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Why (the state) bailing out housing market is a bad idea..mcwilliams indo article
- Thread starter Jethro Tull
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S
Senna
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Re: Why bailing out housing market is a very bad idea
House prices may have been low, but where's the evidence (source) they were undervalued? Value and price are two completely different things.
so if a 'not a economic genius' like DMcW was saying their going to drop but every other economist was predicting continued growth, what does that make the other economists? VI backed, or maybe just Morons perhaps??
And dont think i'm talking about 1999, in 2005 there was no predictions correct, except guess who....
if so many people knew, and all the economists were telling us, then why did so many people buy in 2005/6/7?
The reason, all the VI's were ripping the **** out of it and wanted the gravy train to never stop, if that meant shafting the general public with miss-information, so be it.
House prices may have been low, but where's the evidence (source) they were undervalued? Value and price are two completely different things.
so if a 'not a economic genius' like DMcW was saying their going to drop but every other economist was predicting continued growth, what does that make the other economists? VI backed, or maybe just Morons perhaps??
And dont think i'm talking about 1999, in 2005 there was no predictions correct, except guess who....
if so many people knew, and all the economists were telling us, then why did so many people buy in 2005/6/7?
The reason, all the VI's were ripping the **** out of it and wanted the gravy train to never stop, if that meant shafting the general public with miss-information, so be it.
Re: Why bailing out housing market is a very bad idea
the 2 examples - the first in the list off daft (dublin city centre) are the same property, one you can buy for 3,150 per month, the other you can rent for 2,300 per month
so rents would need to increase by 36% for a person to consider buying this property instead of renting it - how do you see that happening with such a glut of similar properties on the market? This sample shows that it is not worth an investor investing in it and, so financially renting is much better instead then buying. Can you see rents increasing this much in 1 year . 2 years etc, i think not - this property is also 19 times the average industrial wage - Prices have a long way to fall before the reach normality. Even your massive infulx of people/population growth cannot raise rents that high or sustain those prices
DWM has been calling overpriced housing for the last 6 to 8 years. We are curently at 2005 prices. So if we fall to 2001 prices (the start of the easy credit) then he will have been proved right in calling a bubble since 2001.
the 2 examples - the first in the list off daft (dublin city centre) are the same property, one you can buy for 3,150 per month, the other you can rent for 2,300 per month
so rents would need to increase by 36% for a person to consider buying this property instead of renting it - how do you see that happening with such a glut of similar properties on the market? This sample shows that it is not worth an investor investing in it and, so financially renting is much better instead then buying. Can you see rents increasing this much in 1 year . 2 years etc, i think not - this property is also 19 times the average industrial wage - Prices have a long way to fall before the reach normality. Even your massive infulx of people/population growth cannot raise rents that high or sustain those prices
DWM has been calling overpriced housing for the last 6 to 8 years. We are curently at 2005 prices. So if we fall to 2001 prices (the start of the easy credit) then he will have been proved right in calling a bubble since 2001.
Re: Why bailing out housing market is a very bad idea
Why do you think houses were undervalued?
Spotted this some else before
Why do you think houses were undervalued?
Spotted this some else before
S
Senna
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Re: Why bailing out housing market is a very bad idea
Interesting to see that even in 2001, house prices were 100/150% above the CPI.
would be interesting to see a similar graft for Germany or another EU country that didn't fall for cheap credit.
Interesting to see that even in 2001, house prices were 100/150% above the CPI.
would be interesting to see a similar graft for Germany or another EU country that didn't fall for cheap credit.
Re: Why bailing out housing market is a very bad idea
here ya go. inflation adjusted house prices. 1995 = 100. some bubble. would have burst in 2001 if not for 9/11. kinda funny that.
here ya go. inflation adjusted house prices. 1995 = 100. some bubble. would have burst in 2001 if not for 9/11. kinda funny that.
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Re: Why bailing out housing market is a very bad idea
sorry i dont think it was only Mcwilliams who was saying the market was overvalued in 2005. others were saying this.
sorry i dont think it was only Mcwilliams who was saying the market was overvalued in 2005. others were saying this.
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Re: Why bailing out housing market is a very bad idea
Thats a pretty confident prediction.
Thats a pretty confident prediction.
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Re: Why bailing out housing market is a very bad idea
I am not saying house prices are going to be maintained at current prices, what I am saying is more people renting will mean eventually increased rents and if this is the case then there will come a point where it will become reasonable again to want to buy rather than rent.
I am not saying house prices are going to be maintained at current prices, what I am saying is more people renting will mean eventually increased rents and if this is the case then there will come a point where it will become reasonable again to want to buy rather than rent.
Z
z106
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Re: Why bailing out housing market is a very bad idea
That point makes no sense whatsoever.
DmcW audience at the time when he made those statements was the lay man on the street. And that's the crucial point.
When he said back in 1999 (or whenever) that house prices were overvalued, what the layman heard was that they will drop in the near term.
That is how people interpreted that statement - and Mcwilliams well knows it !
In short - with such statements, Mcwilliams was essentrially predicting a drop in house prices in the short term.
That was basically his message given his audience.
And you can try to dress up his statements any other way you want.
You can argue all you want saying the fundamentals of the day justified his point - and that with each passing year his opinion on fundamentals versus house prices continued to more than justify his point.
But the botton line is he got it wrong - and not only that, he got it badly wrong - irrespective of what the fundamentals were !
And not only did he get it badly wrong, he got it badly wrong on teh most important financial topic of the day.
Prices rose significantly in the medium term.
In my book - that mistake was too big to give him any furher real credibility as an economist preaching to the nation.
For an economist, being aware of the fundamentals is only half the battle - predicting human behavious is the other half.
Had he said,for example, that the fundamentals didn't justify the current prices yet he felt that prices would continue to rise due to the irrational behavious of humans, then I would give him the kudos.
Focussing only on the fundamentals and assuming that prices/human behaviour would be dictated by fundamentals in the short to medium term is folly.
The very nature of a bubble is that in the short to medium term it ignores fundamentals.
McWilliams - to my knowledge - failed to include that point.
That point makes no sense whatsoever.
DmcW audience at the time when he made those statements was the lay man on the street. And that's the crucial point.
When he said back in 1999 (or whenever) that house prices were overvalued, what the layman heard was that they will drop in the near term.
That is how people interpreted that statement - and Mcwilliams well knows it !
In short - with such statements, Mcwilliams was essentrially predicting a drop in house prices in the short term.
That was basically his message given his audience.
And you can try to dress up his statements any other way you want.
You can argue all you want saying the fundamentals of the day justified his point - and that with each passing year his opinion on fundamentals versus house prices continued to more than justify his point.
But the botton line is he got it wrong - and not only that, he got it badly wrong - irrespective of what the fundamentals were !
And not only did he get it badly wrong, he got it badly wrong on teh most important financial topic of the day.
Prices rose significantly in the medium term.
In my book - that mistake was too big to give him any furher real credibility as an economist preaching to the nation.
For an economist, being aware of the fundamentals is only half the battle - predicting human behavious is the other half.
Had he said,for example, that the fundamentals didn't justify the current prices yet he felt that prices would continue to rise due to the irrational behavious of humans, then I would give him the kudos.
Focussing only on the fundamentals and assuming that prices/human behaviour would be dictated by fundamentals in the short to medium term is folly.
The very nature of a bubble is that in the short to medium term it ignores fundamentals.
McWilliams - to my knowledge - failed to include that point.
S
Senna
Guest
Re: Why bailing out housing market is a very bad idea
I hear your point and agree that the lay man on the street paid no attention. But to right off an economist, one of the only people to question the bubble, because he only got it half right (your sentiments), when the rest got it completely wrong is hardly fair. Now the reason i think other economist were wrong was because of who they were making the comments on behalf off, banks, EA's, builders etc, so it was not in their interest to say prices were over inflated.
If on the other hand you said i wouldn't listen to any economist, then fair enough i'd probably agree. If anyone can point to another economist that predicted it better, then please post it up.
I hear your point and agree that the lay man on the street paid no attention. But to right off an economist, one of the only people to question the bubble, because he only got it half right (your sentiments), when the rest got it completely wrong is hardly fair. Now the reason i think other economist were wrong was because of who they were making the comments on behalf off, banks, EA's, builders etc, so it was not in their interest to say prices were over inflated.
If on the other hand you said i wouldn't listen to any economist, then fair enough i'd probably agree. If anyone can point to another economist that predicted it better, then please post it up.
Re: Why bailing out housing market is a very bad idea
I too ran a business outside Ireland and didn't even bother contacting friends back home to tap them for funds (and I needed funds) because I knew
1) They were obsessed with property and only interested in that
2) Most of them had already commited all their liquid funds to property
This has a big knock-on effect, people focused on local environment too much, not upgrading skills because no extra money and no need as you make money from property not wages, no interest in starting business because they need to maintain payments every month and to them it was too risky. So of all the young people who stayed in Ireland not one of them started anything on their own. This is a small subset but it illustrates the point I am making....
Now some of them have huge mortgages and they'll probably never get a chance to do something else due to the heavy monthly payments, not able to get capital together or risk loss of income for certain period. It makes people risk averse and that's a pity.
Lack of extra cash to put into the stock market or investment will exacerbate earnings stagflation as it reduces the opportunities for employment and competition to fill jobs.
I'd be an optimist more than anything as Ireland but I'd say it will take 5-10 years to reach a bottom. BTW the Irish birth rate will continue to decrease as people won't have money for kids and there will be competition for jobs so parents will have to pay a lot more for their offspring's education and young people these days want more freedom.
I too ran a business outside Ireland and didn't even bother contacting friends back home to tap them for funds (and I needed funds) because I knew
1) They were obsessed with property and only interested in that
2) Most of them had already commited all their liquid funds to property
This has a big knock-on effect, people focused on local environment too much, not upgrading skills because no extra money and no need as you make money from property not wages, no interest in starting business because they need to maintain payments every month and to them it was too risky. So of all the young people who stayed in Ireland not one of them started anything on their own. This is a small subset but it illustrates the point I am making....
Now some of them have huge mortgages and they'll probably never get a chance to do something else due to the heavy monthly payments, not able to get capital together or risk loss of income for certain period. It makes people risk averse and that's a pity.
Lack of extra cash to put into the stock market or investment will exacerbate earnings stagflation as it reduces the opportunities for employment and competition to fill jobs.
I'd be an optimist more than anything as Ireland but I'd say it will take 5-10 years to reach a bottom. BTW the Irish birth rate will continue to decrease as people won't have money for kids and there will be competition for jobs so parents will have to pay a lot more for their offspring's education and young people these days want more freedom.
Re: Why bailing out housing market is a very bad idea
That graph is more useful than thousands of words written trying to predict house prices. Any of the VI's trying to push up house prices over the last ten years should have been shown it and asked to explain why economics no longer applies.
Housing prices are no different to any other prices and the only reason they can rise faster is due to irrational emotional attachment, like the time of tulip mania (I'm sure there were people criticising DmcW's equivalent at that time for being a pessimist who got his timing wrong!).
For anyone interested in a longer-term trend, research of the US housing market from 1890 indicates that housing rises on average 0.4% per year above inflation - Ireland still has quite an adjustment to go through:
http://www.businessweek.com/magazine/content/08_06/b4070044774504.htm
Thomas, where is the graph sourced from?
Why do you think houses were undervalued?
Spotted this some else before
That graph is more useful than thousands of words written trying to predict house prices. Any of the VI's trying to push up house prices over the last ten years should have been shown it and asked to explain why economics no longer applies.
Housing prices are no different to any other prices and the only reason they can rise faster is due to irrational emotional attachment, like the time of tulip mania (I'm sure there were people criticising DmcW's equivalent at that time for being a pessimist who got his timing wrong!).
For anyone interested in a longer-term trend, research of the US housing market from 1890 indicates that housing rises on average 0.4% per year above inflation - Ireland still has quite an adjustment to go through:
http://www.businessweek.com/magazine/content/08_06/b4070044774504.htm
Thomas, where is the graph sourced from?
Re: Why bailing out housing market is a very bad idea
Not really. The cost of servicing the interest element of an average house purchase (per the ESRI/PTSB index) went from 26% of average net income in 1998 and 1999 to 42% in 2000. The rate cuts post 9/11 reduced this to under 30% again. (Dan McLoughlan estimated the long term average at 28%). The increases in values and rates have pushed this up above 40% again.
If prices revert to the mean (as opposed to income inflation) then assuming long term borrowing costs of 5% (Which is positive) then prices will have to fall from between 25% to 40% from their peak to revert to a more normal % of income.
40% seems a widely accepted number nowadays and not just from property pinners, AIB are talking about that number. Dan McLoughlan and Austin Hughes views are becoming marginalised although like David McWilliams they will eventually be proved right. Will take a while though. Perhaps 10 years if the UK model is followed and banks have the cash to push lending.
Not really. The cost of servicing the interest element of an average house purchase (per the ESRI/PTSB index) went from 26% of average net income in 1998 and 1999 to 42% in 2000. The rate cuts post 9/11 reduced this to under 30% again. (Dan McLoughlan estimated the long term average at 28%). The increases in values and rates have pushed this up above 40% again.
If prices revert to the mean (as opposed to income inflation) then assuming long term borrowing costs of 5% (Which is positive) then prices will have to fall from between 25% to 40% from their peak to revert to a more normal % of income.
40% seems a widely accepted number nowadays and not just from property pinners, AIB are talking about that number. Dan McLoughlan and Austin Hughes views are becoming marginalised although like David McWilliams they will eventually be proved right. Will take a while though. Perhaps 10 years if the UK model is followed and banks have the cash to push lending.
Re: Why bailing out housing market is a very bad idea
How as a mature progressive nation are we looking over the last 10/15 years and blaming/crediting economists, govts, EAs, banks etc for the actions of individuals? This talk of McW being right all along or being totally wrong means nothing and doesn't point to where we are going. Do those who think he is now an economic God think that we should now base our economic decisions on his next book for the next 10 years? The blame game is always in play but maybe its time that we just shoulder our individual reponsibilities and in by doing that I definitely mean the govt should not intervene and I don't think the prices will fall another 40% nor do they have to (at least outside of the capital). you can buy a large 4 bed semi in a good area down here (limerick) for under 300k so not everywhere is unaffordable or overpriced.
How as a mature progressive nation are we looking over the last 10/15 years and blaming/crediting economists, govts, EAs, banks etc for the actions of individuals? This talk of McW being right all along or being totally wrong means nothing and doesn't point to where we are going. Do those who think he is now an economic God think that we should now base our economic decisions on his next book for the next 10 years? The blame game is always in play but maybe its time that we just shoulder our individual reponsibilities and in by doing that I definitely mean the govt should not intervene and I don't think the prices will fall another 40% nor do they have to (at least outside of the capital). you can buy a large 4 bed semi in a good area down here (limerick) for under 300k so not everywhere is unaffordable or overpriced.
aircobra19
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Re: Why bailing out housing market is a very bad idea
Would dropping 40% approach the original lending criteria of 2x one salary and 1x the the other.
Would dropping 40% approach the original lending criteria of 2x one salary and 1x the the other.
Re: Why bailing out housing market is a very bad idea
I would say the blame lies squarely at the foot of the government. They reduced tax rates & brought in tax incentives to push property development (not to mention corruption). They let the central bank turn a blind eye to accepted lending practices (10% deposit saved, 3 times salary) and allowed very poor qualify housing to be built in locations with no community facilities. They were happy to go along for the ride as long as it meant extra money in the government coffers.
They can't argue that they were unable to intervene - not too long ago, they were able to bring in price controls for the price of a pint!
I would say the blame lies squarely at the foot of the government. They reduced tax rates & brought in tax incentives to push property development (not to mention corruption). They let the central bank turn a blind eye to accepted lending practices (10% deposit saved, 3 times salary) and allowed very poor qualify housing to be built in locations with no community facilities. They were happy to go along for the ride as long as it meant extra money in the government coffers.
They can't argue that they were unable to intervene - not too long ago, they were able to bring in price controls for the price of a pint!
Re: Why bailing out housing market is a very bad idea
In short - with such statements, Mcwilliams was essentrially predicting a drop in house prices in the short term.
That was basically his message given his audience.
But the botton line is he got it wrong - and not only that, he got it badly wrong - irrespective of what the fundamentals were !
And not only did he get it badly wrong, he got it badly wrong on teh most important financial topic of the day.
Prices rose significantly in the medium term.
In my book - that mistake was too big to give him any furher real credibility as an economist preaching to the nation.
For an economist, being aware of the fundamentals is only half the battle - predicting human behavious is the other half.
Had he said,for example, that the fundamentals didn't justify the current prices yet he felt that prices would continue to rise due to the irrational behavious of humans, then I would give him the kudos.
Focussing only on the fundamentals and assuming that prices/human behaviour would be dictated by fundamentals in the short to medium term is folly.
The very nature of a bubble is that in the short to medium term it ignores fundamentals.
McWilliams - to my knowledge - failed to include that point.[/quote]
1) In order to give a fair assessment of McW's statements at the time we really need actual quotes. I don't know if he ever expicitly said when the bust would happen, but I agree that it was at least implied in his statements in 2001 that he thought it would be within a few years. You say you would have given him kudos if he said prices would continue to rise due to the irrational behaviour of humans, but to be honest you would have wanted him to say for how long and unless he got the date right he wouldn't have credibility. The fact that he was saying there was a bubble in '99 and still in '01, and that it would peak at some stage indicates his acknowledgement there was irrationality in the market, as that defines a bubble.
2) The bubble lasted longer than anyone expected or predicted for a number of reasons - no arguements there. That's why the fall out is potentially so scary, we have so very very far to fall, maybe back to the 90's.
3) McW's warnings and those of others (Central Bank, Economist, etc.) were also to those in power who should taken the air out of the bubble at the time; they buried their heads in the sand, and basically added fuel to the fire for their short term benefit. Had they acted responsibly the bubble could have been deflated earlier and McW would have been spot on with his timing.
4) At no stage - to my recollection - did the "Establishment" i.e. Dan, Austin, Marion, Bertie, Biffo, Sunday Independent, Estate Agents, Builders, Banks, etc. ever predict an eventual bust, only a soft landing as "the fundamentals were sound and we were only playing catch up with Europe".
5) McW couldn't predict when the bubble would burst, the others never acknowledged that one existed or could exist, until it was staring them in the face, and how many tens if not hundreds of thousands are going to suffer for this, way more than may have deferred buying a house in 1999 based on McW's opinions.
5) For those who favour getting house prices back up to their old levels to help those in negative equity, while in theory it sounds noble, is it really desirable that the teenagers and young children of today and tomorrow should face into ludicrous house prices in the future. I have no problem with my house falling massively in value if it means my children can afford decent housing when they are adults, without mortgaging away their lives and happiness.
6) There is no win win or happy ending situation here. If prices continue to fall steeply as is probable, there will be terrible suffering; if somehow they were to recover, then future generations would continue to be saddled with ridiculous levels of debt in order to enrich the few.
Economics is the dismal science, McW and his ilk over estimated the competence of the government and the banks, could not foresee 9/11 and the effect on interest rates and got the timing wrong, the others being trained economists must, must, must have known in their hearts and minds that there was a bubble, and they willfully continued to hype and inflate it in the name of greed, and that's what makes them scoundrels rather than idiots.
In short - with such statements, Mcwilliams was essentrially predicting a drop in house prices in the short term.
That was basically his message given his audience.
But the botton line is he got it wrong - and not only that, he got it badly wrong - irrespective of what the fundamentals were !
And not only did he get it badly wrong, he got it badly wrong on teh most important financial topic of the day.
Prices rose significantly in the medium term.
In my book - that mistake was too big to give him any furher real credibility as an economist preaching to the nation.
For an economist, being aware of the fundamentals is only half the battle - predicting human behavious is the other half.
Had he said,for example, that the fundamentals didn't justify the current prices yet he felt that prices would continue to rise due to the irrational behavious of humans, then I would give him the kudos.
Focussing only on the fundamentals and assuming that prices/human behaviour would be dictated by fundamentals in the short to medium term is folly.
The very nature of a bubble is that in the short to medium term it ignores fundamentals.
McWilliams - to my knowledge - failed to include that point.[/quote]
1) In order to give a fair assessment of McW's statements at the time we really need actual quotes. I don't know if he ever expicitly said when the bust would happen, but I agree that it was at least implied in his statements in 2001 that he thought it would be within a few years. You say you would have given him kudos if he said prices would continue to rise due to the irrational behaviour of humans, but to be honest you would have wanted him to say for how long and unless he got the date right he wouldn't have credibility. The fact that he was saying there was a bubble in '99 and still in '01, and that it would peak at some stage indicates his acknowledgement there was irrationality in the market, as that defines a bubble.
2) The bubble lasted longer than anyone expected or predicted for a number of reasons - no arguements there. That's why the fall out is potentially so scary, we have so very very far to fall, maybe back to the 90's.
3) McW's warnings and those of others (Central Bank, Economist, etc.) were also to those in power who should taken the air out of the bubble at the time; they buried their heads in the sand, and basically added fuel to the fire for their short term benefit. Had they acted responsibly the bubble could have been deflated earlier and McW would have been spot on with his timing.
4) At no stage - to my recollection - did the "Establishment" i.e. Dan, Austin, Marion, Bertie, Biffo, Sunday Independent, Estate Agents, Builders, Banks, etc. ever predict an eventual bust, only a soft landing as "the fundamentals were sound and we were only playing catch up with Europe".
5) McW couldn't predict when the bubble would burst, the others never acknowledged that one existed or could exist, until it was staring them in the face, and how many tens if not hundreds of thousands are going to suffer for this, way more than may have deferred buying a house in 1999 based on McW's opinions.
5) For those who favour getting house prices back up to their old levels to help those in negative equity, while in theory it sounds noble, is it really desirable that the teenagers and young children of today and tomorrow should face into ludicrous house prices in the future. I have no problem with my house falling massively in value if it means my children can afford decent housing when they are adults, without mortgaging away their lives and happiness.
6) There is no win win or happy ending situation here. If prices continue to fall steeply as is probable, there will be terrible suffering; if somehow they were to recover, then future generations would continue to be saddled with ridiculous levels of debt in order to enrich the few.
Economics is the dismal science, McW and his ilk over estimated the competence of the government and the banks, could not foresee 9/11 and the effect on interest rates and got the timing wrong, the others being trained economists must, must, must have known in their hearts and minds that there was a bubble, and they willfully continued to hype and inflate it in the name of greed, and that's what makes them scoundrels rather than idiots.
Jethro Tull
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Re: Why bailing out housing market is a very bad idea
[broken link removed]
This but might interest television
EDIT: Link fixed
[broken link removed]
This but might interest television
EDIT: Link fixed