Sunday, November 06, 2005
Don't get suckered by the house price rally
Posted by David Smith at 11:00 AM
Category: David Smith's other articles

It is, I think, time to say it out loud. The dog hasn’t barked. The roof hasn’t fallen in. Acacia Avenue hasn’t gone up in flames. House prices, in short, haven’t crashed.

This is a far cry, of course, from the view that was around at the beginning of this year. Many forecasters believed that 2005 would be the year when the foundations supporting house prices would collapse.

August institutions like the International Monetary Fund and Organisation for Economic Co-operation and Development warned of it. The Bank of England flirted with it, by taking the view that house prices would fall, if not plunge, while simultaneously arguing that consumer spending would not be much affected.

Many economists closer to home signed up to the crash story. Capital Economics got their first, with its 20% crash forecast (though not all at once), made some time ago. Barclays agreed, although the economist who made the forecast is no longer with the bank. Deutsche Bank predicted a 10% to 15% fall this year. Others were more apocalyptic. Dye Asset Management and Durlacher predicted 30% price falls, while leaving the timing vague. Even the Halifax predicted a price fall this year, though only of 2%.

Earlier this year I took part in an edition of the BBC’s Money Programme, The Great House Price Crash 2005? The title gives away its slant. I wasn’t exactly introduced as the oddball who believes house prices can continue to defy gravity but I was a lone voice.

What I said, by the way, was this: “What we are going to see is modest or no rises in house prices. A very dull market in some ways. A house price crash in the absence of an economic recession? It just doesn’t happen in the UK.”

A crash is, of course, much sexier than a period of stagnation, so I don’t blame the BBC. Many parts of the media have been itching for the crash to happen. From a crowded field, my nomination for most ridiculous housing headline this year goes to the Daily Express. “House prices slump”, its banner front-page headline screamed on September 30. The story was that the Nationwide building society had reported a 0.2% drop in house prices for the month. Some slump.

A whole industry has built up around the crash story, with websites, weblogs (blogs) and newsletters. I can only think this is driven by schadenfreude - pleasure in the (potential) misfortune of others.

So am I smug? The crash school will say that the pain has merely need deferred, and that rising claimant unemployment, an increase in repossession orders and the latest figures showing a 46% year-on-year rise in personal bankruptcies are harbingers of doom. Maybe the crash of 2005 will become the crash of 2006.

I don’t agree, although I don’t expect to see an early bounceback in household spending. Debt is biting, and restraining consumers. My congratulations to Marchel Alexandrovich, UK economist at Dresdner Kleinwort Wasserstein for coming up with an alternative acronym to Mervyn King’s “nice” (non-inflationary consistently expansionary growth) decade.

The next few years, says Alexandrovich, could be “vile” (volatile, inflationary and low-expansion). Even if you don’t buy into the inflationary bit of his acronym, for reasons outlined here a fortnight ago, prospects look less rosy.

No, what concerns me more than signs of weakness in the housing market is that there are rather too many indications of strength. Estate agents, once more, have a spring in their steps, an extra vroom as they rev up their BMWs. The latest RICS (Royal Institute of Chartered Surveyors) survey was upbeat. Mortgage approvals are up 24% on a year ago, according to the Bank of England.

House prices have perked up. The Nationwide followed that 0.2% “slump” in September with a 1.3% increase last month. The Halifax’s October showed no change but its August and September statistics showed increases of 1.9% and 1.2% respectively.

All three long-running and reputable house-price measures are telling a similar story. The Nationwide has prices up by 3.3% on a year ago; the Halifax 3.9%. The Office for the Deputy Prime Minister, which has figures going back to 1930, reports 2.8% house-price inflation.

House prices haven’t fallen but house-price inflation has, and there are signs it could now be picking up. One possibility is that buyers’ worries about a succession of further interest rate rises by the Bank were removed by the August rate-cut from the monetary policy committee (MPC). Another is that people were deterred by all those crash warnings but have now decided that the doomsters were crying wolf.

The fact is, however, there has been a change of mood. If past relationships between mortgage approvals and prices are a guide, house-price inflation could be heading back towards double figures by the spring.

I hope not. After adjusting for other changes house prices are still, in my view, some 10% to 15% overvalued relative to incomes. The period of stagnation in prices required to work off that overvaluation, and for households to adjust to the debt they have taken on, needs further to run. A rise in prices now would take us in the wrong direction, away from the fundamentals. It would be, to use a stock market term, a “suckers’ rally”. The housing market needs to be dull for a while yet.

PS Signs of life in the housing market have helped produce a shift in mood on interest rates. Nobody expects the MPC to cut this week, whereas not long ago a November reduction was seen by many as a racing certainty. The next move could be up. Richard Jeffrey of Bridgewell Securities thinks so, as does the National Institute of Economic and Social Research. Will this interest rate cycle turn out to be a one-cut wonder?

The “shadow” MPC, which meets under the auspices of the Institute of Economic Affairs, still has two rate-cutters, Patrick Minford and Peter Warburton. But its latest minutes show that seven members are comfortable with the Bank’s “repo” rate (equivalent to base rate) being at its present 4.5% level.

Most of those voting to hold are agnostic about whether rates will need to go up soon, arguing that the slowdown in the economy we have seen will be enough to offset inflationary pressures, for example those arising from higher oil prices.
That looks to be about right. On the face of it, the evidence of slightly stronger growth we have seen, and not just in the housing market, argues against further rate cuts next year.

We shouldn’t forget, however, that the Bank’s target is inflation, not growth, as MPC members keep reminding us. I still think inflation will come down significantly next year as oil prices fall and that this, along with the fact that growth will be below trend and not exerting pressure on capacity, will leave room for a further rate cut or two. But quite a lot of water has to flow under the bridge before then.

Finally, a couple of updates. Three weeks ago I railed against barely-necessary roadworks clogging up our thoroughfares and the lack of co-ordination of different roadworks to minimise disruption. There has been a response. Since I wrote, it has got much worse. The consensus among readers is that lack of co-ordination goes beyond mere incompetence. It is deliberate.

Update number two is on last week’s piece on immigration and the job market. Again, a huge response, some of it from people who feel they have been squeezed out of jobs by migrants. Most, however, came from employers, some of whom turned only reluctantly to migrant workers. Eastern European immigrants are, they say, bright, keen, well-educated and productive. Britain’s unemployed, and those on the fringes of the job market, are often none of those things.

From The Sunday Times, November 6 2005

Comments

It is WAY too early too call off the house price crash.

As everyone should know, actual housing transactions have dropped off a cliff over this past year.

The housing indices are also, in my view, reflecting that only the more desirable properties (and thereby the more expensive) are actually being transacted, so skewing the figures.

Everything else is way overpriced (a lot more than the 10-15% you say) and simply isn't selling. There's a glut of property on the market and relatively few buyers.

Still, that doesn't matter to the vested interests of the market who are always looking to spin their way out of trouble, and the Government who are trying to keep the whole show going with SIPPs.

Alistair Campbell would be proud of the whole effort.

Personally I am coming around to the view that the only thing which will produce a dramatic crash circa 1989 is a rise in Interest Rates - but I don't think they have to be raised much (only a few %) to cause mass panic and selling by BTLs whose profit-margins are already non-existent or laughably small.

The debt burden is huge and wage inflation just isn't there to help like it was in the 1970s. So with rising fuel costs, rising taxes (to plug Gordon Brown's black hole) for everyone, this situation is going to take a long time to rectifty itself.

By which time demographics will turn against the housing market as the baby boomers begin to try and sell-up their second homes.

And with the US continuing to raise their Interest Rates and other central banks making noises about raising theirs - there is only so long that the BoE will be able to hold off.

This is all going to end in tears. David I do not understand your eternal bullishness on property. The market has corrected before and it will do so again.

Posted by: Warwickshire Lad at November 6, 2005 10:03 PM

Everybody has an opinion on the housing market, and is entitled to do so. But let us get the facts straight. Housing transactions haven't fallen off a cliff this year. In the first half of the year there were 464,000 loans for house purchase, down on last year but by normal standards very healthy. The pick-up since then suggests the full-year total will confortably top 1m and may top 1.1m. Again, that will be down on 2004 but is historically high.
As for the 10%-15% overvaluation, I've explained this before. The crude house price-earnings ratio, which suggest a huge overvaluation, has to be corrected for new factors, notably low long-term real interest rates. Steve Nickell of the MPC has suggested there may be no overvaluation at all.
The central point remains: House price crashes in the UK are very rare and there is no example of one occurring in the absence of a general recession.

Posted by: David Smith at November 7, 2005 12:07 PM

Just mannage to sell a one bedroom flat to climb the ladder hopefully for a 3 bed semi in the south east. Sell is complete and we are in rented accomadation.
Not finding any-thing we like. Also not many new instructions. Stuff on the market was also on the market 12 months ago. Is it worth waiting for the Spring to find the right property and run the risk of prices rising or do we settle for something 'that will do'? Intrested on other people's thoughts - it still sounds like the market could do go in either direction.

T

Posted by: Trevor at November 7, 2005 01:05 PM

Up with the crash can buy 100 more BTLs.

Posted by: Immigrant with 100 BTL at November 7, 2005 01:16 PM

David - your comment "In the first half of the year there were 464,000 loans for house purchase, down on last year but by normal standards very healthy"

Does the figure quoted inlude re-mortgages, mew? If so how do these figures compare to last year?

Should say at this point I am not a fan of supid house prices! Average wage iro 22k x 3.5 = 77k, current average house price iro 160k - these figures do not add up end of story.

Posted by: Adrian at November 7, 2005 09:27 PM

"The crude house price-earnings ratio, which suggest a huge overvaluation, has to be corrected for new factors, notably low long-term real interest rates."

It sounds very New Economy-ish. However I think mainstream macroeconomics postulates that real interest rates in the long term are equal to real GDP growth. So low real interest rates mean recession.

Posted by: gabor at November 8, 2005 08:23 AM

Nice article David. I think there will be some regional differences, with the South and South West of the UK hit hardest, (excluding the wealthier parts of London). Nationally I see declines of 2 - 3% over next 2 years. Allowing for inflation @ 2.5% - 3% for the next 2 years, this would result in a possible REAL HOUSE PRICE decline of approx. 4.5% - 6% pa, so the doom mongers might not be far off in reality. Maybe a reality check for all of us!!

Posted by: mt of Croxley Green at November 8, 2005 09:53 AM

What I said, by the way, was this: “What we are going to see is modest or no rises in house prices. A very dull market in some ways. A house price crash in the absence of an economic recession? It just doesn’t happen in the UK.”

I refer to your quote:
If you look at recent history, you will see that recessions have begun AFTER the housing market peaks. Consumer confidence plummets, economic growth falls, just as we have seen over the last few months. We may not have interest rates at 15%, but the fact that consumers are struggling with debt with rates at 4.5% is an ominous sign for this country.

The next stage of the economic cycle usually consists of a Sterling crisis, as the government tries to borrow it's way out of trouble.

As history has taught many many times, if you want to stop the bust, you'd better stop the boom.
This time it's too late.

Posted by: bandwagon at November 8, 2005 10:09 AM

http://news.bbc.co.uk/1/hi/uk/4328366.stm

The article says it all it's social engineering Labour style... today's middle classes (lawyers, doctors, accountants etc. earning between 25k and 60k) can only
afford to buy properties in 'lower-class' areas where 'tesco/asda workers' work and bought their properties in the 90s (p.s. I have nothing against supermarket
workers as my misses used to work in Asda before becoming a primary school teacher).

Personally, I would rather rent if I had to in a nice area than buy the cheapest property in a horrible part of the country.
Are you going to pay £200k to live next to someone who paid £60k to buy just 4 years ago? As in the case of Telford. I'm certainly not. Bizarrely they are on
probably on less than half the wages that you are on right now. However, they probably have the same disposable income as you due to their tiny mortgage
payments if the haven't MEW. Most graduates have worked hard to progress up the career ladder and earn more - I don't want to only be able to afford to
live next to chavs who happened to buy 4+ years ago.

Posted by: Dr Living Next To Labour Chavs at November 8, 2005 10:18 AM

I think one should bear in mind that one significant feature of the economy in recent years has been that most of the ducks have been in line. We've had an unusually long period of economic stability, low unemployment, low interest rates, reasonable if unspectacular growth combined with a stock market that few expact to make spectacular gains (though in 2years the FTSE has gone from under 4000 to almost 5500 - which is pretty respectable).
Just how many of the factors that support house prices at their current above trend levels have to give way before there's a correction? If we see rates or unemployment rise, if oil prices continue to go up and shock our economy in a way it hasn't so far, will that be enough to trigger a downturn in house prices?
I think one might also do well to ask how much better the economy could be? I'd be interested to know what other people think but at a cursory glance there seem to be far more factors that might deteriorate than are likely to improve.
Lasly I think it's worth noting that markets aren't rational. Most of the modelling that's been done on the stock market suggests that there have been perhaps a dozen one day falls since 1988 which are 'once in a hundred years' corrections. The reason the modelling doesn't work is that they tend to be rational in outlook, whereas markets are made by creatures (funny bipedal, pink or brown hairy creatures classified as homo sapiens by scientists) who end not to be as rational as the models think they should be. In an over extended market a small correction can sometimes trigger an over reaction and even a stampede (though less in housing than shares because of the market's less liquid nature).
Personally I have concerns that a long overdue flu pandemic is likely to be far more disuptive of economic activity than SARS (believe me the WHO people were telling me during SARS 2 years ago that they thought it had the virtue of waking the world up in time for a flu pandemic) - and that kind of shock could act as a trigger.
For me it feels like the top of a cycle running out of steam - but then who am I to speculate when there are far wiser heads in estate agents up and down the country ;-)
j

Posted by: jonathan at November 8, 2005 11:10 AM

I’ve posted graphs of mortgage approvals, lending (borrowing) and mortgage-equity-withdrawal here:
http://www.graphicinvestor.com/econo/UK/MORTGAGES/Mortgages.htm

Approvals are monthly up to Sept. and MEW is quarterly up to 05Q2.

Mortgage approvals did fall off a cliff but they have now bounced back to worryingly high levels – above the sensible 100k/mth level from the nice nineties. This suggests speculation has returned to the market. Mervyn won’t like it.

Also, the total value of mortgage approvals is back to record levels. However, interestingly, the value of the average mortgage approved increased rapidly from just over £200k in April 2004 to £250k in November 2004 (and stayed there). This supports WL’s theory that it’s top-quality houses that are selling – the ones that only appear on the market when the market’s at a peak.

But I agree with the original article that the recent small rise in house prices – and the rise in mortgage approvals – is a “suckers’ rally” (or possibly a “dead cat bounce”). So, respec’ to Mervyn King for seeing this situation coming.

The article was also good in shining a light on the role of the media in the housing market. It’s hard to know motives - but it’s safe to say most media coverage (present company excepted) isn’t motivated to give sound advice to ‘hard working families’.

But the article failed to mention US interest rates. Surely this is the most important issue facing the UK housing market. The general view seems to be that US rates will rise to 4.75%. If they do, it seems impossible for European rates to stay at 2% without unacceptable inflationary consequences (although they should be accepted in order to force people to spend and create jobs).

But if US and European interest rates are rising and UK inflation is already above target, how can UK rates not rise – with obvious consequences for jobs and the housing market?

Posted by: David Sandiford at November 8, 2005 11:34 AM

David, I am really struggling with your fundamentals! I remember reading your Times article a few weeks back where you inferred that low inflation would help prevent a house price slump? Part of the reason for 'front loading' with debt is that inflation will erode the debt over time? We now have a record house price to income of 6 or 7 times with the lowest inflation for decades, this isn't good. I couldn't think of a worst investment at the moment. All markets are cyclical, always have been, always will be.

Best regards

Daron

Posted by: Daron at November 8, 2005 11:59 AM

On the house price-earnings ratio, average male full-time earnings last year were £558.6 a week, £29,047 a year. This is the measure used for long-term comparison. Add roughly 4% to that to give growth into 2005 and you get £30,209. The long-run average house-price earnings ratio (the past 25 years) is 3.8, so that gives us just under £115,000, well below the average level of house prices - £157,000 according to the Nationwide, slightly higher according to some measures.

So the question is what factors might have caused a revaluation in prices? I've dealt with some of them but here is a neat description of three from Professor Steve Nickell of the LSE, a member of the Bank of England's monetary policy committee. This is from his Keynes lecture at the Royal Academy recently:

'There are three factors which may be of some significance. First, the rate at which new dwellings are being built is at an historically low level whereas, for a variety of reasons, the growth in the population of working age and the net rate of formation of new households is relatively high (high divorce rates, high immigration rates etc).

Second, the disappearance of the front end loading problem when inflation rates and nominal interest rates are low. For example, it might be quite sensible for young professionals to borrow, and for banks to lend them, four or even five times annual earnings to purchase a house given both their very high level of job security and their very rapid rate of prospective earnings growth. But in times of high inflation and high nominal interest rates, this is not possible. For example, suppose real interest rates are 3%. Then if inflation is 12% and nominal interest rates are 15%, a person borrowing four times their annual pre-tax salary will be paying over 60% of this pre-tax salary in mortgage payments in the first year – this simply cannot be done. Of course, in later years this proportion will fall rapidly. Nevertheless, the early years will provide a binding constraint on the multiple of earnings households can borrow.

In a low inflation environment, this binding constraint disappears. If inflation is 2% and nominal interest rates are 5%, an individual borrowing four times their annual salary will only be paying 20% of it in mortgage payments in the first year. Perfectly possible. So the elimination of this constraint as we have gradually moved from a high inflation, high interest rate era to a low inflation, low interest rate period will have raised the demand for housing in equilibrium, even when real interest rates remain unchanged.

The third factor underlying the potential rise in the equilibrium house price to earnings ratio is the apparently substantial and sustained fall in long-run risk free real interest rates. (Long rates) have fallen from close to four per cent in the mid-1990s to around two per cent since 1999. And the fact that the 10 year forward, 10 year real rate has fallen in exactly the same way as the spot rate suggests that markets expect the fall to have some degree of permanence ..... Long-term real rates are crucial to the housing market since they reflect the average rate which should be used to discount the returns on a long-lived asset and the real cost of long-term borrowing ...

If the risk free real rate falls from 4% to 2% the equilibrium ratio of real house prices to real rents will rise by nearly 67 per cent. Given our assumption that real rents tend to grow at the same rate as real wages, an assumption broadly consistent with the facts, the equilibrium ratio of house prices to earnings may be expected to rise by a similar amount solely because of the observed fall in the long-term real interest rate. And since the actual ratio of house prices to earnings has risen by around 70% since the mid-1990s to the present day, it may be argued that it is close to equilibrium.'

Posted by: David Smith at November 8, 2005 01:17 PM

Thank you David,

I feel that you have missed out a few important points:

* Inflation. I disagree with your view on a persistent low inflation environment. Looking through your past articles you have persistently underestimated inflation risk (in combination with oil prices). Rising oil, US rates and second round effects (which take time to feed through), etc will force an increase in borrowing costs.

* Speculation. No doubt the current market is being propped up by the current glut of BTLs. Surely speculative risk is a strong factor here? BTLs (unlike home owners) have an easier exit route to a failing market and would likely accelerate any form of market correction.

* Cycles. You state crashes are very rare and don't occur in the absence of recession. Yet looking at the adjusted Nationwide graph all booms have been followed by a bust, and at present we stand on a very large boom. In addition didn't the last recession follow the the crash?

* Phantom economy. For the last few years the economy has been running on debt. Futher debt is required to fuel this situation. At present we have a massive debt burden. If cheap money dissappears then we are in deep trouble. Is this why you deny the upside inflation risk? Are the consequences too disturbing to entertain? Is this why we need low interest rates in the face of rising inflation (surely utter madness)?

Things have been rosy for too long and we have forgotten lessons of the past. Bad times have always followed good times. Mervyn King (god bless him...) at least hasn't forgotten and is rightly concerned by current events...

Posted by: Werewolves at November 8, 2005 02:16 PM

Dear David,

macroeconomics tells us that real rates correlate with GDP growth. Because GDP growth is the aggregated yield of all investments in the economy and real rates are the averge yield of all investments. That is why an inverted yield curve means recession or slowing of the economy because it signals that there are no opportunities to invest in the future consequently no growth!
So you cant rejoice at ever decreasing real interest rates because they will end up in an inverted yield curve which stops the carry trade ( borrow short, lend long ) that produces the liquitidy to fuel th bubble.
It already happened in the UK and will happen in the US soon.
China and the OPEC wont finance the anglo-saxon debt economies for good, one day you will wake up and see they have set up a new world trade system of their own.

Posted by: gabor at November 8, 2005 02:43 PM

A couple of points here:

1. House price crashes are rare. The only crash in nominal house prices we have seen in recent years was in the early 1990s, on the back of a doubling of interest rates and a a near-doubling of unemployment. In the two other episodes - also after big economic shocks in the 1973-5 and late 1970s/early 1980s periods, real house prices fell but nominal house prices didn't. The mechanism was stagnation in house prices at a time of high inflation.

The early 1990s deserves revisiting. Many people believe house prices started to fall sharply from 1989 onwards, precipitating recession. It didn't happen like that. House prices stagnated for a couple of years from mid-1989. They only began to fall sharply when it was clear the economy was in recession and unemployment was climbing sharply. The big fall was over the 1991-93 period.

2. Nobody is saying long-term real rates should fall for ever, or even fall from present levels. What is being said is that they have fallen in recent years, partly to reflect a more stable era. As for inflation, I'm glad not to share the hysteria - 2.5% inflation after a period when oil prices have hit $70 a barrel is testimony to the absence of genuine inflationary pressure.

Posted by: David Smith at November 8, 2005 03:06 PM

David,

I feel I must point out to you that in the UK falls in housing market activity have been a good leading indicator of house price falls ( quite sensibly I would summise ), and that house price falls have been an excellent leading indicator of UK recessions.

Your statement that house prices in the UK will not fall in the absense of a recession is to put the cart before the horse. It is falling UK house prices that have, and right now are, leading to a consumer dirven recession in the UK.

You know as well as anybody the time lags involved in macroeconomics. I feel that you, rather like the unfortunate Saxon soldiers in 1066 have claimed victory rather too early in the day.

Posted by: Tim at November 8, 2005 03:15 PM

David,

You mentioned a very important point with US interest rates. If they do rise to 4.75% (as you mention), meaning UK rates rise, what consequences will that have on the housing market?

A few months ago, the media were saying rates were going to fall from now on. With that expectation, it does explain why there was a 'bounce' in prices/transactions.

Posted by: James at November 8, 2005 03:29 PM

Interesting points David.

I disagree with the notion that 2.5% inflation at $70 is not a concern.

Inflationary pressures take time to feed through to the CPI due to numerous buffering effects. A spot price of $70 one month will not unleash it's full fury on next month's CPI figure.

'Second round effects' take time to appear (hence the name).

Ryanair, to quote an example, are almost fully hedged until the end of March with an average price of $41 a barrel.

The CPI will steadily march onwards and upwards as these pent up pressures are realised. Either that or companies will hit the wall. Or both. None of which will do the housing market any favours.

Posted by: Werewolves at November 8, 2005 03:47 PM

I think to assume inflation is 2.5% is a joke. Most sensible people know that this figure is made up by the government. How can petrol costs go from an average of 79.99p at the beginning of the year to what is now 89.99p? We all know council tax has risen (and probably will rise again) as well as other energy costs. Its a joke!

Also how can any sane person on 25K a year borrow 5.7 times their salary at 4.5% just to buy a below quality house and feel safe? If rates rise by 1% thats is going to be hard on them to pay their mortgage!

Posted by: Ozz at November 8, 2005 04:04 PM


Well I refuse to sadle myself with the amount of debt required to buy a decent house that at 30 years old and with a deposit of £70k I should be entitled to.

If the choice is for prices to continue going up or a total and utter colapse in the British economy, then I'll take my chances with the latter, things are already unbearable thanks to Gordon's Economic Miracle, financed on the "Never Never"

Posted by: FrozenOut at November 8, 2005 04:06 PM

Anyway, getting back on topic.

I think we'll see EXACTLY where this country is going in the upcoming budget, debt combined with inevitable tax rises WILL impact the market, it will cause forced selling and Buy To Lets to flood the market, pushing prices down.

Once prices PROPERLY start to fall, buyers will just sit back and watch. What buys a flat one month, will buy a house the next!

Posted by: FrozenOut at November 8, 2005 04:51 PM

.....oh and that's without the forthcoming interest rate rises!

Posted by: FrozenOut at November 8, 2005 04:53 PM

A double whammy of big tax and interest rate rises would indeed hit the housing market, as it would hit the economy in general. I have taken the view that Gordon Brown values his own political ambitions rather higher than that, and will move heaven and earth not to hit voters with a big tax hike. As for significantly interest rates - you have to believe those second-round inflation effects will happen. They may but there is no evidence of it yet.

Posted by: David Smith at November 8, 2005 05:05 PM

Disturbing trend appearing in latest land registry report doesn't point to a very stable market!!

THE SHARP RISE IN % OF MORTAGAGED PROPERTIES NATIONWIDE.

Looking back at data as far back as 1998 it shows a steady trend line of around 70%, but in the last 6 months of data it has risen around 4% above trend,

This is probably down to Mortgage Equity Withdrawals to consolidate debt. (remember the headline credit card debt has fallen for the first time in 10 years, whilst mortgage lending has seen record figures for a single month (yet houses weren't selling?)

Posted by: alarm bells at November 8, 2005 05:25 PM

David,

I would appreciate your comments as to how significant falls in prices can be avoided given:

1. An historically low level of First Time Buyers.
2. An historically high level of unsecured and secured debt.
3. The economy showing weakness despite low interest rates.
4. Interest rates rising around the world.
3. Prices artifically raised due to a speculative BTL frenzy.

Do you own more than one property?

Thank you.

Posted by: Tester at November 8, 2005 05:35 PM

Your position David seems to be that we're not going to have a crash because we don't have a recession. I'd be interested to know what impact you think the decline in consumer and government spending will have on the economy and thus the market. I also wonder what level d'you think US rates will peak at and what impact that will have on UK rates. Your assumption seems to be that UK rates have peaked and that our economy isn't going to get significantly worse. Seems to me that neither of these assumptions are justified.

Posted by: bears all at November 8, 2005 05:44 PM

Sorry - that should read "neither is justified". I hate bad grammar!

Posted by: bears all at November 8, 2005 05:46 PM

Can I be a Times Columnist as well? You don't seem to need any skill or judgement for the job.

Posted by: Dog at November 8, 2005 05:47 PM

David,

I have read this discussion with some interest.

I am quite interested to know where you came by the figure of £30k as the 'average wage' - You have some sound arguments but throwing in such dubious figures as this does you no favours.

Are you suggesting that property prices were massively under -valued 7 years ago and have merely 'corrected' to the norm today? Or are you suggesting that this bubble is somehow different today and that this bubble is going to be the one where we all live happily ever after?

I am not an economists so I wouldnt like to comment on whether you were awarded your Economics degree from the back of a crisp packet....But I do wonder what your lectures make of this column.

Posted by: mail-lite at November 8, 2005 06:02 PM

The proportion of first-time buyers is indeed low; it seems to have settled at around 30%. But it has been there for the past three years. Why has it declined? I wouldn't deny that affordability is a problem for many first-time buyers but many are taking the deliberate decision to leave it until later to buy. Other sources of housing demand, including those arising from marriage break-up, also affect the composition of the lending data and may have reduced the first-time buyers' share. The average loan-to-income ratio for first-time buyers is 3.21 according to the Council of Mortgage Lenders. The average for existing home-buyers is 2.92.

On buy-to-lets in general, they have replaced some of the first-time buyer demand and they have been an important source of demand in themselves at the margin. I don't think the changes in Sipps (self-invested personal pensions) will have a huge impact on demand but it argues against a collapse from this source. I am not, by the way, a buy-to-let landlord, nor do I have a big mortgage on my single property - no vested interests here.

The UK economy has slowed, but it does not appear to be heading into recession. I suspect the official GDP numbers overstate the slowdown, and retailers do not appear as gloomy as they were.

As for higher interest rates worldwide, it is not unusual for the UK and global cycles to be out of synch. We had a rate-raising period, from November 2003 to August 2004, when America and Europe did not.

The £30,000 figure is my extrapolation into this year from the ONS's 2004 number for male full-time average earnings.

Posted by: David Smith at November 8, 2005 06:45 PM

"The average loan-to-income ratio for first-time buyers is 3.21 according to the Council of Mortgage Lenders."

Does this include self-cert mortgages? It's well documented that people have consistently been optimistic, let's say, about their income on self-cert mortgages.

Posted by: Pirata at November 8, 2005 06:57 PM

Whilst I'm grateful for the opportunity to quiz you in this way, David, I do wonder whether we're living in the same country. "Retailers do not appear as gloomy as they were"? Not in the financial pages I read; nor in my experience in the odd foray to the shops. Try and find a chain that isn't having a sale. I would agree that we haven't yet see the retail slowdown filtering through to the wider economy - the CIPS index is surprisingly buoyant.

You don't answer my query about US rates. Most commentators seem to think they'll be up around and about ours by next spring, if only because the new guy (Bernanke?) will want to show he's tough on inflation too. Will the MPC keep our rates above the US? If they don't, what d'you think'll happen to the pound and to the BoE's inflation target?

Posted by: bears all at November 8, 2005 07:35 PM

Hi David,

Interesting site and nice to see you are actively responding to detractors. Personally I'm sitting on the fence when it comes to future house prices movements, but I'd be interested to hear your opinions on how the property ladder will operate in an era of low inflation, high debt, high taxation and possible wage deflation. This to me could be the unravelling of the housing market, as future generations won't have the luxury of their debt being eroded by inflation, unlike the baby boomers.

Posted by: The Man from Del Monte at November 8, 2005 09:14 PM

David has hit this market right, unlike the crash is around the corner brigage, with all thier jibes, for a long time running and his reasoning is sound IMO. Mass immigration will keep houseprices out of reach of FTbers until they are in thier 50's as far as I can see.
However, I do wish to gain Davids opinion two two things that have occured recently which in many ways are quite important.

(1) The current situation in New Zealand, the first economy to undertake independant inflation targeting. Here we do seem to have a crisis like 1990.

NZ Governer Bollard has been hiking rates sharply to try to tame the housing monster at the expense of the real economy, with falling stock markets and rising unemployment, to try to get inflation back to 2% from its recent accelerating 3.4%. However even with rate hikes, houseprices are still accelerating at 14%pa which has caused alarm to both the governer and businesses. He has stated that he is now targeting houseprices and not inflation directly.

What are your thoughts on whats occuring here? Is the UK immune from this type of central bank response thanks to levels of immigration which New Zealand can only dream of? Will NZ look to repeat the UK in the1990s?

(2) The UK. Here I have observed that although a few months ago the UK yield curve had flattened - (low and behold real GDP growth drops) - its has now quite noticably inverted steeply, presumebly signalling falling final output/GDP - i.e. a recession 6 months ahead and falling profits. Is there really any credance to place on this in your opinion? What do you think lower yields for the longterm and higher yields in the short term mean?

Putting the two things together I would guessimate that you have again called the market correctly - as best as can be judged without more data on the all important labour market, with your article, if anyting houseprices really could take off again.


Posted by: Chris Sterling at November 8, 2005 09:41 PM


The immigration argument just doesn't work.

What will all these immigrants be doing for employment? Doctors? Barristers maybe? Lawyers?

Your suggestion that FTB's will be priced out until they are 50 is speculation in itself, time to get real me thinks.

The debt is real
The pending tax rises are real
The budget deficit is real
Rising global inflation is real.

Posted by: FrozenOut at November 8, 2005 10:03 PM

David,

I have not had the benefit of your years of study, but here is my simplistic analysis of the situation.

After the early 90s crash, house prices started to naturally gravitate towards the long term trend line. However, they then drastically overshot the long term trend line because:

low interest rates post 9/11 meant banks felt comfortable drastically eaing lending restrictions, taking salary multiplies from 3.5 to 4 right up to six, then interest only, and the evil of all evils - self certification AKA lie to buy.

So a far greater number of £££ were chasing broadly the same number of properties. Result=inflation. eg you are earning marginally less than me and we both want to buy the same property, if the bank will lend you 5x income rather than 3.5 to bid for it, I must also borrow 5x to outbid you. So the price rises.

Added to this was the Buy to Let craze, banks seemingly turned a blind eye to the extremely high gearing of many of these investors, allowing them to buy house after house using equity from previous houses, so even more £££ chasing a relatively fixed number of properties. In fact this has the hallmarks of a pyramid selling scheme.

Now there is ultimately a limit to this that we are slowly reaching. Wages and therefore rents have come nowhere near to catching up with house price rises, so buy to let margins have been squeezed and are for all intents negative. This must start to restrain what investors are willing to pay. And lenders have pushed salary multiples to the limits of comfort at a time when interest rates are more likely to go up than down.

The immigration issue is an interesting one - it will help push returns that little bit higher for those landlords prepared to get into the business of slum landlording, as you can get that little extra by cramming people into properties. I know personally of 10 Brazilians living in a 3 bed flat. But even that will reach its limit. And these immigrants in the vast majority have no chance of buying property themselves, given that British graduates are now priced out until their mid-thirties.

So we have more or less reached the point where the great wall of money thrown by lenders at the housing market in the last 5 years is coming to an end. As the money supply contracts back to normal levels, prices must fall. How fast they fall depends on how fast interest rates have to rise - if at all.

Posted by: Pirata at November 8, 2005 11:49 PM

Mr Smith,

Interested about your comments on frontloading (a low inflation/ interest market)

Yes, bigger loans are servicable. But doesn't this mean that "the ladder" is no longer functioning? (probably a good thing)

Essentially, because the kicker of inflation is no longer there, equity in the house will only be built up by the repayments, a slow process. After 5-7 years, not much will have been built up, and transaction costs are not insignificant!

So for those with a bright future career, why bother with the first couple of rungs? Rent the starter homes, then only buy the "family house"

In the 19th C. my understanding is that medium term leases were pretty common, because if you think you will only be in a area/ house for 5-7 years, in a low inflation environment, a lease makes more sense than a purchase.

Posted by: richard at November 9, 2005 09:32 AM

A few points:

On retailing, even the perennially gloomy British Retail Consortium said October showed a slight improvement and Marks & Spencer appears to be turning the corner. Other retailers are more upbeat about sales. It is very tough and sales have undoubtedly slowed (with some switching to online) but this is not High Street armageddon.

On sterling. US rates have been higher than those in the UK before, and the markets think we are headed that way again. That is why sterling has fallen against the dollar, but so has the euro. The Bank won't get worried unless the sterling index, its average value, falls sharply.

House prices did not just return to trend after the fall of the early 1990s, they dropped well below it. The Nationwide measure suggests something like a record undervaluation in 1995-6.

The comments about front-end loading are well made. I think this brings us towards a different era for house prices, one where there is much less expectation of huge capital gains. Housing will never be without some volatility but perhaps after the current period of adjustment (which I would see as 2-3 years of stagnation), prices will rise only slowly - in line with earnings.

The central banks of both Australia and New Zealand have been much more activist in relation to housing than the Bank of England (or the Fed). It will be interesting to see what Ben Bernanke's approach is. I don't see any shift towards greater house-price targeting from the Bank of England.

Posted by: David Smith at November 9, 2005 10:06 AM

“sterling has fallen against the dollar, but so has the euro. The Bank won't get worried unless the sterling index, its average value, falls sharply.”

That rather puts us in the hands of the ECB. Although it might seem crazy for the ECB to raise their rate above 2% in present circumstances, the ECB has a different statutory target to the MPC. The ECB might find it impossible to hold the 2% rate if eurozone inflation rises further – caused by a rising dollar, caused by rising US interest rates.

But one thing we should expect from Mr. Bernanke is that he probably won’t be worrying too much about the knock-on effect on UK interest rates, unemployment and house prices when setting US interest rates.

Posted by: David Sandiford at November 9, 2005 10:44 AM

David S
Read........
http://www.housepricecycle.com

Posted by: The Monkey at November 9, 2005 12:52 PM

Hi David,

I have read your article and agree totally with the logic. I think the doom and gloomers have misread the economics data and in fact house prices are cleary sustainable at current levels and there will be no house price crash.

Do not be concerned if you suddenly get a load of negative comments / posts here as a organised trolling of this site has been arranged by www.housepricecrash.co.uk. (a well known doom & gloomers / loser site)

If you go to that site you will see the thread in the main forum telling members to come here.

Just thought I would tip you off !!

I think it is a sign of now the house price crash has been cancelled they are getting desperate !!

Posted by: Paul at November 9, 2005 01:22 PM

Where is your educated comment Paul?

Yes, exactly didn't think you had one!

Posted by: FrozenOut at November 9, 2005 01:48 PM

Dear Paul,

Sounds like a swipe at HPC rather than a meaningful addition to the above argument.

So I guess you agree with David that house prices are overvalued by 10 to 15% and we need a period of stagnation to bring prices back in line rather than a 'suckers rally'?

As for an organised 'trolling' I suggest you reread the HPC forum which I quote:

'Sensible comments only I guess. There is a good discussion in progress so it would be a shame to drag it into the gutter...'

Get your facts straight Paul.

'...now the house price crash has been cancelled...'? You sound just like a certain 'Property Guru' at Singing Pig. In which case I suspect you won't have a clue what David is talking about.

Paul if you are privy to some economic genius that unanimously sways the argument then I suggest you divulge it.

David Smith is man enough to challenge us to a well fought debate so I suggest you could join his side in a sensible manner rather than 'down with the doom and gloomers' drivel.


Posted by: Werewolves at November 9, 2005 02:02 PM

Paul,

I guess you are a home owning "winner" while priced out potential first time buyers (like me) are just "losers" and our opinions should be discounted.

I've just taken a look at housepricecrash.co.uk and I feel I must defend them. All the posts here by their members have asked important and interesting questions.

In fact this comment "the house price crash has been cancelled" seems to come up quite often on the site. Paul, it looks like you might well be a member! Why do you hang around with "losers" all day.

Posted by: Pete at November 9, 2005 02:03 PM

Hi !

I can see with my post hit a raw nerve with the guys from www.housepricecrash.co.uk who seem angry that I have exposed their childish organised trolling of David's excellent forum.

Their trademark flood of abusive, aggresive chav like comments and weak economic analysis is indeed a symbol of www.housepricecrash.co.uk

However David do not worry they reguarly invade other forums with their fundamentalist doom and gloom approach and usually it is a sign they fear your economic analysis. So if anything I would take it as a compliment.

It is amusing that their site which they try to project as "credible" to the media is so easily exposed for trolling activities more suited to 14 year olds.

And these people wonder why they are renters and don't get anywhere in life.

They seem very upset that the house price crash has been cancelled and their trolling exposed.

Posted by: Paul at November 9, 2005 02:16 PM

Paul,

I am not a housepricecrash.co.uk member, by I still find you comments like "And these people wonder why they are renters and don't get anywhere in life." offensive.

It's obvious from you tirade that you have a grudge with the housepricecrash.co.uk site, but please refrain from trying to turn this discussion into a forum for you own personal vendetta again them.

Posted by: Pete at November 9, 2005 02:23 PM

Yes, Paul is Property Guru all right... I recognise the inflammatory style from Singing Pig.

I dare anybody to ask him a question on economics, the guy doesn't have a clue...

I just hope he doesn't start the usual cut and paste of BBC articles.

Posted by: Werewolves at November 9, 2005 02:23 PM

Whilst I'm sure that David Smith's credentials are impeccable I do believe he is either in denial or lending his PR weight to the postponement of the inevitable.

Historically the housing market has always reduced after a massive rise.

Many Buy-to-let investors are currently selling their properties.

Sensible first time buyers are seeking bigger discounts because they can.

Its risen, flattened out, peaked.

People see this and human nature forces them to leverage the benefit. Paying less for your house, purchasers and investors alike.

Once the un-influenced indices are produced such as the land registry data that show these average house prices reducing as a result the same human factors that ramped the market up will ramp it down.

But don't worry this is a good thing and we should embrace it.

Those who will benefit most are those struggling to buy somewhere to live, it will protect the most vunerable from negative equity in the future.

Those who will suffer most are investors, but at least they can accomodate that loss.

Even those who have brought recently will benefit indirectly from possible lower interest rates that will result.

So in summary both inevitable and beneficial - can't argue with that.

Posted by: David James (Not the goal keeper) at November 9, 2005 02:43 PM

As the members of www.housepricecrash.co.uk seem to be in denial about their trolling (though every one can see from the thread in the main forum "Join the scrap at www.economics.co.uk)

I have posted part of that thread here (see below).

It is interesting how the moderators at www.housepricecrash.co.uk ban free speech by accusing any bullish poster of being a troll and putting them in a "troll" forum on their site.

Yet when bearish posters openly brag about organised trolling on sites such as David's the moderators do nothing.

Typical of the hypocripsy and lack of logic at www.hpc.

Its interesting how they enjoy the free speech offered at forums like this or channel4 or siing pig but do not allow the same free speech at their forum.

Well www.housepricecrash.co.uk has been fully exposed for the joke that it is and at least now you know David that it is organised trolling / picketing from HPC that is disputing your article and not genuine posters.

Hope that Helps.

Paul

Below is a POST FROM www.housepricecrash.co.uk re the www.economicsuk.com


Hmmm. Interesting discussions...

Dave's got more comments on this thread than any other... Wonder why?


whoops_apocalypse Yesterday, 04:58 PM Post #5


HPC Poster


"'There are three factors which may be of some significance. First, the rate at which new dwellings are being built is at an historically low level whereas, for a variety of reasons, the growth in the population of working age and the net rate of formation of new households is relatively high (high divorce rates, high immigration rates etc)."

Doesn't this sound just like the crap they come up with at property investing seminars or am I being too unkind?

Then he goes on to say...

"Second, the disappearance of the front end loading problem when inflation rates and nominal interest rates are low. For example, it might be quite sensible for young professionals to borrow, and for banks to lend them, four or even five times annual earnings to purchase a house given both their very high level of job security and their very rapid rate of prospective earnings growth."

"...very high level of job security..."

Tell that to all those in the TMT industries!


"The only crash in nominal house prices we have seen in recent years was in the early 1990s, on the back of a doubling of interest rates and a a near-doubling of unemployment."

Posted by: Paul at November 9, 2005 02:54 PM

I fear I may have renewed some old enmities here. Two points outstanding from earlier comments:

1. The belief that housing boom is always followed by bust is commonly held. I've been trying to point out that that is not the case in the UK, at least as far as nominal house prices are concerned. House prices, to adapt a phrase used by Keynes, are "sticky downwards"; people don't cut unless they are forced to. That's one reason why the adjustment we've seen has been in transactions rather than prices.

2. On that point, the approvals numbers I quoted are for house purchase, and exclude remortgaging. The figures for loan to income ratios may include some self-cert mortgages, though I understand the proportion of these is quite small.

Posted by: David Smith at November 9, 2005 02:59 PM

Paul (Property Guru),

I suggest you stay on topic and discuss the article at hand. This is not a debate on your frustration with Housepricecrash.co.uk...

Now do you have anything sensible to say?

This is an economics website (hence the name) and I have yet to hear anything resembling a sensible economic discussion from you... And you wonder why people think your daft...

Posted by: Werewolves at November 9, 2005 03:00 PM

Please keep this on topic.

If we all ignore Paul, perhaps he will go away and allow a proper debate.

It certainly seems like he is deliberatly trying to de-rail this discussion, don't give him the satisfaction by rising to it.

Posted by: Pete at November 9, 2005 03:10 PM

david, you've been talking so crazy.
lately, nothing seems to be going right.
so low. why do you have to fly solo ?
david. your lazy.
and you've been waiting in the sun too long.

Posted by: right_freds_dead at November 9, 2005 05:30 PM

Dear David Smith,

I understand what you are saying but I do not see it 'on the ground'. Your well written points just do not seem to tally with what is happening around especially with house prices. Although I do hope you are right and there is not a recession in the near future.

Also thank you Paul for making me aware of the house price website, the contents of which help explain why I am a little uncomfortable with some of the articles I read today in the media.

Posted by: Daz at November 9, 2005 06:09 PM

Hi David Smith,

Just wanted to say I've read your comments avidly in the Sunday Times over the past few years, and always impressed with your clear understanding of the property market. Unlike most economists who stick rigidly to "the trend is your friend" you're fully objective within your appraisals, and able to see the property market for what it is, something that is hard to pigeon hole due to the unique amost emotional dynamics of the market. By that I mean relative low investor participation, (7% of mortgagees) and of course an asset that we genuinely all need. (and if you're renting please bear in mind someone is buyng it FOR you)

I post on a website called The Mottley fool (property markets and trends section) and there's some real clever guys there, but unfortunatlely for them they've followed more traditional economists and sold to rent, a reverse speculation if you like, way too early in many cases ,one guy as far back as 2001: ouch!

My own prognosis follows your own, there will be no HPC as long as the economy is still growing. As long as people can afford to buy, and have jobs to do so, they will. Property needs a shock to crash, something serious like a large rise in interest rates, or a recession, something that will bring forced sellers into the market in droves. Bears cite current repo levels as being high, yet they've risen from an extraordinary low base, and would need to rise approx seven fold to match the early 90's.

Property is affordable due to low IR's, even on the higer multiples we now see in many areas. How "bears" and the likes of Oswald from Warwick Uni, and indeed your own "adversary" Bootle can deny this is beyond comprehension to me. Why would something return to trend if the primary means of purchasing it was half the cost/one third of the cost even, of past times? I mean this is a primarily geared asset we're talking about here, the correlation between interest rates and house prices simply can not be denied. Just look what began to happen to the market in 1989 when they rose to 14.88% (a 100% increase from their lows, as opposed to a 37% increase last year)

Anyway, thank you very much for bringing economics firmly into the 21st century, a new environment (low IR''s/inflation) needless to say has a new pattern, a new paradigm if you like. Great to see someone who is actually able to use his intellect and grasp of economics and come up with theory that ultimately tallies up with what is actually happening in the "real" world.


Regards Paul

Posted by: Paul (AKA : Baresknightmare on TMF) at November 9, 2005 08:39 PM


So you basically agree because it suits you to.

Why have you bothered to type so much, two words would have done the trick.

So much property, so few buyers - it can't and won't go on forever.

New Paradigm my arse.

Posted by: FrozenOut at November 9, 2005 10:42 PM

Dear All,

I'd like to commend you for a very stimulating debate - though the occasional appearance of playground level abuse is a shame. I don't agree with everything David Smith writes but he knows how to marshall an arguement. Please do disagree with him by all means, but can you please do so by means of a coherent countervailing arguement.

That said David I would put this to you; markets make prices. Likewise when consumers consistently say 'x is expensive' it generally means that 'x is expensive'. The fact that they buy x doesn't necessarily change that. That sort of expression of 'Expensive' is a measure of perception as much as absolute value.

Property in the UK is generally overpriced when all and sundry are saying 'blow me house prices have gone crazy'. I've heard lots of people saying that £170 for an iPod is a bargain (and tell me to buy one) strangely though I haven't heard anyone much arguing of late that £300,000 for an average house in London is a terrific deal. They buy (in shrinking numbers) but they moan and worry about the consequences.

So while you rationalise the housing market in a very lucid and finely argued way - it simply doesn't seem to pass that reality check test. You can talk about structurally low inflation until you're blue in the face, but markets rest in largemeasure on human factors and while your correspondents are screaming to you to examine that aspect of the market, you seem to be more comfortable with the figures.

Or to put it another way - if it swims like a duck, has feathers like a duck, quacks like a duck, it's not a new paradigm - IT'S A DUCK!!

;-)
j

Posted by: jonathan kent at November 10, 2005 07:55 AM

FO used the argument that higher taxes will trigger a house price fall. But that argument doesn’t stand up. Higher taxes (or higher interest rates) will not force a large number of sellers to suddenly accept a 10% lower price than the one they are looking for today. Most sellers can still tighten their belts rather than have to sell.

Equally, telling a seller his price is too high or that the buyer can’t afford to pay has no effect.

To really force people to sell at a significantly reduced price, rather than keep their property off the market, you need something really major to happen on a large scale – divorce (the sudden availability of home paternity testing kits), death/illness (a bird flu epidemic) or unemployment.

Of these, unemployment seems the most likely. I think it’s misleading to say house prices only fall in a recession. It’s better to say they only fall when unemployment’s rising. It’s perfectly possible to have rising unemployment in the UK without a technical recession – just look at Europe.

The only thing likely to cause higher unemployment is higher interest rates. Yes, higher rates will discourage house buyers but cost-cutting by employers will put sellers out of a job.

UK unemployment is still at historically low levels and low in comparison to other countries. The only way is up.

UK ‘real’ interest rates are back down to 2% (4.5% base rate minus 2.5% inflation). Real rates in Europe and Japan are zero. Real rates in the US, depending on the measure, are no higher than 2%. Historically, in normal economic circumstances, the real rate internationally has been 3%. Again, the only way is up.

The UK may be able to raise rates while the US doesn’t but it just won’t work the other way around without raising inflation.

A falling oil price won’t be enough to keep inflation down because service sector mini-monopolies will keep raising prices and imported manufactured goods must eventually stop falling in price.

So if the MPC can’t cut interest rates to boost jobs then Gordon should act to reduce taxes. But, of course, he can’t because he’s already signed taxpayers up to keep public sector employees in unproductive jobs for life.

There’s just no happy ending to this story.

Posted by: David Sandiford at November 10, 2005 08:04 AM


Exactly my earlier point, inflation up ( I mean REAL inflation including energy, utilities,council tax )

If people want to sell their houses then they will be forced to accept lower offers or they simply won't sell them.

We have NEVER seen boom without bust, last time, yes we had massive interest rates.

This time we have £1.2 trillion quids worth with historically low interest rates, we won't need rates at 15% to bring the country down, all we'll need is rates to move to 6%, that along side the budget deficit is pointing to pending disaster for this country.

Why is it that as soon as we stop buying houses our economy starts to slow? As a country we don't really do much else, we are a nation of consumers and at some point the money needed to consume runs out - then what?

Posted by: FrozenOut at November 10, 2005 09:29 AM

*This time we have £1.2 trillion quids worth of debt

Posted by: FrozenOut at November 10, 2005 09:31 AM

Statistical update. There's been some surprise at my figure of £30,000 for male average (mean) earnngs. The ONS has just released new data on this. Its figure for mean full-time male earnings is £569 in April 2005, £29,600 a year.

For clarity, I should say that the ONS also gives a figure for median earnings - the mid-point of the earnings distribution - which is £472 for men, just over £24,500 a year.

I have used the mean because that has been the basis for comparison in the past.

Posted by: David Smith at November 10, 2005 10:02 AM

I agree with those here who say that you need an abundance of forced sellers to cause a crash. Unless you are forced to sell (e.g. through unemployment, divorce etc.) you are more likely to take your property off the market and tighten your discretionary spending elsewhere. At the moment unemployment is low and interest rates are low, so it's no surprise that property appears affordable at current prices, which are historically high by most measures.

I don't see unemployment rising dramatically in the next couple of years (although it's by no means out of the question). If anything a rapid rise in unemployment is more likely to happen as a result of a house price crash (as consumers tighten their belts and stop spending, causing employers to lay off in droves), rather than being the cause of one.

My view is that a house price crash is much more likely to be caused by a larger number of Buy-To-Let (BTL) investment properties flooding the market. These are often highly geared and are all-too-often reliant on capital growth for financing rather than rental income. In the current stagnant market, many of these investments have negative cash-flow and are unsustainable, especially if interest rates rise even slightly. A BTL business is like any other in that without a positive cash flow it will not survive, no matter what its long-term ambitions are.

It doesn't help that these days many investment properties are purchased off-plan by investment clubs that seem to operate like pyramid schemes.

I appreciate that BTL investors only represent a relatively small percentage of house price purchases, but in the absence of first-time buyers, current market prices cannot be sustained without them.

Posted by: doogie at November 10, 2005 12:25 PM

Dear David Sandiford,

I have read your interesting comments on this site previously. They often provide a useful counterbalance to the discussion at hand.

I agree that inflation is the key towards a rapid house price correction. The only way does seem to be up. I can't imagine the UK will tolerate inflationary pressures without hiking rates in response to the Fed's increases. Oil, I fear, will remain high due to demand issues (God forbid a supply shock occuring).

Another point which I don't think we have covered fully is the impact of rising house prices on the economy as a whole. Rising house prices have a massive positive knock on effect in borrowing (spending) attitudes and boost numerous markets (construction, finance, retailers, legal, etc).

With a stall in house price inflation surely we will lose a large drive to growth? Haven't we seen this evidence already?

I fear that the house fuelled cash machine is running dry and an economic drought lies ahead.

Posted by: Werewolves at November 10, 2005 12:30 PM

Dear David Smith,

Thanks for your insightful analysis, and for engaging with constructive debate. It seems as if stagnation in the UK property market is very likely, and may be very desirable.

I'm a scientist, not an economist, and come to this debate from a very personal angle - namely, should I buy a house in the UK and make my life here, or not? I'm looking find out as much about the property market and general economy as I can in order to make my own decision. At the moment I can only afford to buy something I wouldn't really want to live in for the rest of my life, and the arguments that have been made above convincingly suggest that moving up the property 'ladder' may not be possible in the future in the UK.

The other options available to me are to rent long term or to emigrate. I have good qualifications, and a good job with an above average salary. Yet I find over the past few years living in the UK that my quality of life and disposable income has declined. The pay rises I have received have more than been wiped out by council tax, utility bill, petrol and other price rises. Anecdotal evidence from my early 30s peers suggests that many are in the same situation. I'm interested to know if actual disposable income is taken into account in the arguments above - I note that you say
"....it might be quite sensible for young professionals to borrow, and for banks to lend them, four or even five times annual earnings to purchase a house given both their very high level of job security and their very rapid rate of prospective earnings growth".

My experience of late has been that there is less job security, and that whilst salaries do increase, some more rapidly than others, this does not necessarily equate to having more money at the end of the month to spend on a mortgage or rent once the basics (gas, electricity, water rates, council tax, petrol, food) are all paid for. Maybe it's just that scientists aren't paid enough in the UK?!

It is increasingly looking as if my future will lie elsewhere in the world, which is a bit of a shame since my family are here. However, I'm not willing to put myself into massive levels of debt simply to continue to live in this country, when a better quality of life is available abroad (I've worked both in the US and Canada before & found the cost of living to be much lower). I hope this debate continues, and look forward to reading more insightful analysis.

Posted by: Joe at November 10, 2005 01:28 PM

HI

Approvals, why they are at a reasonable level, and why they are a leading indicator of HPI

http://boards.fool.co.uk/Message.asp?mid=9596722

Approvals and HPI graph

http://www.geocities.com/kingofnowhereiii/houseapprovalHPI.GIF

Why the current HPI is constant with about 7% HPI next spring. IMHO.

From Here, we can see that that the average mortgage repayments (so it includes the saving element), for a person borrowing the current multiple, as % THP is 29%, compared to 27% historical average. Hardly out of line, and nothing compared to the 39% in 1990

http://www.nationwide.co.uk/hpi/historical.htm

If we look at trying to asset price it we have


P=D/(R+RP-G)

P=Price of house
D=Net Rental 3.45%
R=Risk Free Rate 2.40%
RP=Risk Premium 2.00%
G=Real Growth in rents 1.00%

This means that house prices are currently fairly priced as well, at current levels.

Finally if we look here

http://www.geocities.com/kingofnowhereiii/houseriskpremium.gif

We can see that the housing risk premium, is still about 2%, and that compares to -3% in 1990.

So it seems to me that housing isn't too far away from its fundamental value, so against a background of relatively stable interest rates, inflation within target range, and growing employment it's hardly a recipe for a crash.

My personal view is that housing will surprise on the upside next year.


Posted by: Kingofnowere at November 10, 2005 01:29 PM

Well I know hand on heart my pay hasn't gone up in line with house prices over the last four years.

Don't hold your breath about your personal point of view, the figures look beatiful but the future rate increases and tax increases - Including the chancelors "Window Tax" make the whole situation quite gut wrenching.

Posted by: FrozenOut at November 10, 2005 01:41 PM

Dear Kingofnowhere

You seem to have forgotten to factor in the rest of the economy into your argument...

Posted by: Werewolves at November 10, 2005 01:41 PM

Dear Werewolves,

I think it’s right to say that a stall in house price inflation (never mind a fall) reduces growth. We have seen the house price stall feed through to lower mortgage equity withdrawal. In the link I gave above you can see that MEW dropped from 9% of post-tax income down to 4% of post tax income. A 5% income cut is bound to feed through to lower spending and growth.

The media hysteria over low consumer retail spending is excused by the worry that GDP growth will turn negative – a recession. But the real issue for house prices is employment rather than GDP growth.

The ONS figures for wages that David Smith referred to are fascinating stuff (for nosey people). The press release is here:
http://www.statistics.gov.uk/cci/nugget.asp?id=285
(The link to the full report is on that page).

That average male earnings of £29600p.a. includes overtime. For comparison, average female earnings are £22600.

It’s important to consider female earnings because many mortgages are obtained and paid for based on joint earnings. One of the reasons house prices have been rising since the mid 90s is that the percentage of women in the workforce has been rising since the mid 90s.

The question is, will employers respond to a slower economy and higher interest rates by starting to cut women’s jobs first? Many employers would probably see that as the obvious first response. But even just the fear of losing the lower of two incomes could now have a dramatic effect on the housing market.

Posted by: David Sandiford at November 10, 2005 02:06 PM

Hi Werewolf.

The economy isn't anything like when the last crash happened. Debt servicing costs aren't out of line with historical values.

Employment is still rising, although unemplyment is rising very slighlty.

Inflation is under control, and oil prices, which are by far the largest part of its increase are now falling.

Ok, things might get a tad bumpy, we may even get a technical recession, of a couple of qtrs small negative growth.

But can anyone realistically see , us having a large recession, unemplyment rising to about 3M, and repos' rising to 75K a year?

The only reason we had such a large fall last time, was because we got stuck in the ERM, and so the Gov'ment wouldn't reduce interest rates as fast as the economy needed.

Cheers

Posted by: kingofnowhere at November 10, 2005 04:10 PM

Hi David

I forgot to ask, but I owuld be very interested in howyour overvalutation of house prices (10%-15%) is calculated.

Thank you

Mark

Posted by: kingofnowhere at November 10, 2005 07:31 PM

“But can anyone realistically see us having a large recession, unemplyment rising to about 3M, and repos' rising to 75K a year?

No, but that doesn’t mean house prices can’t fall. We don’t need a recession to have rising unemployment. We don’t need mass repossessions to force people to accept a lower price.

“The only reason we had such a large fall last time, was because we got stuck in the ERM.”

It’s not the only reason. The main reason was that house prices were way above fair value on any comparable basis – as now.

“oil prices … are now falling”

Exactly, it’s only five minutes ago that we were being told we were about to run out of oil and the price would go to $100. We didn’t run out. The reality is that speculative activity at the margin pushed up the bulk price. That speculative activity has ended because the ‘story’ no longer stands up.

The housing market has also been influenced by speculative activity at the margin. But that brings us back to the title of the original article. The recent house price rise is a suckers’ rally because the speculative argument for buying houses today no longer stacks up.

Unfortunately more people are going to be burned by speculation before the death of house price inflation becomes common wisdom. I think that’s what Mervyn was trying to avoid by voting against the rate cut.

If you really want to bring down house prices, write to Gordon Brown in support of his plan to build one million new homes in the UK, as stated in his recent speech. That should do the trick.

Posted by: David Sandiford at November 11, 2005 02:22 AM

Hi David S.

"No, but that doesn’t mean house prices can’t fall. We don’t need a recession to have rising unemployment. We don’t need mass repossessions to force people to accept a lower price"

But, history teaches us that these are the only times , house prices fall, by any significant amount. Without these it's improbable that they will fall, people just don't sell. Basically the housing market is extremely sticky downwards.

"It’s not the only reason. The main reason was that house prices were way above fair value on any comparable basis – as now"

Perhaps I didn't word correctly what I meant. I was trying to say, that the reason housing fell so much was because of the ERM. It caused interest rates to stay too high, and indeed rise, while we were in a recession/low growth. This caused houses to fall below fair value in the mid nineties.

Aslo, I don't think houses are anywhere near above the fair value, they were in the early ninties. Affordability is roughly in line with historical norms , asset price is roughly in line as well, and the housing risk premium isn't negative.

"But that brings us back to the title of the original article. The recent house price rise is a suckers’ rally because the speculative argument for buying houses today no longer stacks up. "

I don't disagree, but say, HPI hit's 10% (implied by the current approvals), then house prices rise slowily (Ie below wages), or the BOE cuts rates, so the average house hits fair value without nominal falls (or falls below the 10%), then it's better to be in the suckers' rally than stand from the outside?

"Unfortunately more people are going to be burned by speculation before the death of house price inflation becomes common wisdom"

Why would house price inflation die? Surely house prices can rise below earnings?


Posted by: kingofnowhere at November 11, 2005 08:57 AM

Thanks for all the excellent contributions to the debate. I've reluctantly removed one or two of the moronic ones to keep it flowing.

I was asked how I came up with a 10% to 15% overvaluation. This I did a while ago, beginning with a situation where the house price-earnings ratio was roughly 50% above its long-run trend. I took all the factors that might justify a revaluation of housing - lower short-term interest rates, lower long-term real interest rates, double income households, lack of housing supply, etc, - and on cautious assumptions came to the conclusion that these justified three-quarters of the rise in values above trend, the remaining quarter - 10%-15% - being a little bit of "irrational exuberance".

These things can never be precise. Steve Nickell came up with an argument that there may be no overvaluation at all, as described earlier. Others, and this is the nub of the crash argument, believe housing will always be mean-reverting, and will have to get back to its long-run average in relation to earnings. I disagree, for the reasons set out.

Posted by: David Smith at November 11, 2005 09:59 AM


This says it all I think, read and digest - anyone who thinks the good times are going to be around for a while can take this as a huge wake up call.

As I said earlier new paradigm, my arse.

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2005/11/11/ccjeff11.xml&menuId=242&sSheet=/money/2005/11/11/ixcoms.html

Posted by: FrozenOut at November 11, 2005 10:42 AM

Personal sector debt £1.2 billion, more than 80% secured. Personal sector assets £7 billion. Net personal sector wealth £5.8 billion.

Posted by: David Smith at November 11, 2005 11:32 AM

Dear Kingofnowhere,

Thank you for your comments.

I disagree that inflation is under control, by basic definition it is not.

The CPI has continued it's heady ascent and at 2.5% is ABOVE the 2.0% target.

The FED continues to roll out interest rate hikes with corresponding inflationary pressure on the pound.

The ECB are poised to increase the Euroland rate (they would have done so if it weren't for corporate arm twisting).

All this without mentioning the much disputed 'second round effects'. As I've said before, I think it's a bit early to be ruling them out.

As for oil. At present we have had warm weather and relative calm on the supply side. A cold winter (as predicted) will see oil on the rise again and I'd be suprised if we didn't encounter supply scares on the way. US/ China/ India/ etc continue to grow and so do their oil demands. Our supply is failing to keep up.

As for house prices being sticky, I do agree. In which case in line with simple Keynesian rules we then enter a recessive state with low transaction volumes. A large proportion of our economy (construction, retailers, legal, finance, etc) would suffer. In which case we would have lower employment and forced selling.

Haven't you notice repossessions going through the roof? (And this occuring at low interest rate levels.)

All this would have a knock on effect on reducing rental incomes. Landlords a sensitive to rental incomes. A drop in rental would see forced selling on their part. This would really get the ball rolling.

It bugs me that people expect a crash overnight...

The 89 crash took over half a decade from peak to trough. For the first couple of years large swathes of the press denied it's existence. The market was 'stabilising' we heard. The Halifax parped on about 'a recovery around the corner' through most of this period.

We are I'm afraid in a large bubble... A massive one in fact... A silicon-implant enhanced monster of a bubble...

Boom and bust. It's all happened before in numerous other markets. A few saw it coming, but most didn't...

Posted by: Werewolves at November 11, 2005 03:25 PM

David, can you justify why and how house prices have doubled, tripled and even quadrupled in Swansea in the past four years? How can a house that last sold in 2001 for 82K now justify an asking price of 425K? Or a house bought in 2000 for 60K now has owners expecting 175K? I can give countless more examples along these lines in an area of the country that has amongst the lowest wages in the UK.

The reality is that easy credit combined with speculators combined with poor economic direction by the Government has created the biggest pyramid selling scheme in history - with houses! Do you honestly think that the 1.1 TRILLION of consumer credit does not have to ever be paid back? Do you think that the population of the UK can simply keep on borrowing year after year without ever having to pay back the money borrowed for holidays, consumer goods and cars? That is the economics of the insane asylum!

House prices in the UK are teetering on the edge. No doubt spin, denial and articles like yours will prolong that teeter but, boy, when UK house prices fall we are going to see a bubble burst that economists will be talking about hundreds of years from now!

Posted by: The Masked Tulip at November 11, 2005 05:03 PM

"Personal sector debt £1.2 billion, more than 80% secured. Personal sector assets £7 billion. Net personal sector wealth £5.8 billion."

Secured debt? secured on what exactly, a depreciating asset?

Posted by: consa at November 12, 2005 07:58 AM

From today’s Times:

“ State sector pension bill 'is billions more than estimated'
By Gabriel Rozenberg, EconomicsReporter
http://www.timesonline.co.uk/newspaper/0,,175-1868534,00.html

THE Government was accused of playing down the scale of its "pensions time bomb" last night after a report claimed that it had public sector pension liabilities of £817 billion, well above previous estimates. The study from the Institute of Economic Affairs (IEA), the free-market think-tank, claimed that the extent of the Government’s pension obligation to workers in the state sector was vastly higher than its official figures showed.

The gap between the government and independent estimates arises from assumptions about future interest rates. The Government assumes a future real rate of 3.5 per cent when calculating its liabilities, based on historic rates of return, but the IEA report said that the Government ought to use the current long-term real market rate of 1.6 per cent. The much lower figure means that the Government would need a higher lump sum to guarantee its promises.

The report also estimated that individual public sector workers are being remunerated with far more generous pensions than generally believed. Female police officers, for example, are receiving pensions with an effective annual cost of 85 per cent of their salary, the report showed. ”

It seems Gordon’s Prudence must now be enjoying a very comfortable retirement.

Posted by: David Sandiford at November 12, 2005 11:59 AM

From this morning's FT, the FT-Acadametrics house price index:

"House prices nudged up by 0.1 per cent in October, much less than the 0.9 per cent rise the same month a year earlier. Slower monthly price growth this October caused the annual rate of house price inflation to fall from 3.3 per cent in September to 2.5 per cent. General price inflation in September, as measured by the consumer price index, was also 2.5 per cent.

The housing market has been broadly stable for the past eight months. There are no signs of an imminent crash or renewed strength in the market.

The stagnation of prices, alongside a recovery in transactions, will please the Bank of England and the Treasury. It shows broad stability for the first time in almost a decade in one of the most important markets in the economy. As recently as August 2004, the annual rate of house price inflation was 15.2 per cent.

There have been few signs of large price falls or rises in any region in recent months. House price inflation fell faster in the north of England, where it had been higher, and showed continued modest annual rises in most other regions."

Posted by: David Smith at November 12, 2005 02:55 PM

Dear David Smith (what is the correct way to address you?)

I'm sorry if I'm telling you to suck eggs, however the FT index is based on the Land reg numbers, which are about three months behinds the Haliwide numbers.

see the time line, for the housing market

http://www.geocities.com/kingofnowhereiii/houseapprovalHPI.GIF

Therefore I would expect the FT and the Land reg to start reflecting the recent haliwide numbers soon. (probably next moth or the month after)

Current approvals levels are in consistant with about 10% HPI, as can be see here

http://www.geocities.com/kingofnowhereiii/houseapprovalHPI.GIF

So IMHO the housing market is showing renewed strength?

Also just to throw bangers in the fire, perhaps houses are cheap? Sounds like heresy?

Well, consider that the debt servicing costs are in line which historical averages. Yet interest rate volatility is lower, therefore people can probably sustain more debt (after all repaying debt is saving).

Therefore as people tend to borrow as much as they can for their houses, and perhaps people can justifiably borrow more, and if they borrow more (which is generally for house purchase) they will drive prices higher.

OK I'm on a limb here I know, and playing the devils advocate, but Nickell, said house prices were fairly priced, you have said on conservative estimates they are 10-15% over priced, therefore it's not a great leap that they are in fact cheap, so perhaps it’s not a suckers rally?

OK that is cat and pigeons combined.

Any views on that?

Mark

Posted by: kingofnowhere at November 12, 2005 07:16 PM

I'll stick with my view. I quoted the FT figures to address the argument that the Halifax/Nationwide data have an optimistic bias.

Posted by: David Smith at November 12, 2005 08:31 PM

Hello everybody.

Just a quickie, as I'm off out...

Are we not just seeing the summer boom figures coming through?

I'm sure that approvals will drop off in winter as they normally do.

Mr Kingofnowhere suggest that approvals today mirror HPI in 6 months times.
Eyeballing his figures for 1988-1990:

31-Dec-88 328 109 34.03%
31-Mar-89 284 95 32.19%
30-Jun-89 272 91 25.98%
30-Sep-89 299 100 14.22%
31-Dec-89 306 102 5.06%
31-Mar-90 303 101 1.34%
30-Jun-90 241 80 -1.25%
30-Sep-90 252 84 -1.20%

The stated correlation breaks down somewhat here. Looking at the figures as interpreted by Mr Kingofnowhere the rise in approvals Sep/ Dec 1989 should see a corresponding increase in HPI in 6 months time, yet the market continues to drop.

Surely a model that didn't accurately predict the crash last time cannot be relied on to do the same this time?

Looking at the HPI approvals graph just clarifies this.

http://www.geocities.com/kingofnowhereiii/houseapprovalHPI.GIF

Looking at March 1990 we would have thought that prices were on the way up, yet they continued to fall.

I refute the statistical analysis offered by Mr Kingofnowhere (I'm sorry, not meaning to sound harsh).

The whole pattern (squint your eyes) may well be sinusoidal, as we would expect in a cyclical market.

There's nothing in the current set of figures that confidently asserts a further boom. The same figures did a similar see-saw wobble back in the late eighties which I'm sure threw a lot of people off track, as it has done today.

Many thanks, now I'm off out to get plastered... Take care everyone.

Posted by: Werewolves at November 12, 2005 10:52 PM

After reading all the arguments for and against the House/Economy scenario, no-one has mentioned the impact of the Information Age and how we are entering the dawn of a new revolution. Maybe the High Street is suffering because people buy on-line now, maybe travel agents are shutting down branches because holidays and last minute flights are cheaper on-line. The rise in people working from home is due to new technology where you have a Virtual Private Network and office. The impact of the information age is only just starting and is behind more than you can imagine, just look at CD sales and piracy, recent credit card fraud and loss of revenue for the film industry. Why bother paying street and shop prices when you can dowload ? Ebay has also made a huge impact along with Google and how information can be accessed. Freelance press is another plus, people can see how the US used banned chemicals on iraqi civilians and not see the lies spun by our govenments.

With all new revolutions come the collapse of the last. Governments will have less power as people move into to the cyber-age, taking themselves in affect off-shore, so its goodbye too the nanny state, fraudulent paper money and the industrial revolution.

Are you prepared ?

Posted by: Mark at November 16, 2005 12:20 PM

After reading all the commentaries above, I still feel very unsure of whether I should buy a house in the suburbs of London.

I am a divorcee who needs (at least) a two bed property since I have two kids.

I have 100k in savings and am scared silly if the market goes pear-shaped.

Posted by: Frank Parrish at November 28, 2005 02:04 PM

Hello,

Since this topic was last posted and SIPPS has been removed from the individual, direct pensions-investment scenario, do you think this may alter your analysis? Particularly as the times has been running articles all week about how so much of the property industry had geared up for this? How so many individuals had bought BTL investments on the expectation of a reform being made? The Times has been quite strong in running these stories (expecting the taxpayer to further distort the housing market and PAY for THEIR property speculation).

Surely any of the recent momentum, or counter to what many expected to be a year for falling prices, was mostly on the back of bubble investment mania in anticipation of tax breaks and short term property values rises? I cannot believe that the current level of house prices is sustainable in a global economy. Our cost base will be destroyed and unless many yonger workers are prepared for a substantial reduction in living standards and little prospect of home ownership, there is little alternative solution bar inflation, particularly very large wage inflation, to sustain this without the SIPPS investment expectation. The latter would be questionable as much of the impetus to the the SIPPS reversal was politically lead by the Liberal Deomcrats and some conservatives and rebel labour MP's championing the cause of non-affordability, property speculation, record debt levels and their links to the pensions crises present and future and the slump in consumer spending.

I will be blunt sir. I believe that you act out of vested interest in attempting to use the media to portay the property market as healthy when it is infact chronically ill and damaging to the current economic situation simply to profit personally from property investment.

Regards,

C Walker

Posted by: Chris Walker at December 8, 2005 08:09 PM

Apart from the paranoid nonsense in the last paragraph, two good points:

1. Will the SIPPs U-turn remove a vital source of support from the housing market? I've never used this as an argument for predicting a soft landing, partly because of a suspicion that the Treasury would nip it in the bud, mainly because in macro terms the effect was always going to be small. Having said that, flats built by developers specially for the buy-to-let market were suffering before this and will suffer more now. But that won't drag the whole market down.

2. High house prices could affect the economy's competitiveness. It appears to have happened in Ireland and it could do so in the UK, though there is no sign of it yet, or of any follow-through from the housing market into pay settlements.

Posted by: David Smith at December 9, 2005 11:32 AM

Hello ;

point 1;

The OECD has recently been yet another economic body to outline the over valuations in British housing, in the region of 33% in their opionion. Again, I think you underestimate the impact SIPPS had in proping up a sick housing market beyond economic fundementals. Why did your paper make such a fuss about it during the past week? Devoting many pages to it, for something that does not seem like a big deal in your opinion. Why has the abbey national, an aggressive mortgage lender who was championing SIPPS, since projected that house prices may experience 0% real growth, negative growth when adjusted for inflation, with the chance of real falls a possibilty. They are an organisation who surely would be the last to make anything other than positive statements about the market. Why the sudden revision in thoughts?

Why are the Portman Building society pulling out of BTL mortgage provision in the same week that the SIPPS reversal was announced, indicating one of the underlying reasons being a 5% fall in new build house prices over the past year, even before this announcement. And as investment properties have reached an all time record number, at the same time as first time buyer numbers have fallen to record lows, surely market sentiment is much more important to the market now then ever before?

Point 2;

I don't think there is any 'could' about it. Speculative-driven over pricing of houses will reduce competitiveness, for the whole knock-on affects of any large costs increase,not just wage demands although you are likely wrong on that point also. Voca have already identified a 5.5% increase in private sector wage increases this year. The costs are coming to bear already and the high levels of debt servicing in the UK are draining money from the wider economy. More fundemental to the competiveness issue though, how can the current level of pricing be sustained? UK productivity has not greatly increased over the past decade and our eduction and skills levels are still also low in international comparison. We are not the tax-pull we used to be and there are no new strikes of oil in the North Sea. Where is the funding that has and will drive this? For this reason again, particularly over the past two years, I believe that UK property prices have been mostly driven by artificially low interest rates, lax credit restrictions and a bubble mentality driven by SIPPS and general property speculation.
If you can point me to anything here, or elsewhere to reconsider my views, I would like the opportunity to reconsider my views. I have not seen anything yet though.

point 3; (Paranoia)
The UK media industry has in some parts fuelled the bubble. I hope some other parts of the media will publish quotes and articles later on down the line to remind people of what was said, when and by whom within the mass media. The Times printed a false and distorted view of the economics of UK housing 15 years ago, possibly adding to the hardship of many people facing over extended purchasing in a fundementally unsound, declining market. Can you say to me here, Sir, that you do not own susbstantial property investments yourelf or advise in a professional capacity to firms that are directly involved in property investment and sales and hence have no vested interest in anything other than a rising property market? If not, do you view a decline, if even modest, in house pricing, a problem to the economy? (regardless if you agree it a possible scenario or not)

Thank you,

Chris

Posted by: Chris at December 9, 2005 07:28 PM

1. We've been through the overvaluation argument before in this debate. The reason newspapers have made so much of the Sipps U-turn is that for the individuals who had planned to take advantage of it (and parts of the financial services industry) this was a huge inconvenience. The point was not that the residential property should or should not have been in Sipps, it was the timing of the Treasury's change of mind.

2. The Voca measure is too new and unproven to be of any use. Every other measure of pay pressure shows a benign picture. I don;t disagree with your other points about productivity and competitiveness and, indeed, have often written about them. But it is a red herring to tie them too closely into housing.

3. As I've said before - no vested interest. Perhaps you have a vested interest in a fall in prices?

Posted by: David Smith at December 11, 2005 09:24 AM

Hi David,

I think you have made a balanced call on this subject so far. Is it correct that Roger Bootle, one of the prominent forecasting professionals, has revised his advice to investors that house price falls are now unlikey? This is very comforting news to those of us who have bought recently, I would be interested to hear your views.

Posted by: frank van weil at December 22, 2005 05:22 PM

I believe the average income Mr Smith quotes is the MEAN average rather than the MEDIAN and this overstates his case. What is the distribution of income? - An awful lot of potential buyers earn nothing like £30k a year. I don't and nor do any of the admittedly few people I know. We have evolved from a situation where one breadwinner could pay for house, to two becoming the norm, and with the imminent propect of shared equity two people buying half a house! The house is in danger of becoming a product in search of a market. So much for progress.

In the comments from Mr Nickell, what he overlooks is the initial house price. We have moved from a low house price-high inflation-high interest rate scenario to a high house price-low inflation-low interest rate scenario with affordability at similar percentages (not the 60 / 20% quoted). However, under the old conditions high inflation often meant high pay rises, and the mortgage rapidly declined as a percentage of disposable income. Not any more. Even in real terms (i.e. allowing for inflation) the high inflation is the better one for the buyer because of the effect of compounding on pay rises. Constrained growth in disposable income has consequences for consumption and GDP growth. Did I forget to mention the prospect in the next few years of pension saving, tighter lending criteria and council tax re-evaluation?

The credit controls of the 1950's and 60's have been scrapped, and as the lending and housing markets have become freer and more 'perfectly competive', prices have become more volatile, even though the macro-economic enviroment has been more stable. A house price crash is possible in a low inflation, low interest rate environment: witness Japan.

Risk free interest rates have fallen. Greater transparency in central bank interest rate decisions following idependence has reduced uncertainty and increased the risk financial markets are prepared to bare. However, the practice - or belief - in America and the UK that interest rates will be cut if there is any trouble has created 'moral hazard' - why worry about a downturn, the bank will bale us out! Arguably risk is under-priced. Especially since there is a danger inflation will rise. Inflation has never gone away from the services sector. Retailers can cope with price deflation and rising labour & rates costs for only so long: the competition is cut-throat. Cheaper good have been imported from China, but manufacturing is only one part of the value chain: raw materials to retailer - how much lower can they realistically go? Can the undeveloped part of China produce any cheaper than the industrialised areas? Raw material prices are volatile (better not mention the growth in oil demand versus the production and refining constraints). The risk free rate seems to be kept artifically low by China buying US Treasuries and pension funds buying bonds to meet FSA rules.

To complete a housing chain there needs to be a buyer at the bottom. I would suggest 'professional investors' after rental yield would have stopped buying as prices rose.

Many potential first time buyers lack the income or the deposit or both. Estate agents etc. often talk of high demand from immigration, divorce etc but unless they have the cash and and are prepared to buy this latent demand is not effective demand. And high latent demand on average can easily conceal low effective demand now with prices at record highs. With fewer young people and more of those spending years at university and racking up large debts there is likely to be even less effective demand in the future.

First time buyers have been priced out by the 'speculator' chasing capital gain. He has lower monthly payments for any given property owing to a higher deposit (15% for a buy-to-let mortgage versus 3-5% for a first timer) and commonly an interest only mortgage rather than a repayment one. The speculator will be limited by: 1) mortgage payments exceeding rental income [negative cashflow], 2) low house price inflation limiting his ability to leverage his existing property for the next deposit via mortgage equity withdrawal, 3) better returns available in other markets. There is always the Greater Fool though...

And I'm only a third of the way down the page.

Posted by: David Goldfinch at January 20, 2006 05:59 PM

With the recent interest rate rise and another one looming to possibly take the rates to 5.75%, i think the BTLs will start feeling the pinch and will find it difficult to make the property rentals stack up. There is also the worry of the downturn in the USA. I don't know about a crash but wander how much these factors will influence the property market.

Posted by: stop repossession at May 23, 2007 12:16 PM

The situation is not as bad as it first seems. Although the rates have gone up with another possibly expected, the inflation is coming under control and the long term outlook is for the rates to stabilise or even move down further. So we could be coming to a peak of rises.

Posted by: sell my house fast at June 16, 2007 11:45 AM

With confirmation from Lord Edward George that the housing boom was manufactured to deliberately encourage the massive take up of debt that would then be injected into the economy attitudes have changed.
There is no shortage of housing, never has been: That is a fact.
It was all about selling debt and convincing people that they were richer as they took on catastrophic levels of debt. Keeping Interest Rates artificially low for as long as they could.
This made it possible to re-mortgage most homes in the country to borrow a further £80,000 and for the home owners to still have lower mortgage payments.
Pretending that £700,000,000,000.00 of extra debt was not inflationary was frankly criminal.

Oh, and this is too the expert who posed the original paper.
House price crashes lead into recessions, not the other way round. That is an absolute fact.
To quote:
“What I said, by the way, was this: “What we are going to see is modest or no rises in house prices. A very dull market in some ways. A house price crash in the absence of an economic recession? It just doesn’t happen in the UK.”
Is just a 100% incorrect statement.

Posted by: pragmatist at July 12, 2007 05:15 PM

Lord George said that when the global economy was weak in 2001 the Bank acted to stimulate domestic demand to keep the economy going, A side effect of that may have been to boost the housing market but that was not the intention.

Household debt has risen, but so have household assets - the net financial position of the household sector is strong - assets exceed liabilities by around five to one.

The last UK recession started in the middle of 1990. At that time national house prices were still rising, as this link shows: http://www.communities.gov.uk/pub/115/Table506_id1156115.xls

Posted by: David Smith at July 13, 2007 09:21 PM

The Bank of England are in a very difficult position because as the credit squeeze tightens worldwide their inclination to increase interest rates will be countered by the need to lower like the Federal Reserve has recently done. It's a question of confidence.

Posted by: Sell my house fast at October 5, 2007 11:42 AM