Friday, May 25, 2007
I like their numbers!
London Evening Standard: Houses 'are priced 65 per cent too high'
The housing market in Britain is up to 65 per cent overvalued and needs further interest rate rises to cool it, international economists have warned.
The Organisation for Economic Co-operation and Development revealed that UK property prices are among the most stretched of any major world economy.
Posted by papabear @ 11:20 AM (359 views) Add Comment
26 Comments
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1. Alan said...
The market may be "15% to 20% overvalued" but while people are happy to pay the asking prices, there is no likelyhood of a drop in prices.
Let's see what happens if interest rates go up another 0.5%.
.... the really determined buyers seem to be finding the money as all the statistics have told us !
2. Orwell said...
"... The housing market in Britain is up to 65 per cent overvalued and needs further interest rate rises to cool it, international economists have warned..."
Note the plural.
3. waitingfor hpc said...
i like it! this is the truth. only a matter of time now. people are going to realise too late that they have signed the mortage paper work to 20 years of misery and slavery!
4. David20040_0 said...
They may be overvalued in historical terms but it is very unlikely there will be a crash and a crash of this magnitude will not happen.
5. talking rot said...
How incredibly irritating. Having just written a churchillian comment on why high house prices are bad news, I hit submit, only to be told that "Your access to this site has been forbidden due to it's content being categorised as 'web chat'." Please could some one comment for me that high house are bad news and it will all end in tears.
Have to admit, I don't buy this "overpriced by 65%" business - this implies house prices will fall 65%! Yes house prices are overpriced but not by 65%; more like 25%. I seem to recall each boom has been followed by a decline of about 20% to 30% over the next 3 or 4 years.
For those of you who are thinking otherwise, just shout "Yes, IT'S DIFFERENT THIS TIME AROUND."
6. sold 2 rent 1 said...
"Yes, IT'S DIFFERENT THIS TIME AROUND."
Your decline of 20-30% that occurred in the early 80's and early 90's saw no decline in debt levels.
Debt has been powering ahead for 25 years with only a pause for breath in the early 90's recession.
The next recession will see debt levels fall and when they start falling they won't stop until they hit levels that they were at in the 1950's (very low)
The article says "up to 65%".
I think that is fair.
7. Candian said...
I don't know if I give much credibility to the article. I'm Canadian, and I don't think that house prices there are more over-stretched than in the UK at all! In fact I bought property in Toronto whilst living here because it was so much more affordable! It's at normal levels I think in most Canadian cities, running at about 4-6x average income.
8. The Bald Man said...
If houses are overpriced by 65% the fall will be around 40%???
9. dohousescrashinthewoods said...
As the guy on Newsnight said, this boom has gon much futher and longer than others, so presumably the falls will be correspondingly greater (assuming credit conditions return to "normal")
10. Mark Wadsworth said...
Talking Rot, "65% overpriced" means that a house on the market for £200,000 is really only worth £121,000. Don't forget that that £121,000 plus 65% = £200,000.
This sort of ties in with price/earnings ratio now being at (or over?) six, whereas the long run average is three-and-a-half.
11. confused76 said...
The start will be slow... unemployment up, migrants go back home, rental yields deteriorate...
Some accidental causes will weigh in, like government wanting to tax BTL windfall (you can bet they will do.... it has happened any time a segment of the economy has overperformed... dot.com in the 90s, North Sea oil in 2005-06)
The real crash will take place when the BTLers bail out en masse ... any guess when?
12. Pr said...
Previous crashes have overshot, taking prices below the long term average, presumably because mortage companies over-react with strictly limited mutiples, and higher deposit requirements. Why would this time be different? A soft landing will result in measured restriction of finance. As soon as drops occur, the over-reaction is triggered to protect banks against negative equity, so its self-reinforcing until inflation is squeezed out of the system, just as booms are self-reinforcing until affordability and inflation are stretched too far. If property prices are 65% too high, then one should expect way more than 65% correction. A telling thing is to look at the trend of trough's on the house price cycle. It goes, something like this:
1977: 53k
1982: 62k
1996: 68k
2010: 90k??
The height of peaks in each of the recent cycles are increasingly pronounced, with what appears to be a partially exponential curve, but the trough's follow a remarkably stable line that is consistently lower than the average. Well, to bring us down to that stage, we would probably need 8-10% interest rates, but, if the current trend of interest rate rises continues, we would see 6.5% by 2008, 7.5% by 2009 and 8.5% by 2010. I think it all depends on how high oil goes. If we hit peak oil, then supply and demand will diverge and fluctuations will become massive, reducing the inflation rate comfort zone, requiring a lower level to buffer fluctuations. This may already have happened, which could explain why 2% CPI is so hard to keep. If oil reaches $100/barrel this year, then that is most likely to trigger the higher end of interest rate rises and I see no reason why we won't get a fall like previous times. Afterall, 90k house prices would only be just under the multiple of 5x the average wage. Is this overly extreme? Well, I guess that depends on how prices pan out over the next few years.
13. sold 2 rent 1 said...
"The real crash will take place when the BTLers bail out en masse ... any guess when?"
Good question - but I figure they will hold on "for the long term" always thinking the bottom is near.
Most BTL landlords have pulled out gains on earlier purchases to pay for the most recent buys. As no sale is ever made there is no CGT due.
Selling a property breaks this "golden rule" of BTL thinking.
It may get to the point for the most highly geared that selling becomes impossible as they cannot afford the CGT.
I liken this bubble to the dotcom era where I had friends who were paper millionaires with stock options. They didn't exercise the options because of the tax due.
As the stocks fall there is always the belief that they will rise again. The rest is history.
The biggest mistake novice investors make is not knowing when to sell.
BTL landlords can be classed as novice investors.
IMHO most will watch their portfolios decrease in value month after month.
The mass selling will occur when they are forced to by bankruptcy
14. Orwell said...
That's a bit depressing S2R.
What may happen is that the Govt. buy them out and then the job of providing social housing has been done but with a discount as this is through the private sector. The problem of course is that if you look at the quality provided by the private sector it isn't good. Compare a 1930'3 red brick municipal council house with a Barratt or Wimpey job. There isn't any competition.
15. maddison said...
Dont forget that if you hold an asset for 10 years then the CGT is down to about 12% I think.
16. millard said...
The Bald Man said...
If houses are overpriced by 65% the fall will be around 40%???
a 40% reduction = a 65% gain i.e. 100 is true value, 100 x 1.65 = 165 (current situation), 165 x .60 = 99 (or a fall of 40%), as all corrections overshoot a fall of 50% in real terms could be reasonably expected, although as this will be over a number of years the effect of inflation will need to be factored in.
17. Pr said...
Millard. That makes sense. A 50% fall would be very close to what I said about £90k prices, given that the average price is hovering around £200k. A fall like that would be heavily resisted by consumers and would take some time, as it did in the 1990's, which makes it very difficult to make decisions about buying my first house. But remember, that house price falls of around 2-4% are probably about equal to throwing money away in rent, so you don't need to buy at the total bottom of the cycle if you, like me, just want a decent roof over your head!! Fortunately, BTL's will not be attracted by that market so will continue to be squeezed out during the period and will not be re-entering. The big fall last time was very sharp and only took 1-2yrs, with it stabalising to about 4% fall for the next 3yrs, stabalising to about 2.5% falls for the 3yrs after that, before entering the current bull run. The biggest fall, during the first couple of years was half of the total fall. Therefore, the time to buy, if you want a home, is when prices get to between £140-160k and the time for BTL or to upgrade from that last purchase to a larger place is when prices get to £90k-£110k (The difference between large and small properties will be at its lowest at that point). If getting into BTL at that point, make sure you invest later money into a more diverse portfolio as the bull market gets silly again. Sound like a plan?!
18. sold 2 rent 1 said...
Pr,
"Sound like a plan?!"
All generals plan to fight the last war.
Winston Churchill said, "The further you look back in time the further you can see into the future.
Don't bet on this being a repeat of 1990
19. dohousescrashinthewoods said...
If I was Callous Gordon, staring down the barrel of unavoidable national bankruptcy, economic derpession and working classes revolting, I would probably take an all-or-nothing bet, hit the housing market as hard as I can, destroying the middle classes, but providing a mass of cheap housing which I can snap up and then trumpet my benevolent successes with social housing.
Then again, his gold sale doesn't suggest he's particularly good with capitalising on asset prices.
20. talking rot said...
We decry those with Vested Interests (VIs) for having one extreme point of view. Several learned colleagues on this site represent the Doomsters view (DVs). I have yet to see anything in life settle at either of the extreme ends of the spectrum. There is too much of Crash Gordon’s political capital locked up in the golden-debt economy. (Lax lending criteria is the goose that laid the golden turd!) Gordon’ll think of some clever scheme, like the property in SIPPs lark, which will prop up house prices. Alternatively, we’ll suddenly decide the Euro is a good thing or something equally bizarre. I'm expecting a decline of 25% max over 4 years followed by a period of stagnation while wages catch up, although I'd love a drop to about 90K!
21. confused76 said...
Listen, if house prices go down 40%... my vote is for Gordon, I promise. The guy can relax, if there is a house price crash he s got my vote!
22. sold 2 rent 1 said...
TR,
There we have it. 3 categories
VI – no crash
HPCM (M for mainstream) – 25% fall in prices
DV – 50% or more fall in prices
I am glad to be a DV.
The problem with a1990s crash repeating is that debt levels carry on rising.
As I said before debt levels cannot keep rising to infinity.
After the 1929 crash there were 3 business cycles before the secular bear finished in 1948. In each of these 3 recessions the debts were forced lower each time.
After 1980 when debt started rising rapidly each recession only caused a plateaux level of debt which then rose sharply in each recovery
Once debts start to reduce there will be a mind-shift with borrowers and lenders.
Borrowers won’t want to borrow.
Lenders won’t want to lend
23. Pr said...
House prices fell by about 20% during the 1930's, from about £600 to about £500. Presumably much of the debt was in the stock market. Could greater property falls be expected now, with lower relative inflation and more money in property?
24. Crash Bandicoot said...
The only difference between a crash and the fabled "soft landing" is timescale. The ultimate result in either case will be that 3x the average salary (or less) will buy the average house. In my oppinion, once support for the current price levels fails, prices will rapidly fall until those of us who are unprepared to buy at the current levels start spending again. I can't imagine a situation where prices fall a small way and people carry on buying. The myth of "prices only go up" will have been exploded and the main driver will be that you can only borrow what you can afford to pay.
25. talking rot said...
S2R1
Thanks for your latest post - the graph is good. Where did it come from please?
At the risk of being "It's different this time around", how do you think globalisation would effect your graph? Is it plausible that China can buy sufficient of the West's debt to avoid a meltdown?
26. sold 2 rent 1 said...
TR,
Graph came from article
http://www.safehaven.com/article-7475.htm
"Is it plausible that China can buy sufficient of the West's debt to avoid a meltdown?"
The answer is no
US total debt is at least $30 trillion and may be much more.
China foreign reserves is between $1-2 trillion.
China will be suffering its own banking crisis in 2008-2010 after their stock's bubble bursts.