Monday, Feb 15, 2010
Look Down.
The Economist: Shaky foundations: The recovery in British house prices is built on sand
In Britain, house prices are overvalued. This shows up most starkly in the figures for first-time buyers, the plankton of the housing food-chain. Figures from the Nationwide Building Society show that the ratio of house prices to earnings for such buyers peaked at 5.4 in 2007. The ratio then fell as the housing market deteriorated, reaching 4.1 in the first quarter of 2009 before rebounding to 4.4 at the end of last year. But the record low for the ratio was 2.1, which was reached back in 1995. Indeed, the ratio did not even fall back to its long-term average of 3.3 (the data was first compiled in 1983).
Posted by 51ck-6-51x @ 08:36 AM (2344 views) Add Comment
21 Comments
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1. matt_the_hat said...
High house prices is just a symptom of the very immobile labour force.
2. happy mondays said...
High house prices are a symptom of an unhealthy society & general economics of the country.
3. Mark Wadsworth said...
"now that rates are about as low as they can get, that boost to affordability cannot be repeated". According to Jack C's comment on the Daily Express thread, they aren't even that low, so the government has got plenty of scope to reduce them further (by hiking VAT to 20% and cutting £500 off Council Tax, for example).
MTH, HM, high house prices are not a "symptom" of anything, they are a deliberate and calculated result of overtly Home-Owner-Ist economic policies. Keeping house prices inflated is the only metric that the majority of voters seem to care about in this country.
4. wdbeast said...
High house prices are a symptom of too much easy credit, now that has gone, it is only a matter of time.
5. 51ck-6-51x said...
All of the above & more.
High[er] house prices are a symptom of demand exceeding supply, which, whilst transactions are not forced in any way, may be influenced my a multitude of factors, many of which feed back from the market saturation, for example:
1) [MTH] Many own -> labour force relatively immobile.
2) [HM] Many own -> Political pandering towards this set -> market distortion via policy.
WDB said, "..symptom of too much easy credit", yes, but the easy credit did not /just exist/ - it was there due to other such forces, (2) did not help (e.g. take mortgage payments out of the inflation measure used to feedback for central bank base rate) but also from other, even bigger, markets (international reserves in emerging markets built up as a protection against the risks associated with floating currencies which led to huge creditor/debtor affecting import/export markets, and hence local central bank policy)
6. 51ck-6-51x said...
* my -> by
* huge creditor/debtor -> huge creditor/debtor imbalance
7. taffee said...
there is alot of demand for housing in india....so what.....40% of people live without electricity
there was alot of demand for tulip in amsterdam until people woke up
No-the real reason for high house prices is people think we are on the next leg up....when thet realise its false then house prices will fall....probably for a decade or so.
8. 51ck-6-51x said...
taffee,
There is no doubt that speculation plays it's part, but you confuse "demand" and "aspire". Demand is not someone simply wanting something, but rather it's someone offering to buy something at some level or other. The demand for housing in India to which you refer is largely the former rather than the latter and hence has no effect on price.
Regarding your comment on tulips, I would not like to propose any such thing myself. The price of tulip derivatives certainly went up and then crashed back down to what would appear a huge extent, but whether this was a speculative bubble (as popularly believed) or just an intrinsic abrupt change in price is (kind of surprisingly) still a matter of debate. If you're interested you may wish to read this 1997 paper by Earl A Thompson, which concludes that "tulipmania" was actually just an efficient market in action.
9. taffee said...
thanks for the post,but tulips,dotcom boom oil prices to $147 were all as a result of blind speculation,whereas time and time again in history we see that markets always return to and fall below historic fundamentals
oil prices fell for 20 years,houseprices in japan down 90%(central tokyo) over 17 years etc etc...there is absolutely no way house prices should be going up in this economic climate....lets face it...if interest rates were at their long term average then house prices would fall 50% in a year imo
10. Unbeliever said...
"And planning laws mean that the growth of new housing supply has been very limited." This pretty much sums up the situation. We have a government that beats its chest about the importance of housing being affordable while at the same time ensuring that high prices are supported by imposing draconian restrictions on supply.
How about this for an idea to free up the housing market and pay of the national debt:
When local authorities decide that a piece of land can be built upon they compulsorily purchase it at a fair market value. Planning permission is then granted and the local authority then hold a public auction. The land is sold off as plots of various sizes. The difference between the purchase price before planning permission and after planning permission swells the local government coffers and can be used to improve services or reduce taxation.
11. 51ck-6-51x said...
taffee,
I fail to see how your conclusion of "blind speculation" follows simply from price levels achieved.
As I said, speculation plays it's part, but we cannot be so Gung-Ho in our assertion of "this is a speculative bubble" as we may think at first. Oftentimes it appears to be pure speculation, when it's only a little speculation and much more a lack of information (a good example would be the dotcom valuations; sure there was an element of speculation, but the driver was a lack of information, which once revealed caused the market to turn).
I totally agree house prices are above fair value, but I fail to see all this speculation of which you speak: the market is very thin and speculators are reduced to those with both vast amounts of cash and inability to see the thin market and lack of credit. Please provide me with evidence to the contrary if you have it. I am much more inclined towards the distortion being due to other factors such as there having been fewer repossessions than expected due to both intervention and low base rates giving hard-pressed borrowers a relatively easy ride ( compare with U.S. where there is no-recourse to a mortgage, and debtors can just send back the keys; prices there seem to have fallen as one would expect) - If the driver is speculation, why Britain?!
12. taffee said...
if you fail to see the speculation then you do not want to see it.....there were still the 3rd highest repossessions ever in 2009...interest rates won't stay this low(rising interest rates caused the credit crunch) and bailing people out doesn't solve the problem....unemployment is rising...and bailing people out will have to stop eventually.
The only reason house prices are going up is 'cos first time buyers have been replaced by speculators who want tpo make a quick buck
Its a giant ponzi scheme for want of a better expression
13. mark wadsworth said...
Chaps, the tulip bulb thing was not just speculation - what kick started it was a law that was passed converting a purchase contract into an option to buy, with the option price set at 3% of the contract price (I'm simplifying here).
So beforehand, you agreed to buy for $3 and hoped you could sell for more than $3, say $4.
Afterwards, you could agree to buy for $4 - if the price went above $4, you bought and sold, made a profit. If price went down to less than $3.60 you rescinded the contract for a fee of $0.40.
But if people can suddenly sell to you for $4, then somebody else offers $5 (knowing the price only has to go up by $0.50 for him to make a profit and so on).
After several months of this, you could agree to buy for $100 - if the price went below $3 (which is what they were worth before it all started), you just paid the 3% x $100 contract price to break the agreement and that was that.
But people thought that $100 was the market price, so they were prepared to offer $3,000 (if price falls, they pay the exit charge of $90 and cut their losses) and so on and so forth.
14. mark wadsworth said...
Correction:
"If price went down to less than $3.60 you rescinded the contract for a fee of $0.40" should of course read "If price went down to less than $3.78 you rescinded the contract for a fee of $0.12".
15. 51ck-6-51x said...
taffee,
I am not denying prices are increasing. I am not denying that a ratio such as affordability says H.P. are overvalued...
"there were still the 3rd highest repossessions ever in 2009"
But well shy of the approx 70K there /should/ have been
"interest rates won't stay this low"
I agree, but this is not evidence of speculation, but a future prediction of affordability - when rates go up, there will be greater downward pressure.
"bailing people out doesn't solve the problem"
I agree, but, again, this is not evidence of speculation. Furthermore bailing people out _will_ support the market (still wont solve, I totally agree), it's one of the distortion I alluded to.
"unemployment is rising"
Currently, maybe a little, and sure it will once the P.S. start cutting back, but again this is not evidence of speculation, this is an affordability fundamental.
"first time buyers have been replaced by speculators who want to make a quick buck"
This was true during the last 5-10 years of the boom, and this may have started again to some degree, however, if I were a speculator all the prior points (and more) would be encouraging me to make short sell plays, not to go and buy up property. Do you not agree? So, I'd love to see some data to support your argument for a new speculative bubble, but I am yet to see it.
16. dbc reed said...
@Tulips
The tulipmania was quite sensible compared with the land market :the tulip bulbs could reproduce themselves: land can't.
17. mark wadsworth said...
DBC and I have discussed this before - not only do the bulbs reproduce themelves, but the whole bubble was over and done with in the space of a year or two (a bit like the recent oil at $147) so the damage it caused was very small compared to our ten-year house price bubble.
18. taffee said...
51ck-6-51x said...
I work in estate agency in a large town and I haven't sold a property to a first time buyers for 4 months...the only thing supporting the chain is buy-to-let investors or cash buyers,both of which intend to flip the property when they can
without them,the market would collapse
19. 51ck-6-51x said...
taffee,
OK, now we get to the nub, if not a little late in the day :)
You have evidence that BTL investors are supporting your local market.
Thank you!!
Out of interest do you know how many cash buyers were actually not "investing", but rather buying their first home? (as this is the category I could all into if I went out and bought right now)
I think we agree on the major point - the BTL investors you are selling to are indeed speculating (even if they think they are arbitraging!*), and that if we were speculators we'd be selling short if we could without excessive liquidity risk.
* An arbitrage opportunity (putting my capital in this BTL property will yield x; putting it in a 5yr bond yields y; x > y , so I choose the BTL) often has risks which should be hedged which the investor missed, if these hedging costs make x <= y, then the investment is certainly speculation, although the investor thinks it's an arbitrage.
20. 51ck-6-51x said...
* as this is the category I could fallinto if I went out and bought right now
21. matt_the_hat said...
Bonus time is it 666