1. uncle tom said...

I re-visited one of my own models this morning, looking at home buyers with identical circumstances, entering the market at different times over the years - and then projecting forward.

I looked at a young couple in the mid second quintile of earning power (if you divide household income into 1% units, with 1 lowest and 100 highest, they come in at 70) first entering the market in 1978,1985,1991, 1997, 2003, and prospective 2009; with attitudes to borrowing that are broadly middle of the road. I worked on the basis that they planned to set up home a year prior to doing so, and did so at age 25.

I also worked on the basis that they sought to move house after six years, again after another six years, and then settled until their children flew the nest, prompting them to downsize after a further eighteen years.

It follows that the entrants of 1985 and 1991 are settled, with little interest in moving house, other than to a property of similar size. They should also be financially secure.

The entrants of 1978 are now looking to downsize, and will be dismayed by price falls; however their motivation to concede on price may be very low, often preferring to wait and see.

The entrants of 1997 should also be secure, and may have more than 50% equity despite recent price falls. They may have a pressing desire to move or upsize, due to a growing family or the desire to get into a better catchment area for secondary education.

The entrants of 2003 are stuffed. They are likely to have borrowed heavily, borrowed at 100% due to debt accrued during their student days, and may well have MEWed to clear their card debt. They are also likely to have an interest only mortgage, so their debt doesn't go away. Their scope for upsizing is likely to be thwarted by an absence of equity.

The prospective entrants for 2009 are likely to have a massive debt burden from their college days - probably ten times as much as the entrants of '97. They have no savings, and their parents are reluctant to re-mortgage to give them a golden goodbye. Renting is their natural choice now, and they may elect to rent somewhere inexpensive, so they can clear their debt and start to save a deposit.

Clearly there is no engine for price growth within this scenario. The potential FTB's can't play as things stand, and the 2003 entrants are in lock down.

Nor can prices stay where they are. The entrants of '78 may want to downsize, and may have a potential purchaser from the entrants of '97, but there is no-one buying the homes the '97 entrants want to vacate.

What further price fall would remedy matters?

The entrants of 2003 are effectively locked out of the market, while the entrants of 1997 are in a relative position - they can accept less for their home if the one they want to move to also drops in price. Prices therefore have to fall to a level that enables the 2009 entrants to enter, not at rung one, where the 2003 entrants are trapped, but at rung two, which is currently far in excess of what they can reasonably afford.

This one snapshot suggests that the price falls needed are more absolute than percentile; that property that peaked at £375k and now valued at £300k, might need to fall by a further £100k to become affordable - a 33% further fall; while property that peaked at £500k and now worth £400k might also need to fall by another £100k, but that would only be 25%.

Whichever way you look at it, heavy further falls in property values are inevitable.