Wednesday, 3 August 2016

Here we go, the mid-cycle wobble...

As is easily observed, land prices/bank lending goes in 18 year-cycles, there is a credit crunch and associated recession every 18 years and a wobble after 11 which is soon forgotten.

The last credit crunch started in 2007-08, so we'd expect the mid-cycle wobble in 2018-19, i.e. in about 2 years' time.

Here are the first signs:

London Luxury House Prices Keep Falling After Brexit Vote (they blame all bad news on "Brexit").

NB - in the UK, every higher house prices are seen as A Good Thing and voters will re-elect any government that kept them going higher.

Home ownership falling in major English cities, says think tank

"What we particularly have seen since 2002-03 is that incomes simply haven't kept pace with house prices, so it's not just that house prices have gone up. We had access to lots of relatively easy credit and the position we're in now is that credit has been turned off.

"We have this sense now that house prices have become detached from people's earnings ... and we no longer have the route through 100% mortgages and the like for getting on to the housing ladder."

the flaws in the Bank of England’s stress testing programme

The report's release comes as Europe faces a renewed banking crisis. There is already a major crisis in Italy and mounting concerns about Deutsche Bank, the biggest bank in Europe and recently described by the International Monetary Fund as the most systemically dangerous bank in the world.

Rate cut 'foregone conclusion' as economy slows sharply

They'll paper over the cracks and reinflate the land price/credit bubble - by depressing interest rates if nothing else - then sit back and watch the money print itself until next massive credit crunch and associated land-owner and bank bailouts etc, currently pencilled in for 2025-26.

UPDATE: Lola submits this rather more technical article: The FOMC Butterfly that Will Ruin the World


Steven_L said...

I think the 'Brexit' vote might well be the 'shock' that starts the mid-cycle recession.

From what I remember it took a major shock to shake people out of their mentality that house prices only go up last time. It wasn't all new news in the financial pages about 500 point falls on the DJIA, collaterised debt obligations and the like that scared the average UK punter. Remember, a lot of them were speculating on houses because they believed the stock market to be an unreliable investment after dotcom.

Nor was the typical UK punter bothered about reports that house prices were falling in the USA, Spain and Ireland. After all, it's different in the UK isn't it? There is a shortage of land in the UK, and every dumb as BTL speculator knows that!

Nope, it wasn't until the banks actually started going bust one by one that they actually believed house prices might fall. Most of them lost about 50% of their equity in US Dollars, or 40% in Euros from mid 2007 to mid 2009.

And generally they still won't accept that a house worth £300k at 1.3 $/£ and 1.2E/£ is worth less than a house worth £250k at 2$/£ and 1.5E/£.

It does take something to shake them out of their collective mindset, and this time, I think Brexit might be that thing.

Mark Wadsworth said...

SL, if Brexit knocks a few quid off house prices, that is much to be welcomed and reassures me I did the right thing voting Leave.

paulc156 said...

Lola's link. Core inflation just edged lower in June to 1.57% over the 12 mts to June. And the target core inflation rate is 2% average, not tops in any case. Or so I read yesterday. As for low unemployment cited in the article, there's also a rather sickly prime age employment/population ratio which paints quite a different picture. That and low quit rates, long periods of unemployment for those who do lose their job, slow wage growth, high levels of involuntary part time workers (wanting full time). So plenty of reason to leave rate rises alone.

Mark Wadsworth said...

PC, why do you think that lower interest rates = less unemployment? The point of low interest rates is to prop up land prices and share prices. If they wanted to get unemployment down, they ought to reduce taxes on employment like VAT and NIC or at least reduce means testing on lower earners.

paul said...

should "hey'll paper over the cracks and reinstate the proper land price/credit bubble" read "hey'll paper over the cracks and reinstate the property land price/credit bubble"

Mark Wadsworth said...

P, it should indeed. Thanks and updated.

paulc156 said...

MW. Yes, lower VAT and NI would make more sense...but that wasn't my point. The article was demanding higher interest rates on a spurious;an overheating economy. Though as you say, shares are doing rather well and residential property getting frothy. I agree, keeping rates this low won't make jobs appear but if all other policy remains unchanged, higher interest rates will worsen employment conditions.

Steven_L said...

I think one possibility for the shape this takes is that manic yield chasing starts. Since the financial crisis there has been a 'flight to quality' and London prime property has become a bond proxy.

The 'Brexit' shock plus tax reforms to stamp duty and BTL taxes seem to have spooked investors in London prime - especially foreigners. But yields were already bid down to 2% or so there.

Perhaps by the top of the next cycle, wealthy BTL investors using tax efficient ltd companies and/or much less leverage than during the Brown bubble, will have chased gross yields on crappy houses in Middlesbrough down to 3%?

I'm certainly positioning my investments along the lines of the 18 year land price cycle theory, and will be trying to buy mortgage providers and landowners / property developers through this wobble.

Piotr Wasik said...

Why 18 exectly years? It reminds me of Bodhi character in the Point Break movie who "predicted" 50 year storm because something in the Universe lined up for it exactly every 50 years. I don't believe these cycles theories that claim that cycles recognised in hindsight have any predictive power.... unless somebody can show me a plausible mechanics behind the belief.

Another thing is that we did not have land price crash in 2008 in the UK, it was more like a glitch in otherwise unstoppable march forward. The glitch was fixed by the govt. Maybe that was mid-cycle wobble?

Mark Wadsworth said...


1. why is it 18 years? Nobody knows, but it was observed in 1987 at the latest. Fred Harrison predicted the 2007 crash in the early 1990s and everybody laughed at him. He was right and people say it's a lucky guess.

2. I couldn't care less what it reminds you of - you have taken it upon yourself to gently undermine and ridicule reality. Just because you don't understand something does not mean it does not exist. The sun and the stars are giant balls of nuclear fusion, do you understand that? Can you explain the "plausible mechanic behind the belief"? No, neither do I or can I. They still exist.

3. The land price bubble and credit bubble go hand in hand. When they pop, there is a recession. The land price bubble is quickly brushed under the carpet - as you tried to do just now - but the "banking crisis" or "credit crunch" or "financial recession" remains on record.

4. Don;t confuse rental values - which march ever upwards - with selling prices (which are rental values divided by interest rates plus subsidies). As you say yourself, the "glitch" can be fixed - i.e. rigged by the government.

5. I'm not sure what level of reality you are operating on. Are you actually trying to learn something - in which case open your eyes and read around and have a good old think - or are you trying to score cheap internet points by expecting me to explain the life, the universe and everything in one comment and then unilaterally declaring yourself the winner?

Pablo said...

PW: see here -

Steven_L said...

Another thing is that we did not have land price crash in 2008 in the UK

Try looking at land/house prices in US Dollars, Euros, Yen, Swiss Francs or just a mixed basket of currencies.

Then you will see the true scale of the land price crash. If my old man had sold his house in 2007 and change the proceeds into USD bank deposits he would have dollars of more than double the value in GBP than his house is worth today.

If he had changed into US government bonds rather than bank deposits, more like treble.

Mark Wadsworth said...

P and SL, thanks!