Thursday, Sep 13, 2007
Where is the demand, where is the supply, where is David?
Guardian: Boom turning to gloom as house prices begin to show signs of falling
"Surveyors around the country told Rics last month that sellers were finding it harder to get their asking price as higher borrowing costs and the fear of more interest rate rises before the end of the year made purchasers reluctant"... has the demand collapsed, has the supply increased?... noooooo... credit is tight!!
Posted by confused76 @ 09:07 AM (1569 views) Add Comment
31 Comments
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1. inbreda said...
Beat you to it Confused76!!
"the chancellor, Alistair Darling, called on big international banks to examine their behaviour and think about a return to "good old fashioned banking"."
If that is the case, it is only going to delay the recovery of the property market once this mess is all over. But it will mean that prudent savers will be rewarded as they will be the only ones able to borrow money. I suspect it will be a free for all for the bottom feeders in a couple of years time
2. denzil said...
Interesting times.
From the article:
>>House prices fell in England and Wales in August for the first time since October 2005.
And it is around that time that BoE cut rates to re-invigorate the market and the talk today is of the same. However, there is a lot more dark clouds on the horizon this time which may not provide any impetus to the housing market.
I remain sceptical about a crash and still see a period of brief falls (10%) to blow froth from the market and then stagnation. Reading this site with the right pair of blinkers it would have been easy to coclude house prices were about to crash every day for the last three years but I've seen so many false dawns regarding HPC and remain sceptical but current movements make a crash more than a boom likely.
3. Mark said...
supply is increasing too, as people panic about the future or struggle with payments... ideal crash scenario...........
4. confused76 said...
I think it is more than just that, Inbreda
Prices have been inflated by cheap credit, so the right-pricing of the credit that is taking place, and the tightening of the lending conditions (back to the normal, historical criteria) will cause a reduction of asset prices. This will be just a return to normality (e.g. house price to salary ratios of 3.5) and you will have to wait many years until inflation brings salaries up and house prices back to the 2007 peak (just look at the price evolution after the 1990 crash)
5. mrmickey said...
Central banks are becoming powerless in sorting this mess out, lowering interest rates will not help because the banks and building societies see a lot of risk out there and are pricing that risk in to their lending rates. By lowering interest rates central banks will create a bubble in consumer prices not reinflate houseprices.
6. confused76 said...
Denzil
I do not know when the housing market will crash, but you cannot beat historical averages
house prices will revert to the historical mean of 3.5x salaries, by when? by a sudden crash or by creeping inflation? good questions but noone has the crystal ball
Recent events in the credit market have demonstrated that the "this is a new era" and "it is different now" was all wrong (sorry David).
The fact that house prices have stopped to grow and went into reverse proves that the issues of over-demand and under-supply were grossy exaggerated (it was cheap credit instead)
So we will have to live with normal lending conditions going forward, the demand and the supply are by and large balanced (except maybe london) hence the return to the 3.5x multiple of salary.
As per London, the market is even riskier than you think since the London economy is highly highly highly highly dependent on the credit market. Cheap credit translated into huge amounts of dumb money looking for investments and is what has made London the financial capital of the world... hedge funds, private equity, structured finance, m&a, investment banking have ballooned in the past 3 years... how many jobs will be lost if the transaction-related activities drop back to the levels of 2004-2005?
7. harold said...
"a return to "good old fashioned banking".
What good old fashioned banking? The money lenders have been at it for centuries:
http://video.google.com/videoplay?docid=-1583154561904832383
8. little professor said...
Who is David? And why all the references to him today???
9. dbnazz1 said...
Confused76 said
Couldn't agree more. The jobs created in the city are only off the back of the credit bubble. Pretty much all HPI in London and suburbrs is being created off the back of the bubble and when the bubble bursts, which I think it is starting to now, the jobs will go in the city and so will the London segment of the UK property market.
If the crisis gets as big as i feel that it may, there is a possibility that there may be far more regulation of the city. It was deregulation of the city that lured a lot of firms there in the first place. This ultimately will then result in firms relocating and thus further resulting in the decline of the city and the Uk property bubble. This may sound like all doom and gloom, but
the London and London suburbs economy is largely reliant on the city and in my opinion teh city as it has become is a house of cards.
10. maddison said...
We have been here before with thousands of jobs lost in the city. Asian Crisis, LCTM hedge fund, Dot com bust, London faltered a little but the city is more resilient than people think.
11. voiceofreason said...
littleprof ... David 2004_ something (otherwise known as David 90210) is one of our favourite bull contributers :-)
5x back to 3.5x , I make that a 30% fall in real terms.
Similar to '94 when a friend of mine sold his one bed flat for £28K after having bought it for £42K in '91.
Equate that to say a £199K off plan BTL flat (sorry luxury apartment) of 2007.
Should see a loss of 60K by 2010 as "normal credit markets" resume.
12. talking rot said...
I'm afraid I believe Denzil will be proved correct. Politicians are loathed to let house prices decline and more ruses will be introduced to prop up the housing market - all in the pretence of helping people get on the market of course. Furthermore, inflation as measured by the [flawed] CPI will fall so the case for higher interest rates will fall away; I expected rates to be cut in the new year but now I am not so sure.
A cut in interest rates will stabilize the housing market. Owner-occupiers who are near the brink will have breathing space as will BTL investors. The number of Forced Sales (or Distressed Sales) will cease to rise. Without Forced Sales, there will not be a rapid and severe decline in house prices. It doesn't matter if owner-occupiers are scaping by or if BTL-ers are almost covering their costs: Neither will have to sell while accepting a lower price then they would otherwise like. Without Forced Sales, stagnation will occur.
What is more interesting are the likely effects on the Pound. Will declining interest rates causes the Pound to decline in value or drop in value? If the latter, there might be inflationary effects but only if those items measured by the CPI become more expensive.
13. sara said...
If the Rics report is based on canvassing estate agents, I wonder how honest they are?
14. denzil said...
confused76 said:
>>I do not know when the housing market will crash, but you cannot beat historical averages
house prices will revert to the historical mean of 3.5x salaries, by when? by a sudden crash or by creeping inflation? good questions but noone has the crystal ball
I appreciate we don't have the crystal ball. It's fair to say that I think as near as 100% contributors would accept that the housing market has been far more resilient than they expected.
Regarding house prices reverting to 3.5x. What is your take, crash or creeping inflation?
15. David 90210 said...
I want a mega crash but I just cant see it. House prices continue to boom!!
16. confused76 said...
@Denzil,
ehmmm... a nosedive crash, I would reckon. The UK housing market looks like a "textbook case" in behavioural finance.
Things ARE indeed different now. There is over a million of BTL properties out there, 800k of which were bought over the past two years. Once BTL starts folding on low-yield and low-capital gain expectations (and I was waiting for the latter to start, and we are there according to Rics) it will be a landslide... then ask yourself where is the "next big thing" that can prop up demand in housing? On the contrary, I see only big risks on the downside: repossessions, job market crisis in the City,...
"A cut in interest rates will stabilize the housing market." as TR says... I doubt since BoE does not control the final mortgage rates anymore. Risk is being right-priced as we speak, and if you and I (with solid balance sheets) will enjoy low rates, how about the million or so of overstretched "price-makers"? What can the government do about them? Last thing Brown and King will do is to sacrifice the Pound.
17. Drewster said...
confused76: Yes I agree prices will probably revert to around 3.5x local incomes, but there will still be local and regional differences. For example lots of people want to live in Windsor, few want to live in Slough. London will remain more expensive (maybe 5x incomes) for several reasons, not least because London is home to many international company headquarters. Corporate profits will continue to flow back to London and it will remain wealthier and more expensive than the rest of the country.
18. confused76 said...
this is in short my argument... see links below, anyone has different opinions?
Property prices are falling for the first time in two years due to a drop in demand, a leading housing market survey revealed today.
http://www.dailymail.co.uk/pages/dmstandard/frame.html?in_bottom=http://www.thisismoney.co.uk/mortgages/house-prices/article.html?in_article_id=424291&in_page_id=57&ct=5
'Mortgage rates out of control' - King
http://www.dailymail.co.uk/pages/dmstandard/frame.html?in_bottom=http://www.thisismoney.co.uk/news/article.html?in_article_id=424278&in_page_id=2&ct=5
19. David 90210 said...
House prices only ever go up! Read any book on finance and you'll all see this to be the case. Stop being bitter and go with it. You know you want to.
20. Davidr said...
The house price crash debated here needs to be more accurately defined. It won't happen overnight, or at least if it does we won't be able to tell. It will creep up on us gradually. Assume someone has a house which he believes has risen in value to say, 400000. They see that it is not likely to sell at more than that figure, perhaps by observing similar houses not selling, attracting low unacceptable offers, or selling for much less in forced sale situations. The plan to move gets shelved. There is a dearth of properties on the market. That person never has to admit his house is worth less. "It is only worth less if I have to sell it right now...I don't' thus I have lost nothing...I wouldn't sell this place for less than 450000!" Their houses are quietly withdrawn after months on the market with an increasing number of agents. Agents, being past masters at running with the hare and hunting with the hounds, don't tell sellers "you're never going to get that much" but they encourage buyers with "try an offer" or "yes you are right, the price is on the high side---try an offer". You know loads of people who deceive themselves in this way and so do I. A bear housing market has to persist over a couple of years before attitudes change. After all,the only real test of the value of a house is to sell it. If the active market shrivels up so that a large proportion of actual sales are forced or made in stressed stuations, wew could all still be arguing whether or not the crash has arrived . Crash is not really an appropriate term to use until after the event, when what has happened becomes clear. I've been monitoring houses for sale in the Isle of Wight for the last twelve months and although I could prove nothing, it looks very much as though the market there is to all intents effectively stalled, and has been for most of that time. Is that a crash? I am sure the agents would deny this, but they would wouldn't they? There are houses there that have been for sale for all that time at least. If they sell next year for 40% less, when will the crash have occurred?
21. dohousescrashinthewoods said...
I have a simple plan - Wait for housing to fall below 3.5x salary. It's a fundamental.
Then wait some more for it to bottom out (undershoot). Then wait patiently for another year or so, just to be sure, because it's unlikely to recover quickly after such an astronomical boom, then buy a "home" on the cheap, preferably for cash, or else with a generous deposit (saved over the next 3/5/7 years) because by then the banks won't lend to anyone who doesn't show serious money down.
Then forget about it for 20 years, move up the ladder while it's cheap to do so and, when the nation has finally paid off its credit cards, ride the recovery, sell up and move to the Caribbean.
22. denzil said...
confused76 said.
>>a nosedive crash, I would reckon
I remain unconvinced. Clear indication that a bad recession will happen will help convincing me. A few bankers who have had their heads stuck up their greedy arses for the last 5 or 6 years losing their jobs isn't enough.
>>Mortgage rates out of control' - King
>>http://www.dailymail.co.uk/pages/dmstandard/frame.html?in_bottom=http://www.thisismoney.co.uk/news/article.html?in_article_id=424278&in_page_id=2&
I don't buy this one either. The main lenders have raised their trackers 0.1 & 0.2 yesterday and most will follow but the interest on mid to long-term fixed rate deals has dropped lately. Mid and long-term fixes say where the lenders see rates going. They could of course be wrong but they are frequently annoyingly correct.
23. dbnazz1 said...
Denzil.
Not quite with you. Inflation is increasing and so is the inflationary pressures that fuel inflation. Therefore inflation to continue rising. BoE will logically have to raise rates eventually to combat this as controlling inflation is ther task. If Boe doesn't raise rates inflation will start to run away. The other alternative is that the figures are corrupted to hide inflation. Well this concealing inflation has been going of for a while with the result that wages have reduced in terms of purchasing power. The unions have now starting to get the bit between the teeth on this one which is why we are now looking at a lot of union noise about strikes - hence i think we are heading for a lot of strikes. So I don't think concealing inflation will work any more either. this just leaves raising rates which will be a killer for the property market. And all of this before you consider things like rising inflation in countries that we import from,
the credit crunch and a recession in USA (which will have a big effect on our economy).
So I am struggling to see where you a are coming from about there not being a crash.
24. Hurryupandwait said...
The majority of 1st time buyers I know in west wales who have purchased their 1st property over the last 3 years have done so under a scheme where only half the property is purchased by them and the other half purchased by a local council funded charity. Therefore any increase or decrease in asset value is halved. As the government has plumbed so much cash into the property market in this way(Which contributed to the boom), they too are set to loose part of their "investment" is prices start to fall. I think that they will try and stagnate the market until inflation catches up.
25. denzil said...
dbnazzi.
Agree with your comments just about entirely and you are right "UNLESS" controlling inflation is no longer the primary target. I cannot see the BoE cutting rates for small house price falls but they will cut rates if house prices absolutely plummit and they will cut them at the slightest hint of recession. The US is looking really dodgy. The FED will cut rates, I'm certain. If US woes hits the UK, which I expect it will then the BoE will cut rates at the expense of some loosening of inflationary policy. Don't get me wrong I really don't advocate such a move and I'm not naive enough to realise a lot of the bigger picture such as the impact on the £ but I would put money on it the BoE will cut rates if required.
26. Dbnazz1 said...
Denzil.
See your point.
At the end of the day what we all say here is a matter of personal opinion and no-one knows for certain until events unfold a little more. I think where we are heading will be a lot clearer
in about say a months time. It does seem that we pretty much agree on these matters, but where we have a different opinion is what the BoE will do. I am thinking that the BoE task was to control inflation through rates and this was part of the the government making rate setting outside of political control. I may be wrong on this but house price inflation I don't think is part of BoE responsibility. Assuming this is correct the question then becomes does the BoE stick to its task of controlling inflation and pretty much ignore the other issues OR
ignore its inflation task and come to the rescue of homeowners. The noises coming from the BoE over the last few days are all indicating that the BoE is focusing on its remit of
inflation and can't be sidetracked by other issues. A prime example being the BoE comments that amounted to it not being its responsibility to bail out banks that are victims of its own poor lending deciscions. If the bank takes this stance with the lenders I am not so sure that it will take a softer approach with individuals who have taken poor deciscions as borrowers i.e. borrowing unrealistic sums of money.
27. dbnazz1 said...
Denzil.
I think we are thinking along the same lines, where we seem to have a different opinion is with regard to what the BoE will do. BoE main objective is to control inflation though rates.
The BoE will face the no win deciscion of does it stick to its task with interest rates and thus leave other economic factors like house prices to go south OR does it ignore its main task of inflation to save things like house prices. The BoE governors job is dependent on controlling inflation as this is the BoE's main task, so I don't think they will abandon inflation.
Also the noises coming out of BoE in the last few days are in brief that the BoE task is to focus on inflation and not to bail out banks that are really victims of there own poor practice.
If the BoE is taking this stance with lenders, i am not so sure that it will be any different with borrowers ie the house buyers who have borrowed unrealistic sums of money.
The main point here is that a lot of economic variables are looking bad with the result that if action is taken to solve a problem with one variable other variables will deteriorate. We have thus manouvered ourselves into a no win situation.
28. dugmug said...
"We have thus manouvered ourselves into a no win situation."
'ere, not so much of the "we" thanks! :-)
29. Dbnazz1 said...
ok, the government.
30. dbnazz1 said...
Ok, the governemnt.
31. This comment has been removed as it was found to be in breach of our Blog Policies.