Saturday, Sep 12, 2009
The Bears are back in town
Moneymarketing: Property Price Party Poopers
Property advisers Jones Lang LaSalle has warned that the recent reports of UK house price increases is merely a rally that will lead to further falls. This week Halifax reported that house prices have increased by 0.8 per cent in August and Nationwide reported that last month was the fourth month in a row where UK house prices had increased - but the property experts expect much more pain into 2010.
Jones Lang LaSalle head of residential housing James Thomas says the pick-up is “irrational” and without improved lending, a slowdown of unemployment or an increase in new properties, the market will struggle going into 2012.
Posted by jack c @ 10:30 PM (1043 views) Add Comment
17 Comments
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1. devo said...
Do you support the concept of fixed term annuities?
2. devo said...
In the future there will be no
Fixed Term Annuities
ISAs
CDOs
MBSs
Derivatives
IPOs
etc.
3. alan said...
Jones Lang LaSalle - they seem familiar!
I've seen their name over boarded up shops and offices from East London to Basildon. I'm willing to go with their analysis as they seem to have their finger on the pulse and are well aware of the impact of unemployment in my area.
If they reckon the market is going to slide downward, I'll go along with it.
4. taffee said...
what agents generally fail to realise(apart from this one) is that during the last crash transactions were about the same as the boom(around 1.2-1.4 million) agents need volume and normal market forces support this...banks will lend more if prices fall to more reasonable levels
I would suggest that the property market is currently a giant ponzi scheme of vested interest....in holland during the tulip bubble prices were apparently supported by lack of supply and high demand...until one day the penny dropped and an auction ended with no sales..within months the price had collapsed
5. Dbc Reed said...
More respect for the tulip speculators! Any one bulb would produce numerous off shoots next season and the season after that loads.
Houses do not provide this self-expanding market.
Mind you it has been seriously suggested that the collapse of the tulip bubble is the reason that we no longer refer to New Amsterdam.
Dunno why the latest upsurge in house prices is deemed "irrational": the whole market is irrational; the whole political system based on "Wage increases bad: house price increases good" is irrational.
6. wanderinman said...
This sentence from the article interested me:
"Most advisers I talk to are pinning their hopes on house prices continuing to grow into the new year - if equity grows, risk shrinks and lenders are more likely to offer mortgages, which will kick-start the market and hopefully the real economy at large."
So, I interpret that they're hoping for relaxed lending, to restart a house price boom, against which further lending will be made, so pulling the economy up with it - to get us out of a crisis caused by ... err ... relaxed lending, leading into a house price boom, against which further lax lending was made, creating a nasty feedback loop and debt bubble upon which the economy depended for most of the last decade until it got all too much.
Now, one of the lessons I've learned in life is that you don't go back to doing exactly the same thing that led to screwing things up in the first place. You learn your lessons and change - or you're just digging a bigger hole for yourself.
It really strikes me about this country that we've got it all the wrong way around. A sustainable economy should be based on investment in business and industry creating exports and jobs, thus increasing peoples' earnings, on the back of which a housing market can then flourish. However, in the UK we want to do it the other way - we want to begin with funny money lending and selling each other more expensive houses.
Putting that aside, is it really possible that lenders will allow that sequence of events the writer describes to occur so soon after the once-in-lifetime financial collapse last year?
7. clockslinger said...
wanderinman...re closing question,yes, of couse it is if the odds show that there is a quick profit to be made...(see yesterday posts on new entrants to mortagae market and also note falling LIBOR rate) They don't give a f#&k about you, me or the long term good, not at all!Where is the stick to make them care? Where is the profit in being concerned?
8. c'mon correction said...
Yeah, agreed. Just to add, this attitude of 'let's just keep doing' it is a result of the government bail outs, 0.5% interest rates, money printing - it's moral hazard. A bank/organisation/ individual will over-stretch themselves again because they'll think the bail-outs will be endless, the safety net will catch them.
Reality will catch up though with the UK. We're a globalised country and will have no choice to increase our interest rates in line with other countries or we WILL have a currency crisis and an economy that will rebounds back to what for many will feel like the stone age!!
9. mark wadsworth said...
@ Taffee, the Dutch tulipmania had nothing to do with supply and demand!!
For some reason or other, a Dutch politician forced through a new law that said all contracts to buy tulips would be treated as options to buy (excerciseable at the option of the buyer) for the contract price, with a payment of 3% of the contract price if he did not exercise.
So think about it, tulip bulbs were going for $3 (before the law came in) and you had a contract to buy for $3, you were in a win-win position; if the price rose to $4, you exercise and make a $1 profit; if the price fell to $2 you only paid 9 cents.
So people kept bidding the price up until it reached the obvious conclusion, if the bulbs were really only worth $3, the contract price would say $100, because if the real value fell to less than $3 you would waive the option and pay the $3 fee (and buy them for cheaper in the market) but if the price went up to $110 you would exercise and sell them on for a net $10 profit.
Once the bubble was underway, the price just kept going up and up and up, well past $100 because that's what happens in a bubble.
(By analogy, look at all the people who paid 20% deposits on new build flats in the (false) assumption that if the price fell, they could walk away but if the price went up they could then just 'flip' the flat once it was finished.)
10. uncle tom said...
I've been doing some more comparisons of house sales data with the number of houses on the market, using Houseprices.co.uk and Rightmove.
After checking over 40 postcodes, both rural and urban; north, south, east, west and midlands, I'm finding the average time on market to be typically a year - although as some homes are sold without ever appearing on Rightmove, it would seem the average time to sell a property is currently over a year - extremely long by historical standards.
So why, when the market is so generously supplied, have the house price indices been rising?
This is my theory:
1) The weakness in the methodology.
The makers of house price indices take the first half of a postcode and look for all the property that has been sold within that area, and then divide those sales into Flats, Terraced houses, Semis and Detached. As far as I can tell, that's it; no counting bedrooms, and no distinction between the neat period semi in the leafy lane, and the semi in the sixties sink estate round the corner, that happens to be in same postcode area.
2) Who has been buying property this year?
Predominantly the better off; the equity rich. These are the people who are more interested in the period semi in the leafy lane, than the drear sixties dump.
There are also those seeking to move to a better school catchment area; again, something only the better-off can contemplate. Good schools tend to have attractive catchment areas.
3) So how does this affect the index?
Imagine a postcode area that has two streets with a similar mix of detached semi and terrace properties, plus a block of flats. Both streets have the same number of properties.
Dump St prices are always about 20% lower than those in Smart St. If the same number of properties are sold from each street, then the average sale price will be an intermediate of the two.
If more properties are sold in Smart St than in Dump St, then the average sale price will rise, even though the value of the individual properties remains the same. Conversely, if more properties are sold in Dump St than in Smart St, then the opposite will happen.
4) So it that it?
Only to a degree. Because the house price indices stopped falling and started to rise, sellers stopped lowering their prices, and held out for better offers, while buyers became more confident. This has fed the rally.
5) What happens next?
We still have a fundamental affordability problem. Far too many people need to be able to afford a home, but can't. The market has to correct.
The school catchment area issue is seasonal. Now that the new school year has started, there will be little pressure on that front for a few months.
Interest rates (those that borrowers actually pay) seem to be on the rise.
The emphasis on the better properties changing hands may not alter suddenly, but as a trend it must be a spent force now. Those selling less attractive properties must be losing patience.
Prediction:
- I think it likely that the next issues of stats will show slackening or stagnant activity, and there's also a good chance of price falls being recorded; although they may be modest at first.
- Fears that the market has turned again will pressure already impatient vendors; especially if they are part of the brigade who bought a new house before selling their old one. Buyers will resume their aggressive stance when it comes to offers.
- The balance of property sold in the coming months is likely to gradually return to normal, pushing the indices down. A combination of genuine price falls and this factor together, might generate some dramatic stats, enough to panic some vendors.
- House prices WILL fall relative to incomes. Substantially so. There is no way that can not happen.
11. happy mondays said...
Nice Theory ut, & thats without unemployment / interest rates rising, with the possibility that more property will hit the market as people try to max out on profit from there house / flats etc, as any sane person knows there is only a certain level it can reach before the foundations crumble & the whole thing collapses, with the falls earlier this year, i expect many will try to in the not so distant future..
But maybe i live in a country with not too many sane people...
12. mark wadsworth said...
UT, excellent summary. I applied your tried and tested method to my old postcode and also came up with 'Time on market' well over one year and gap between 'Sold STC' and actually selling about five months (my new postcode gave much the same results).
NB, HM Land Registry work on basis of 'Repeat sales regression' of the same property, so they compare the price achieved for Flat 32, Number 7, Dump Street with a previous sale of Flat 32, Number 7, Dump Street. They don't compare it with the sale of Number 3, Smart Street. Rightmove is less sophisticated and may well make the errors in methodology that you explain above. But who takes them seriously?
13. house said...
@9 to @11
All very comforting, as I have said in the past, it takes 3 years from the start of the fall to bottom out. This is what happened in the 1990's. This time however, it may take slightly longer because of direct government intervention.
Do you agree ?
14. happy mondays said...
Possibly, but if the markets take another hit ? which again could happen, as there could still be alot of rot in the finacial world + the financial experts & government find it hard to inform us of the truth.. Who know's ? But as it goes, it could well be a slow death..
15. uncle tom said...
Mark,
'repeat sales regression' relies on finding properties that have changed hands more than once. People who buy houses to live in are now averaging quite a long time before they move - close to twenty years, before the market soured; and theoretically much longer now.
Properties that change hands after a only a short period of time have usually been bought to re-furbish, and may also have been extended, - so you can't reliably compare the sale prices.
House,
Don't fear government intervention - the govt's broke, and even if it wasn't, the property market is too big to control.
16. mark wadsworth said...
Uncle Tom, don't forget that HM land Reg have got sales data going back for decades.
17. wanderinman said...
Mark and Uncle Tom
The website www.home.co.uk gathers 'Time on Market' reports. On the homepage, choose the house prices tab, enter your chosen location and you get links to various property data for that area, including time on market.