Saturday, Aug 23, 2008
"There is a strong case for letting market forces do their damnedest."
Times: Gordon Brown needs to do a U-turn on Sipps
HBOS’s decision to shut a quarter of its estate agency branches speaks volumes about the housing market. Transactions are rare, lenders are cautious, prices are falling and there’s no sign of respite any time soon. Gordon Brown faces pressure from some quarters to do something about it and his advisers have hinted at a package of measures once he gets back from Beijing.
Whether he should intervene in the housing market, however, is a moot point. There is a strong case for letting market forces do their damnedest. At some stage, prices will fall far enough to flush out buyers and financiers and create a new equilibrium. The Government’s supposed goal of affordable housing is getting closer with every passing month.
Posted by drewster @ 02:02 AM (933 views) Add Comment
24 Comments
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1. Quad said...
is the number of buy to let owners, larger or smaller then the the number of first time buyers?
one question brown needs to concider before the next election.
i have a nasty feeling he will do whatever he can to save his skin, by trying to keep house as high as possible.
2. handle_it said...
** The economics of buy-to-let property owning would improve at a stroke, with property in Sipps free from income tax and capital gains tax. A change in the rules would help to unleash a rush of buyers and would also help to deter the thousands of existing buy-to-letters now considering selling. **
I need not read any further. Vi nonsense. Times, let it go,it's over...
3. d'oh said...
Ugh! VI drivel it may be, but can't you just see it happening?! Tax breaks on houses in pensions...why not just sell the youth to slave traders and be done with it.
4. japanese uncle said...
House prices more than trebled with no reason but phony cases including 'growing demand' while hiding from the public hundred of thousands of empty houses, will have to get back to where it once belonged. Then 1-100/300=66.7% should be the minimum size of the HPC, a simple elementary arithmetic. In London/Edinburgh, some 'premium' will have to be added because of the extra lunacy in the form of the investment by foreign speculators which are more than quick to withdraw in the event. And that 'event' is now unfolding at full scale after all.
5. str 2007 said...
JU
Just for the thickies amongst us, and I don't mind putting my hand up to being one of them. Just run your calculation past me in English please with and explanation as to how you get the numbers you use. I like the idea of a 66.7% fall in prices but need to be sure it's worth waiting for.
You haven't got a timescale calc. while you're at it have you ?
6. japanese uncle said...
Suppose 100 was the average house price in the first place. Trebling of the HP means 100 becomes 300. If this 300 gets back to its old level of 100, the size of the original HP ie 100 as compared to the boosted 300 should be 100/300 (ratio of 100 against 300). Thus 100/300=33.3% should be the size of the HP after re-shrinking. Then the size of the HP drop itself should be 100% - 33.3% = 66.7%. Clearly I am ignoring any inflation factor here, while actually HP more than trebled, some arguing 3.5 times increase, justifying my omission of taking inflation into account.
7. beartil2010 said...
What JU says is true, but inflation varies - the simplest way to do it is to look at the average income to house price ratio. It's over 6; it needs to get back to a trend level of 3-3.5. It will overshoot this on its way down, so 45-60% looks like the range. I think JU is a little over pessimistic - or should I say overoptimistic!
Whichever way it's good news for those of us who thought it was coming.
As for timing, I wouldn't worry about catching the bottom - that's easy. Wait until the average cost reaches the 3x salary or so and you can't go far wrong.
8. drewster said...
Read the last paragraph of the article:
I would wager that he prefers high prices. High prices create an illusory feel-good factor for the 70% of households which are owner-occupied, while only creating a feel-bad factor for the 10% who rent privately (the remainding 20% are council or housing association tenants who are indifferent to house price fluctuations). Politically there are far more votes from homeowners than from tenants; also homeowners tend to be marginal voters so more resources are targeted at them.
9. str 2007 said...
JU
Assuming house prices have trebled since 1996 I assume you're using, my similar calcs would suggest that wages since then have gone up about 40-50% based on about 3% per annum.
Back in 1996 they would lend about 3 times 1 and 1 x second salary (how most houses are purchased).
I will base the ave. salary at 20k then (1996) so ave house would be 4x20 = 80 + deposit 20k = 100k ish.
I think banks will lend again at 3.5x1st + 1x2nd (just a hunch) and I reckon ave salary of home buyers would be about 28k. 4.5x28k = 126k + 20% dep £31.5k = £157.5k.Hence my original guess at 20-25% fall from Halifax 200k.
The speed at which it has come down so far is impressive and I think that a big factor will depend on what happens in the BTL market.
If banks go for margin calls etc. then it will destroy btl and prices will fall further than my illustration as there will be excess supply. Also if unemployment rises alot then this will also depress figures further due to lack of purchasers (or again over supply if you like).
If the economy has somehow held together by the end of next year and prices are down to 155ish ave. then I think that would put 1 bed flats at 90-100k and 2 bed flats at about 110-120k and at these levels I think there would be support from the pent up demand of 1st time buyers etc.
I still wouldn't expect much in the way of price rises but as soon as sellers see a level of support they will once again start to hold out for what they think they may be able to get.
Your 67% falls would put an average house at £66k a 2 bed flat at say 50k and 1 bed at 40k. I just think their will be too much support a long way before then.
Don't forget everyone is still a property investor nowadays and have seen prices bounce back after the last recession (lenders aswell). And whilst I don't believe they'll bounce back as before due to strickter lending, I don't think they'll fall as far due to a different psychy nowadays.
10. str 2007 said...
Beartil2010
Yes your numbers are probably a far simpler illustration of what I was trying to say.
I agree to a point, but I think the bottom would be about 4.5 times (including 1x 2nd salary and I think 1st may go to 3.5 times). Waiting for 3 times I fear you may see it pick up before then, which the uber bears will call a dead cat bounce and before you know it you'll have rented for another 18 months and missed the bottom.
From my point of view I want to see 25% off (halifax figures) at which point I'll be making decisions based on gut feeling for the economy and my own circumstances.
I think i'd be more comfortable having bought just before the bottom and maybe negotiated a good deal aswell rather than just after the bottom when a good deal would be harder to achieve.
The reason is it puts me in my own home earlier and possibly allows me to buy at a price that would be the bottom.
11. plato said...
I think there is another big factor in property price drops. This is the real cost of living and this is the factor that is going to make sure of JUs prediction. We either have massive wage rises or massive reduction in the cost of living.......... Or huge property devaluation.
It is no good affording to buy a home if you can't eat, never mind all the gimmicks we are used to with property ownership and debt.
12. handle_it said...
@ 10. I think you're underestimating how far wages will fall. Earnings at current levels are geared to hpi. A 25% drop in prices ain't that far away imo and no-where near the bottom.....
13. matt_the_hat said...
How about an even simpler calculation its hard work for the average person in this country to save (and alot easier to spend) so a 10k deposit is about the limit. 90 LTV = 100k average house price. Forget about average earnings the average person (i.e median) earns no where near
14. japanese uncle said...
Str2007
I am afraid to say, 'wages since then have gone up about 40-50%' proving to be just another bubble, in an economy 'prospering' based on the debt and housing bubble. You cannot take it for granted as well as you cannot take more than trebled house prices for granted. All those premises will have to be terribly shaken for the next few years.
15. str 2007 said...
@ plato
Not to say they won't this time but I don't think wages actually fell in the last recession, unless you're talking in real terms in which case they always do - don't they !
Well I don't actually want the end of the world as we know it, but assuming we avoid that and you're all correct about falls way in excess of 25% that suits me just fine
16. Gotout2006 said...
A builder near us built two flats top and bottom( like a det house) two beds in each with a very small back garden.Had them up for sale at £149.000 each
after a year they are down to £129.000 each. My friend offered £200,000 for both they said yes. He was putting down £50,000 and taking the rest up
on mortgage. He was going to live in the top flat and let the bottom out. Bradford & Bingley said yes to the mortgage he is 58 and on benefits and will never
work again. I think they will never learn.
17. str 2007 said...
JU
Part of my HPC unknown factor is Margin Calls on BTL.
If banks did nothing and the falls were only 25% (arguably BTL type properties would suffer larger falls if the average was 25% falls) then the BTL market could hold together even if it did so for a few years with no equity.
If your predicted falls came about :-
1/ Do you anticipate margin calls ?
2/ At what level would you expect them ?
18. handle_it said...
The end of credit seems to have been portrayed as a really awful thing -even the end of the world ! It isn't and it isn't awful - it's what we need. Natural resources obviously can't keep up and we as humans haven't evolved to withstand the stresses and strains of a 24/7 lifestyle. People in general will adapt very well - it's what we do.
19. japanese uncle said...
str2007
Margin calls will be inevitable at certain point in time when banks financial standing proves fragile enough, though I have little idea at what level. It depends, say on the pace of HPC, particularly how it will accelerate in the next few quarters. Banks and BSs are incredibly selfish animals and prepared to do anything to the borrowers to save their own necks, as proven in the 1990s Japan.
20. str 2007 said...
JU
There is a difficult balancing act.
Do banks go now whilst there is still equity but by doing so push prices down.
Or do they do nothing and hope for max 25% falls and that all will be well, but if it isn't, there will be by that time no equity left to call on.
If they are not going to call it, why have it in the contract.
If they are and by it's nature collapses the BTL market, then the banks themselves have a very flawed business plan.
As prices fall there will be a crossover where it becomes cheaper to buy than rent (providing there is a deposit). At this point rents must fall (if the present glut of rental properties being reported doesn't push prices down first).
So as prices fall do the banks have the option of requesting ever bigger deposits forcing people to continue renting and hence not exposing BTL capital losses. But again the nature of larger deposits in itself will push the market down further.
Sorry, I'm thinking the scenario through out loud so to speak.
Unless banks of course offered BTL investors smaller deposit requirements than home owners, keeping the BTL market alive and not realising those losses as potential home owners would be forced to rent from BTL Landlords.
Which in a way is what the goverment are currently doing by offering tax breaks to BTLers.
The big question for the banks though (and the exciting part) is how many other lenders maight margin call a single BTLer. The last lender to ask may end up with nothing. Therefore it should be a race for the equity that is there now.
So if I as a hardnosed banker would my strategy be to margin call all BTL borrowers, those that could come up with equity would be the one's I'd back with lower deposit loans to mop up properties from those who couldn't make the 1st margin call.
By doing so I would end up with maybe 1/3 of the clients (the best 1/3) and still most of the business.
Yes I think that would be my strategy.
I may have shot myself in the foot to a degree by doing so, but at the same time shot the slower banks (my competitors) in the head.
21. japanese uncle said...
str 2007
Banks are selfish and (by definition), individually so rather than collectively so. A bank cannot afford to honor the interest of the banking industry as a whole, when its own survival is at stake. Having said that they are instinctively conformists at the same time, always looking around to see what their peers are doing. Otherwise this housing boom ought to have ended much earlier as any bank president with half a brain should have wound up the BTL lending operation circa 2006 at the latest. 'Big boys are still doing it, then we will be OK as well' sort of stupidity exacerbated the situation this far. Again I have little idea at what point their mindset critically changes with their sense of crisis driving them cross the Rubicon. All I know is it will happen anyway and that sooner rather than later.
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23. Missingteddybear said...
"High prices create an illusory feel-good factor for the 70% of households which are owner-occupied, while only creating a feel-bad factor for the 10% who rent privately (the remainding 20% are council or housing association tenants who are indifferent to house price fluctuations). "
I almost agree with you Drewster. But I would say 'many' council or housing association tenants are indifferent to house price fluctuations.
I bought a flat in London in 2000 and had to sell in 2005 after suffering a stroke (unexpectedly at the age of 29) and having to quit a well-paid job. I am a now a council tenant and am certainly hoping for a price drop as I want to buy again some day soon. I am lucky because the low rent means I can save a lot (even from my new lesser-paid job) each month towards a deposit as well as having some of the equity from my old flat tucked away.
Some council/HA tenants want to see lower prices for various reasons including
a. They aspire to home ownership and may want to buy on the open market or exercise their 'right to buy' or 'right to acquire'
b. They are hardcore socialists who despise the rise of BTL and speculation
c. They want their children to be able to buy a house since there is an acute shortage of social housing
I need a drop of 25% to be able to afford the place I want in suburbia. I am working towards saving a 40% deposit based on that calculation. 66.7 % drop would make me ecstatically happy since I could nearly buy outright at those levels.
24. mark wadsworth said...
@Beartil2010 "Wait until the average cost reaches the 3x salary or so and you can't go far wrong."
Exactly! Timing the top is awful difficult, getting back in in the trough is quite easy.
@STR2007, the banks did a race to the top. Let me rephrase that, the cowboys (whom bank shareholders employed to look after their capital) did a race to the top, fuelled by their own bonuses (bonii?). Now the bank shareholders will replace the cowboys with a bunch of 'let's keep the damage to a minimum' beancounters, who will start a race to the bottom. It's no longer 'first-mover-advantage', it's 'first-to-bail-outer' advantage.