Comments: Spending less and saving more

If the savings ratio increases as you say, then House Prices are sure to fall.

History shows that there is very strong correlation between the two. When one goes up, the other falls and vice versa. This goes against your previous statements which predict no significant house price falls or a crash.

Perhaps you'd like to explain the scenario of how house price falls won't happen when we are to increase our savings significantly in a country which also has rising fuel costs and taxes ?

The British consumer is up to their eyeballs, and the economy has only been kept out of recession by 20% per year House Price Inflation.

Now that's ended, it's payback time. It'll be a big hangover.

More information on savings vs house prices :-

Posted by Warwickshire Lad at July 14, 2005 11:25 PM

The saving ratio can and does rise without house prices falling, otherwise we'd have had many more house price falls over the years than we have had. Even the piece you cite says that the effect is either for house prices to fall or the rate of house price inflation to slow, as does the limited evidence it provides. The latter - a slowing of house price inflation - is exactly what we have seen. The saving ratio did not rise in the early 1990s for the sake of it - 15% interest rates had something to do with it.

Posted by David Smith at July 15, 2005 08:58 AM

When people are up to their necks in mortgage and credit card debt across the spectrum, then I find it hard to see how we move back in any significant way to a culture of saving, without something else in the economy having to "give".

There is no incentive to save when Interest Rates are so low. Having Interest Rates this low is causing long-term damage.

"Investors" have been buying property speculatively for the last several years causing this bubble (and YES it is a bubble of global proportions) and young people now see their properties as their pension, because they can't afford to both service their mortgage and pay into a pension as well.

But when property prices fall (as they now are) then this strategy is false because this property boom has always been unsustainable. Investors have now almost deserted the market because returns are low and now First Time Buyers are priced out. There is only one way the housing market is going and that is down.

Your use of the term "slowing of house price inflation" seems to be a common euphemism - what it really means is that House Prices have been falling (as Hometrack have been reporting for 12 consecutive months).

The answer for the future is to let go of our obsession with property and to make more traditional methods of saving attractive, and for houses to become affordable again.

By the end of the year I expect the Year-on-Year Nationwide house price figures to go negative as well. When the British masses get the message that prices are falling across the board then I would bet on a further acceleration in falling prices.

Posted by Warwickshire Lad at July 15, 2005 10:24 AM

Hometrack has no track record, and even it has provided only mild succour to the bears. The three main house-price series, Halifax, Nationwide and ODPM (which builds on a run of data going back to the 1930s) all tell the same story - a flat housing market since last summer and, yes, slowing house-price inflation. No euphemism.

Posted by David Smith at July 15, 2005 10:46 AM

I believe a longer term mortgage will help younger people to afford to buy property. Clearly they would have more working years ahead of them and therefore would be able to afford the repayments associated with a mortgage of say 40 years. More young people are recognising that home ownership is no more costly in real terms than throwing money away on rent (in fact compare the cost of rent over a 5 - 10 year period against mortgage debt servicing cost coupled with a reduction in asset values of say 15% on a £115k first time buy). An extended borrowing period would offer a twenty year old a much more affordable monthly payment by adding an extra 10 or 15 years to the term. Another consideration should be the later retirement age.

Posted by Home owner at July 15, 2005 12:24 PM

I do take exception to homeowners remarks about taking on a longer term mortgage. Least it be forgotten that first time buyers are not just 22 year olds that have not seen 150-250% prices rises in the last 5-6 years.
Those that are aware of this rise are also aware that they are being expected to find 60,000 cash deposits or sign up for crippling multiples or longer terms.
Spending the next 25 years of my life paying someone 80,000 in profit is not acceptable. (125,000 asking now (48,000 5 years ago, +250%!!).
Nothing in the times between then and now has made this affordable, the monthly repayments have not been balanced by the IR reductions. So what has caused this sudden rise in affordability?
Wage increase?
Nothing has, if anything living (even excluding mortages) costs have risen.

Everthing points to a re address back to financial fundamentals, you can only spend what you earn.

Posted by Rob MK at July 17, 2005 09:33 AM

Mr Smith is correct. A slowdown in jobs will not cause houseprices to drop.

When the immigration figures, housing builds, and government policy are studied closely, it clear that rising interest rates will only produce rising rents.

The savings rate is important in economics, but with forced savings around the corner, (Bluncket's on the case) there is simply no need for the REAL (after tax) interest rates to move above 0% to -ve% where it is now, and, with people like myself in secure employment, (who can borrow slightly above), and help poor old FTbers and those in 'unsecure' employment by providing them with a place to live in exchange for rent!

The housing market IS the UK economy in every way that matters.
Poltically - Its this homeowner vote (36%) that is the base that will see Labour get in yet again.
Socially, it is the difference between poverty in old age and sucess in society, ownership enableing people to realise a decent standard of life, against rotting away locked out and homeless.

It's lead to the biggest increase in millonares this country has ever seen as more people become landlords giving a service to the rot locked out below to enable them to live. In reality we have a propertied class and 'the rest'. Roll on SIPPS in 2006!

Posted by Bob Duffy at July 17, 2005 11:26 AM

There are two arguments here. One is that in an era of low interest rates it makes sense to extend borrowing terms. Thus, the government is issuing 50-year gilts. The other is that extended terms encourages people to take on excessive levels of debt, as in the infamous three-generation mortgages in Japan before its bubble economy burst. I'm sure there's a happy medium somewhere.

Posted by David Smith at July 17, 2005 11:28 AM

'Home Owner' clearly has no grasp of opportunity costs when referring to rent as money 'thrown away'. Even if you are mortgage-free the opportunity cost is the loss of income that might be derived from investing that equity elsewhere.

On this basis I am afraid to tell him that renting is not 'dead money'; on the contrary it is mortgage payments which are 'dead money' so long as property remains grossly over-valued. On any cost analysis renting is currently cheaper than buying and I suspect that this will continue to be the case until house prices return to sanity.

Posted by Red Baron at July 17, 2005 01:45 PM

House prices will only ‘return to sanity’, i.e. fall, when house owners are prepared to sell at a lower price. So far that hasn’t happened. The monthly number of mortgage approvals has fallen from 133,000 in Nov. 03 to 77,000 in Nov. 04 and is back to 96,000 in June 05. House prices haven’t fallen but the number of houses sold has fallen.

The only thing likely to force sellers to suddenly accept a lower price is unemployment. Although a sudden, large rise in unemployment is possible it doesn’t seem very likely at this stage. If it happened, the MPC would be right to reduce interest rates in response to the deflationary consequences.

On the other hand, a gradual drift to higher unemployment is more likely and that could produce a gradual fall in house prices over the next couple of years. But an economic slowdown could also cause a rise in inflation - as sterling falls and monopoly (sorry, niche) service companies increase prices to maintain profits. The MPC would be wrong to reduce interest rates in those circumstances.

But there’s another way house owners could be forced to sell at lower prices – if the government brought about the building of hundreds of thousands of new homes. Houses cost much more than the stuff they’re made of because of the shortage of building land. But anyone flying over the UK can see there’s no shortage of land that could reasonably be built on. The shortage is artificially created.

If Blair wants to leave a respectable legacy he should take on the vested interests and force through house building on surplus government land, council land, military land and railway land – and then tax the land bank holdings of building companies so they can’t make a capital gain from holding land. As well as being in the national interest this would create real jobs. Unfortunately, Blair hasn’t got the guts.

Posted by David Sandiford at July 18, 2005 07:47 AM

The house price bubble is a result of too much liquidity in the economy at too cheap a price.
Speculators are bailing out as capital gains are no longer available as house prices start to drop, into equities, again largely for the capital gain on a "greater fool" basis.
Homeowners are now borrowed up to their credit limit and until repayments of the principal open this gap up again house prices can't get any higher - the slow down in borrowing fuelled consumption is already leading to a reverse multiplier effect which can only stimulate a growth in unemployment - government fiscal stimulation can only support the economy so far, and the government has run out of money.
Add to this mix pension savings, which will not go into property as the capital gains are obviously no longer available, and the storm clouds over the economy get darker.

Posted by John Howard at July 18, 2005 11:31 PM

The people I talk to who continue to borrow against their property, seem to find it impossible to grasp that the money their spending today, is the work their saving for tomorrow. Work equals Money! The only thing their saving is a boat load of what will feel like years of un-rewarded work, and I can't wait to hear their foolish wingeing. I look forward to watching their "positive outlook" magic those life sapping debts away

Posted by Optimist/fool? at July 19, 2005 11:07 AM

House Prices NEVER go down. Everyone knows that. UK house prices can NEVER go below 2004 levels, ever. Only an idiot can't see that. In fact, as the proud owner of 100+ BTL properties, I see prices 25% higher by December 2005.

Buy properties now! They have stopped making land! Person A buys a house and pays 25 years of mortgage person B rents all his life what is better?

Posted by Property Guru at July 19, 2005 04:40 PM

According to Nationwide, the price of the average UK house fell from 62,782 to 50,128 between 1989 Q3 and 1993 Q1. That’s a fall of 20% in nominal terms. But, allowing for CPI inflation, prices actually fell by 33% in real terms.

Also, average house prices were still only 50,930 by 1995 Q3. That’s a fall of 37% from the peak in real terms over six years.

While this was going on, the UK workforce fell by 6.3% between 1990 and 1993.

The same thing happened between 1979 and 1982. The workforce fell by 7.4% and the average house price fell by 17% in real terms (although not in nominal terms as inflation was so high).

Unemployment is the key.

And they’ve stopped making land, have they? The government could pass legislation to turn thousands of acres of otherwise unproductive land into building land at the drop of a bill. They could force the land release either directly or indirectly through taxation.

Posted by David Sandiford at July 21, 2005 06:59 AM

The Halifax's seasonally adjusted index dropped from 227.4 in May 1989 to 197.9 in February 1993, a fall of 13%. The ODPM (official) measure shows a similar fall. I think the Nationwide series for the period exaggerates it because it is not seasonally adjusted. Even so employment is clearly key. But don't forget monetary policy (15% interest rates from October 1989 to October 1990) and the subsequent tax rises, from 1993 on, which kept the consumer and the housing market down.

Posted by David Smith at July 21, 2005 08:18 PM

Money=Work? Only for the rot below.
The real secret of sucess is having a safe easy job, pension etc... without any stress - to enable you to access credit at very low rates. This has been demonstrated historically even by immigrants who arrive here with nothing.
I am a VAT inspector.
I get access to the savings of the rot below me, for nearly free, which have enabled me to build up quite a property pool. In your example I access saved work=money for nearly nothing, stick it into property and then rent it back out to for your work income.

Property is never ever going back to pre Labour days. This government has outlined many many schemes which will allow other government workers into the market to purchase - subsidied by the taxpayer.
My own rental cashflows are now subsidied by the tax payer, under recent IR rulings, and there is more (indriect) taxpayer subsidy to come via SIPPS in a few months.

I know many in the private sector are suffering, many of the small directors I inspect have no pensions, properties themselves!
Tradionally society has the cream above and the rot below, a view another millonare property owner - Van hoogstrenten put forth in 1967. People who rent may think they are being clever, but in reality they are the rot now locked out below financing me.

Posted by Bob Duffy at July 29, 2005 02:18 PM

I agree that society contains two classes, the "cream" and the "rot" . If foolish rot like Mr Duffy aspires to join me, he must learn to spell my name first or suffer the consequences.

Posted by Nicholas Van Hoogstraten at July 30, 2005 12:56 PM

This debate is taking an interesting turn. Just to say, in response to Bob Duffy, those on low incomes don't generally save that much, which is why the government is always trying to come up with schemes to encourage them to do so.
On another tack, readers may have noticed figures a few days ago showing mortgage repossessions (or possessions as the lenders call them) creeping higher. Tie that with the rise in the unemployment count and a few storm clouds are gathering. The housing market is still flat, and in my view likely to remain so. The interesting test for the economy will be how it copes without the spending stimulus provided by rising house prices. The Bank of England can safely cut rates this week without the remotest risk of triggering another housing boom.

Posted by David Smith at August 2, 2005 08:55 PM

I’d just like to take issue with the statement that the housing “market” is still flat. It’s true that house prices are flat, as can be seen in the latest Rightmove House Price Index report:

But the housing market, i.e. market activity, has picked up very nicely:

The number of mortgage approvals has increased to just below 100,000 per month from a low of 77,000 per month last November. The 100k level is important because this was the long-term upper limit for the number of approvals during the decade up to the start of 2001. But from 2001 to the first half of 2004 100k became the lower limit.

Coincidentally, the MPC started reducing interest rates to stimulate the economy in Feb 2001 and started raising them again just before the start of 2004.

So I would say the housing market has already returned to normal and a rate cut risks over-stimulating market activity, if not a boom in prices.

P.S. And service companies don’t seem to need any help either, according to today’s PMI, in spite of the BCC comments.

Posted by David Sandiford at August 3, 2005 11:32 AM