Tuesday, Jul 21, 2009
Current housing market optimism is a rose-tinted view
Telegraph: Wishful thinking about house prices smacks of dotcom delusion
It is amazing what you can believe when you really want to. I don't believe this rose-tinted view of the housing market for at least four reasons. House prices are still above their historical trend. Unemployment is heading relentlessly upwards. Credit, the lifeblood of the housing market, has drained away. The downturn in the housing market since the 2007 peak is short by historical standards.
It took six years from the peak in house prices in 1989 to the bottom in 1995. It is inconceivable that a housing downturn triggered by an as-yet unresolved credit crunch should last barely a quarter as long. Is it any more likely that a 20pc price correction has done the job of unwinding a 12-year, debt-fuelled bubble that saw prices rise three-fold?
19 Comments
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1. wiltshire said...
Good points there LP.
I think the current situation is a bit like an 'event horizon'. When you're looking at something so closely, ie. daily, it's hard to see the whole picture. The VIs are of course desperately trying to cash in on the summer bounce. The likelyhood that these 'green shoots' will lead to anything substantial must be so slim as to be practically non-existent.
Of course, only time will tell but I believe when this bounce has run it's course, and sucked in the very last of the believers, then the real fireworks are going to happen.
2. mystie010 said...
"But in Japan, where land is even scarcer than in Britain, house prices fell by 68pc in real terms between 1991 and 2006. Anyone who sees their home as their pension could be in for a rude shock."
I found the above comment very interesting as it completely flies in the face of what we are always being told regarding ours being a small overcrowded island with a shortage of places to build more houses. This cheered me up no end :-)
3. alan_540 said...
12 years up 12 years down.
4. fubar said...
An excellent and VERY apt article, I've been finding the recent bullishness around house prices tedious in the extreme. Sums up why the bulls hopes are based on nothing more than sand and hope. The comparison with the dot.com bubble is fascinating for me as it passed me by at the time. I thought the key point that at first as prices fell people only saw buying opportunities. Exactly what is happening with housing. Japan's real terms drop of 68% between 1991 and 2008 is quite a shocker.
5. a saver said...
Nice to see something honest for a change. I've been getting really PO'd with the incessant VI talk of green shoots.
Seems so wrong that people are not protected from low lifes hoodwinking them into a sucker's rally that could ruin their lives.
The BBC are the worst for presenting VIs as credible spokesmen.
6. enuii said...
Just been reading 'The Great Crash 1929' by J.Galbraith and what strikes me is the unrelenting similarites with what we are seeing now. Bearing in mind the book was written way back in 1954 it is truely eye opening stuff to read, from the Florida land boom and bust, highly leveraged investments, financial creativity and the similarity with the willingness of people to pay sizeable premium over the real market price for investment trust securities ala todays residential and commercial property markets. The actions we are seeing today relating to the property market are so similar to those that were indulged in way back then by the Fed and the notion that the reason stock prices were so high was that 'there wasn't enough to go round' to meet the public demand.
History is unfortunately repeating itself but with a different class of asset.
Says 'Lively and Highly Readable' on the front cover, it may have been in 1954 but it is a bit dry now unfortunately.
7. alan_540 said...
Who or what are VIs?
8. alan_540 said...
Vested Interests... OK
9. britishblue said...
Surely, the cureent waive of optimism is just simply what is to be expected when a house price touch or dip just under the trend line. It happened in the last two downturns so, sure as eggs its happening again.
What is very, very apparent in my stretch of London is the sudden and almost overnight malaise of 'For sale' signs. As a neighbour commented, 'everyone was waiting for the right time to sell.' So we will have an increased amount of property coming onto the market in the next few months as the summer come to the end. Simple economics, if demand remains the same and supply goes up, prices tend to come down.
10. jackas said...
LP
Sounds to me they're getting to you.
Don't flinch.
Time will show your head to be the clearest.
11. inflation is eating my savings said...
nice article- I tend to disagree with the idea that property is a bad hedge vs inflation. Bellwether put it better than me this morning, but this surely depends upon the level of inflation. I expect that property in the early 20s in Germany was a pretty good thing to be holding, as long as you didn't hold on for another 20 years- and if you did and it wasn't destroyed, then you were again in good shape, when everyone was given the same restart capital. The boomers generation maintain that it was the only way to go in the 70s. As regards the crash- most middle class punters on the ground uon Tayside are still in disbelief. Many bought cheap in the last 10 years and have no or little mortgage left. They have bought a bigger place as their families have expanded, whilst keeping the old 2-bed. Lots of unsold stuff out there, but aside of the little piggie BTL squealing, not much drama.
12. little professor said...
jackas - the summary was a direct quote from the article, not my own words. They're not getting to me at all, I am very confident that we will have wave 2 of the great crash starting this autumn/winter.
13. amjidk said...
Top article & some great comments at the bottom of the page...
14. Stammer said...
LP @ 12
and you just know whent it does there will be an ear bleeding crescendo of wailing that warnings were not heeded re the loosening of lending criteria or that there should be a cranking up of Gord's QE generator. Even now there a daily quote somewhere that all would be well if the lending was there ( sub text get the lending back to pre crunch levels ) and I vision a gaggle of VI's arm's outstretched, greedy gleam in the eye, chanting " Turn on the tap, turn on the tap.... My area, Twickenham, has definitely picked up in sales but this is more a case of buyers lured out whilst volumes are low as sellers are reluctant to let their property go "cheap", daft headlines about house prices equating to rightmove asking prices are feeding both of these notions.
15. tenyearstogetmymoneyback said...
enuii said
"History is unfortunately repeating itself but with a different class of asset."
You could be talking about the Dot Com bubble there.
You only have to go back to the late 1990s to find that all the "smart" money was in Technology shares,
and housing wasn't considered to me an investment at all. There was no such thing as a buy to let mortgage
while it was quite the norm for people to remortgage or even downsize to buy Tech Shares. One bloke gave
a week by week account of his profits and losses in the Sunday Times just like the property VIs do now.
Anyway, for a long time I have been convinced that there needs to be an unrelated bubble (e.g. Tulips or
South Sea trading shares) before property will become profitable again.
:- Duncan
p.s. having bought in 1989 I can confirm that the statement in the article
"It took six years from the peak in house prices in 1989 to the bottom in 1995." is absolutely spot on.
16. uncle tom said...
Pretty sound piece, although drawing comparisons with Japan is always dangerous territory.
The comparison with the DotCom boom is really quite good - we all know that this false dawn can't last, but it's actually quite difficult to put a precise time on the resumption of the price collapse.
A similar state of affairs surrounds QE - we all know that if government prints its way out of trouble, then, sooner or later, the currency will collapse and inflation will kick off - exactly when though is a very hard call..
17. monty032 said...
An outstanding comment from Tom Stevenson: is it likely that a 20pc price correction has done the job of unwinding a 12-year, debt-fuelled bubble that saw prices triple?
18. letthemfall said...
I don't know how valid comparisons with Japan are, but the point about land shortages and population densities is an interesting one. When you consider that Ireland and the USA have a considerably lower population density than the UK, but also had a housing bubble, the argument for maintaining excessively high prices due to high population looks weak.
19. it_is_going_with_a_bang said...
The Uk property market ( as well as other countries ) has just been one huge pyramid scheme designed to make money and gain popularity in the short term by banks and politicans. It always was going to be uncontrollable and hence unsustainable. We currently have the lowest bank rates in history and yet the market is "just clinging on" by it's fingernails over a very steep cliff.
Comparisons with other countries are not needed. The simple question is do the majority of people / borrowers have the finances to buy and pay off property in the long term at the currrent prices. Answer is no they don't.