Scooter

Analysis The Times December 29, 2006 Cassandras keep shtum on property risks Patrick Hosking The funny thing about the housing market is not that prices are starting to accelerate again, but that policymakers, regulators and lenders are so relaxed about it this time around, and so confident that it won’t lead to a painful reversal. Prices rose 10.5 per cent this year, 3½ times faster than in 2005, according to Nationwide Building Society. Valuation measures are deteriorating. Affordability is again plunging, especially for first-time buyers. Average earnings rose less than half as fast as house prices. Borrowing costs are on the up. Even with rents rising, buy-to-letters are struggling to make the sums add up. The occasional Cassandra issues a warning. David Miles, of Morgan Stanley, argues that a substantial fall in real house prices is likely at some point. The Financial Services Authority has quietly instructed banks to ensure that they could cope in the event of a 40 per cent crash. Yet on the whole the attitude is sanguine. That’s in sharp contrast to the summer of 2002, the last time that the market was frothing upwards. Then, Sir Eddie George, Governor of the Bank of England, told MPs that house-price inflation was “unsustainable”. His deputy, Sir David Clementi, said: “The longer it goes on, the sharper is likely to be the eventual correction.” Sir Howard Davies, then head of the Financial Services Authority, said that he wouldn’t be surprised if prices fell. That June, the average home in England and Wales cost £103,500. Fast-forward 4½ years and the average home costs £173,700. There has not been a quarter when prices have even paused for breath, let alone fallen. Prices have continued to grow much faster than incomes. If Sirs Eddie, David and Howard were right to be concerned then, they, or rather their successors, should be thoroughly alarmed by now. If price falls then seemed possible, now they would appear probable. If buyers then were risking taking on too much debt, now they would appear to be positively reckless. But few believe that a crash is remotely likely. Partly this is rational. The era of permanently low inflation and interest rates seems more assured. Employment prospects look benign. The gap between supply (constrained by planning rules) and demand (boosted by immigration) is as wide as ever. Partly it is time. The era of negative equity is now 15 years ago and fading from memories. But partly it is the fear of looking foolish. There are only so many times that you can warn of imminent disaster before being accused of crying wolf. On most conventional valuation measures, however, house prices are looking more stretched than for a long time. The first law of rubber bands still holds: the more the elastic is stretched, the more pressure there is on it to snap back.

The binmen "take your refuge away"? Do you live in a bin Mr Tramp?

Dubsie, I think he was joking about the racist bid hence the avatar. S.

It may well be the knock on effect but FFS surely £1.4m is pretty big money to most people even in NW3 (maybe it is the bonus for a year!) This was a house I would not be proud to have people back to, especially if they knew what I had paid that. I would think anyone who did buy it was a fool. And you are right, it is not the best bit of Hampstead by any means... S.

Just got dragged to see a house in Hampstead, bearish as I am, for the first time in 12 years (since I last bought.) Four bedroom Victorian semi but obvious subsidence problem (cracks in front bay, subject to an ongoing insurance claim) and damp, not mentioned by the agent previously, evidenced by the dehumidifiers and the odd patch. "£1,395,000 Joint Agent Literally moments from the Heath and the excellent cosmopolitan shopping and restaurant centre at South End Green, a charming bay windowed Victorian home skilfully enhanced by the presented owners to an exceptionally high standard retaining a plethora of period detail. The property offers excellent family orientated accommodation and is presented in a ready to move into condition. Master Bedroom With En Suite Bathroom & Dressing Room, 3 Further Bedrooms, Family Bathroom, Guest Cloakroom, 27ft Double Reception Room, Kitchen/Breakfast Room, Cellar, 19ft South Facing Patio Garden Ref: 105_5216 Contact agent" The "garden" turns out to be a small yard backing directly on to the railway track, 3 metres of which is actually owned by Railtrack, by law. The house was pretty shabby and in need of generally refurbishment. The agent had organised several viewers at the same time, maybe to create a buzz or maybe to save time, but no one was looking impressed so I guess that backfired. But £1.4million! We were in and out pretty quickly... Now to read the agent's blurb on this, you would have thought you were buying something akin to a New York brownstone. No particular point to this except that despite tales of London being awash with cash, it does not quick feel like everything is flying off the shelves. I hope that something severe is just around the corner for housing, even in London and seeing stuff like this, maybe it is. The agents are saying there is nothing about, very low turnover, although anything decent is selling at asking price allegedly. Hmm... S.

You must be my long lost evil twin! S.

Certainly loose liquidity has a lot to do with prices since 2001. But interest rates are rising here in the UK, in the Euro Zone and possibly further in the US, where Bernanke still says he is worried by inflation (i.e. they are not falling and may rise). Broadly, when cost of money rises, asset prices fall. At the peak of a bubble, most people do not think it can do anything but inflate further but they usually not only revert to mean but overshoot on the downside. You may be surprised by how quickly a bubble can burst but look at some of the housing reports from the US recently. S.

I see what you are saying about extending and staying put but it is still not for everybody and if prices were more in line with historical ratios to earnings or notional rent, I suspect most people would move and not have the hassle (PP, managing builders etc) of extending. I just do not think stamp duty is the main issue preventing moving and high prices are. For a hosuing expert to claim otherwise makes me suspicious. I can do nothing about stamp duty (so getting angry is pointless.) I can do something about when/what I buy and how much I pay(although I cannot fight the market) . In practice I am bearish on prices and I expect to be looking still in a year's time but you never know. S.

You assume wrong. I have bought twice in the last 16 years, last time 1995 but I remember well enough. I am not saying that stamp duty does not hurt, I am just saying it is a small part of the overall pain of buying an asset that has massively outpaced wage inflation. Where I live (North London), prices have risen several hundred percent, which I have nominally benefited from as an owner but I would rather not have, as in practice to get anything much bigger (which I would like) has me paying well into seven figures, and handing over that sort of cash for a 3 or 4 bedroom flat bothers me even more than paying Gordon. S.

The rate of stamp duty on the kind of properties you mention is 4% (over £500,000.) This looks like like a drop in the ocean compared to rises of several hundred percent in asking prices over the last few years. It is clear to me that the problem is the prices themselves, not the stamp duty, although it is obviously more pain on top of bubble pricing. S.

The Times December 05, 2006 Loft conversions and house extensions to be put on fast-track Jill Sherman, Whitehall Editor Improvements won't need approval Small businesses also to be exempt Homeowners would be able to build conservatories, kitchen extensions and loft conversions without planning permission under changes to planning laws proposed today. The long-awaited report from Kate Barker, an economist who was commissioned by Gordon Brown to investigate how to ease the housing shortage, will recommend an overhaul of the current laws to speed up housing developments and infrastructure projects. She is also expected to propose fast-tracking small domestic and commercial extensions to ensure that planning authorities can concentrate on larger developments. The changes, which are expected to be backed by the Chancellor, will be widely welcomed by houseowners who cannot afford to move because of the cost of stamp duty. Instead they could find it much easier to build a new room or extend their kitchen by merely filling out a form and complying with building regulations. In future if homeowners can agree with neighbours about a party wall or extension in advance, the council will only have to rubber-stamp the application. Ms Barker is also expected to recommend that businesses, including retailers, can go ahead with small developments and extensions without planning approval unless they are proposing a change of use. At present councils have 650,000 small planning applications a year, which are disproportionately expensive to process. But rural campaigners fear that her wider recommendations to increase housing and infrastructure projects such as roads and railways will lead to extra development on green belt land. In an interim report in the summer, Ms Barker argued that many planning applications were being blocked by councils or delayed by the lengthy planning process. She claimed that as many as one in four applications was rejected, up from 13 per cent in the late 1990s. She also argued that too much land, particularly in the South East, was protected from development and should be redesignated to allow more house and road building. Her report is expected to recommend a new independent commission which will make decisions on all major planning developments. This could cover road and rail projects, nuclear power stations, airports and big housing developments. Many of these currently get mired down at local level as councils oppose them on the grounds of local factors such as sustainability or congestion. The new commission would study the application on the grounds of its social economic benefits to the nation rather than the self-interest of local populations. Ms Barker will argue that if a project is of economic and employment benefit it should go ahead, provided it is not outweighed by environmental or sustainable concerns. Ministers have been concerned that despite rising housing demand, particulary for first-time buyers, many developments are being blocked at district or county level. Once an application is turned down by the council, the Secretary of State can overturn the decision. In her previous report Ms Barker recommended that an extra 70,000 to 120,000 houses should be built each year.

You first! I am staying in Belsize Park for the moment... S.

Better get herself a gun (just to keep up with the locals)!

Sorry, I don't do bullshot!

The housing boom will end, but how? By Martin Wolf Published: November 24 2006 02:00 | Last updated: November 24 2006 02:00 For the British, houses are as much gold mines as mere dwellings. Over the past 10 years, real house prices have doubled, while real disposable incomes have risen only 29 per cent. Ratios of house prices to incomes and rents have, as a result, reached all-time highs. Housing made up as much as 53 per cent of the total wealth of UK households in 2005, against 39 per cent a decade before. Can this last? No. Will it end with a bang or a whimper? That is indeed the big question. Given this, what are we to make of a prediction that "sharp falls in real house prices may not come for a year or so, but come they probably will" (emphasis in original)? We should take it seriously, particularly since David Miles of Morgan Stanley, the lead author of the report in question ("UK Housing: how did we get here?"), is an erstwhile adviser on housing finance to Gordon Brown. The study estimates a simple model in which prices depend on average incomes per head, the size of the population and the real cost of home ownership. The last, in turn, depends on real house prices, interest rates and other housing costs (such as depreciation, repairs, insurance and taxes). But, above all, it also depends on expected changes in house prices. The more house prices are expected to rise, the cheaper the effective purchase price also becomes. This last point is central. If people's expectations of future price increases are affected by their recent experience prices will tend to overshoot fundamentals: this is just how bubbles form. In the Morgan Stanley analysis, people's expectations of future price rises are affected by both recent experience and the belief that there is some long-run average rate of house price inflation towards which the current rate will converge. The analysis then gives two interesting results. First, it does explain the doubling of real prices over the past decade. Second, changes in expected prices explain a very large proportion of those increases. In one specification, higher incomes per head would have generated a 28 percentage point real price rise on their own, rising population would have generated a nine percentage point rise and the reduction in real interest rates would have generated a further 14 percentage point rise. All the rest (62 percentage points) was due to changes in expected prices. But a specification that includes the increase in supply of new housing reduces the impact of price expectations to 39 percentage points. None the less, the conclusion is clear: what we are seeing is, in significant measure, an overshoot of fundamentals, in which house prices are being lifted by their own bootstraps. In other words, people now buy houses at historically unprecedented prices because experience has taught them to expect those prices to go ever higher. This analysis then depends on the assumption that expectations are "adaptive": instead of expecting prices to fall when they have risen, people expect them to rise still further. An implication of this approach is that the amplification of price movements works in both directions. At some point the real cost of housing will bring price appreciation down. When that happens adaptive expectations will go into reverse and so generate price falls. The study's conclusions then are that declines in prices are plausible. But predicting timing is impossible since that depends on precisely how expectations are formed, which, inevitably, we do not know. So how disastrous would such falls be? On this the study is sanguine. It argues that the impact on consumption is modest, in both directions, because higher prices make purchasers worse off to the same extent as they make owners better off. The big point is that higher house prices cannot make society as a whole better off. They merely redistribute income from the young to the old, which is socially destructive. If, in addition, there is an element of overshooting, that will prove particularly costly to those who turn out, retrospectively, to have bought at the peak. For these hapless people, it would be far better if price overshooting had never happened. The model is not invulnerable to criticism. It is entirely in real (that is, inflation-adjusted), rather than nominal, terms. Yet lower nominal interest rates make purchasing appear more affordable, because the annual cash outlay falls. Affordability, thus measured, does remain below levels reached in the early 1990s, when interest rates soared and house prices crashed. That is surely one reason for higher demand and so prices. The implication of this is that prices may stay high. But it also means that purchasers may have contracted to pay a far higher real amount than they realise. If so, this will prove a painful long-term burden upon them. The question, above all, is not whether the boom will end, since it must, but how. Will real prices stabilise, or fall? I suspect that the answer will indeed be the latter. But, as the study notes, nobody can possibly know when or by how much.

Dear Mr Mangle, You do not have to be a member of or supportive of right wing organisations to be concerned by immigration. Suggesting an automatic link is a much discredited way of closing down a valid discussion. BTW, I am not a member of the BNP or similar or even remotely sympathetic but I am concerned by uncontrolled immigration. S.

Why? Those of us doing real jobs that earn something for the country via taxes pay for the legions of non-job, public sector spongers. I hate them and our country would run fine-or better-if many of them fell under a very large bus. S.

I can accept what she says are her views (although I disagree with them) but I do not see how she can logically square the circle by for example opposing private education but exercising her right to choose and privately educating her kids (as Dianne Abbott also does). She is a plain old hypocrite. Glad it amused you! S.

You sound like Red Ken re ES (he still worked for them though.) When were they pro-Nazi by the way? 1985? 1995? 2006? 1935? Not an excuse at all for whoever owned/ran the paper then but a lame slur in 2006 unless you actually think they are Neonazis now. S.

BORIS JOHNSON DESTROYS TOYNBEE 23/11/6 Torygraph: Polly Toynbee the Tory guru: that's barking. Or maybe not By Boris Johnson Last Updated: 12:01am GMT 23/11/2006 Comment on this story Read comments Nah, I said to myself. You have got to be kidding me. I squinted again at the Guardian headline on the mat, and felt all funny. Someone, I whispered, is pulling my leg. You all know of course that I am a voortrekker of the Cameron movement. You realise, I hope, that I positively breathe the spirit of the solar-powered, bike-riding, glacier-friendly modernising tendency of which I am proud to be a part. But when I saw yesterday's Guardian, I almost swooned. A new ideological guru had been found for the Tory party, smirked the paper in triumph – and it was Polly Toynbee! The author of the new position paper was none other than my brilliant friend Greg Clark, MP for Tunbridge Wells, with whom I found myself recently in total agreement at the Tory conference. Greg! I gasped: what are you saying? Not Polly! For Telegraph readers unfamiliar with her work, Polly used to be the BBC's health and social affairs correspondent, and now writes a weekly column in the Guardian. advertisementIn so far as New Labour has a fairy godmother, Polly is the girl. She incarnates all the nannying, high-taxing, high-spending schoolmarminess of Blair's Britain. She is the defender and friend of everyone whose non-job has ever been advertised in the Guardian appointments page, every gay and lesbian outreach worker, every clipboard-toter and pen-pusher and form-filler whose function has been generated by mindless regulation. Polly is the high priestess of our paranoid, mollycoddled, risk-averse, airbagged, booster-seated culture of political correctness and 'elf 'n' safety fascism. In an ideal Polly Toynbee world, private sector broadcasting would be banned, Rupert Murdoch would be nationalised, and the BBC would hire thousands more taxpayer-funded social affairs correspondents to psalm the benefits of social democracy. In Polly Toynbee heaven the NHS would drive out all private competition, and taxes would go up to fund it. How the hell, you may ask, can a proper Tory find anything to admire in Polly's world view? All I can say is that when I had come out of my faint, and read what Greg was saying, I saw, naturally, that he was absolutely right. In spite of all she gets wrong, there are things that Polly says that are serious and true, and that any Conservative government should be saying. I don't just mean her stance on fox-hunting, admirable though it is. I recall some powerful pieces in favour of the immemorial rights of the British to slaughter foxes – as you might expect from a gel who is a descendant not just of various ineffably grand Toynbees but also of Gilbert Murray and the Earls of Carlisle. More important still, she is also deeply conservative and Conservative in some of the things she does, as opposed to the things she says. She joins the usual Labour snarling against fee-paying education, and selective education of all kinds. In reality, of course, she is the beneficiary of a highly selective education and also sent her own offspring to one of the most expensive and competitive public schools in the country, an establishment way beyond the means of most people. Of course there will be those who accuse her of monstrous hypocrisy, and wonder how she can write her hate-filled philippics about selection in education, and how on earth she can insist on imposing a one-size-fits-all comprehensive system on the rest of the country, and close down the opportunities of so many poor but bright kids, when she has so ruthlessly maximised the opportunities of her own children. To which I reply: oh well, of course she is a hypocrite; but by their deeds shall ye know them! Never mind the rhetoric of her Guardian column. In her actions, Polly emerges as someone who cares about securing the best possible chances for her own children, and in that way she is bowing before the strongest and deepest conservative force of all, a great and immutable fact of human nature, a truth of biology and motherhood compared with which a thousand hypocritical Guardian columns are nothing but chaff. Then there will be those who complain that it is hypocritical of Polly to have her lovely second home in Italy, to which she doubtless repairs on so many cheapo flights that she has personally quilted the earth in a tea-cosy of CO2; to which I say, yes, it probably is wrong of Polly to keep calling for higher taxes when that would put such opportunities – for air travel to second homes – beyond the reach of millions slightly less fortunate than her. But never mind the hypocrisy: look at the fundamental Tory behaviour. At least she's renting the villa out at pretty keen rates. Good on you, Polly! You can't buck the market, as Mrs Thatcher used to say. And the private-school-using, villa-owning Polly Toynbee is also right in this paramount sense: that if natural Tories like Polly are to have a hope of governing this country again, then they must show that they know and care about what life is like for those who do not have it as easy as they do. It is easy to make fun of Polly Toynbee. It is easy to convict her of hypocrisy; but she genuinely knows and cares about the bottom 20 per cent. She is right that there are too many people in poverty under this Government, and right that they are overworked and overtaxed. It is a deep conservative insight that life is competitive, and that there will always be people who can get into the good schools, because they have Toynbee genes or money, and there will be people who are less lucky. And if you believe that there must always be winners and losers – as I do – then you must understand that a healthy society will do its best to look after the losers. She may be a hypocrite, she may be a solid Thatcherite in her approach to property rentals and private education, but Polly Toynbee has made herself an authority on the evils of Gordon Brown's high taxes on low earners, and for that alone she deserves respect. Greg Clark is right. Welcome to the Tory party, Polly. Let's all have tea! Boris Johnson is MP for Henley

public sector parasite?

Most of the immigrants in London I see are low skilled. Clearly pot-washing and serving behind bars were in grave danger of outsourcing to Lahore. S.

...but tomorrow's will be back on City bonuses etc. They are pretty inconsistent.

If you going to lie, tell a big one, I think Goering once said.

True-I also covered myself I suppose by saying it is only semi-bearish. It still reads better than a lot of the mainstream "prices will rise forever" bollx. I guess most commentators must be nervous about still calling a HPC after so long. We can get away with it without one obviously in sight because we are anonymous but if my career depended on it... S.