Comments: 'House prices double in four years' - no they didn't

How unlike the Mail to spout rubbish. Timescales aside, house prices are now verging on the seriously unaffordable for many. What is starting to unwind in the US should be a salutory lesson for us in the UK, but there is still alot of bravado about where prices are headed. Also, the notion that prices will stagnate while wages catch up has no historic precedent.

The recent inflation figures should prompt another rise in rates, maybe sooner rather than later. It's hard to comprehend how prices will simply stagnate against a backdrop of rising rates. I am looking to move, but will not be offering anywhere near asking prices based on interest rates of 2 months ago.

Posted by Tom at September 15, 2006 12:56 PM

Hi Tom

Prices normally stagnate while wages catch up, the only times this didn't happen was in the 1930 and 1990s. All the other times prices rose slower than inflation.

Regards

Posted by kingofnowhere at September 15, 2006 01:03 PM

That's true KON, but in previous years we had much higher inflation rates where real values were quickly eroded away. At present we have low inflation and nominal prices may well need to fall to achieve any form of correction.

Posted by werewolves at September 15, 2006 01:21 PM

Hi Werewolves

Indeed.

In the past people could wait 12 months, and have 10% taken off the price but they were still glad that they sold for what it was worth. (IE they didn't think it had fallen). Now they have to wait two years.

Now it will indeed take longer to get rid of any overvaluation (If there is one, which to be honest I don't think there is). However house prices are very sticky downwards (Probabaly wages are the only thing more), and it takes a lot of the grease of lower employment, and rising rates to get force people to reduce their prices.

Cheers

Posted by kingofnowhere at September 15, 2006 01:35 PM

KON,

Sorry, I meant there are very few precedents of where in a hugely inflated market situtation, prices remain high for years while wages catch up.

Tom

Posted by Tom at September 15, 2006 02:09 PM

Because inflation is so low and house prices are so over-valued we will see a combination of nominal and real drops over the next 4-5 years.

15% nominal drops over this period, add the inflationary affect and real prices will be 25-30% down. I am staggered that first time buyers are crucifying themselves to get on the 'ladder' against a backdrop of such risk.

Posted by peter kiddle at September 15, 2006 03:16 PM

David - well done for spotting this "Daily Mail Lying" scandal, the latest lie in a catalogue of lies that have been told about the housing market by newspapers such as the Mail and the Express over the last several years. May I draw your attention to a particularly distateful and enraging article published today by your colleague Anne Ashworth, in your own newspaper:

http://property.timesonline.co.uk/article/0,,14049-2355058,00.html

If this is The Times' latest effort to appeal to a wider audience and report news that is relevant to the population of Great Britain then I must say I am sorely disappointed. Why do we need to be told how much the price of multi million pound houses in Kensington and Chelsea have risen? It is not relevant to most of us and only serves to frustrate and anger those who have been priced out of owning their own home solely due to the greed of speculators such as Ms. Ashworth and Ms. Millard of your newspaper.

Martin Lewis was correct when he appeared on BBC Breakfast News the other day - we have become a nation obsessed with Property Porn and it is doing untold damage to families up and down the country, and to the economy of our nation, which now seems to be solely based on bidding up each others houses and taking on debt via remortgaging in order to afford the latest fad electronics the high street continues to churn out. The sooner the idiocy ends, the better.

Posted by Angry at September 15, 2006 03:45 PM

I probably shouldn't have started this. We'll still be arguing in 10 years time about the UK housing market crash that never was, and no doubt some people will still be predicting it. Rising unemployment won't be a trigger because it is associated with rising employment. Higher interest rates won't be unless the Bank really loses control of things. The UK and Australia are now regarded as models of housing market soft landings, which the US may or may not follow.

Posted by David Smith at September 15, 2006 04:43 PM

Don't be so confident David, your patter sounds too much like famous last words. Are really telling me that inflation will stay low for the next 10 years? Your struggling to manage a good forecast over 1 year at present (though I'm sure you will manage to find a way to deny this).

Quote: http://www.economicsuk.com/blog/000232.html

'The oil bubble will burst and interest rates fall'

Article quoted August 14.2005. In fact oil prices continued to rise and the next rate move was up. Quite the opposite to your prediction.

It interests me to note that you think that the oil bubble has been about to pop any minute for a while now, but the price trend has continued to rise. Yet the housing market bubble, which is massive, will never do so. You quote historical trends to justify your oil bubble pop, yet ignore the same evidence for house prices.

Dear KON, prices have been sticky downwards so far. But if we start getting nominal drops in price and fear grips the market, I'm sure quite a few BTL will want to get out quick. Remember historically we have NEVER had a big increase in real house prices without a correction over the last half century or so.If we get rate rises or the economy slips then the BTL posse may be forced to sell at any price.

Posted by Werewolves at September 16, 2006 04:16 PM

This oil spike has lasted longer than I expected, I'll concede, though prices are now coming down. Whether this is the start of a sustained fall to what I regard as a sustainable level - $40 a barrel - remains to be seen. But I stick to the view that we will return to that kind of level.

The analogy with housing is a good one. In both cases I think there has been a revaluation - a permanent real-terms rise. In the case of oil, the revaluation has been from the low-$20s, to what I regard, as I say, a sustainable $40 - a big change. In the case of housing, I also believe we have seen a revaluation - relative to earnings, so anybody who expect a reversion to the old averages for the house price-earnings ratio are barking up the wrong tree.

Without being aggressive about it, and I'm not referring to you specifically, I find it staggering that people who have spent the past five years - in some cases more - predicting house price crashes have the gall to accuse anybody else of getting it wrong.

Posted by David Smith at September 16, 2006 05:47 PM

David regarding this quote:
The UK and Australia are now regarded as models of housing market soft landings, which the US may or may not follow.

I suggest you do some research on Australia.
I suggest you try reading some Australian news, I'd call 42% donw in 3 years a crash (and bearing in mind the gearing associated with property, the loss to the owners will be significantly higher)

http://www.smh.com.au/articles/2006/08/20/1156012414995.html

That's without a recession or interest rates at 15%. And that's not the only example, there are plenty of others.
I have friends who've lost 40% on a house in Sydney in the last 3 years as well.
The Australian "Soft Landing" has now turned into a "Hard Landing". Right now the US has the highest unsold inventories in 30 odd years, ie the current slump is going to be bigger than the 90's crash.

But you keep on holding out for your "Soft Landing"...

Posted by BandWagon at September 17, 2006 10:32 AM

David - seeing as you have made your latest prediction on here that housing will not fall in value over the next ten years, would you like to give your view on another article in your newspaper today which clearly disagrees with this prediction:

http://www.timesonline.co.uk/newspaper/0,,2770-2360913,00.html

And in particular the following paragraphs:

"Most rational people would agree that “share-to-buy” schemes like these, and other exotic ways to help people who really can’t afford to climb on the property ladder, are a sure sign that we’re in a bubble."

"Most people can easily rent a nicer property in a nicer area than they could afford to buy. So why not just sit it out? At some point — and some point soon, if arrears and interest rates continue to rise — the same people who are panicking about getting on the ladder now will be rushing to get off it."

Which clearly contradict your prediction in comment #8 of this post. Would you like to comment on how the above article has been allowed to muddy the message that has consistently been coming out of the Times for the past several years, that house prices only ever go up?

Posted by Angry at September 17, 2006 10:36 AM

On Australia, we're back to fantasy figures, and anecdotal nonsense. Just look at the real numbers - they're easily available: http://www.abs.gov.au/AUSSTATS/abs@.nsf/Lookup/6416.0Main+Features1Jun%202006?OpenDocument

As for the Money Week contribution in today's Sunday Times, I've always made two things clear:
1. There is no censorship of alternative housing market views in the paper - a crash has been confidently predicted from the above quarter for years.
2. The message from The Sunday Times, even from me, has not been that house prices can only go up. It has been that they won't crash, which is rather different.

On the 10-year comment: The triggers for a housing market crash will always be economic. If we were to have a serious recession or the Bank lost control of monetary policy, house prices could indeed fall. I don't expect that to happen for the foreseeable future. Whether 10 years is foreseeable or not is a good question.

Posted by David Smith at September 17, 2006 10:56 AM

Ten years is a long time in my book. I can't see how you can accurately forecast such a period. The economic and geopolitical variables are too unpredictable. For example, if Iran manages to attain nuclear power status in this time (quite possible) then we could be looking at middle eastern mayhem. A large scale terrorist attack could regin havock. People might realise that the dollar is worthless and its value plummet (ha ha). Bird flu may wipe out 10% of the UK population. Who knows?

In regards to the oil price. Were there not mumblings from OPEC about defending a £60 barrel? I'm sure OPEC members are enjoying their windfall and would be reluctant to give it up so quickly.

Posted by Werewolves at September 17, 2006 11:44 AM

Agreed. What I should have said was that in 10 years we'll still be arguing about what was really happening now. As for Opec, they were happy with $22-28 a few years ago. I'd like to see prices fall, if only so we don't keep rewarding their greed. I've just re-read the August 2005 piece, by the way, and it did suggest that prices would probably rise further - even to $100 - before gradually falling back. On interest rates, we're getting quite a few predictions coming through now of UK and US rate cuts next year.

Posted by David Smith at September 17, 2006 11:53 AM

We have had predictions of falling rates for a number of years now, we have only managed a single marginal vote reduction last year so far. Here Mervyn King was outvoted, it would seem that Mervyn was right in the end.

OPEC may have been happy with $22-28 in the past but greed is a wonderful thing. I think many OPEC members having had a taste of higher prices may be have had their threshold of happiness redefined. In addition the high prices haven't brought down the world economy, this makes for another bargaining chip. Anti-western sentiment also seems to be rising, how much will this influence pricing decisions?

In regards to rewarding greed for the oil producers, that could be seen as one sided. We could consider our want for profit and reluctance to pass this on to our commodity suppliers.

Posted by Werewolves at September 17, 2006 12:21 PM

I do love it when Brits get onto house prices - it's our equivalent of getting upset about cartoons of the prophet Mohamad.

David's right in so far as plenty of people, myself included, have been predicting for years that the sky is about to fall on our heads - and it hasn't happened.

I think he's brave to say that it won't - two words one should avoid in journalism are always and never - it leaves one a hostage to fortune.

But hey people seem pretty happy arguing about property - maybe they should have a TV show just about housing envy / anger/ greed / lust. The seven sins of property - Channel 5 after 10pm - it's a winner I tell you....

Posted by Jonathan at September 17, 2006 02:08 PM

I'd love to see the US try and lower rates. Their debt burden is huge, and little of it is going into developing business but consumption. There comes a point that will have to stop and then comes recession. Personally I think their rates won't be lowered until the recession has kicked off and put the frighteners on debt fuelled consumption. They've got the keep value in the dollar throughout this!

Posted by Rev at September 18, 2006 03:42 PM

I'm assuming the 'property boom' should be seen as something that is economically divisive, and socially stagnating. I'd like to hear what David Smith, or some of the posters on this blog, feel the government should do to address the problem.

Posted by walt at September 18, 2006 06:15 PM

Walt,

The government should stop interferring in it and let it runs it natural course. Booming house prices take away from the economy as more money has funnel into paying for ever increasing housing costs, and not on spending. Of course tha banks do nicely, as do EAs, Solicitors and Building companies. Would be nice for the government to ensure the banks lend responsibly, maybe then we wouldn't have record growth in bankruptcies and repossessions.

Posted by Rev at September 18, 2006 09:47 PM

There are certain things the government can do, and certain things it can't, or shouldn't. It should try to increase housing supply, by easing planning restrictions. It should also replace the social housing that has been turned into owner-occupied housing through the right to buy. It should not try to control credit or return us to the dark days of mortgage rationing.

Posted by David Smith at September 18, 2006 10:12 PM

David,

I always enjoy your writing but I am quite frankly shocked that you can accuse Opec of greed for increasing its price expectation. This in my opinion shows a basic lack of understanding of the situation with oil at the moment.

1. There has been massive inflation in the cost of finding oil and getting it out the ground. Rig rates have soared. There is a global shortage of skilled staff. The cost of the raw materials to build and maintain oil infrastructure has soared. The long-term price of oil needs to rise to compensate.

2. New reserves lie in frontier areas like deepwater that cost much more to explore and produce from. Higher prices are needed to attract the necessary investment or we will run out of oil.

3. Most of the cost that the consumer pays in the developed world is tax. Why not label the governments of consuming countries greedy for levying this tax, which ultimately has the effect of surpressing the price achieved by the producer? If consumer countries desperately want cheaper oil, all they need to do is cut taxes. What is wrong with the developing nations that make up Opec defending the price of the non-renewable resource with which they have been blessed, allowing them (hopefully) to foment development of their own economies?

I believe you fundamentally misunderstand the role of Opec. It is not a cartel that aims to screw every last penny out of consumers. It is fully aware of the threats posed by letting oil prices get out of control. What it is interested in is a stable price horizon and a "reasonable" price, both of which will nurture investment and ensure oil's role as our major source of energy. And it also acts as oil's central banker, far more than the IEA could ever. If Iranian supply goes down for whatever reason, other members can (just about) and will turn on the taps and keep the world supplied.

Posted by El_Pirata at September 18, 2006 11:15 PM

>> It should not try to control credit or return us to the dark days of mortgage rationing.

So it should allow families to be swayed by public opinion that "there has never been a better time to buy a home" and "buy now before you miss the boat". People are duped into this and borrow ludicrous amounts of money to fulfil what they believe is a dream. Then interest rates rise and they default. If you borrow a certain percentage of your take home pay (no more than 1/3rd usually) and no more, then you are reasonably protected from interest rate rises in the future.

Posted by Rev at September 18, 2006 11:35 PM

On OPEC: Fair points about high levels of taxation in the West, the usual bone of contention between the producing and consuming nations, though you could argue that Western governments have been doing their bit to restrain consumption. As for exploration and extraction costs, they've gone up but they are still way below prices. My point was a simple one - one minute OPEC is happy to defend $22 to $28 a barrel, the next it wants to stop prices dropping below $60. That, to me, is greedy and opportunistic.

On mortgages: Average loan to income ratios are in line with the figures you quote - just over 3.

Posted by David Smith at September 19, 2006 10:04 AM

>> On mortgages: Average loan to income ratios are in line with the figures you quote - just over 3.

Personally I think that the max should be 3.5 not the average, but thats just my opinion.

I hear about 1st time buyers paying 6-7x salary on IO mortgages - this is insane!

Posted by Rev at September 19, 2006 11:02 AM

Well there is a case for making banks take a greater share of the responsibility for bad lending. If the balance of liabiliy was shifted somewhat a greater degree of responsibility might follow.

It's not about legislation to constrain the banks ability to make choices about who they lend to - it's about making them pick up the tab for iressponsible lending.

I'd readily admit though it's a difficult formula to get right because if you put too much onus on the banks then unscrupulous borrowers can take advantage.

Perhaps if you played around with a formula which linked the amount banks could recoup from borrowers to the value of the property at the point in time that the banks reposess it might ensure that lenders think long and hard about the state of the market.

Interestingly Islamic banking works along similar lines. Since Islam prevents the charging of interest Islamic lenders have to assume a share of the risk and profit in any venture instead. Which is not to say that Islamic banking is perfect, there have been scandals associated with some Islamic banks - just saying it's a very different approach than the rather laissez faire one taklen by British banks at the moment

Posted by Jonathan at September 19, 2006 01:53 PM

David, with regard to your quote of the Australina Bureau of Statistics:
The obscured reality about housing busts is that they don't start with price falls, they start with a slump in transaction volumes.

When the bottom falls out of the property market the buyers disappear.
This began from the end of 2003, transfers almost halved (from about 17000 to 9500).

It's unusual for prices to fall in a housing bust, but the fact that prices are now falling in their leading city (according to the ABS, just scroll down the page you mentioned) should be a wake up call to anyone who thinks they're having a soft landing.

The anecdotal of a 42% fall in a house price is the sad reality for those who bought on the false conception that prices can only rise.

Posted by bandwagon at September 30, 2006 10:34 AM