Comments: Warning signs but no crash

"But why worry unnecessarily?"

Isn't that what economists are normally paid to do?

Posted by Giles at January 3, 2005 12:49 AM

A house price crash IS quite likely.

Why?

1/ Unemployment: the figures are masked by

Over-education: most people are in uni from 18-21+ the time when people are most likely to be unemployed.
Fiddles: after 3 weeks unemployment, you go on a course, and are signed OFF the list.
Mal-Employment: We have 800,000 extra state employees, all not doing too much, (and all on final salary schemes!) Gordon has started to feel the laffer curve, and revenue will not be increased by increasing tax. The MalEmployment con, cannot continue for long, and soon alot of council non-jobs will be competing for work in the wealth creating part of economy.

2/ Inflation:
Fiddled This has been high, but the Govt say it's low figures ignore Rent, Mortgage interest, council tax, travel costs etc. They do include that DVD player that was made in China, the one you buy once every two years!

3/ Debt:
The UK public is in debt, the state is in debt, Debt is consumption brought forward temporally. We pay it back in the future, and just paying the interest will erase economic growth.

4/ Prices:
No-one I know can really afford to buy a house, and I know some VERY well off people. Transactions are LOW, FTBs are priced out, BuyToLet will lose you money. So where is the money for price rises going to come from?

5/ Bubble Economy: The definition of a bubble is that people are buying for the capital appreciation not the yearly return. This is the housing market to a Tee.

The housing prices have to fall at least 30% to return to their average. Unless there's a "New-Paradigm" like the Dot-com boom ;)

Posted by Rob Read at January 3, 2005 01:12 AM

In response to Giles:
Good point. It depends how dismal you think the dismal science should be.

Posted by David Smith at January 3, 2005 11:17 AM

In response to Rob:
I don't agree. The only period of significantly falling nominal house prices we have seen in the UK was in the late 1980s and early 1990s. The peak-to-trough fall in prices then was 13% (on the Halifax and Office of Deputy Prime Minister measures). In normal circumstances house prices are "sticky downwards". I also believe that the house price-earnings ratio is no longer a reliable measure of housing valuations. Valuations are stretched but so are people's expectations. I suspect the people you know aren't opting for what used to be the usual practice in getting onto the housing ladder - buying in a cheap, often grotty area just to get started on the process.
That's anecdotal. The upshot of my argument is that it takes a lot to produce a big fall in house prices. If the Bank of England lost control of interest rates or the economy was to slide into recession (try finding an example of a house-price crash without a general recession) and I might change my mind.
By the way, there's a lot of misunderstanding about the inflation measures, for which the government has only itself to blame. I agree with you about the CPI but a more reliable measure, the RPI excluding mortgage interest payments (an appropriate exclusion) only has inflation at 2.2%.

Posted by David Smith at January 3, 2005 11:27 AM

The only period of significantly falling nominal house prices we have seen in the UK was in the late 1980s and early 1990s

Before then this was considered impossible. It happened once and it can NOW more easily happen again.

In normal circumstances house prices are "sticky downwards"

Homes are sticky downwards. Rapidly non-performing => loss-making amateur Buy To Lets are a completely different story. This is why a fall is MORE likely than before. A fall in employment in London, could increase the rental voids in BtL sucking yet more money out of the economy to cover the mortgage gap. BtL losing money might decide to sell forcing down prices.(Anecdotally New Years Eve was very quiet in London, people just aren't going out and spending.)

getting onto the housing ladder - buying in a cheap, often grotty area

There ARE NO cheap areas, just expensive grotty areas. FTB are disapeering and will be extinct soon. What market increases valuations with no new entrant money appearing?


Basically I think we are about to go into recession.

Debt will cause the recession or more accurately, the inability to continue to take on debt will cause a drop in spending, causing a drop in employment, repeat feedback loop, the interest payments will also not help.

Your opinion boils down to "New Paradigm Beleiver", I still see no justification for changing the new way of valuing houses?

Posted by Rob Read at January 3, 2005 05:05 PM

I think that there were nominal prices fells in the 30’s and 1890’s as well. Still one thing that is worth mentioning when discussing house prices is immigration. Current net immigration of 200k per annum far exceeds the construction industry’s ability to build houses and hence puts upward pressure on house prices, particularly in the South East. However its also important to note that immigration flows can reverse quite quickly net inflow of 200 thousand can turn to an outflow of 200 thousand if entrance visas were suddenly restricted. And this is quite possible – it the Tories get in they’re bound to tighten up the granting of visas almost immediately and a major terrorist attack might have the same effect on Labour. So I think there’s a possibility of a crash driven by immigration.

Posted by giles at January 3, 2005 07:31 PM

There were indeed nominal house price falls in the 1930s. Interestingly, the peak-to-trough fall was 13% then too according to ODPM data. But this was a time of huge economic dislocation, the Great Depression and, most importantly, general deflation. It is worth noting that out of the wreckage came a housebuilding boom. Think of all those 1930s' semis. Anybody who expects a UK recession is right to predict a housing crash. Those who don't have their work cut out. The immigration point is a good one.

Posted by David Smith at January 3, 2005 09:06 PM

"inflation that has lasted a long time disorganises the economy"

The question of house price adjustment can only be answered if a reasonable analysis of the disorganisations to the economy is made.
To date I have not seen, nor read much about the disorganised economy that is the UK. However signs are there. (credit boom, FTB out priced, ...)

can you advise ?

Posted by Ryan Dallas at January 4, 2005 01:03 PM

I think the quote refers to Alan Greenspan's famous dictum that central bankers should aim for a rate of inflation that is low enough to not distort economic decisions. High house-price inflation has led to some distortions, probably encouraging a higher rate of growth of consumer spending than would otherwise have been the case. I wouldn't say, however, that it has "disorganised" the economy.

Posted by David Smith at January 4, 2005 03:30 PM