Thursday, Nov 29, 2007
Obituary for the housing market
Times: Analysis: Dire data
Are we there? YEESSSS: 1. all the surveys - Rightmove, RICS, Halifax, Hometrack and now Nationwide, have reported price falls over the past two months. 2. Mervyn explicitly warning on the risks to the housing market from the credit crisis. 3. Barker said the market hinges on confidence and could turn down very sharply if the arithmetic of buy-to-let gets worse (and it has done). 4. HSBC said yesterday that their models implied house prices were 30 per cent above true value. Those who have built up mini-property empires should think carefully. Any plans that rely on household equity rising to offset shortfalls in mortgage repayments are simply no longer sustainable. In other words BTL is in the poo poo.
Posted by confused76 @ 11:40 AM (1682 views) Add Comment
26 Comments
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1. confused76 said...
Sorry I forgot.. one last point:
MWUAAAAAAAAAAAAAAAAAAAAAAA aHHHHHHA AHHAHH AHAH AHHHAHHA HAHA HHAMWUAAAAAAAAAAAAAAAAAAAAAAA aHHHHHHA AHHAHH AHAH AHHHAHHA HAHA HHA MWUAAAAAAAAAAAAAAAAAAAAAAA aHHHHHHA AHHAHH AHAH AHHHAHHA HAHA HHAMWUAAAAAAAAAAAAAAAAAAAAAAA aHHHHHHA AHHAHH AHAH AHHHAHHA HAHA HHA MWUAAAAAAAAAAAAAAAAAAAAAAA aHHHHHHA AHHAHH AHAH AHHHAHHA HAHA HHA
2. Sold My Soul To The Never Never Never said...
C76 - Thanks for the chuckle!
3. planning4acrash said...
And take a long deep breath, and relax, !
4. talking rot said...
I stand to be corrected if I am wrong, but if memory serves me correctly, the annual rate of increase has fallen but is not yet in negative territory. Ask yourself, are houses prices cheaper now then they were a year ago?
5. maddison said...
It could be premature to talk about a 0.6% fall as the start of a crash.......
6. cyril said...
TR - you're right, inflation is generally measured over a year and this is still up.
But really there is nothing special about one year is there? Why not compare house prices to what they were 2 or 3 years ago since people say they are in it for the long term.
Maybe we are calling the crash too early - it wouldn't be the first time I've been wrong on this subject. Does anyone know what the official definition of a crash is? I think we should mark the occasion.
7. waitingfor hpc said...
Forget firgures think sentiment.....all the people who laughed at me now agree that house prices are / will drop.
8. maddison said...
I would say a crash is a fall of 25% or more on an annual basis. That would bring us back to prices 2 years ago! and even back then everyone was saying prices were too high. A recession in house prices is a different matter perhaps 3 consecutive quarters of falls.
9. Jonathan said...
It's too early to jump for joy.
What will the BTL crowd do? There may well be strong and increasing rental demand; I'm renting as are many on this blog and loads of people will consider realising value in their homes by selling, renting and buying in the future. Therefore if demand increases maybe the BTLers won't sell up in droves and there won't be the oversupply to send prices crashing. 0.6% - 1.1% down doesn't do it for me yet especially when annual HPI is still up.
I hope that's not the case, but it's an alternative scenario and I don't want to get too excited just yet ....
10. Fanniemae said...
Anybody who does not think the UK housing market is about to crash is deluded or in denial.
(i) UK Housing property is currently overvalued - thus susceptible to a crash
(ii) The world banking system is in crisis including the UK. Despite best efforts of the ERM, Fed, BoE; there will be a significant drop in supply of loans/mortgages. (housing demand will fall).
(iii) UK inflation is heading upwards not downwards - therefore interest rates are unlikely to fall in the near future.
(iv) UK economic growth is also slowing.
(v) US Housing market has already crashed currently down 20% and falling, with the economy on the brink of recession. The UK generally follows the US economic trends and so far this is holding out for the present crisis.
(vi) Once the housing market starts to fall fear appears in the housing market. Buyers delay - waiting for a better deal, and sellers tend to accept low offers knowing that further delays will lead to even lower prices. Thus the whole thing becomes a self fulfilling prophecy.
The questing now is not IF the housing market will crash, but, to what extent will the falls be and the duration of the housing recession.
My guess is based on the US economy (which granted has major differences to the UK) and our own historical trends will be around -20% and will last around 2-3 years. But this is just a guess.
The smart money will sell now (or will have already sold), rent and buy later.
The BTL sector is in for a painful correction.
11. drewster said...
TalkingRot, Maddison, Cyril: I don't think it's premature to talk of a crash. The mid-2005 hiatus was too early because there were no external factors and little change in sentiment. This time there's a huge list of factors:
- change in sentiment (few people believe prices will continue to rise any further)
- five interest rate increases by the BoE
- the LIBOR rate rising even higher, forcing the banks to increase mortgage rates
- the Northern Rock scandal, scenes of long queues at the banks
- some major lenders withdrawing from the market entirely (e.g. Paragon, NR)
- tightening of lending criteria by the remaining lenders
Taken alone, none these would have much effect. However as a combined onslaught on the market we can say with considerable confidence that the turning point has passed and it's all downhill from here.
12. cornishman said...
"Estate agents tell me the market changed with lightning speed in the past two months. In some city centres prices of new-build flats are said to be down 30%-40% – and things aren’t much better in the countryside.
One agent in the southeast said hits on his properties listed on the internet are down 80%. He has very few buyers and those he has are demanding cuts of at least 20% on asking prices".
I was skim reading this and saw that "properties listed on the internet are down 80%" and thought that prices had come down 80%! When I looked again I realised it was only internet hits that were down that much. Nice feeling for a short while though!
Quote from Merryn: http://www.moneyweek.com/file/38502/why-buy-to-let-will-be-the-british-subprime.html
13. maddison said...
The thing is that with 20% of the market (subprime, BTL self cert whatever) out of the equation this may mean that there are only 8 instead of 10 people bidding for the same property if sentiment changes. I agree sentiment is very important and this can stop the market in its tracks BUT it doesn't necessarily mean a crash. I remember very well in 1996 when I bought my first property sentiment was crap everyone thought prices would fall further and this happened again in 1998, 2001 and even to a small degree 2004/5. One fact is that banks will have to start lending money again or they will all go bust as this is the only way they can make money.
14. geed said...
a 25% crash in one year would wipe off 3 years of 10% yoy rises. Its not the amount in years that is important, it is the amount in money that you save.
15. confused76 said...
Maddison,
sorry do you feel well? do you need some water? how about a tea?
"there are only 8 instead of 10 people bidding for the same property if sentiment changes"
what are you talking about? have you read one of the best reports on the status of the london property market
http://www.primelocation.com/priceindex/2007/october/2
"The most notable change in the prime London sales market this month is the surge in the number of properties for sale that were on the market in October. Indeed, a 54.6% increase in property volumes, compared to this time last year, has helped turn a seller's market into a buyer's market in a very short period of time. With fears of falling property prices to come, Londoners have been quick to get their properties on the market to maximise their chances of a profitable sale, with a 12.9% increase in stock since last month alone."
if a 54.6% increase in property for sale can change the market from seller to buyer, that means there were 1.5 people (sorry i@iots) at best chasing each property back at the peak of the market.
I hope you were joking and did not believe the EA mantra of the 10 chasers per each property
yes, I am sure you were joking, actually it was a good joke
AHH HAHHAHHAHHAHHAH AHAHHHHHHHH
regards your other statements, it would take just too long to comment. but the one on the banks that "will have to start lending money again or they will all go bust as this is the only way they can make money". Totally wrong. Actually NROCK went bust BECAUSE it lent too much money (technically could not cover the lending at cheap rates with the borrowing, that was at higher rates). Then it was never the banks who lent the money, but it was the capital markets (have you heard of "wholesale") "via" the banks and that trick has dried up completely
tell you what is different today: house prices at 7x average salary, that different. It was not that way back in 1998 and 2001, and about 2004/5 actually you cannot compare because those were the years with the lowest mortgage interest rates on records
in any case, keep adding your posts because we need a BTLer actually explain us the collective mania of investing in property
16. maddison said...
You did slightly misread my post I said that if sentiment changes there could be 8 instead of 10. Yes I know stock is up but these people don't necessarily have to sell and they could start withdrawing it from the market. I will make a prediction though of a 10% fall in prices. I am not a "property can only ever go up" person but I am not as bearish as you. I do sometimes give the impression of being a bull as I feel I have to balance the doom sayers a bit. By the way I do not own any investment properties anymore. I sold mine last year..... because I knew prices weren't sustainable...
17. dohousescrashinthewoods said...
Prices aren't lower than they were a year ago, but they are certainly lower than they were a month ago.
I wonder how fast that window will open - e.g. in 6 months will we be back to 1 year ago?
18. uncle tom said...
Quote: "And no one wants to see a messy crash"
Really? I think there are millions who have been wishing this wretched bubble to burst for some time.
On the mechanics of the downturn, the YOY HPI figures are likely to go negative in the spring, but it could be sooner. There is no sign of the credit crunch easing, so any rate reductions by the BOE will make very little difference. The good and the great are now resigned to house prices falling over (note how The Times has changed it's tune over the last month!), and the predictions of 'no crash' and 'no recession' sound about as credible as Labour's protests of innocence over it's funding sleaze!
Over the last three months we've seen the speculators stop buying, which has prompted the current over-stock and price falls. After Christmas I expect to see many speculators make increasingly urgent endeavours to offload their assets, which will up the pace of price decline.
Right now I can see the rate-setting boffins at the mortgage lenders coming to the conclusion that they are under-pricing 90% mortgages. Look out for a widening rate gap between 75% loans and 90%, and don't even think about trying to get a 95% or 100% deal...
...Those flying close to the wind will struggle to stay aloft..
19. talking rot said...
I think I understand where Maddison is coming from but I do not know if I am sufficiently eloquent to explain. Banks have to lend to make money - if they don't lend, then they won't make money and therefore market forces will cause Banks to start competitive lending again. As credit becomes more easily available, downward pressure on property prices will ease, thus preventing further a decline from turning into a crash.
I'm not convinced by this idea. I am not a Banker but I don't believe the Banks make money by lending; they make money by charging interest on the money which they have loaned to a debtor. As Bank rates have decoupled from the BoE base rate, and are increasing, then the Banks are likely to make more money from lending less. This is a double whammy for the over-stretched home-owner and the leveraged home-investor. By increasing interest rates, the Banks are making credit more expensive for the debtor. By lending less, the Banks are making credit harder to come by. We are starting the see the result. The rate of house price inflation is dropping or slowing - but it is still not yet in negative territory when considering Year-on-Year changes.
I think the definition of a crash must be a function of a drop in prices within a given time frame.
Alternatively, a change of 1 or more standard deviations in the ratio between rent to SVR mortgage payment, given the median Loan-To-Value mortgage.
20. confused76 said...
Guys,
of course no blame if you do not understand the current issues about lending. If you do not work in financial services these can be difficult to grasp.
Banks do lend money for a living, but it is not their money, they have to borrow it from someone else.
They have two choices:
- UK saving account deposits
- the wholesale credit market (basically financial institutions in countries with high savings rates like Japan shipped sh@loads of money to UK retail banks, like NCrock)
To fund the lending binge, banks had to tap the wholesale market, since UK was particularly bad at saving £s. So, the wholesale credit market was cheap, but risky, since the borrowing duration was short (3-6 months) and not matching the lending duration (mortgages have fixed rates for several years). Moreover, credit conditions deteriorated due to US subprime crisis. In short, now banks cannot access funds as cheaply as in the past.
Therefore, yes they would like to lend out this world and their wife (or sister) but at rates higher than the current interbank borrowing rates appropriate for the loan tenure, otherwise they make a LOSS on the loan. The issue now is not "banks do not want to lend" but "banks cannot lend at decent rates without losing money". Of course banks want to lend at high rate but then there are no takers... ie. the borrowers, and we go back to the issue of supply and demand (of money) and price setting (in this case the price is the interest rate)
21. confused76 said...
Ok Maddison sorry I misread your post
There is another crash that is coming in the housing market, particular in LOndon, and that is the rental crash
at present there is an artificial supply shortage of rentals because btletters are scared and try to offload properties, keeping these vacant in the process. but as these properties fail to realize the extortionary deluded asking prices, they will be offered for rent, to "wait and see"
this is exactly what happened back in 2004
look again at the fantastic report
http://www.primelocation.com/priceindex/2007/october/2
it tells u all about the future of the london market, just look at the stock levels
22. uncle tom said...
The elements that Maddison & Co. need to take note of are:
1) When house prices are perceived to be likely to rise, mortgage lenders are able to offer better terms, because they consider their money to be safer. After house prices rose for a decade on the trot, the lenders became reckless. Now it's crunch time. As house prices fall, the lenders can only offer good terms on very low LTV ratios, which makes it very hard for FTB's to enter the market.
2) When house prices are seen to be rising, FTB's are prepared to take a much bigger risk when entering the market. When house prices are flat-lining or falling, they are much more cautious.
3) Despite good lending terms, FTB's have been increasingly priced out by speculators for more than five years now. With the speculators running for the hills, the market has to settle back to the point where FTB's can afford to buy.
Taking these factors together, house prices have to fall to a point where FTB's are brought back into the market, borrowing on much lower LTV's than before, and because of the borrowers increased caution, much lower income multiples than has recently been the case.
A 25% fall in prices will not achieve that. 40% is getting closer to the mark, but the wave of defaults that will accompany such a fall will leave the mortgage lenders bereft of any funds to lend.
That, simply, is why I believe a full-on crash is inevitable, and that prices will descend (for a while) to exceptionally low levels.
PS. I am currently very concerned about the solvency of our high street banks. As a precaution, I have just put almost all my spare cash into a short-dated Gilt (expiring next March)
If a couple of major international banks collapses, there is a real risk of a domino effect. The government's guarantee on deposits would then be unfundable, and they would probably resort to handing out long dated IOU's at a low fixed interest - and then let inflation rip.
I'm betting that by March we will have a better idea of the on-going consequences of sub-prime and other deals involving doubtful bits of paper that are just emerging. For now though, great caution is appropriate.
23. A Bear In The Woods said...
Uncle Tom, can you explain (briefly!) how to put your money into a short term gilt?
24. Ihopeitgoeswithabang said...
4 or 5 months of consecutive sustained falls will destroy confidence in house price inflation. That bubble will be burst.
Whenever someone buys a house they will EXPECT to demand a realistic drop in the asking price to compensate for the 'deflation' which can be argued quite rightly will be coming.
This will put people off buying. Estate Agents will price peoples houses to 'sell' so that they don't get made redundant due to lack of sales revenue.
The only thing that can slow this crash down is the Interest Rates being dropped by 2%. Which is really out of the BOE control now.
25. jack c said...
A couple of other factors to consider
Property prices have also been artificially inflated by EA’s, Property “specialists” and Solicitors colluding and marketing properties at an inflated price. Unsuspecting buyers are in for an unpleasant surprise if a forced sale comes about in a relatively short space of time – Negative Equity is on the horizon once again.
A high proportion of lenders no longer have the additional security of a HLC (Higher lending charge) or MIG (Mortgage indemnity guarantee). This is basically where the lender insists that the borrower pay an additional premium (an insurance) which protects the lender should the borrower default. Many lenders scrapped MIG’s under consumer pressure because they were seen as unfair i.e. the borrower paid for an insurance that protected the lender and not themselves. If a Bank or B/Society took possession of a property and that property were then sold at auction raising say £80K but the remaining mortgage were £100K then the lender would seek the difference from via the MIG and thus no loss is suffered. The MIG provider could then chase the borrower for the £20k. If property prices show a continued downward trend (some may refer to this as a crash) then the lenders do not have the security they once had in the past i.e. when negative equity was prevalent – this means that lenders are currently less willing/able to lend and as a consequence when coupled with the reduced liquidity in the market will place further downward pressure on prices.
26. Crashhorizon said...
Maddison's flawed logic make me even more convinced that prices are set to dive..
Come on bulls... You can you better than this!