I agree with Doug. Situation in the UK today is somewhat different 
from the US, because of the steadfast refusal of planning authorities 
to allow adequate building to meet current needs, providing some 
support for inflated prices.  I still think that there's a bubble 
that is likely to burst. My opinion is re-enforced by the consensus 
of self-interested bank economists encouraging people to continue 
buying with the uniform assurance that anything more than tiny 
localised price falls are impossible. It's so very redolent of the 
tech analysts a few years ago.

Investment considerations are paramount in buyers' minds. There 
is a widespread mentality that prices will only go up - or at worst 
stabilise. People are buying the most expensive house they can instead 
of getting a basic pension, for example, because they are confident 
of ever-rising house prices.  It's a mentality that applies to people 
buying houses to live in as well as houses to rent out. 

The mortgage market is more competitive today, with mortgage 
brokers playing a much bigger role than in the 1990s. One result 
is that lenders are relatively relaxed about deposit levels, and 
about verification of income. Mortgage brokers and wannabe buyers 
then inflate their income on applications to buy property, in the 
hope that it will keep rising and that they will make money.  Many 
of these people will struggle if the boom stalls. Basle II capital 
accord means will encourage further liquidity into the market.  

Whereas only a few people can trade futures on the margin, banks 
are allowing the masses to gear up and speculate on property.

Another consequence of the mortgage market is that when people get 
into difficulty, they can re-mortgage over a longer period, or on 
an interest-only basis, quite easily. And people can easily sell 
their property, repay the lender and have some spare cash when 
prices are rising 20% a year.  So record lows in mortgage 
arrears and reposessions hide the real picture. If prices fall even 
a little, lenders will start to tighten up lending criteria, and 
will be more aggressive in pursuit of arrears. From a low base, 
arrears and reposessions are likely to rise significantly, which 
will affect confidence in the market and increase the number of 
forced sales. Then there could be a sentimental turn against the 
market.

I don't have the figures to hand, but if you look at income 
distribution and house price distribution in London then it seems
that very few people will ever be able to afford to buy houses. 
Most bank economists commenting on the housing market rely too much 
on average incomes, which are distorted by all the bankers and 
lawyers at the top. 

I'm putting my money where my mouth is.  I'm currently selling my 
apartment and moving to rented accommodation.  Anyone have any 
good tips for where to put my capital? :-)

--James

James Greenstein

--- Doug Henwood <dhenwood@panix.com> wrote:

From: Doug Henwood <dhenwood@panix.com>
Date: Fri, 28 Jan 2005 16:36:06 -0500
To: lbo-talk@lbo-talk.org
Subject: Re: [lbo-talk] housing bubble?

Jordan Hayes wrote:

>I said there was (typically) no margin call.  If you get stuck in a
>limit down futures contract, you can get wiped out in ways that are
>(again, typically) not possible with houses: you can't be forced to sell
>your house _just because it's value goes down_ ...

No, but if you've really stretched to buy the house on the joint 
assumptions that rates will stay low and prices will rise (and maybe 
that you'll keep your job) you may come to regret the decision.

And the negative wealth effect from declining house values could be 
strong, just as the positive wealth effect of rising house prices has 
been over the last several years. Britain in the early 1990s offers a 
precedent.

Doug
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