Sunday, Sep 16, 2007
Still in denial
The Times: Housing stalls - but don't expect a crash
NOT for the first time, the vultures are circling over the housing market. America’s sub-prime mortgage market has sneezed, but some say we will end up with the worst cold.
A piece in America’s Business Week warns of “Britain’s coming credit crisis” – it claims that British house prices are 11 times the average salary (almost double what they actually are) and says Britain could suffer a worse fate than America.
Posted by bufferbear @ 01:16 AM (1060 views) Add Comment
23 Comments
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1. Island Of Sanity said...
I think this article couldn't have been more wrong. The 1998 crisis was caused by (primarily) a single large hedge fund (although a large one) goind done and threatening the stability of the financial system. China and India were not as big of part of the world economy as they are now and there was a real threat that the world, including these countries will slip into a recession.
The current crisis is a result the massive leverage in the system that has built up since, partly aided by negative interest rates for a very long period of time. The American subprime crisis is only a part of the malaise where corporates and individuals have built up huge debt which is now unsustainable. The deleveraging has to take place otherwise the next crash will be even more spectacular.
Regarding cutting rates, in 1998, the US and Western Europe were the drivers of world economy - recession in these countries would have meant inflation came automatically under control as demand came down. Thus rates could be aggressively cut without stroking inflation. This is no longer the case - the current inflation pressure is driven by increased commodity prices and agri prices which will not necessarily go down if the US doesn't do as well.
That is not to say central bankers wouldn't cut rates - but they are between a rock and a hard place currently
2. su said...
Did anyone watch Jonathan Davis talking about HPC on sky news this morning? Hopefully he'll get a few more interviews in the near future!
3. bearshare1616 said...
I have just watched Sky News breakfast where report stated 'a UK property crash of up to 50% over the next 12 months shouldn't be ruled out' !!
4. An Bearin Bui said...
David Smith's analysis is just wrong: it's hard to believe he still has his job as his knowledge of economics is poor and about 10 years out of date. This is just another exercise in calming down the masses so the Times journalists' buy-to-let portfolios / houses in Islington / second homes don't drop in value. Anyone who has even been casually following the recent credit crisis could see through this article.
1. He claims Business Week is wrong in its claim that UK house prices are 11x average incomes and in fact they're only 5.5. x average incomes. That's an outright lie. Average house prices (depending on what measure is used) are between 218-235k and average salaries are c.25k which gives a salary multiple of between 9-10 x average incomes. Looks like Business Week are a lot closer to the truth than he is
2. Governments will now cut rates as they did in 1998 and it'll all be fine: so inflation's off the cards is it? Food prices, oil prices, metal prices - all just fine, falling in price?? In 1998, as a previous poster pointed, we didn't really have "the China effect" and it was just starting to emerge as a deflationary influence on the world economy. Now it's beginning to emerge as an inlfationary influence as demand for raw materials rises and its costs of labour and production are going up so the days of importing deflation from China are over. Inflation is bound to rise over the next year (unless a recession intervenes) so central banks are not now in a position to slash rates as in 1998.
3. There is no such thing as a slowdown and stagnation in the aftermath of a speculative bubble: you either get high inflation to realign ratios eg. house prices to income or you get asset-price deflation where the bubble focus, in this case housing, drops back to the historical average. That can happen in a short period of time where price drops are spectacular or it can happen with small regular price drops over a protracted period of time. Either way, it's a crash. Prices would have to stagnate for about 10 years for wages to catch up with current values and with the amount of speculation that has gone on in property, that's just not going to happen. As soon as people realise that they aren't making money on their house anymore and can't remortgage to pay for holidays and a new car, they'll panic. Fear is more powerful than greed.
This is all pretty basic economics, I would have thought, but if you're being paid to not allow the thought of a house price crash to cross your mind or the mind of the public then I guess it's difficult to think about this rationally.
5. denzil said...
Crikey if Smith is saying that there will NOT be a crash I may have to change my personal view from stagnation to crash.
6. The Baldman said...
The sun says there will be a crash!!
7. david20040_0 said...
If rates fall though, and confidence in stocks and banks fall won't that mean even more money going into property?
How awesome would a 50% fall be though. Finally I would be able to get a deposit on a house :) That would be happy days!!!! :) :)
8. whiteknight said...
Idiotic , fantastical nonsense with a complete lack of understanding of the severity of the situation.
9. financial planner said...
I have just watched Sky News breakfast where report stated 'a UK property crash of up to 50% over the next 12 months shouldn't be ruled out' !!
What idiot forecast that? 35% over 4 years more like.
10. wiltshire said...
I think 50% over 12 months is a little extreme but don't forget only 4 days ago 99.9999999999999% of the UK population would never have expected to see an established firm like NR unwind in such dramatic fashion.
The house price inflation bubble AND the debt bubble (mountain more like) have been bursting at the seams for years now. I think quite a few people on here (myself included) have commented that when the situation starts to fully unwind it could do at an unprecedented pace. I stand by that and I think we can all expect the rule book to go out of the window over the next couple of years. In many ways those queues outside NR were historic and history making scenarios could be the tale from here on in.
11. talking rot said...
Ha Ha Ha Ha Ha Ha Ha
David Smith is a genius, a true genius - albeit a comic genius.
Can you remember his article a few months back when he predicted the cost of oil would return to $40 per barrel, if not lower.
12. Flapjack said...
I think David Smith has just joined Michael Fish in 'never say never' department.
August 1997 - 'Don't worry there won't be a hurricane'
September 2007 - 'Don't worry there won't be a crash'
Oh dear!!
13. The Bears' Picnic said...
Guys, David Smith's website (www.economicsuk.com) contains all of his articles, and each article has a 'comment' button below it where you can post, in the vain hope of waking him from his slumber.
Interestingly, he has removed the 'comment' button from this latest article. This is an overt attempt at censorship that suggests he is starting to feel less secure about his position.
For those of you that don't know, David Smith is the arch cheer leader of the 'house price can never go down' mantra in the national press. His theory is that house prices have never corrected in the UK without a recession, or loss of monetary control preceeding the crunch. Of course, this time things will be very different and he will be proved catestrophically wrong. Lending crtieria are tightening, rates are increasing, sentiment is changing, house prices are starting to fall, banks are collapsing, and the emporor is looking distinctly naked.
14. This comment has been removed as it was found to be in breach of our Blog Policies.
15. sold out said...
David Smith is a joke he says "Even more alarming, on the face of it, is the news from Rightmove that average asking prices have slumped 2.6% this month. That, however, appears to reflect mainly the distortion created by the introduction of home information packs (Hips); the average being brought down by a 41% drop in the number of four-bedroomed and larger houses being put on the market."
I really do not understand the logic behind this statement.Firstly there does not seem to be any proof that HIPS has caused this slump in asking prices.What about all the other factors IR,affordability and the fall in demand?
Secondly if there was a drop in the number of 4 beds being put on the market,surely the ones that are, could be marketed at an inflated price.How can a fall in the number of one type of property coming to the market have any effect on the average asking price figures? Can anyone explain?
16. Bloo Loo said...
DAvid smith by be callingit wrong, but so have a lot of people here, 2003 crash anyone?
17. denzil said...
Blaming HIPS for a drop in house prices is like blaming Shakespeare for Englang getting hammered by South Africa in the Rugby.
18. Symo said...
David Smith is a joke. As a "respected" wroter for a large circulation newspaper he should have predicted the run on Northern Rock but didn't. I assume Mr Smith has a large BTL portfolio he is currently trying to rid himself of before the lowering of prices takes hold.
The Times on Sunday was a joke in both it's Money section and Business section. Apparently the UK has it's own little bubble immune to the world's prolems and no sub prime mortgages at all.
19. bidin'matime said...
David Smith is a complete idiot.
Wiltshire said...
"don't forget only 4 days ago 99.9999999999999% of the UK population would never have expected to see an established firm like NR unwind in such dramatic fashion."
Wiltshire - apply that percentage to a population of 65 million and you get every single person - well, count me out for one - I have divided the proceeds of sale of my house across 15 different accounts and not one of them is with Northern Rock... You obviously haven’t been paying attention to the very useful tips that we get on this site...
20. wiltshire said...
Bidin, not entirely sure what you mean. My point was that only a tiny minority wouldn't have been surprised at the NR scenes. Most people on this site would have been expecting some fallout from the current debt/mortgage situation but not the vast majority.
I STR'd 11 months ago, proceeds in 5 accounts and counting (none NR).
21. su said...
Wiltshire, don't worry about Bidin's comment. I think he understood your point, but I bet he's into maths in a big way. Some of the guys here are sticklers for details. That's why they're such good lawyers, accountants etc.
22. Realist said...
You are all so wrong. Sitting there for years on end waiting to pounce on a deflated property market with your money 'safely' tucked away in cash accounts is naieve at best. There will be no crash. Markets are of course all about supply and demand, simple as that. Unless potential UK buyers are only put off by the media scare mongering (thanks to the ramblings of Jonathan Davis etc), there is no need for there to be such a stark and unnecessary price correction as bloggers on this site believe is imminent and indeed are hoping for. (Incidentally, a 30% reduction in property prices will destroy our economy and push us into recession, which on the basis that some of you wish for this just so that YOU can buy a house for yourselves, is not only irresponsible but indeed quite anarchic). More people living alone (25% of all households); a population living longer; immigration at a net positive of around 250,000; 200,000 additional households being needed annually against at best 180,000 new households being created; all ensures that albeit there may be a reduction in the rate at which prices increase, there is absolutely no prospect whatsoever of a 'crash'.
In my property career to date I have listened constantly for nine years to those doom mongers who are 'waiting for the crash'. Wait on chaps......
23. bidin'matime said...
Wiltshire / Su
"Most people on this site would have been expecting some fallout from the current debt/mortgage situation"
This item has had 799 views, so lets round that down to 600 odd, which would make it around 0.001% of the population, leaving just 99.999% surprised at Northern Rock. (Plus David2004!). Sorry - just winding you up now – and yes Su, I am a bloody accountant...
Mind you, been a bit light-headed this weekend, celebrating all the good [ie bad!] news. On Friday we move into our ‘dream home’ – at a rental of around 2.5% of the current market value. The whole thing is coming together very nicely – I really think that when people see our new place, they will start to question their previous judgement of me as a bit of a nutcase. Even my mother-in-law, who was just a bit concerned at us selling up and ‘losing the security’ of owning our own home, when seeing where we were moving to had to accept that it was starting to make sense.
Having said that, in the short term I can see an analogy with the tsunami – people standing on the beach, looking out at all those people being tossed about in small boats – glad that they were safely on the beach… I bet that many people (this weekend) will be saying “glad I haven’t got any money in the banks – mine’s all safely invested in bricks ‘n mortar”. Run for the hills!!!