Wednesday, Mar 18, 2009
How far do house prices have to fall?
MoneyWeek: How far do house prices have to fall?
If we want to see a sensible link between house prices and earnings, house prices will have to fall a lot further than they have already - but just how much further?
Posted by damien @ 10:59 AM (1982 views) Add Comment
30 Comments
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1. need-a-crash said...
"The faster we get back to normal, the better it is for everyone. We all know where we are going. There's no point dragging it out Japan-style for 20 lost years."
I know Money Week have always been on our side, but thoughts like this and the new FSA Regs really could be the turning point we've been waiting for.
2. japanese uncle said...
The average salary multiple over the last 37 years (1971 to 2007) is 4.54. At the 2007 average wage of £24,000, that gives an average house price of £109,000 – a fall of 40% from the peak. But if you exclude the bubble years (from 2001 to 2007), you get a 4.17 average salary multiple – which would give an average house price of £100,091, a fall of 45% from the peak.
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This argument is clearly based on the assumption that unemployment rate should not violently deteriorate. Unfortunately I can envisage unemployment rate may well reach 15% or even 20% possibly, reducing the overall average salary in this economy, which could well go below 20,000 mark, taking into consideration that financial and its fringe sectors in London + South East were the main element that drives the average wage sky high. (This area is suffering direct hit in the current/coming depression).
A fall of 65% from the peal, 85% in London, 75% in Edinburgh is inevitable, period.
3. japanese uncle said...
need-a-crash
Indeed. We must allow stupid banks to go under, as long as savings are properly protected. For this purpose LVT must be introduced to finance the financial compensation scheme.
4. crunchy said...
I dont like Scott Adams featured chart. Looking at the chart it could take five years to reach a 50% drop.
We need a panic to speed things up a little.
5. rocket robbie said...
Ju
It makes sense what your saying, however in my area (Dover) the prices just dont seem to be falling. I think like you say it will take a big rise in unemployment before we see big falls.
I brought a two bed-semi detached bunaglow in 2001 for £84000.00 and similar properties are currently on the market at around £140000.000 - 1550000.00
6. mark wadsworth said...
@ JU, always good to give land value tax a mention, but what makes you think the losses from cutting banks loose would be particularly large?
Let's say five per cent of UK mortgages turn out to be irrecoverable, or even extreme case ten per cent, that's a £140 billion loss. UK banks like to boast that they have total assets (and hence total liabilities) of £7,000 billion or something. So if all creditors take a 2% reduction, that's that fixed.
7. letthemfall said...
I'd like to see some of these banks fail myself, but I think the consequences for ordinary people would probably be disastrous; savings may not be protected in such circumstances. House prices are gradually coming down (20% in my area in the SE) but so much money is tied up in them, and belief in the never-ending upward spiral so ingrained, that it is a very slow process. But continue to fall they surely will.
8. str 2007 said...
Looks to me as though Money Week wrote the article from the posts on here over the last couple of days re: 3 x borrowing cap articles.
Nothing wrong with that, it's where the cutting news is.
9. will said...
Moneyweek have been talking sense, regarding House Prices, for many years now. Keep it up guys.
10. japanese uncle said...
mark
Unfortunately banks' bad debt for both corporate loans and personal loans including not least mortgage, in this phase of economy will snowball in a spiral as history indicates, while their assets are dropping in nearly all markets (stock, bond, etc), though sterling's decline is one of few positive elements here as considerable portion of ther assets exist overseas.
11. amjidk said...
i thought the article was excellent, rather have a quick crash than a prolonged one...
12. amjidk said...
i thought the article was excellent, rather have a quick crash than a prolonged one...
13. george monsoon said...
I like this article. I do hope the FSA go ahead with these plans. The next few years are going to be painful for a lot of people, but sometimes a cold hard shock is required to speed up the recovery. I for one, would rather endure 5 years of healing, rather than 20 years, festering to the same conclusion.
Someone pointed out that if we go into a period of deflation (which seems highly likely) then the average wage will fall and as a consequence will exacerbate the fall in house prices. Now all we need is for the sellers to see sense, and a full year without a single viewing should put paid to that.
Excellent article, written in plain English, stating the facts as they are, or will be soon.
14. uncle tom said...
A pleasantly sane article - identifies the issue that past wage growth may not be sustainable.
And yes - so much better to bite the bullet and get it over with, sooner rather than later.
15. rm96696 said...
I also hope the FSA will go ahead, but I am sure that they will note. At most they will set some voluntary "guidelines". Limiting lending to 3X salary obviously implies that current house prices are unsustainably, let alone a return to 2007 and more that many "homeowners" are hoping for. Obviously this is political dynamite. Not at all the sort of thing a government want just before an election...
16. Maddison said...
can someone please tell me what proportion of wages the average person spends on rent?
17. This comment has been removed as it was found to be in breach of our Blog Policies.
18. stillthinking said...
This article serves only to illustrate how obvious the bubble pricing was. Considering MoneyWeek is a reasonably widely read population, I am surprised that the journalist chosen to write the article needs to "I'd like to thank Scott Adams for sending me this chart. " considering that everybody remotely interested in the price of housing has seen it a million times already. Fair enough to include it for the readers, but to acknowledge only recently being aware of such a simple price history ought to knock numpty out of financial journalism.
19. Blackswan said...
This article also mentions my main concern with current BofE policy - the fact that interest rates are so low has eliminated a arge number of potential forces sellers from the market. These people will hold on to assets that they, technically, should no longer be able to afford to keep. This prolongs the decline period and effectively "taxes" anyone buying a house in the next two years by forcing them to pay a BofER created price-premium. House owners really are being given prioirty over everyone else and are being protected to avoid real price falls happening as they should.
What also appears to have been forgotten is that the economy started slowing down in 07 when interest rates started to go up to something like normal levels. This will happen again in next 18 months as price pressure from imports and the inevitable commodities shortage start to create inflation. Anyone taking advantage of the new "cheaper to buy than rent" mantra will be a bad position unless property prices correct themselves quickly.
20. Andy said...
There is no point looking too far back in history with that curve. It does not take into account that now most houses are bought by couples where the second wage is significant (in the old days, women either looked after the kids, or many had a poorly paid job). How do the FSA plan to limit mortgages to couples currently using the 3x joint model, or 3.5x higher + lower? I imagine the old 3x + 1x model made sense when there was a big wage difference between each partner, but this is no longer the case for many and is why multiples have taken off in recent years. If the FSA only plan to limit it to 3x per person, then 3x joint will still be feasible, therefore with these cheap borrowing rates, prices around £150,000 - 200,000 for the average could be maintained.
21. drewster said...
stillthinking,
It wasn't obvious to many people. Faced with a chart like that in 2005/6, they would dismiss it with talk of a "new paradigm", or "they're not making any more land", or even "ever-rising immigration, divorce, students, russians, city bankers". How quickly we forget our old madness. Just flick through some old Assetz News articles to get a picture of the previous mentality.
22. shipbuilder said...
I love how Moneyweek so closely reflects this site - either there's someone on here from Moneyweek or they read here regularly.
C'mon, 'fess up!
23. house said...
I have said previously, be patient it takes time for people to realise that the property asking price has to go down if they are going to be able to sell. My own personal experience was that it took 3 last years for the last property boom to bottom out and then it stayed there until 1998/99. It only started to recover only around 2001/02. It does not matter what the FSA tries to do, the ordinary man on the street who does not understand finance cannot comprehend what has been said on this site by people who understand finance or using common sense to see how markets do work.
Be patient, I did say in my last comment made yesterday that I expect the average FTB property to be around £100,000, but some of you expected to be lot worse which I do not doubt it could happen from my own experience in 1990's.
24. bidin'matime said...
Shipbuilder - my thoughts exactly!
25. Johnmcgeechan said...
I think with all of this things, it is going to take a sadly predictable path. House owners will still hold out for 2007 prices, sometimes through greed, sometimes because they don't need to sell. I am looking at the moment and every day I see unrealistically priced houses being added to the already huge pile of unsold ones. And before people are too quick to judge I have no doubt in my mind then many of the posters here,if in a similar position would do exactly the same. Fear and greed have always trumped common sense. So that just leaves people who need to sell, repossessions and professional landlords liquidating. In time I am sure that this number will increase as the recession bites deeper. For myself I am looking to buy, I sold 4 years a go and still have proceeds in the bank. But I am far from feeling smug. Apart from the fact that I fear for friends and family losing their homes (I am already seeing the first murmurings of this) I am concerned that things could go so badly , that savers could have their savings wiped out with hyper-inflation.
26. 51ck-6-51x said...
Even though a faster crash would be be beneficial to me personally I still fail to see why it's a good thing generally. The faster the crash the farther it overshoots and the more people are left with huge unsecured loans, which will feed back into the real economy - the house prices may come down faster, but the economy would be bad for longer IMO.
Does anyone have a logical explanation for why they think a regulation-forced speedier house price adjustment would actually be beneficial to the economy?
(The only argument I can imagine is that of a planned massive period of general inflation induced by an increase in the money supply quickly reducing the real value of said debts.)
27. Adds J said...
I agree with the principle of 3x multiplier, however I think they have calculated their average price prediction incorrectly.
One thing we all agree on is that house prices are linked to affordability/availability of credit/ ability to pay. However, everyone always forgets the cultural drift over the past thirty years to better equality in male and female wages. Historical mortgage multipliers were based on a single dominant wage earner (the male). This must have been reflected in the house prices. Quite rightly things are different now with women carrying equal weight in business, therefore equal weight in paying for houses.
I personally think that the huge house price rise we have witnessed is in part a correction for the double (and equal) income family.
The 3x multiple in this article does not take into account joint applications. If you take 3x a joint income of the average wage (25k x2) x3 you get back to 150k average price. Not all applications will be joint so lets say 75% are.
(150*0.75) + (75*0.25) = 131.25k. A further 12.5% reduction from now.
28. braindeed said...
21. 51ck-6-51x said...
Does anyone have a logical explanation for why they think a regulation-forced speedier house price adjustment would actually be beneficial to the economy?
I think that when house become affordable, the will actually sell - causing an uplift in economic activity.....removals, new carpets. etc.
Those caught in NE will just have to knuckle down and get on with it (no one forced anyone to buy) - those outwith the NE trap can then resume some sort of normality.
Life is tough, and we cannot afford to subsidise every mug who bought an overpriced pile of cr*p.
29. str 2007 said...
51ck
I think with a third party announcing how much people can borrow a line will clearly be made in the sand. At present no-one is quite sure how much people can borrow and hence no-one knows where prices will fall to.
OK if you haven't got a job you can't get a mortgage, but 3x ruling puts a cap on where things whould be as a max. It should also be made clear how joint incomes will be treated and BTL lending profile.
People buying now are simply going to be next years victims as things stand, therefore to get out of the mess the bottom (foundation if you like) needs to be found as quickly as possible.
With regard to kick starting things I still feel every town/village should have to make fresh building plots available at low levels. This within a year will pump a good chunk of money directly into every local economy. (I'd build a house for 1 - that's £150-£200k of direct spending just from little me), who would benefit if I bought a house for £300-400k. An estate agent, solicitor and bank. I wouldn't 'have' to replace kitchens, bathrooms, carpets etc. I would have to buy all these if I built a house.
So lets see £30k building plots everywhere and build our way out of this.
30. crunchy said...
21. 51ck-6-51x
No doubt about it people will suffer. However I for one and speaking for many like me, feel that the people that have been forced on the margins have suffered enough. It's time to spread it around more evenly now.
Fairs fair. As for the people in the middle fair play to you.