James Wyatt

If you want to see a 'good chart' go to voxeu and read Carmen and Vincent Reinhart's paper on "The Decade after the fall" herewith is the link and the best graph is the one at the end albeit just covers post WWII collapses. http://www.voxeu.org/index.php?q=node/5499 Real housing prices for the full period is available for ten of the fifteen financial crisis episodes. For this group, over an eleven-year period (encompassing the crisis year and the decade that followed), about 90% of the observations show real house prices below their level the year before the crisis. Median housing prices are 15% to 20% lower in this eleven-year window, with cumulative declines as large as 55%. The observations on unemployment and house prices, of course, may be related, as a protracted slump in construction activity that accompanies depressed housing prices may help to explain persistently higher unemployment. Figure 3. Real house prices before and ten years after severe financial crises: Ten post-WWII episodes Probability density function: Advanced economies Sources: Reinhart and Reinhart (2010) and sources cited therein. Another important driver of the cycle is the leverage of the private sector. In the decade prior to a crisis, domestic credit/GDP climbs about 38% and external indebtedness soars. Credit/GDP declines by an amount comparable to the surge (38%) after the crisis. However, deleveraging is often delayed and is a lengthy process lasting about seven years. The decade that preceded the onset of the 2007 crisis fits the historic pattern. If deleveraging of private debt follows the tracks of previous crises as well, credit restraint will damp employment and growth for some time to come. Another important driver of the cycle is the leverage of the private sector. In the decade prior to a crisis, domestic credit/GDP climbs about 38% and external indebtedness soars. Credit/GDP declines by an amount comparable to the surge (38%) after the crisis. However, deleveraging is often delayed and is a lengthy process lasting about seven years. The decade that preceded the onset of the 2007 crisis fits the historic pattern. If deleveraging of private debt follows the tracks of previous crises as well, credit restraint will damp employment and growth for some time to come.[/i]

Our latest indices are available including Fulham: http://www.johndwood.co.uk/content/Services/Research__Publications/ Just go onto our website and they are all available under Surveyors, Publications. James Wyatt FRICS

Our latest indices are available for Fulham, Chelsea etc on our website under Surveyors and Publications http://www.johndwood.co.uk/content/Services/Research__Publications/ James Wyatt

By kind request Capital Economics put broad money (M4) against house price to earnings ratio (see attached). James M4 against HPE December 2010.pdf M4 against HPE December 2010.pdf

The attached chart from Capital Economics charts broad money (M4) against the house price to earnings ratio and following Irving Fisher's identity equation (MV=PT) suggests further QE. James Wyatt M4 against HPE December 2010.pdf M4 against HPE December 2010.pdf

There has been academic research to suggest prices are 'sticky' downwards as owners will not lower their prices below a certain level. This level is normally around the cost of purchase. The problem the market has at the moment, and one I raised in the Moneyweek roundtable, is the fact owners can afford to stay put as servicing costs are so low. These interest rates are likely to stay low as raising them quickly to where they should be (RPI at 4.5% so interest rates at 5.5-6%) would cause a signiciant correction and a debt deflationary spiral (Irving Fisher's piece in Econometrica 1933 is worth a read). However, in these uncertain times events will drive the market i.e. Euro or $ collapse, China imploding, North Korea or Iran exploding etc. The fundamentals still suggest property remains well above historic trends (Keynes "Markets can stay irrational longer than you can stay solvent). James Wyatt FRICS

I believe The Economist had actually warned about asset price bubbles in the 1990s (pin pricking a bubble in about 1997-1998). Pam Woodall, the economics editor at the time, continued to argue for asset prices to be monitored and remedial action to be taken. Unfortunately, she moved on and the current economics editor seems to have little understanding of this neglected school. In actual fact many hard monetarists share similar views and have even supported the abolition of fractional reserve banking. If you want to read more there are several very good books (stocking fillers). Austrian Economics a Primer by Eammonn Butler Austrian Economics by Jesus Huerta de Soto Vienna and Chicago: Friends or Foes by Mark Skousen Money, Bank, Credit and Economic Cycles by Jesus Huerta de Soto Websites to check out are the Cobden Centre (UK), Foundation for Economic Education and the Mises Institute. For a libertarian perspective combining Austrian and Monetarism try the Institute of Economic Affairs (very cheap to join), The Adam Smith Institute and The Economic Research Council. Unfortunately many schools and universities only teach neo classical economics and advanced maths. It would be more use to society if they taught economic history. James Wyatt FRICS

In reply to the question on what is next for Prime Central London, it very much depends on the City and the international consequences of the deleveraging. Our indices we produce are indpendently compiled by the LSE and use actual pounds per square foot at the date of exchange and show far greater volatility than other indices. However, they do show central London has almost tripled in the last ten years and even allowing for beyond trend earnings growth due to the City bonuses, this again suggests prices may be above fundamental values. However, with the low levels of debt it would suggest there will be far greater "price stickiness" once prices reach the original purchase level. It should be noted whilst participating as part of the panel we concentrated on the national market and acknowledged different areas and price levels have different influences. It is often said there is no national market merely a myriad of different micro markets. James Wyatt FRICS

"Markets can stay irrational longer than you can stay solvent" Keynes (one of my favourite quotes) Whether looking at the price to earnings ratio or affordability, house prices are above long term fundamental values and have been for a number of years. As many of my colleagues will testify I have been of the belief we have been in a credit bubble for many years (probably since 1997/1998 after I was gazumped twice); however, property prices continued to soar. The deleveraging which must take place is highly deflationary and this is why many economists, including Mervyn King and James Ferguson (my fellow panel member), believe deflation is a very real danger. Whilst RPI is running at 4.6% and food prices at a much higher rate this on the surface suggests inflation is the threat to the economy. However, if you consider we have had depreciation of sterling on a trade weighted basis of circa 25% and doubling of the monetary base (QE1 of £200bn) it is a wonder why we have not experienced much higher inflation. The answer lies in Irving Fisher's identity equation of MV=PT, where very simply M=quantity of money, V=velocity, P=prices and T=transactions. Whilst M has increased the fall in velocity has almost offset it, which is no surprise as people worried about falling house prices and loss of their job have started to save and pay down their debts rather than spend. The deleveraging, which is only just beginning, creates strong deflationary pressure as asset prices will tumble leading to a further collapse in the velocity of money, hence the belief another round of QE will occur next year. There have been studies on the "stickiness of prices" and owners tend to be "sticky" around the original cost of their property (allowing for renovation costs and in nominal terms). Prices could return to the long term fundamental average, but history tends to suggest they "over correct" by the amount they over extend. Whilst it is possible inflation will continue to erode the nominal prices and lead to real drops, if the deleveraging deflationary camp is correct, then the falls will be in nominal terms. The reality is no one really knows and whilst the current trend is downwards in property prices, it will not take much to let the inflation genie out of the bubble. If that happens the Bank of England will be forced to act and raise rates (19.5% of all gilt issuance is indexed linked), as the international bond market will exact a very high price if they believe there is a deliberate attempt to debase the currency either through benign neglect or excessive QE. Suggested reading list: Dimson, Marsh and Staunton in “Triumph of the Optimists” Important note: This analysis is the most authoritative on asset returns as it examines 101 years of data from 1900-2000 and therefore has periods of deflation, inflation, stagflation, recession, booms and depressions as well as covering social changes due to pandemics, wars and technological and demographic growth. Debt Management Office http://www.dmo.gov.uk/documentview.aspx?docname=publications/quarterly/jul-sep10.pdf&page=Quarterly_Review Dr Steve Gibbons of the London School of Economics research note on standard deviation of Prime Central London property using John D Wood & Co. indices. John D Wood & Co. graph and indices use actual pounds per square foot achieved on the date of exchange (methodology by Professor Muellbauer and Dr Gibbons) http://www.johndwood.co.uk/surveyors/research-publications The Governor of the Bank of England, Mervyn King, in his Buttonwood speech (http://www.bankofengland.co.uk/publications/speeches/2010/speech455.pdf) Jesus Huerta de Soto ‘Money, Bank Credit and Economic Cycles’ Carmen Reinhart and Kenneth Rogoff “This Time is Different: Eight Centuries of Financial Folly” Irving Fisher, “Debt Deflation Theory” in 1933 (Econometrica (1(4), pp. 337-357/) http://fraser.stlouisfed.org/docs/meltzer/fisdeb33.pdf Bank of International Settlements working paper 300 http://www.bis.org/publ/work300.pdf Carmen Reinhart and Kenneth Rogoff “Growth in a Time of Debt” http://www.economics.harvard.edu/faculty/rogoff/files/Growth_in_Time_Debt.pdf and Carmen Reinhart and Kenneth Rogoff “From Financial Crash to Debt Crisis” http://www.economics.harvard.edu/faculty/rogoff/files/RRFinancial%20crash_February_241.pdf Japanese land prices: http://tochi.mlit.go.jp/english/6-05.pdf Case-Shiller US property indices http://www.standardandpoors.com/indices/sp-case-shiller-home-price indices/en/us/?indexId=spusa-cashpidff--p-us---- Would also recommend Eammon Butlers excellent primer on "Austrian Economics" and Steve Keen's work on modelling Minsky on his debtwatch website. James Wyatt FRICS

Sorry for the delay in replying. To angrypirate We do keep a record of properties which have come to the market. The problem is with negative real interest rates owners can afford to sit tight and try high prices and this does not help the liquidity. To denarii It would be an interesting study to examine the percentage of foreign buyers compared to other areas. Fulham has changed markedly over the years and there are many foreigners especially French, due to their nursery school and primary school. Consequently, all agents have reported a large number of French moving from their South Kensington flats and buying Fulham houses. High real interest rates would force many people to move, but my suspicion is Fulham owners have a large amount of equity and therefore may be less affected than other areas. TLP: excellent analysis and work James

Apologies for the delay the Notting Hill Graph and Index should now be on our website at www.johndwood.co.uk James Wyatt FRICS

Most agents will tell you the market is far more volatile than almost all indices show as they are normally heavily "smoothed". One month can be quiet and the next everything is going to sealed bids and for 10-15% more than the guide (typically around bonus time). In central London many properties are held in companies and the companies are transacted thereby not showing up on Land Registry. Property portal indices show agents opinions and are therefore forward looking, our index uses the date of exchange when the deposit is paid and Land Registry uses completion, which can be several months later. The methodology developed by by Dr Gibbons of the LSE and Professor Muellbauer of Nuffield College, Oxford, was designed to capture the volatility and uses an asymmetrically locally weighted regression. Rather than use hedonic, such as Halifax and Nationwide, we use pounds per square foot to allow for size as hedonic can be very subjective and needs a huge sample size. There are currently over 5,900 transactions in the flat series for PCL and over 4,300 in the house series (the regression for these laregr series is over the last 250 transactions). Flats must have a minimum lease of 80 years to avoid complications over marriage value and houses must be freehold. There are numerous examples within our data of substantial falls and rebounds eg Wilton Crescent achieiving £2,594 per square foot unmodernised in July 2008 and in April 2009 another unmmodernised house a couple fo doors along achieved £1,692. The market moves very quickly and research by Dr Gibbons shows the standard deviation, which is a measure of volatility, for Prime Central London houses is just slightly less than equities and greater than gilts. James Wyatt FRICS

Most portals track asking prices and therefore give an indication of the future direction of the market. It will be interesting to read the RICS survey. Our own research as mentioned on another thread uses actual prices achieved on the date of exchange from all leading agents and shows record prices achieved in the third quarter (many of the properties have not completed). However, many agents are reporting falling applicant numbers and a rise in supply, which would account for asking prices dropping off. With negative real interest rates there is very little pressure on owners many of whom probably do not have a mortgage. http://www.johndwood.co.uk/surveyors/research-publications James Wyatt FRICS

It seems the last post was quite an accurate prediction of the direction of the market. Latest graph and index: http://supadu.com/images/ckfinder/54/pdfs/Chelsea%20Property%20Graph%20and%20Index%20October%202010.pdf James Wyatt FRICS

New graph and index available: http://supadu.com/images/ckfinder/54/pdfs/Notting%20Hilll%20House%20Graph%20and%20Index%20October%202010.pdf It seems the negative real interest rates coupled with the rising stockmarket and City bonuses are having an impact (for now). James Wyatt FRCIS