Comments: Is the house party coming to an end?

"With some of the Iran-related froth gone out of oil prices, that forecast looks quite secure."

There is a weekly broadcast on which is often quite interesting. this week the guest is a chap called matt simmons who, as i understand it, has studied the oil market in depth for some time.

anyhow he reckons that oil will be increasingly expensive looking forwards due to depletion.

any comments anyone, please? will it drop to $40/barrel or zoom to $300? :-(

Posted by newbie at April 8, 2007 06:48 PM

If you are interested in the outlook for oil prices in the medium to long term, it's worth doing a google search on "peak oil". Have a read about the subject, theories and so on. This lecture is worth a watch as well:

You can make up your mind whether you believe it or not (personally I think it seems fairly solid).

Posted by Minh at April 8, 2007 08:59 PM

I'm familiar with Mr Simmons and with the peak oil debate. In fact, I've got a research note from Matt Simmons from the mid-1990s saying we were about to hit a peak then. Here's a link to a piece I did a few months ago:

Posted by David Smith at April 8, 2007 10:11 PM

It seems clear to me that we will hit a peak at some point in the next 50 years or so - the fact that deep water exploration etc is taking place seems evidence enough of that, if they are looking in such difficult places there clearly is no easier alternative. But as you say, the exact timing of the peak and the economic effects in the short term are harder to judge. Will it be next year? 2015? Have we already passed the peak? But the medium and longer term economic effects seem fairly clear.

Posted by Minh at April 8, 2007 10:30 PM

I did some interesting maths recently. My parents bought a Sussex farmhouse in 1968 for £7000. I fed the price and the year into a calculator that offered to translate that figure into an equivalent for any previous or subsequent year by applying any one of seven or eight indeces (RPI CPI etc). I picked the measure of inflation that had climbed most steeply in the intervening years. Using that measure £7000 in 1968 would be equivalent to around £196,000 today. That makes sense. My father was a consultant at the time in his mid 30s and £200,000 is the kind of money one might expect a professional earning say £40-50,000 a year to pay for a middle class house. It's current market value is probably upwards of £900K.
I know there are all sorts of demographic changes and supply and demand to be taken account of - the population of England in 1968 was just over 45 million and now it's something over 50 million. And along with that 10% rise there's the tendency of people to live in smaller family units. Offset against that is the fact that despite the shortfall in building there has been construction in the intervening 4 decades - so it's not a case of there being no building to meet the increased demand.
But for all the economics I still can't quite accept that property is four to five times more expensive now than it was in the late 60s in real terms. A increase of 50% measured against a wealth increase adjusted figure maybe - even double at a pinch - but twice that!
But the first law of the science of irrational exuberance is that it's only legitimate to use the word bubble after you hear it go pop.

Posted by Jonathan at April 9, 2007 07:45 AM


Your view of inflation seems to have changed radically from last week’s article.
Any drop in the CPI will be short lived. The CPI was underweight in energy when it was rising and will be overweight in energy when it falls. I can’t believe that it can drop 50% in 3 months and still reflect a fair view of inflation in the economy.

There are plenty of reasons to believe that the longer term view of inflation will be to stay high. Liam Halligan’s article in the Telegraph says that there is little spare capacity in the economy.
See it here

There is also rising commodity prices as the emerging economies (especially China) consume more of the world’s resources. The money supply which has been storming ahead at 13% will eventually show up as higher inflation. The relationship between money supply and inflation is not broken; it just has a longer time lag.

With China and India’s pay increasing 8% and 6% respectively, the effects of globalisation reducing our inflation are rapidly running out of steam.

Onto house prices…
Although HPI may have reduced slightly it will still remain strong over the summer months. LSR got the 2006 HP prediction spot on and have predicted 15% for 2007. Their affordability index has proved a pretty impressive model so far.

With the MPC staying put last week, this is a clear signal for buyers to go out in the spring and start making offers.

My “skip index” for the housing market is measuring the traffic for the website See the traffic rankings have fallen to a one year low. See

You like to use the LSR affordability index model to back up your argument for rising prices but when they predict that house prices may fall in 2008 you turn your back on it.

Everything looks on course for the affordability index to hit 80 points by Q1/Q2 2008. HP are rising, IR rising, real disposable income slowing.

The big question is what happens when HP peak, which I think will be Q1/Q2 2008.

Your argument that we will have another gentle slowdown is somewhat optimistic.
House prices have shown time and time again that they cannot remain stable for long. They either have to shoot up or down. The 2004/5 slowdown was soon followed by a period of rapidly rising prices again.

Looking back at that event it seems pretty clear that interest rates were still way too low for a crash back then. Things are different now to 2004/5. House prices are much higher. Interest rates are higher with the likelihood of increasing and remaining high for much longer then we expect.

World stocks markets were doing well back then but if/when the US goes into recession, the secular bear in stocks that began in 2000 is likely to continue for another decade. Stock prices in 2017 will be no higher than they are today. Any serious correction in stocks will likely have an impact on London house prices which is the corner stone of the UK market.

House prices are falling in the US, France and Ireland. Spain which has unbelievably overvalued property will surely follow soon.

Please read research on the Irish house price correction.
The Irish market is in a worse position than the UK and could see falls 40-60% in real terms over 8 years.

The CEPS research in February 2006 shows that over 30 years, Europe’s house prices normally tracks the US house prices with a lag of 2 years. This puts Europe’s house prices as a whole peaking at the end of 2007.

Going back to my thoughts about how stock, commodity and property markets are linked by their cycle of 33-36 years (see blog ) I am convinced that the outcome after prices peak in early 2008 is either

1. 17 years of booms and busts in the economy and house prices
2. A decade and a half slump - similar to Japan from 1990

Out of these 2 the latter is more likely. My reason for this conclusion is that I don’t think inflation will get out of control like that last time we were at this stage in the 33-36 year cycle. A deflationary slump is the more likely outcome. It is possible that UK house prices will fall slowly, say 8% in real terms and 4% in actual terms for a decade or more.

The Economist wrote in 2005 that world house prices were the biggest bubble in history. Since then world house prices have gone up. So did they get it completely wrong or has the bubble just inflated more.

Fred Harrison, in his boom and bust book, predicted this 2 year surge in prices before a bust in 2008. Very few economists predicted this.

The debt taken on by households in the last ten years will have effects of lower consumption for the next decade and a half.


Posted by Liam at April 9, 2007 11:35 AM

In response to Jonathan - that rise looks exceptional. Had your parents house risen in line with average house prices it would now be worth, on my calculations, £308,000.

In response to Liam, I haven't changed my mind on inflation. What I said the previous week was that firms were trying to exercise pricing power, and the question was whether they would succeed. There were good reasons to believe that price resistance would continue, indeed I cited some examples of it. What I was trying to bring to life in that piece was the Bank's worry about pricing power. It obviously wasn't a big enough worry for them to hike rates last week.

As for all this long cycle stuff, I simply don't buy it. We all get a little bit captivated by long cycles at some stage and think that Kondratiev had the key to it all. Unfortunately, it doesn't work. China and India will continue to exert downward pressure on global prices, as they continue to gain market share.

As for house prices, Irish prices have flattened, that's all. And US prices are down only slightly on a year ago.

Posted by David Smith at April 9, 2007 12:00 PM


I thought you may have soffened your case for house prices going down but obviously not.

I found this video of "Real estate roller coaster" on You tube.
Quite amusing and scary


Posted by Liam at April 9, 2007 02:22 PM

As for Irish house prices, I know from first hand experience from selling my wife's house in Dublin last year that prices peaked in July/August 2006. The market has turned down since then. The figures that get published don’t show the true extent of the downward trend yet.

The euro base rate is still very low. These markets in Ireland, France and soon Spain are beginning to struggle and rate hiking cycle has not finished. The wealth affects of Brits who have bought abroad in these areas will take a knocking. This also includes the Brits who have bought in troubled Florida.

It also works both ways. There are many Irish investors who have invested heavily in the UK & Northern Ireland. When Irish prices start falling heavily they may want to cash in their UK property investments.

You replied very fast. Did you actually read the Irish HP research?
Also, what about the CEPS research on European property prices.


Posted by Liam at April 9, 2007 02:46 PM

I think house price statistics are biased by the "mix" of properties sold in the different periods one is comparing. Give you an example, if two flats of a house conversion are bought for £200k each and turned into a house, then the house is sold a year later for £600k, the statistics shows a 200% y-o-y increase. Another "bias" comes from the average size of the properties sold. If larger properties hit the market this year vs last year (... we know first time buyers are struggling!) that may have quite an impact on the recorded house inflation.
Not convinced of that? How about the proliferation of house price indexes (Halifax, Land Register, Nationwide, etc.) all coming up with VERY different figures? FYI, house prices in Dublin went down 2.3% over the past quarter, and in Boston Back Bay down 10% since last summer... but of course I was looking at a different statistics... and (oh, I forgot) I happen to own properties in those two cities.
Even if that is not outritght "data manipulation", you understand how easy it is to paint a rosier picture of the housing market by the media, and - by the same token - how politically motivated the choice of the inflation measurements (e.g. CPI vs RPI) may be.
You said...
Asset bubbles are unavoidable - they are driven by greed and market sentiment, and sometimes fueled by cheap credit. Property bubbles are made worse (and can last longer) by the presence of unscropolous, unregulated market intermediaries (property agents, mortgage advisors). Governments may do a lot to prevent boom and bust cycles, and I think house lending should be regulated (or self-regulated) much more tightely.
One last thought... good investors know when to invest in a market but also when to exit...

Posted by Michele at April 9, 2007 03:38 PM

In response to Michele - all the reputable house price series are mix-adjusted so should not suffer from the shortcoming you mentioned. I don't dispute your personal experience but, by its nature, cannot reflect the Irish or US housing markets as a whole.

In response to Liam, I had a quick look at the two papers you cited. They were contradictory - one said you could have a big fall in house prices without a big economic effect, the other that there would indeed be a big effect. The Irish paper, it seemed to me, was based strongly on mean reversion - the historical house price-earnings ratio will reassert itself - and did not distinguish between real and nominal house prices. If you've been following the discussion forum on this site, you'll be familiar with my views on both these matters. In summary: The house price-earnings ratio is of limited use and nominal house prices are sticky downwards. I would be astonished if, in the absence of the severest of economic downturns, real house prices in Ireland fell by anything like the numbers this paper was talking about.

Posted by David Smith at April 9, 2007 08:43 PM


The Deutsche Bank also thinks Ireland and Spain are likely to correct


Posted by Liam at April 9, 2007 09:17 PM

Deutsche Bank predicted a house price fall of 10%-15% for the UK in 2005. This paper is a bit confusing and has a health warning attached:
'It is important to understand that this kind of model is not indicating the absolute likelihood of a downturn in any of the analysed markets. Rather, the model assesses the relative risk of the European housing markets.'

I also think some of the correlations between US and European housing markets - some of which are weak - some stronger, probably relate to the 'if America sneezes Europe catches a cold' period. In other words, if the US enters recession, so does the global economy, and so obviously does Europe. In the absence of that, it is hard to see where the 'contagion' from the US housing market comes from.

Posted by David Smith at April 9, 2007 10:15 PM

Thanks for your reply. You said reputable price series are mix-adjusted. Well... not that straighforward... some are (Halifax, Nationwide) some are not (LandReg, RightMove, Hometrack) and all are quoted as reputable in the mainstream news. Pls see summary at

Price statistics are information that propels the market. More in general, I would be very interested in hearing your opinion on the role of media (the newspapers, the "home millionaire" TV programmes, the bombardment of leaflets and glossy magazines from the estate agents) on sustaining the property craze (or "irrational exuberance").
And your opinion on the need of more regulation to protect us, the investors: accurate, consistent information on the house market? rigorous personal credit checks? salary-multiple caps? When I buy into a mutual fund I read "past performance is not guarantee of future returns". Should that warning be applied to property too? Should people be educated of the risks of financial leverage (80+% for first time buyers!!)?
Or am I just naive, and this is a Ponzi scheme blessed and guaranteed by the MPC?... Well, Lord George said precisely that...
Best regards,

Posted by Michele at April 9, 2007 11:44 PM

You may have noticed that I always focus on Halifax, Nationwide and DCLG house price measures. As for the others, they cut both ways - some journalists use them to support crash stories, some non-stop boom. I don't disagree with you about TV property programmes. I would take issue with your interpretation of Lord George's comments. What he was saying was that when the global economy was turning down sharply in 2001, the Bank's response was to maintain domestic demand - and prevent an inflation undershoot - by cutting rates. A side-effect of that was to boost the housing market, though that wasn't the intention.

I realise reading through these comments that it could look as if I'm saying that house prices can never fall in any country. That was not my intention. There's a lot of vulnerability in the US, though not yet big national price falls, and it is by no means guaranteed that other markets will follow the Netherlands, Australian and UK soft landings.

I have to close these comments for a few days as I shall be out of internet contact. Happy to resume this debate at the weekend.

Posted by David Smith at April 10, 2007 08:56 AM


is the UK really experiencing a soft landing? Leaving out rises in broker and oligarch territory surveys of house price inflation published by the likes of Halifax and Nationwide suggest that prices continue to race ahead. A landing in my books would be price rises in line with the CPI or even way inflation - 10-11% on the year looks like a healthy yield (or are you getting that sort of return on your building society account?)



Posted by Jonathan at April 13, 2007 03:59 AM

Spoke to a young chap last night living in the New Forest in a 2 bed house with 2 acres of land. This has recently been gifted from his parents.
He lives in fear of them dying in the next 7 years as he will then have to sell up to pay the 40% IHT element of the £1million market value of the property.
His words: "I would be much happier if the house was only worth £1000."
Another example of how money locked up in one permenant place of residence is not "wealth". Yes, if he had two houses, it would be seen as "wealth" because he could sell one. But like most people he has only one house to live in....
He doesn't feel more wealthy.
Lots of equity in a permanent and only place of residence does not (apart from to an Economist) equate to being more wealthy for the vast majority IMHO.

Posted by Nick Thorne at April 13, 2007 10:40 AM

The soft landing usually referred to was in 2004-5 - it remains to be seen what kind of landing we have from here.

I think Nick is confusing two things - a potential tax liability with wealth. His friend has been gifted a £1m house, and should be pleased, and he is worth a lot more than if he had been gifted a £1,000 house. He could sell his £1m house, buy one worth £500,000, and still have enough for any tax liability with money left over. Wealth is wealth, the issue is when, and how, you monetise it.

Posted by David Smith at April 13, 2007 09:23 PM

Assuming any sensible person cannot believe house prices can rise at 10% p.a. forever, can you please comment on the following:
- what in your view would be a 'hard-landing' (... we understand your view of 'soft-landing' would be like in 2004 with nominal prices stagnating)
- why you think a soft-landing would be the most probable outcome
- if you see a (potential / probable / unlike?) risk in a downturn of "market sentiment" to drive an abrupt exit of speculative buyers (those who are unhappy with low/marginally negative capital and that are scared by volatility of returns). We know the buy-to-let investors are close to 1 million, each with average more than a property
- can the downturn of market sentiment be accelerated by the particularly high volatity of the property returns, due to the high financial leverage?
- do you see an additional element of risk the rental yields not keeping pace with the interest rate rises and depressing BTL profits?

Thank you in advance for your answers.

Posted by Michele at April 15, 2007 03:05 PM

A hard landing would be a significant fall in prices, say 20%-30% or more. That would be unusual in the UK. Depending which index you use, the peak-to-trough fall in house prices in the early 1990s was between 12% and 20%. The distinction between real and nominal prices is important. Nominal house prices, I believe, are "sticky downwards" - people do not cut prices unless they have to, and only do so in extreme economic circumstances.

All the factors you mention about buy-to-let should reduce the appetite of new buy-to-let investors to get into the market. I'd be very surprised, however, if they led to a mass exodus. Rightly or wrongly, the vast majority of buy to let investors appear to be there for the long haul. They don't trust pensions but they do trust property as a long-term investment.

Posted by David Smith at April 15, 2007 06:59 PM

Thanks for your reply.
Re the notion of soft- versus hard-landing you have good arguments for the former, but I think you are agreeing that both are possible.
The early-90's crash, with a nominal 8-10% (real 20-30%) peak to bottom, sounds a reasonable estimate for the worst-case scenario drop.
However, I am sure that it did not escape you - but let me mention for the benefit of the other readers - that even a seemingly innoucous 8% nominal negative return on the property value, with an average financial leverage of BTL investors = 65%, corresponds to a return on equity of -22.8%! (nominal!!)
Note: I have used 65% which is a BTL average figure, but the equity percentage has recently shrunk. In addition, I made the assumption that rentals cover exactly the interests (and we know it is not always true, in particular for the more stretched BTLers).
I hope the above comment may help clarify why the speculative (BTL) structure of the market - in my opinion - does represent its Achille's heal, and that the market may turn sour also in a healthy economy.
Concerning the "long-term" view of the BTLers, I am not arguing that is not true, but you can only maintain a long-term position provided you are solvent (...but allow me not to say more).

I do not expect you to agree with the above, and those are just my opinions... and I do not have the crystal ball.

Posted by Michele at April 15, 2007 09:38 PM


The tax liability wouldn't have arisen if his house had followed RPI inflation. Consider the scenarios below.

Scenario A: He is gifted the house and it is valued at £1million. His parents die within the 7 years. He has to sell it and buy a less desirable house for £500,000 to pay the IHT liability.

Scenario B: He is gifted the house and it is valued at £250,000 (because the price rose with RPI). His parents die within the 7 years. He has to pay no IHT and stays in his more deirable house.

Would you agree that he would be happier with Scenario B than A ? He does. I do.
His tax liability is purely down to house price inflation in the New Forest.
He cannot monetize his wealth and maintain his quality of life. He wants scenario B. Sure, in pounds and pence he is wealthier in scenario A. But in quality of life terms, B is the best option.

On the subject of this "overcrowded island" that we live on. I drove Southampton to North Devon yesterday through 150 miles of countryside almost devoid of any houses. It doesn't look overcrowded.


Posted by Nick at April 16, 2007 09:59 AM

No it wouldn't, but house prices are never going to rise exactly in line with RPI - the real house price trend over the past 50-60 years has been RPI plus 2% to 2.5%. In other words, prices rise in line with average earnings plus a bit. I don't think the situation you describe, while it may be desirable, is tenable, because we'd all be able to afford a lot more housing which would push prices higher, etc.

You could argue that inheritance tax thresholds should rise in line with house prices, but that's another story (if they did the government would be accused of conniving in the house-price boom).

I don't disagree with what you say about whether the UK is crowded or not. The Barker review of land-use planning (available on the Treasury website) found that people have wildly inaccurate ideas about the proportion of the UK that is urbanised - they think much more of it is than is actually the case. The problem is that the planners tend to legitimise those views by restricting land release for development.

Posted by David Smith at April 16, 2007 10:12 AM

Interesting debate on RTE. I thought the following link may interest you and others on this blog,null,230

Housing market fundamentals in Ireland look weak, very much like in the US. IMHO, it is in the long-term best interest of the economy for bubbles to burst, better sooner than later. Thus people can move on and focus on activities that support real economic growth not pure asset plays.
Any lesson learned for us here in the UK?

Posted by Michele at April 18, 2007 05:23 PM

... sorry, posting one additional comment.
Just stumbled on this interesting news in The Guardian, showing the latest aberration by the lending industry and why the UK is already outright into deep sub-prime territory:

"Rent-a-room mortgage launched",,2059968,00.html


Posted by Michele at April 18, 2007 09:53 PM