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


spunko
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50 minutes ago, Durabo said:

Any idea on timescales for this? I think previously you have said over the next decade or so? Are you expecting a slow grind down, a big event in the next year or two, or a combination of the two?
 

It’s likely already started in marginal areas.  This average house prices adjusted by RPI.   Real terms they’ve not touched the 2007 high, doubt they ever will. And last ten years, they’ve done almost nothing, inflation adjusted.

06-May-10    £227,692
07-May-15    £228,920
08-Jun-17    £247,980
01-Apr-19    £241,499

And that’s RPI, if inflation is running higher as many people here suggest.  They’ve likely been falling for some time now. 

Next few years, if we get inflation at 6/7 % with house prices static and doesn’t take many years for prices to have fallen by 50%

These are averages though, so locally, YMMV.  Some areas will obviously do worse than others.  
 

image.png.4ae7d8fb093a557324f2b8f42e313e73.png

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I'd agree with both of you I think - housing isn't really increasing by all that much, but neither are wages, so housing feels just as unobtainable as it ever did. Either wages need to increase, or house prices need to decrease at a faster pace to really feel the impact.

My worry is that the market has reached an equilibrium, with slow wage growth matching a slow grind down in house prices. I feel like something needs to give - increased interest rates, or increased supply - otherwise this slow grind down over a decade or so will be the reality, and people who have been priced out for years are doomed to buy into almost guaranteed negative equity.

I come here to learn, and I know many others have a much greater depth of knowledge on these matters, so I'd love further thoughts from people if anyone is willing!

Edited by Durabo
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1 hour ago, Durabo said:

Any idea on timescales for this? I think previously you have said over the next decade or so? Are you expecting a slow grind down, a big event in the next year or two, or a combination of the two?

I get into regular arguments with my parents about house buying - they just don't seem to get the difficulty of committing to a lifetime of debt. Articles like this by the So-Called BBC, which go through the relative cost of housing over the last few decades don't help as the idea that "houses only ever go up" is so engrained. Hopefully the old adage that the market hurts the most people will ring true in housing. I am seeing so many house flips and BTL buyers in my area at the moment, preventing people who actually want to use housing for a family, and it is boiling my blood. Not to mention the amount of people who believe it is their right to have kids, but forget about their responsibility to pay for the kids. The culture of having children despite not being financially equipped to pay for them is infuriating.

The fact that a huge crash, that I know will bring about a lot of pain, is the only solution I see to bring about the cultural change needed says it all. I don't want a crash, but I think a crash is less damaging than the continuation of all this bullshit.

I road map where i see liquidity driving assets (tight or loose policy,at the moment its very tight).I then do cross market work on factors that have affected prices over history.Then apply leads and lags depending on sector,and then add lots of other things like sentiment indicators etc (i use these for a contrarian affect,the worse the sentiment the better).

On housing everything points to big falls by 2027ish.However i dont know how those falls will happen,and i havent done any cross market work on them as i have no interest in house prices for themselves.Most of my effort went into PMs the last 18 months and UK cyclicals,and now is moving to reflation sectors.

However from a pure road map i would think we will see nominal falls of 15% to 30% then flat line as inflation starts to tick higher.The back end of the cycle might see inflation at 12% to 22% and house prices down that year.A lot depends on the scale of the printing to come.I would add,no scenario going forward from where we are is good for house prices in the UK.Iv said many times that the markets tend to hurt the most people possible.In the UK that would be housing,and so that is where most of the pain will be.

Young people signing up to HTB on expensive crap houses have made life changing mistakes IMO.

Edited by DurhamBorn
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35 minutes ago, feed said:

It’s likely already started in marginal areas.  This average house prices adjusted by RPI.   Real terms they’ve not touched the 2007 high, doubt they ever will. And last ten years, they’ve done almost nothing, inflation adjusted.

06-May-10    £227,692
07-May-15    £228,920
08-Jun-17    £247,980
01-Apr-19    £241,499

And that’s RPI, if inflation is running higher as many people here suggest.  They’ve likely been falling for some time now. 

Next few years, if we get inflation at 6/7 % with house prices static and doesn’t take many years for prices to have fallen by 50%

These are averages though, so locally, YMMV.  Some areas will obviously do worse than others.  
 

image.png.4ae7d8fb093a557324f2b8f42e313e73.png

In my home area of Co Durham they have been falling since 2003/4 inflation adjusted by a lot.Nominal they are at or just above 2003/4 prices.

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As always, thank you for the insight DB. Hopefully we see the 15/30% falls early on.

I agree on the HTB - I'm very worried for my brother who has just bought a new build with a 95% mortgage on an estate that isn't the best.

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12 minutes ago, Tdog said:

The chart is RPI adjusted, a chart with wages would be more apt. The price of houses in relation to phone apps is an irrelevance.

Wage inflation is what matters, not the govt rigged no. But if RPI was 7% then interest rates would spike and house prices would crash.

 

 

 

That’s affordability not a comparison on pricing.  
In ten years a £250k priced house may well still be priced at £250k and that’s going to represent a hell of a fall in value. Irrespective of wages.  

 
 

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7 minutes ago, TheNickos said:

I'm expecting double digit inflation to wipe out most of the gains but not soo much in terms of nominal falls but who knows. A few years of 10% pay rises wouldn't be sniffed at.

What makes you think that runaway inflation will be matched by wage increases?

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8 minutes ago, Tdog said:

Affordability is what matters, not a comparison to the rigged basket of goods.

Well ok, but that’s a different question.  I’m talking about valuing the asset, not how affordable it is.
And sure, things can fall in price and get less affordable, particularly if you’re getting paid in a currency that’s losing value.  
 

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Well, Mrs S has agreed (with quite a bit of enthusiasm) that we should put the house on the market and go into rented. We almost pulled this trigger when we moved at the beginning of last year but in the end bought a house that needed work. It's now been fully refurbished and, at the moment, we are in a decent marketplace in a growing city. However, our gut feeling is that our house 'value' is likely to be at a high point with only one direction of travel in the nearish future. We have a large chunk of equity and I would like this to be invested elsewhere, before we move and buy a house in Cumbria or Yorkshire. 

Interestingly. when speaking to an estate agent, he confirmed what we already knew. Hardly anyone is prepared to roll up their sleeves and buy a wreck or even a tatty house these days. Everyone seems to want shiny shiny and no DIY work. We sold our last house quite easily as it was in mint refurbished condition and hopefully the work carried out to the latest one will stand us in good stead again. The marketplace where we live is mental. Our city has 3 bed terraced houses down at £80,000 and 3 bed posh flats at £800,000 - £900,000! Anyone who buys at that top level must surely crash and burn. Even our house is far too expensive for most people.

The housing market has to be corrected at some point. As I've mentioned on dosbods before, we bought our first house in Nottingham in 1992. A very nice 3 bed edwardian semi bought for about £55,000 on a 95% mortgage based upon 2.5 x joint income with a £2,500 affordability gap dealt with by a parent acting as guarantor. Interest rates were around 8% I think. Therefore all sensibly affordable for a pair of young graduates (albeit with a bit of help from parents). That same calculation doesn't work anymore.

 

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1 hour ago, Durabo said:

As always, thank you for the insight DB. Hopefully we see the 15/30% falls early on.

I agree on the HTB - I'm very worried for my brother who has just bought a new build with a 95% mortgage on an estate that isn't the best.

Then why oh why ...didn't ya point him/send him a link to the BEST educational Thread on the entire interweb?

Right HERE!

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1 hour ago, BearyBear said:

The interesting part is that once bonds enter a bear market,then lending costs also go up for companies.Its the key part of the next cycle.Margins go to zero when everyone can borrow at zero to enter the market,hence dis-inflation like we have had.Once you need to pay 7% to borrow nobody enters the market because the companies already depreciating assets have far too much advantage.Inflation loving assets tend to take a long time to build/expand.Thats why in a reflation cycle prices can and do move quickly.Anyone can stick a new server in quickly,not everyone can build a telco network that connects 100 million people,mostly already depreciated.

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2 hours ago, Durabo said:

I'd agree with both of you I think - housing isn't really increasing by all that much, but neither are wages, so housing feels just as unobtainable as it ever did. Either wages need to increase, or house prices need to decrease at a faster pace to really feel the impact.

My worry is that the market has reached an equilibrium, with slow wage growth matching a slow grind down in house prices. I feel like something needs to give - increased interest rates, or increased supply - otherwise this slow grind down over a decade or so will be the reality, and people who have been priced out for years are doomed to buy into almost guaranteed negative equity.

I come here to learn, and I know many others have a much greater depth of knowledge on these matters, so I'd love further thoughts from people if anyone is willing!

The only way out of the mess the UK is in is wage growth in the private sector.

Inflation won work as the public sector spend and pension are index linked - although slightly less since the changes ~5 years ago.

Booting out the non citizen who are drawing benefits and using public services is the first step.

Youll see ~3m dwelling free up.

 

 

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2 hours ago, TheNickos said:

I'm expecting double digit inflation to wipe out most of the gains but not soo much in terms of nominal falls but who knows. A few years of 10% pay rises wouldn't be sniffed at.

I'm seeing plenty of nominal falls already, and unemployment hasn't even started ticking up yet into recession. What happens once it does? FWIW I'm seeing around 5% falls YOY for semi and detached homes in areas around the Midlands. Anything above 300k really struggling, on/off/relisted with another agent/sold stc/back on etc, although I'd say that's been a very recent development in the Midlands, past 3 months or so. Now schools are almost back and we head into Autumn I'm starting to see panic reductions of chain free homes. Remember many of the media numbers being heavily skewed by zombie families waltzing naively into new builds through deposit incentives.

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reformed nice guy

Here is a question that came up during an argument I had.

With the ongoing currency war, the goal that all of the central banks are aiming for is a weakening of their currency relative to others. Even Trump has tweeted about it.

Hasnt Brexit, by weakening our currency, achieved what the big brained economists in central banks have FAILED to achieve?

I dont think it is necessarily a good thing in the long term but hasnt Brexit done what Carney et al were trying to do and yet still they attack Brexit?

 

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29 minutes ago, Tdog said:

The only way is a  deep recession with lots of bankruptcies including banks and an epic house price crash.

But recessions aren't allowed anymore as central bankers know better.

You might both be right.

The 'purpose' of a recession is to re-balance an economy.  The current problem with the economy is that people have more call on wealth in the future (own assets including pensions) than they actually have offered in the past, present and future as labour.  This can be resolved through labour getting more worthwhile and/or 'saved calls on future labour' becoming worth less.

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1 hour ago, reformed nice guy said:

Here is a question that came up during an argument I had.

With the ongoing currency war, the goal that all of the central banks are aiming for is a weakening of their currency relative to others. Even Trump has tweeted about it.

Hasnt Brexit, by weakening our currency, achieved what the big brained economists in central banks have FAILED to achieve?

I dont think it is necessarily a good thing in the long term but hasnt Brexit done what Carney et al were trying to do and yet still they attack Brexit?

Thing is, we haven't even remotely "brexited" yet, weak £ driven by not knowing what the hell is going on until that point. Some say parity with the dollar is on the way, who knows? There's strategically manipulated currency weakness, and there's economic weakness/uncertainty driving currency weakness which is hugely volatile. Carney wants the 1st, but we've got the 2nd.

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