Friday, Apr 10, 2009
Countering the ramping myths
Times: Is it time to buy property?
It's started again. People are talking about getting back into property.Nothing, it seems, can shake Britons confidence in bricks and mortar, even a near 20 per cent drop in house prices. But here are five myths about property that need to be challenged.
Housing is not cheap. The recent falls have only sent prices back to 2004 levels, and even though affordability is improving it it still not back to the levels at the bottom of the last house price downturn. The average FTB house price to earnings ratio is 4.1, almost double the 2.1 it stood at in 1996.
Japan, like Britain, is a crowded island. Japan's property bubble burst in the late 1980s and hasn't really recovered since.
Inflation could return with a vengeance, meaning interest rates may jump again.
13 Comments
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1. cyril said...
I thought houses were overpriced in 2000 but now I am beginning to think a house is as good an investment as anything. The fact that the pound has collapsed and inflation is rocketing (e.g. food) doesn't seem to bother anyone because mortgage repayments are next to nothing. The banks were bailed out because they are "too big to fail" and the so is the housing market - if inflation does return with a vengeance, expect much hand-wringing and not much else from the BoE. Too many votes at stake.
2. quiet guy said...
@Cyril
"mortgage repayments are next to nothing."
Lucky you, if that's so. Some people have trackers with no collar and they are doing very nicely out of the ridiculously low interest rates but my understanding is that these are a rather small minority. Of course, the other factor is equity; an FTB like me would definitely not get 'next to nothing' mortgage repayments - assuming I could get a mortgage at all.
"I am beginning to think a house is as good an investment as anything."
To be honest, I've had similar thoughts recently but upon reflection I realise that it's still to soon for FTBers. Maybe in a couple of years. I suspect that houses will start rising in nominal terms in the not to distant future thanks to inflation but that's not necessarily the same thing as value for money.
"Too many votes at stake."
Yup.
3. mander said...
If house prices keep rising it will be the end of the world as we know it. Now it is time to focus on so many other economic activities and wake up at last. We must tie house values to earnings. Houses must get sold to young families not to people who will never live in those houses...
4. little professor said...
Cyril - fixed rates are still around the 4.5-6% range, so not much cheaper than they have been over the past decade. You could of course go onto a tracker and benefit from the crazy low BoE rate, but what happens in a year or two when inflation takes off and interest rates hit double digits again?
I'm in a similar position to you, my cash nest egg is earning next to nothing (luckily I stayed out of the stock market so haven't lost 50% of my wealth like some people) and I can't be bothered going abroad this year because the silent 30% depreciation of sterling has dramatically reduced my spending power overseas. But property is going to be stagnant at best for many years to come. We have only just started this recession - unemployment has only been taking off in the last few months, and with banks delaying repossessions for as long as possible, it could be a year before this feeds into the market.
5. bidin'matime said...
The time to start looking is when average prices are less than 3 times average earnings - but by that time, prices could be falling so fast that you just sit back and wait. It’s likely that the final nail in the housing coffin will be when interest rates have to rise to prop up sterling and/or head off general inflation – expect all hell to let loose at that point.
It’s sad to see people out spending their ever dwindling equity – it’s a sort of government sponsored MEWing – instead of using the money they save on mortgage interest to pay down their mortgages and prop up their equity, they are simply encouraged to spend the saving, so the effect is precisely the same as MEWing. It’s a case of ‘recession postponed’..
6. Frank Bell said...
post 5, And what about when things start to look better through Alistair Darlings rose-tinted specs. He proclaims a mild recovery and then in the same year we get hit by a recession upon a recession but this time it will really hurt.
Post 2. Yep, them early trackers were good at base + 0.19% and base + 0.5% but now they have hit base + 2.5% or more, not worth it anymore with the rumblings being made about high interest rates as little prof states. The reason not many borrowers took the good trackers was that the IFA's or tied FA's were too busy promoting fixed rate mortgages to grab a fatter commission from the lenders.
Lets hope that Joe Public learn to search for mortgages themselves in future on the net rather than fill the rather empty pockets that the financial advisers have now....
7. drewster said...
Holy sh!t - a bearish article in the Times!
Oh wait I see.... it's a bank holiday, the shadowy people who censor bad news are on holiday. Normal service will resume on Tuesday.
8. night said...
We should be taking account of inflation when measuring house price falls. Might not be making tons of difference yet, but a chunk of the crash might end up being hidden by increased inflation meaning 2004's £150,000 > 2009's £150,000.
9. Joe said...
Some people seem to be refusing to accept that we are still at the early stages of a recession.
Right now we are meant to be experiencing a "correction" of prices - they are meant to be falling, people should be retreating from the overpriced market. Falling prices are what we want.
Unfortunately for the long term health of the economy the Labour Govt., BoE and so it seems, the lumpen British populace do not see things like that.
They think that quantitative easing will magic away any pain which is inevitable with a correction; they see the current times as the problem to be solved rather than accepting that the problem was the overpriced market caused by easy money.
As we know QE is inflation and with inflation comes real pain, real job cuts, and ultimately real house price crashes.
10. Feupwithlies said...
Thank God for House Price Crash, lone voices of reason in a crazy high house price desiring country!
11. will said...
It's a great time to buy a property - at a 40% discount.
12. mark wadsworth said...
What Little P and Bidin' say.
I love this 'crowded Island' myth. If that were a factor, why would house prices in Ireland (pop. 4 million-ish) ever go up? And what do the Dutch do when it gets a bit crowded, do they build homes in neighbouring countries?
13. shining wit said...
Agreed Mr Wadsworth....@ 9
Oh, and Japan, that's about the same size as the UK but the usable space (away from volcanoes and mountains) limits the two main islands immensely (feel free to help me out here Japanese Uncle) from available building space and wht happend to the Janapnes property market.....Oh yes it tanked for nearly 15 years.........
.......mmmmmmmm.....Glad I didn't jump on the property bandwagon and.......mmmmmm... glad I'm not about to jump in right now either.......
House price crash?.....What house price crash...........
Hahahahahahahah - Happy diety cruxifiction and torture weekend everyone !