Wednesday, Nov 28, 2007
Here! Here! HSBC says UK houses are 30% overvalued!!
Times: ‘Bubble to burst for 30% overvalued homes’
"The alarming report from the bank’s chief UK economist, which gave warning that the coming property downturn would cause sterling to plummet and force the Bank of England to slash interest rates aggressively, came as official data revealed the fastest fall in London house prices for more than two years." My my my... we have been saying that for 2 years!! Actually, the journalist missed the "causality" link between slashing rates and currency collapse. But who cares...
Posted by confused76 @ 06:49 PM (1312 views) Add Comment
18 Comments
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1. Bobsta said...
Finally someone in the mainstream making a point we've all made for years: "Contrary to the view that supply shortages have forced up prices, Ms Ward argued that UK home starts had picked up since 2000 by the same amount as in the US, which is now grappling with a glut of properties and falling prices. Had there been a true supply shortage, rents would have been pushed up, but rental growth had in fact been mild, she added."
Confused76 - you really should post this in the main forum, I'm sure there'd be a lot of discussion around it.
2. enuii said...
My own belief from in depth knowledge of my local area is that houses board priced at £249K are in reality really worth £189K which equates to an over valuation of 31.7%. The HSBC is therefore spot on and there is increasing land registry evidence in my area that 10% plus reductions (board to sale) are common place and I expect the % reduction figures to rise significantly over the next 3 months if vendors need to sell.
3. Sold My Soul To The Never Never Never said...
SHOCKING!! Ms Ward added "Had there been a supply shortage, rents would have been pushed up, but rental growth had in fact been mild". So now we have Buy to Glut! Two "executive" apartments have come on Rightmove today in my area - both for sale and to rent - the first one has been put on the market for 275K but is being rented out for £950 and the other for 195K the rental being £600 - I won't do the Maths but the yields look a bit dodgy!
4. the reaper said...
I think you're foregtting that markets tend to overshoot on either side.30% may take it back to the long term average but it could go a fair bit lower.
Makes me laugh ,Hsbc talking about rents not having moved up with house prices.......like they've only just realised...lol!
5. voiceofreason said...
And I particularly like this bit :
Contrary to the view that supply shortages have forced up prices, Ms Ward argued that UK home starts had picked up since 2000 by the same amount as in the US, which is now grappling with a glut of properties and falling prices. Had there been a true supply shortage, rents would have been pushed up, but rental growth had in fact been mild, she added.
Excess credit = high prices, not lack of supply..... maybe the govt will cotton on too. Hello Yvette Cooper (Housing Minister) are you listening... ?
6. Quiet Guy said...
I think reaper is probably right:
http://www.oftwominds.com/blogaug06/post-bubble-symmetry.html
The very bottom could be a long way down.
7. Growler said...
It seems that reality is finally coming home to people. But I can't see that slashing interest rates is so great as it will impact the currency in the UK. Imports will rise, and since we buy lots of imports, prices will rise for goods compounding the strains on the household budget. With low interest rates it will put huge strain on the economy to support Sterling. If a few more banks need emergency lending, what then? It's got to be a short term fix in the hope recession can be avoided. But with so much dependant on the housing market here in the UK, it's going to be a cold wind that blows for a while yet.
8. planning4acrash said...
30% overvalued? Rediculous! The long term average multiple for properties is 3.5x earnings and take home pay has reduced the past 5yrs. Houses should be closer to 100k. I think prices will bottom out at 90k over a 5yr period.
9. dohousescrashinthewoods said...
If the average wage is 20K, the average house should be 60-70K at 3-3.5x salary.
I wonder if anyone has done the after-tax comparison - presumably we now have the highest ever levels of tax?
On a separate note, Kirsty will be eying her hat with some concern as dinner time approaches.
10. bidin'matime said...
George Monsoon asked me the other day to explain my reasons for anticipating a 50% fall. Here they are:-
The long-term ratio of prices to earnings is between 3:1 and 3.5:1. It’s currently around 6:1 and is likely to fall back to around the long-term average. As sentiment by that time will have turned very much against property, an overshoot is very likely.
In the early 90’s we had about double the rate of inflation as now. Inflation eases the burden of mortgage debt, so the lack of it will mean that the fall back to and below the house price: earnings ratio will be more reflected in actual asking prices, as opposed to the asking price fall being softened by increasing incomes, has happened in the 90’s (and earlier crashes).
At current prices, typical BTL returns are around 4% before costs (my landlord gets less than 2.5%). Once landlords factor in the time and effort involved in managing property (or the cost of using an decent agent, and even then there is work for the landlord), the maintenance costs (which in the next few years will rear their ugly heads) and the risk on rising interest rates, they will realise that they need at least double that. I’ve mentioned before that I looked very closely at BTL when prices were around half their current levels and concluded that I needed 8% yield to make it worthwhile – the only places providing this needed a lot of work doing before they could be let, or had some other blight on their value, so I lost interest – I hadn’t bargained on the bubble we’ve seen since, but once people realise that the bubble has burst and they start to see it as an income stream and not a speculative investment, I don’t think that serious BTL buyers will re-enter the market until prices and below half their current levels. The sheeple who bought into the bubble will steer clear for even longer.
The sudden drying up of mortgage funds will cause the economy to falter, due to the lack of new money coming into the economy, whether through buying or remortgaging. This will have a knock on effect on both the capacity of both buyers and renters, depressing both sale prices and rents. Many immigrants will return home as they find it harder to get work here. Landlords who have been unable to sell will compete for tenants. All this will keep rents down, so even as the cost of buying a property falls, the cost of renting will fall as well. Add in the negative sentiment that will exist and it becomes clear that the factors that pushed property prices up when buying was cheaper than renting will be absent when prices reach that point on the way down.
A lot of people who have bought in recent years will be stuck in negative equity, so unable to take advantage of the fall in prices of the next ‘rung up the ladder’. This will restrict the number of buyers for larger properties, depressing prices further.
Finally – if you plot the projections issued by economic commentators (I haven’t done this, but can imagine the outcome), you would get a graph that shows a small growth in prices next year (some even quite confident) falling off to ‘flat-lining’, then more recently small falls and now the Times saying ‘30%’ fall. It wasn’t long ago that anyone publishing such a prediction would be laughed out of town (ask Roger Bootle..). So, where next? 40%? 50%? Now, I personally don’t make up my mind on the basis of what the papers say, but it’s not me we’re talking about here – it’s the great British public – they were largely unaware of all of this a few months ago, but are now becoming very aware – once they start to read headlines predicting 30% falls, they will run a mile – so it becomes a self-fulfilling prophecy. Who knows - 50% could be an underestimate..
I think that about covers it – time for a rest and give someone else a turn!
11. planning4acrash said...
summarised perfectly. You should post this on wiki somewhere!
12. eyeoftheweasel said...
I was rather puzzled by the comment in this article about why Sterling plummeting would force the BofE to slash interest rates, unless the Bank wanted Sterling to fall even further. As it turned out, I found I wasn't the only person puzzled after seeing the comments added at the bottom. I can only imagine that this conclusion was wishful thinking, or simply an error, on the part of the Times Online journalist who wrote the article.
13. taffee said...
obviously the journo didn't realise that cutting interest rates usually decreases sterling...this is why interest rates went to 15% to support sterling
14. Hotairmail said...
The 30% over valuation is based on 'future rental growth'. They are being over optimistic. Rents will correct too.
Add in an overshoot as bidin'mytime says above.
On a little note, when they say they are 30% overvalued, are they saying you need a fall of c.23% to get back to fair value?
(23 divided by 77 is 30%). In which case they are even more wrong than I initially thought. Still, they are going in the right direction.
15. lvmreader said...
In defence of currency...
16. Richard Bristow said...
Bidinmatime - what a wonderful, clear, comprehensive bit of writing. You put all the journos to shame with this. I shall save this to show to the naysayers, if you dont mind...
17. Urine Trouble said...
Nice one bidin'. Do the Bank Of England now worry about the strength of currency or are they only bothered about inflation? Inflation up = rates up, Stirling down = rates up. In defence of currency and all that! Yazz from 1988 said it right, " the only way is up, baby, for you and me now." and so on
18. eyeoftheweasel said...
Hi Urine,
Since the UK has been importing low inflation for the last few years, the Bank will need to worry about the strength of the pound in order to contain inflation. That's my theory anyway, but I'm no expert. (Mind you, I do have a degree in Economics, which probably makes me more of an expert than most journos/chancellors actually paid to do a job in the field.)