Monday, Oct 27, 2008
A bit too optimistic
Daily Mail: House prices will tumble £40,000 by end of 2009
The average price of a home will tumble by as much as £40,000 by the end of next year, experts claim today.
A study shows a peak-to-trough fall in house prices of up to 20 per cent by December 2009, taking the figure back to 2004 levels.
The figures come from the Centre for Economics and Business Research (CEBR), which predicts the market will not show any signs of stability until 2010.
However, the organisation believes prices and sales will see a new boom in 2011 and 2012.
The CEBR puts the average house price peak at £196,000 in 2007 with a predicted figure of £157,000 by next Christmas.
Posted by little professor @ 12:56 AM (1534 views) Add Comment
39 Comments
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1. techieman said...
Bad news: That everyone seems to think HP will fall in a straight line from now on.... thats not good, i still think we will have a bounce first before real capitulation. Good news: The size of the falls predicted by the 'experts' are still conservative. Perhaps they are right re Dec09, i dont know when the bounce will be i have always thought next spring, and i suppose the more 'experts' predicting continual month by month falls the more the possibility i am right. Still unlike the liquid markets, short term timing in HP has previously not been that important. Again that may be different this time....
2. landofconfusion said...
@techieman
What makes you think house prices will bounce?
"The figures come from the Centre for Economics and Business Research (CEBR), which predicts the market will not show any signs of stability until 2010."
Aren't HPCs normally symmetrical? 2015 looks more likely.
3. beartil2010 said...
Techieman - I know you say you ignore thefundamentals and focus on the technical. I believe it's much harder to see a bounce, ie. temporary shift, in a market based on such illiquid assets. There is precisely zero good economic news coming, and nothing the government can do will be enough to get anyone to buy houses.
So I vote no bounce.
The Centre for Economics and Business Rubbish are out quite a bit - I think -20% by February, and 35-40% end of 2009 - at least!
4. Panda said...
I object to this sort of report, because implicit in it is the assumption that "house price inflation is the cornerstone of our economy". It is simply looking the wrong way. What concerns me far more is the inability of industry to take advantage even of the low exchange rates that have prevailed recently; industrial output has DECLINED!
This kind of report raises concerns in the wrong direction - declining house prices would be a tremendous impetus for the economy if proper taxation rules were established for multiple ownership - but ignoring everything else has to stop. The street finishes at the brick wall and you have to do a turn and somehow rejoin the highway somewhere else.
By the way, I agree with Beartil2010 - the report is also far too optimistic. Price declines will surely be at least twice what they predict.
5. sold out said...
I dont see any real bounce happening, we had that in 06/07.We might just see a very short lived rally in spring next year which may see a couple of months of stable prices.The downward spiral will continue with a vengeance as the economic gloom suffocates any green shoots in the spring.
6. matt_the_hat said...
2 Things are in action at the moment.
1. Zero volume in the housing market, however the expectations of home owners on house prices is being eroded (thanks BBC and others).
2. At the moment there are few forced sales, this will change before xmas.
The best way to calculate house prices in the near future is to look at lenders multiples and LTV ratios. Anyone know what these are at the moment.
7. mark wadsworth said...
@ Techieman, of course prices won't fall in a straight line, but this is not the stock exchange or foreign currencies where you get all sorts of interesting double-tops, flags, wimples etc (and dashed useful they are too), they was no recognisable bounce in any of the last three big crashes, why would there be one now?
8. techieman said...
Well looks like i started a debate! I just think a market is a market (and yes you can have patterns in an illiquid market its just they are not so easy to spot), i actually hope i am wrong and that there is no bounce, or a very shallow one, and yes there could be regional variations. BUT i think i am right to anticipate one - so that i dont get sucked in. I think Mark you are equating this to prior falls and that may be wrong. Prior falls were against the prevailing RISING trend. In my view we now have a prevailing FALLING trend (which is why i am probably one of the most bearish people here). So i do think its different - and i hope THATS right. In any case even if the the last crash of the late 80s was comparable (i.e. both this and that were corrections against an upward biased market) then there is a rule of alternation in Elliott that states the downmoves would be different in shape (which they have already proved to be somewhat).
I hope you guys are right and maybe i am prejudiced by my training! :-). I dont completely ignore fundementals i just dont trust em. Maybe im being a bit early with next spring!
9. Luckyjim said...
There were bounces in the previous crashes.
There will certainly be a point next year when buyers will see value in the market. And those that have sold to rent (myself included) will get restless if interest on their capital is low and it is possible to buy a house for cash. There may be further falls but a house is a home not a speculative investment.
10. little professor said...
I zgree that the bounce was the 06/07 period - prices almost went negative in 05, but were saved by the IR cut and the boom in global markets at the time.
11. jack c said...
I think Little Prof in his above post is pretty close on this one - we've had the bounce when they cut rates back in 2005 leading to a peak in Aug 2007 - house prices are now on a firm downward path (no Spring 2009 bounce from me) - rate cuts wont work (they are debating this on Bloomberg TV as I type) - my prediction (for what it's worth) is a prolonged downturn with month on month falls before prices flatten out and stay flat - so baically an L shape decline - flatlining in 2011 - the bounce at this stage is really anyones guess.
12. Fjcruiser said...
who are these property experts. When your job is at risk, the last thing who want to do is buy a house to be honest. Rubbish talk from the so-called professionals, ie EA,macroeconomist and government organisations.
13. str 2007 said...
I sincerely hope you're all right with the continued downward tradjectory.
Another reason the falls may produce a different 'curve' this time that may look a little more like the stock market is that there is a far higher level of 'investors' in the game this time around compared to previous falls.
Alot of BTL mortgages require 25% deposit (75% LTV). As much as we are committed to the downward tradjectory there is a larger number of people reading their 'BTL Bible' and looking for buying opportunities (whether to add to an existing portfolio or start one having missed the previous boat) This is the factor that COULD produce a dead cat bounce to the graph on the way down.
Just an opinion, but don't forget, if a levelling of falls or even a couple of months of very small rises does occur it will get the full weight of the media behind it. It will be ramped as hard as possible and may well suck more buyers in (particularly if mortgage rates have dropped by a couple of %).
14. sold 2 rent 1 said...
If there is any bounce/stabilization it will come in the spring (March/April) when IRs hit 2pc.
The LSR affordability index will be over 100 again (very affordable) and the financial crisis declared over.
From here oil will begin its ascent to $400 in 12 months as USD, GBP and EUR collapse.
This should be phase II of the crash.
15. Ayupmeduck said...
There could be a bounce, falling markets don't normally go in a straght line. As "str 2007" notes there could easily be a bounce due to BTL people stepping in and positive media coverage following. However, we are going to have an inflation-deflation battle. It seems that UK and US governments are going to try the inflationary route. In this case there could be a raise, or least a slowing fall in prices, as inflation takes off.
However, having said that, I'm not convinced that the US and UK govs are going to be able to inflate this time. We look to be in a period of falling demand, and even low or zero interest rates may not be enough to save the debt ridden consumer or the massive deleveraging that is happening. A Japanese-like cycle of falling asset prices and deflation seems likely to me. In this case houses are clearly into the asset class and may continue a slow relative fall for 5+ or even 10+ years yet.
16. str 2007 said...
S2R1
I assume by 2% IR you're talking base rate.
I guess this would translate to roughly 3.5% mortgage interest rate.
3.5% interest only mortgage equates to £291 monthly interest on each £100k borrowed.
Assuming a South East (excl London) 2 bed apartment could be purchased at about £140k by next Spring (Down from roughly £180k or 20%). Then I believe this could be easily let for about £600 per month (currently £7-800 per month) (£7-800 per month was the going rate back in 2000 BTW)
Assuming 1 month void and £1000 p/a incidentals £600 per month rent x 11 months = £6600 - 3492 interest - 1000 incidentals = £4492 or roughly £10% return on Capital Invested.
Better than a bank and at that rate would under pin house price falls.
Particularly given £40k in bank would be earning about 2% interest or £800 per year.
Does that arguement make anyone see that serious interest rate cuts could stem the falls.
Now where my tin hat !
17. str 2007 said...
Yes I know I pressed the wrong button and can't add up, thought that looked to good to be true.
£6600 - 3492 interest - 1000 incidentals = £ 2108 or roughly 5% return on Capital Invested.
Still 2 1/2 times better than a bank would be offering with a 2% base rate.
Now where's my tin hat !
18. jack c said...
sold 2 rent 1 - I cant see how we get a "bounce" in the Spring (unless u are talking Spring 2013) - one thing that I have factored in at the moment (which almost everyone else seems to be ignoring) is a potential run on the UK insurers many of which are interlinked with the Banks for starters HBOS owns Clerical Medical & LTSB owns Scottish Widows. If a run starts with Friends Provident and spreads the banks will be under even more pressure - couple this with falling stock markets, rising unemployment, falling consumer confidence and the fact that mortgage lending remains extremely tight at present there is (IMO) no chance of an immediate "bounce".
19. jonb said...
I think we will see a sort of mirror J shaped curve where we are currently just past the top of the market, but not yet at the big plunge downward stage. The downward fall is being constrained by a lack of supply at prices buyers are willing to pay, as sellers are still holding out for pre-crash prices. At some point, they are going to realise that they will just have to accept whatever they can get, and at that point, prices will really start to plummet. We are not there yet.
20. jack c said...
This just in from Standard Life Bank - Product changes effective 28 October 2008 From Tuesday 28 October there will be an increase to the Term Tracker product rate.The new rates available for both house purchase and remortgage are: 6.65% up to 75% LTV (7.0% APR)
21. mark wadsworth said...
@ Techieman, I am a great believer in technical analysis, but the housing market is much simpler than that. It's basically 18 year cycles (give or take a bit). Ten years up, four years crash, four years flat (broadly speaking).
The BoE can cut base rates all it likes, this is just easy money for banks.
BUT, why would banks charge interest rates of anything less than inflation plus 2%?
Far more important than the potential yield to BTLers is the simple equation "Is it cheaper renting or buying?". Last year's asking price of the house we are renting would have to come down 64% to make buying cheaper than renting (assuming 100% mortgage @ 7% interest, for comparison).
22. timmy t said...
str - I can see where you are coming from, but equally, I'm sure these are the exact same formula that amateur BTLers were taking to their Bank Managers a couple of years ago, and they are now fighting for survival. Surely the sums only work if current price declines stop, otherwise your return is just funding your capital loss. What bank is going to lend money to a BTLer in the current climate if their business case is reliant on house price declines stopping. Look at previous cycles, and at the situation in the US housing market. We have a LONG WAY to fall before new BTL investment becomes a significant factor in this market.
23. sold 2 rent 1 said...
jack c,
In addition to IRs being dropped to 2pc, councils will be buying up massive amounts of empty houses/flats.
This huge attempt to reflate should cause a minor bounce lasting only 2-4 months in spring 2009.
24. sold 2 rent 1 said...
For all you guys "worried" that the hpc may not live up to your dreams - DON'T PANIC.
For those of you who liked Chris Martenson's videos "The Crash Course"
http://www.chrismartenson.com/crash-course
He also wrote "The End of Money"
http://www.chrismartenson.com/the_end_of_money
Be careful what you wish for. You might actually get it.
25. Luckyjim said...
I've been arguing that there is a floor to the market based on STR2007's logic. Houses cannot fall significantly below the point where a BTL landlord can easily buy a house and rent it out at a profit.
And no, Timmy T, this is not the same formula people were using a couple of years ago. A couple of years ago BTLers were happy to rent at a loss purely for the capital growth. They had seen others get rich and could not accept that they had missed the boat and that the numbers no longer added up.
26. str 2007 said...
Alot will come down to the margin banks are prepared to lend money at.
Jack C - your post implies just over 2% above base being the going rate. However that could also translate to 50% above base. IE if base rates were dropped to 2% could we see mortgage rates of 3%. Or would they still need base +2% ie 4% mortgage rate ?
mark wadsworth - or a 60% fall in interest rates ie down from roughly 6.5% to 3% would have a similar effect ?
timmy t - Agreed with catching a falling knife, however once the sums add up for BTL and someone is prepared to put down a 25% deposit why would they continue to fall much more ? Agreed the massive purchasing wouldn't be able to resume until capital gains re-appeared (which I wouldn't expect for a long time). However pricing is set at the margins and if people still see the ability to purchase a flat and rent it out and pay off the mortgage over 25 years, which will ultimately represent a third of their retirement income they may well start purchasing in small numbers.
With regard to flats and typical BTL purchases alot will also depend on the mess the recent BTL purchasers get themselves into (ie not being able to re-mortgage to lower rates because of lack of equity).
My personal feeling is still that the rental sector will be the tipping point (either way) on how the crash unfolds. It is this sector of the market that contains the brave/fool hardy clever/fool ish. If banks choose to do whatever they can to support it then the market will start to hold at a level where the numbers start to work.
If on the other hand it starts to unravel, it will do so incredibly quickly due to the multiple holding situation. Take our friend Furgus for example and his ever so clever wife who have just discovered the games up and have announced it to the whole of the country.
27. beartil2010 said...
Those who are looking for a bounce:
I agree there are lots of VIs and possible causes of malinvestment that might cause a bounce. However:
Banks still have to lend the mortgages. Due to massive deflation, people and companies will continue flights to safety. Banks remaining short of capital means that base rate reductions will not be appropriately reflected in either offered mortgage rates or volumes.
I just can't see, no matter what, enough good news to cause the market to turn. I do think currencies will disintegrate with all the money pumping, and we will see lots of inflation sometime next year!
:-(
28. str 2007 said...
beartil2010
Given your scenario don't you think property might actually represent a 'real life' area of safety given the volatility everywhere else ?
29. flintster1994 said...
Great links s2r1. Cheers.
30. jack c said...
@str 2007 Monday, October 27, 2008 10:32AM - Typical rates are currently at best 1% to 1.3% above BOE for a remortgage. People often forget that lenders place a floor on BOE tracker mortgages ie the rate cannot go below a pre-agreed limit - so the idea that borrowers are going to see the full benefit of swingeing BOE cuts wont happen. If BOE reduce rates the lenders simply increase theirs to maintain margin/differential as per my Standard Life bank post. Northern rock cut rates last week but then reduced their loyalty discount meaning many people have an increased payment not a decrease !
@sold 2 rent 1 - as for councils buying up massive amounts of empty houses/flats to give the market a mini bounce - you are assuming they have the cash (what cash they do have at present might well be tied up in Iceland and pension liabilities will surely have first call)
31. mark wadsworth said...
@ STR2007 and others.
BoE base rate cuts have practically no effect on mortgage rates. Banks need every penny they can get and there is no reason to assume that mortgage rates will fall below inflation plus 2%, i.e. about 7% as at today. Not in a zillion years will rates come down to 3%.
In any event, look at Japan, their base rate has been at 0.5% since the 1990s, it did nothing to stop the slide in land values which have only just about bottomed out (I think).
32. letthemfall said...
Depends on what you mean by a bounce. There will be occasional months where prices apparently rise, a feature of the statistics of house indices, but I don't think there has ever been a sustained rise during an established falling house market before another big drop, at least not since the 70s. Asking prices are still remarkably high round where I live; they have nothing to bounce off.
33. str 2007 said...
jack c
I expected banks to 'cash in' on falling interest rates - I wasn't sure to what extent. I didn't know there was a floor rate with trackers, that's interesting.
The typical 1-1.3% you talk of are slightly less than the margins I was using in my example.
Mark Wadsworth
A zillion is quite along time and aren't we being told that inflation is set to fall sharply (although at present I'm doubting this). Lets say inflation fell to 1% and base rates to 2%, wouldn't that give a mortgage rate of about 3-3.5% ?
I believe mortgage rates were dropped to 2%ish in the States after 911. This being the cause of the problems now.
34. sold out said...
s2r1,
had a look at the link you have posted about the end of money.
I can in my limited ability understand the concept of exponential growth being unsustainable.
However i cannot quite get my head around what happens next.
when chris martenson and others talk about the end of money, what will actually physically happen?
Whats your view on this? Beyond just saying "end of money by 2011" What will physically happen and what will replace it?
35. jack c said...
@str 2007 - the floor is likely to be set at 2.75% to 3% at present on a BOE tracker mortgage and then you need to add the differential - so a deal at 1% above bank base with a 3% floor means the borrower wont see their rate drop below 4%.
In any event IMO cheap and easy money was partly responsible for getting us into this mess with regard to ridiculously priced properties - we hardly need a repeat prescription.
36. sold 2 rent 1 said...
jack c,
"@sold 2 rent 1 - as for councils buying up massive amounts of empty houses/flats to give the market a mini bounce - you are assuming they have the cash (what cash they do have at present might well be tied up in Iceland and pension liabilities will surely have first call)"
That is an easy question to answer.
They will borrow on our behalf.
It will be more burden on the UK taxpayer - debt that will never be repaid as the UK will go bust within 2 years.
37. sold 2 rent 1 said...
sold out,
"when chris martenson and others talk about the end of money, what will actually physically happen?
Whats your view on this? Beyond just saying "end of money by 2011" What will physically happen and what will replace it?"
In the short term, probably a hybrid system of gold, silver, and local community currencies.
After 2011, who knows; Ian Lungold talks about "admiration" being the new currency, but we shall have to wait amd see
38. beartil2010 said...
STR2007 - unfortunately no, houses will not be seen as a real life place of safety. Malinvestment leading to overvalued asset classes means that houses are overvalued - and will keep going down. Watch the US as the barometer, until the US turns people will not trust houses. People will stick to Bonds - government means that you will, at least, get 2% return or similar.
Never mind that your currency is crashing and becoming worthless!
39. mark wadsworth said...
STR2007, OK, a zillion years is maybe an exaggeration, let's call it "highly unlikely in the next three years, by which time the crash will be over and prices will be down 40%-plus from peak"