakdown of buying a house on a 15 year fixed at different interest rates/discount levels and I provided that. Keep in mind these numbers represent a 15 year fix so interest rate movements during that time aren't really relevant to the calculations. Admittedly, I'm not sure how to model in the impact of inflation during that period.

I completely agree that wider economic/personal considerations can impact the overall situations, and I did mention the impact of the deposit. We could alter the variables until the cows come home, but I think what I provided is a good illustration considering the question asked.

Sorry - just re-read this and I don't want to come across as a pretentious cunt. Just making the point that the numbers I gave answered Stokies question, but I completely agree that you could war game the shit out of it and change the numbers based on loads of different factors.

But the prices won't hit those points -- the interest rates and price reduction points are just made up, albeit they're about right.  My point is that If you've just about got a £1285 a month spend and you're in the %age of the population that gets that size of house, then the house will always cost £1285 -- the price and interest rates will compensate exactly.  If you can afford more because interest rates are a bit low, then the house price will just go up so that your demographic group in that geographical location can only just buy it again.

I'd absolutely accept that there's interesting stuff to see, particularly downstream from the buying decision, but at the point of purchase the interest rates absolute compensate for price changes.

[kibuc]

Whoops, reality check for markets living in Chinese deal la-la-land. 

Private payrolls 96k vs 150k forecast, last month revised down from 156k to 131k.

All nonfarm 130k vs 160k forecast, including 25k temporary hires for a decennial Census. 

 

[Durabo]

1 hour ago, dgul said:

But the prices won't hit those points -- the interest rates and price reduction points are just made up, albeit they're about right.  My point is that If you've just about got a £1285 a month spend and you're in the %age of the population that gets that size of house, then the house will always cost £1285 -- the price and interest rates will compensate exactly.  If you can afford more because interest rates are a bit low, then the house price will just go up so that your demographic group in that geographical location can only just buy it again.

I'd absolutely accept that there's interesting stuff to see, particularly downstream from the buying decision, but at the point of purchase the interest rates absolute compensate for price changes.

Thank you for the perspective. I know that when you want something badly (a huge house price crash in my case) it's easy to ignore data to the contrary and intepret every piece of data as pointing towards what you want. One of the great things about this thread is how epople will introduce those counterpoints calmly, logically and with data to back it up so you can hopefully be a little more unbiased in your assesment.

[Loki]

I'm thinking of topping up my National Grid holdings as the dividend is healthy and it's a reflation share.  Currently only down 8% from original purchase, so fits in with durhamborn's ladder strategy.  Any thoughts?