If Property Prices Needed To Be Reduced 25 - 30% In Jan 2009 How Much By Jan 2010

[Sybil13]

Yes every week every month we get more ramping from those with a vested interest in the market going up and the past few weeks have been no exception.

This week we had Simon Rubinsohn chief economist Royal Institute of Chartered Surveyors saying there will only be 30% fall from peak yet it was only in March that he said:

Most of the house price indices suggest prices have fallen by up to 20pc from the peak. However, many of our members [surveyors and estate agents] cast doubt on this and calculate independently that the scale of price falls has been even greater − 30pc or more already. They suspect the Nationwide and Halifax figures are underestimating scale of the peak-to-trough fall to date.

Looking at the surveys you have to come to the conclusion that we aren't at the bottom by any stretch yet. Our members are still expecting further falls in prices, according to our survey, and if there's anyone you might expect to be talking up the market it is them.

So if Rubinsohn believed there had been 30% falls already in March 2009 one can only conclude that his recent prediction is based on surveyors needing to get some work this summer .

Merryn Somerset Webb said a few months ago in her article "Stay Away From Property it Has a Lot Further to Fall"

Stay Away From Property

The truth is that all real bear markets tend to offer the unwary investor one last opportunity to lose money. The summer of 2009 is probably that opportunity this time round.This will be partly down to the fact that, for those who have cash and want to buy at some point, the housing bear market is getting boring

However, before you take the plunge it might be worth taking a few moments to consider that according to Rightmove's Index based on asking prices the average asking price is around £220000, according to Nationwide / Halifax the average selling prices is around £155000, about 30% off, which seems to confirm what RICS said in March not what RICS is saying now.

So I ask you to consider that if Rightmove and Savills were saying in January/ February 2009 that sellers needed to reduce prices 25- 30% how much they will say sellers need to reduce by January 2010?

How to Sell your Property in a Buyers Market

Estate agents report many buyers basing asking prices on what they think their home was worth at the peak of the market in late 2007 – minus a little bit. It may be a bitter pill to swallow but this is unrealistic. The Nationwide house price index shows prices down 20% since then and buyers will be expecting a further 5% to 10% off that.

February:

"Sales are being achieved at around 25% below peak prices, yet new sellers coming to the market are starting out asking an average of only 10% less He added that the group expected to report further falls in asking prices in the coming months, and is forecasting a 10% drop during the whole of 2009

March:

Potential home buyers are only willing to purchase properties on sale at a 25% discount to peak prices ......

Rightmove said there was interest among buyers but only at a substantially reduced price of around 25% below peak prices

March:

Rightmove Index: Raised Asking Price Doing More Harm than Good

.....The report admits that agent's are being forced to up initial advertising prices to win new instructions, amid the fierce competition for the few quality properties that are currently being put onto the market.

That makes the asking price rise, for me, more like bad news than good news. I understand that agent's are trying to survive in a difficult market, but we need to firm out the price drops that we have had, before we can ascertain if they are enough to bring the market to bottom, and accelerate any further drop that may be necessary.

In short, by humouring unrealistic vendors over asking prices, agents may be doing nothing more than prolonging their own misery.The Rightmove index is based on new houses coming onto the market, it is likely the index would show a drop in prices were it expanded to properties added in the last two months, as agents gradually negotiate vendor price drops from their inflated initial price.

The report also said that lack of mortgage availability is hindering market recovery as sellers who have dealt with the market reality and drastically dropped their asking price are faced with buyers unable to obtain finance.

"Until banks get their own houses in order, the active minority of sellers and agents who have drastically adjusted pricing will remain frustrated by the limited functioning of the financial services sector."

So, after its initial optimism the Rightmove index enforces the realisation that the UK property market recovery hinges on two things: vendor realism and mortgage availability. The latter more than likely hinged on a recovery to the wider UK economy, which in my opinion is also necessary to increase buyer numbers sufficiently to bring vendor realism.

As mortgage lending is already down nearly 2/3rds, and nearly 2/3rds of mortgage lending pre crash coming from the RMBS market and that market is now closed and most do not expect it to open for a decade or more and then not in the same way that drove the inflated property bubble , property prices are going to have to adjust to lenders returning to using deposits. I will leave it up to you to consider how far they are going to have to fall given :

1. there is a £200bn shortfall in lending from 2007 levels due to the RMBS market being closed

2. lenders are now reliant on deposits but with interest rates being so low and Moody's and Fitch downgrades of lenders and the FSA saying they will not allow building societies to remain independent if they cannot prove they can absorb future losses and councils etc having to withdraw funds due to the downgrades and overseas investors withdrawing from stirling.

Despite being skewed towards more secure retail deposits, 30pc of the sector’s funding – or around £100bn – comes from institutions, who may think twice following the Moody’s downgrade, and the wholesale markets, which remain effectively closed. Without funding, mortgage lending will dry up. “To the extent that funding is restricted, it will restrict our ability to lend,” Nationwide chief executive Graham Beale told the TSC. The BSA’s Adrian Coles reckons “it is quite conceivable that lending will fall this year” as funding evaporates. ......

3. BOE has said:

The Bank of England is concerned that the UK's banking system is heading for a third wave of crisis that could snuff out fragile signs of recovery in the economy.........

......Continued weakness at these banks may prevent the increase in lending that ministers are desperate to see, and dash hopes of a pre-election recovery for Labour.

The Bank of England is also worried that continued stresses in the global financial system will suck money out of the UK as cash-starved international banks bring money back home. Foreign banks are thought to be withdrawing funds from Britain once loans expire, rather than roll them over.....

4. The IMF have said:

Britain's homeowners must brace themselves for a prolonged slump in the housing market, according to the International Monetary Fund, which delivered a grim assessment of the UK economy this weekend, in stark contrast to Alistair Darling's prognosis.

While the chancellor insisted in last week's budget that he expected to see green shoots before the year is out, the Washington-based lender believes the housing crash is far from over, with property still over-valued

5. there is only one way interest rates can go and 60% of lenders have said they are going to have raise interest rates on mortgages to cover FSCS payments

6. IPPR and FSA have spoken of a cap on mortgage lending of 3 x's loan to income

So if Rightmove believe that :

the UK property market recovery hinges on two things: vendor realism and mortgage availability. The latter more than likely hinged on a recovery to the wider UK economy, which in my opinion is also necessary to increase buyer numbers sufficiently to bring vendor realism.[/

What do you believe Rightmove and Savills will be saying by next January with regards how much vendors need to reduce prices? The average time on the market for a property currently seems to be nearly 200 days. I have been tracking 50 + properties in the £200000 to £250000 range in Dorset , some have been removed, a couple went STR came back on a few more went STR / or Under Offer but NOT ONE HAS SOLD. Can I have chosen the only 50 properties in Dorset that didn't sell?

One assumes by next January the asking prices will be down at least the 30% that Rightmove and Savills agreed sellers needed to reduce in January 2009 which the asking and selling figures seem to confirm along with RICS have already happened .

So with mortgage lending now dependent on deposits , interest rates only having one way to go, unemployment and repossesions how much will Rightmove and Savills be saying sellers need to reduce to get a sale by January 2009?

Just some figures to consider.

If you buy a £300000 property with 20% off from peak now £240000.

If Rightmove /Savills and RICS and indeed the lenders are right and that property is already worth 30% below peak you will have lost immediately £30000.

If that property falls 35% you will have lost £45000.

A few months ago before they too sold out, CEBR predicted 35% falls even if mortgage approvals doubled, 40% if they didn't.

So if the property falls 40% you will have lost £60000.

The Q of course is how much do you lose by waiting?

Why House Prices Have a Lot Further to Fall

How to Preserve Your Wealth

Edited May 23, 2009 by Sybil13

[Radge]

And now that the bond market is starting to play out, 40% from peak price falls are chickenfeed. 50-60%+ here we come!

[AwaitingFairPrices]

Wow, thanks for taking the time to put that together.

One thing I decided long time ago was that all these 'experts' have no real idea about the future, they are just speculating that the rest of us. Their expertise and experience give them better insight and skill to discuss the matter and allows them to do their jobs, but as has been proven, things to do happen as planned, as per expectation, by logic, rationally etc, and the the nature of our global society and the amount of differing wants/desires/problems that people/comminuties/countries have/face means no models can cope with it all in a nice predictable way.

With wage deflation taking place this year through pay reductions / pay freezes and fulltime moving to part-time I personally can't see that anything but continued price falls can happen through the rest of this year. I have no idea about how this might play out in percentages though.

What I keep in mind though is that whatever the percentage a potential house purchase will be fairer value in January 2010. I cannot control that percentage so I do not worry about that. When it gets closer to the time, I will, like others, make my own judgement as to whether that value is fair enough for me or whether the market clearly has further resetting to do.

Thanks again for the analyis, great stuff.

AFP

[endofcrash2]

Yes every week every month we get more ramping from those with a vested interest in the market going up and the past few weeks have been no exception.

This week we had Simon Rubinsohn chief economist Royal Institute of Chartered Surveyors saying there will only be 30% fall from peak yet it was only in March that he said:

So if Rubinsohn believed there had been 30% falls already in March 2009 one can only conclude that his recent prediction is based on surveyors needing to get some work this summer .

Merryn Somerset Webb said a few months ago in her article "Stay Away From Property it Has a Lot Further to Fall"

Stay Away From Property

However, before you take the plunge it might be worth taking a few moments to consider that according to Rightmove's Index based on asking prices the average asking price is around £220000, according to Nationwide / Halifax the average selling prices is around £155000, about 30% off, which seems to confirm what RICS said in March not what RICS is saying now.

So I ask you to consider that if Rightmove and Savills were saying in January/ February 2009 that sellers needed to reduce prices 25- 30% how much they will say sellers need to reduce by January 2010?

February:

March:

As mortgage lending is already down nearly 2/3rds, and nearly 2/3rds of mortgage lending pre crash coming from the RMBS market and that market is now closed and most do not expect it to open for a decade or more and then not in the same way that drove the inflated property bubble , property prices are going to have to adjust to lenders returning to using deposits. I will leave it up to you to consider how far they are going to have to fall given :

1. there is a £200bn shortfall in lending from 2007 levels due to the RMBS market being closed

2. lenders are now reliant on deposits but with interest rates being so low and Moody's and Fitch downgrades of lenders and the FSA saying they will not allow building societies to remain independent if they cannot prove they can absorb future losses and councils etc having to withdraw funds due to the downgrades and overseas investors withdrawing from stirling.

3. BOE has said:

4. The IMF have said:

5. there is only one way interest rates can go and 60% of lenders have said they are going to have raise interest rates on mortgages to cover FSCS payments

6. IPPR and FSA have spoken of a cap on mortgage lending of 3 x's loan to income

So if Rightmove believe that :

What do you believe Rightmove and Savills will be saying by next January with regards how much vendors need to reduce prices? The average time on the market for a property currently seems to be nearly 200 days. I have been tracking 50 + properties in the £200000 to £250000 range in Dorset , some have been removed, a couple went STR came back on a few more went STR / or Under Offer but NOT ONE HAS SOLD. Can I have chosen the only 50 properties in Dorset that didn't sell?

One assumes by next January the asking prices will be down at least the 30% that Rightmove and Savills agreed sellers needed to reduce in January 2009 which the asking and selling figures seem to confirm along with RICS have already happened .

So with mortgage lending now dependent on deposits , interest rates only having one way to go, unemployment and repossesions how much will Rightmove and Savills be saying sellers need to reduce to get a sale by January 2009?

Just some figures to consider.

If you buy a £300000 property with 20% off from peak now £240000.

If Rightmove /Savills and RICS and indeed the lenders are right and that property is already worth 30% below peak you will have lost immediately £30000.

If that property falls 35% you will have lost £45000.

A few months ago before they too sold out, CEBR predicted 35% falls even if mortgage approvals doubled, 40% if they didn't.

So if the property falls 40% you will have lost £60000.

The Q of course is how much do you lose by waiting?

Why House Prices Have a Lot Further to Fall

How to Preserve Your Wealth

God I gave up reading that lot of drivel. Cut to the chase young man!!

[eric pebble]

STAY OUT OF THE PROPERTY "MARKET":

ANOTHER 40% DROP TO GO.......

[Treebeard]

Thanks for the post very informative. I am a total newb about all this house stuff so I do like posts like this, that confirm my original belief (before I found this site) that houses prices could not keep going up.

Naively my only logic for this was that wages were not going up at the same rate as house prices!

[yellerkat]

God I gave up reading that lot of drivel. Cut to the chase young man!!

No wonder the bulls have problems.

Thinking someone called Sybil is a young man...

[eric pebble]

Thanks for the post very informative. I am a total newb about all this house stuff so I do like posts like this, that confirm my original belief (before I found this site) that houses prices could not keep going up.

Naively my only logic for this was that wages were not going up at the same rate as house prices!

Treebeard; Do you fancy a

LIAR LOAN?

'Cos that's the ONLY way you can "afford" to "buy" properdee......

[erranta]

STAY OUT OF THE PROPERTY "MARKET":

ANOTHER 40% DROP TO GO.......

And the rest - there is going to be an almighty drop in prices!

Indeed, it's been revealed to us just how much our beloved leaders and Government are THE Vi's in property, working in close conjunction with Finance and Building Industries.

When they are swept aside after elections, the whole thing is going to implode!

Brown etc are the ones who have artificially extended the BOOM, many of us did call the right time. circa 2005. for a crash but it's been held up for the pure greed of of The City & our Heirarchies esp thru LIAR LOANS !

Edited May 23, 2009 by erranta

[eric pebble]

Oh I know.

Lets dream about a 40% drop and put it in big red letters. Everyones bound to take notice and panic. I bet this time next week houses will have fallen 80%.

NOT

Moron.

[dances with sheeple]

Yes every week every month we get more ramping from those with a vested interest in the market going up and the past few weeks have been no exception.

This week we had Simon Rubinsohn chief economist Royal Institute of Chartered Surveyors saying there will only be 30% fall from peak yet it was only in March that he said:

So if Rubinsohn believed there had been 30% falls already in March 2009 one can only conclude that his recent prediction is based on surveyors needing to get some work this summer .

Merryn Somerset Webb said a few months ago in her article "Stay Away From Property it Has a Lot Further to Fall"

Stay Away From Property

However, before you take the plunge it might be worth taking a few moments to consider that according to Rightmove's Index based on asking prices the average asking price is around £220000, according to Nationwide / Halifax the average selling prices is around £155000, about 30% off, which seems to confirm what RICS said in March not what RICS is saying now.

So I ask you to consider that if Rightmove and Savills were saying in January/ February 2009 that sellers needed to reduce prices 25- 30% how much they will say sellers need to reduce by January 2010?

February:

March:

As mortgage lending is already down nearly 2/3rds, and nearly 2/3rds of mortgage lending pre crash coming from the RMBS market and that market is now closed and most do not expect it to open for a decade or more and then not in the same way that drove the inflated property bubble , property prices are going to have to adjust to lenders returning to using deposits. I will leave it up to you to consider how far they are going to have to fall given :

1. there is a £200bn shortfall in lending from 2007 levels due to the RMBS market being closed

2. lenders are now reliant on deposits but with interest rates being so low and Moody's and Fitch downgrades of lenders and the FSA saying they will not allow building societies to remain independent if they cannot prove they can absorb future losses and councils etc having to withdraw funds due to the downgrades and overseas investors withdrawing from stirling.

3. BOE has said:

4. The IMF have said:

5. there is only one way interest rates can go and 60% of lenders have said they are going to have raise interest rates on mortgages to cover FSCS payments

6. IPPR and FSA have spoken of a cap on mortgage lending of 3 x's loan to income

So if Rightmove believe that :

What do you believe Rightmove and Savills will be saying by next January with regards how much vendors need to reduce prices? The average time on the market for a property currently seems to be nearly 200 days. I have been tracking 50 + properties in the £200000 to £250000 range in Dorset , some have been removed, a couple went STR came back on a few more went STR / or Under Offer but NOT ONE HAS SOLD. Can I have chosen the only 50 properties in Dorset that didn't sell?

One assumes by next January the asking prices will be down at least the 30% that Rightmove and Savills agreed sellers needed to reduce in January 2009 which the asking and selling figures seem to confirm along with RICS have already happened .

So with mortgage lending now dependent on deposits , interest rates only having one way to go, unemployment and repossesions how much will Rightmove and Savills be saying sellers need to reduce to get a sale by January 2009?

Just some figures to consider.

If you buy a £300000 property with 20% off from peak now £240000.

If Rightmove /Savills and RICS and indeed the lenders are right and that property is already worth 30% below peak you will have lost immediately £30000.

If that property falls 35% you will have lost £45000.

A few months ago before they too sold out, CEBR predicted 35% falls even if mortgage approvals doubled, 40% if they didn't.

So if the property falls 40% you will have lost £60000.

The Q of course is how much do you lose by waiting?

Why House Prices Have a Lot Further to Fall

How to Preserve Your Wealth

The VI`s can get way with talking crap because the sheeple really really want to believe in it. It is cognitive dissonance at it`s most destructive. It is probably better for the banks if it plays out slowly?, but individuals are going to lose out big time by waiting too long to sell, and keeping to unrealistic pricing. I heard another person blabbing into their phone on a crowded bus again about how it is a "bad" time to sell just now, and they will wait for next year! she really thinks (or wants to believe?) it can pick up. I am sure that mobile phones have become the new confession boxes, the new way people express little aspects of themselves that they need to feel some approval about. I think either phones should be banned on public transport, or there should be ads in LARGE (maybe red?) PRINT for this website on public transport, one of the two.

[moonriver]

Thanks Sybil for going to the trouble of putting that informative post together.

I think property prices still have a long way fall, as all the economic problems continue to emerge and develop.

[dances with sheeple]

And the rest - there is going to be an almighty drop in prices!

Indeed, it's been revealed to us just how much our beloved leaders and Government are THE Vi's in property, working in close conjunction with Finance and Building Industries.

When they are swept aside after elections, the whole thing is going to implode!

Brown etc are the ones who have artificially extended the BOOM, many of us did call the right time. circa 2005. for a crash but it's been held up for the pure greed of of The City & our Heirarchies esp thru LIAR LOANS !

Exactly, and I think the British people tend to turn nasty when they discover that they have been getting their arses raped? The implosion of society( where driving to a retail park equals participating in your community) and some of the darker elements much discussed on here are bubbling just under the surface IMO. The only problem I have is when I see sheeple on Question Time blaming the bad bankers and politicians. Put the average sheeple in Mr. Martin`s position and they would have done the same. The bankers are excellent scam artists, the politicians are not bad, but they have been rumbled, and the sheeple are the worst scam artists of all because all the little money making schemes that they fall for always bite them on the ar*se. Many sheeple IMO are just pissed off that they can`t make free money like the masters of the game. When I see a Question Time dedicated to Liar Loans, and sheeple putting their hands up to how their own MEW`ing and borrowing and using plastic contributed to the mess, then I will believe we are getting somewhere, until then I think the expenses "scandal" is all about taking attention away from an ars*e kicker of an economic storm?

[tiggerthetiger]

Oh I know.

Lets dream about a 40% drop and put it in big red letters. Everyones bound to take notice and panic. I bet this time next week houses will have fallen 80%.

it has to be big red letters because the population is up aginst the might of the governments propoganda machine....

Edited May 23, 2009 by tiggerthetiger

[FreeTrader]

Nice work Sybil.

We're being told that the average house price has almost returned to its long-term price/earnings ratio. So, because of historically low mortgage rates, now would be a reasonable time to buy.

Let's examine the P/E ratio data from the Halifax house price series. They supply an earnings figure in their releases which is based on the ONS Annual Survey of Hours and Earnings, and the earnings number used is the mean earnings of full-time males. The use of this statistic has been criticised because it arguably overstates the average earnings level – for example, the median full-time earnings of all workers (men and women) is some £10,000 less than the mean male figure.

However, the Halifax has been consistent in its use of this earnings figure over the years, and therefore it does provide a like-for-like comparison with the past (assuming the general methodology used by the ONS over the years isn't too different).

The chart below shows the P/E ratio over time, and also the long-term average. Now, the important thing to note about this chart is that the long-term average P/E ratio is very much influenced by boom and bust. This is the same issue that we've seen with Nationwide's long-term price trend, where the trendline has inevitably moved higher because house prices went so high.

At the end of the last boom the long-term average P/E ratio peaked at 4.01 in Dec 1990 and stayed at that level until Mar 1992. It then fell continuously until it hit a low of 3.61 in July 2001. Since then it has risen again and is now at 4.00, almost the exact peak we saw in the last boom.

The monthly P/E ratio high in the last crash was 5.01 in Mar 1989, and the low was 3.09 in Oct 1995. In the latest boom the high was 5.84 in Jul 2007.

The present ratio is 4.26.

I've included a small table on the chart which shows where prices would be based on the current long-term average, the long-term median, and the low of the last crash. It strikes me that if we're going to have anything like a normal boom-bust cycle, then prices still have a considerable way to fall – another 27.5% if we hit the P/E low of the last crash (although that assumes earnings remain flat). And in terms of the economy and credit availability the situation is much worse today, although interest rates are lower. The outlook for disposable income after the next election is pretty dire too.

[Executive Sadman]

Dont know if Halifax were big Self-Cert/Liar loan issuers, but id assume once volumes increase again their reported 'average' earnings will plummet. Some (most) people with liar loans were pretty economical with the truth it seems.

[endofcrash2]

Nice work Sybil.

We're being told that the average house price has almost returned to its long-term price/earnings ratio. So, because of historically low mortgage rates, now would be a reasonable time to buy.

Let's examine the P/E ratio data from the Halifax house price series. They supply an earnings figure in their releases which is based on the ONS Annual Survey of Hours and Earnings, and the earnings number used is the mean earnings of full-time males. The use of this statistic has been criticised because it arguably overstates the average earnings level – for example, the median full-time earnings of all workers (men and women) is some £10,000 less than the mean male figure.

However, the Halifax has been consistent in its use of this earnings figure over the years, and therefore it does provide a like-for-like comparison with the past (assuming the general methodology used by the ONS over the years isn't too different).

The chart below shows the P/E ratio over time, and also the long-term average. Now, the important thing to note about this chart is that the long-term average P/E ratio is very much influenced by boom and bust. This is the same issue that we've seen with Nationwide's long-term price trend, where the trendline has inevitably moved higher because house prices went so high.

At the end of the last boom the long-term average P/E ratio peaked at 4.01 in Dec 1990 and stayed at that level until Mar 1992. It then fell continuously until it hit a low of 3.61 in July 2001. Since then it has risen again and is now at 4.00, almost the exact peak we saw in the last boom.

The monthly P/E ratio high in the last crash was 5.01 in Mar 1989, and the low was 3.09 in Oct 1995. In the latest boom the high was 5.84 in Jul 2007.

The present ratio is 4.26.

I've included a small table on the chart which shows where prices would be based on the current long-term average, the long-term median, and the low of the last crash. It strikes me that if we're going to have anything like a normal boom-bust cycle, then prices still have a considerable way to fall – another 27.5% if we hit the P/E low of the last crash (although that assumes earnings remain flat). And in terms of the economy and credit availability the situation is much worse today, although interest rates are lower. The outlook for disposable income after the next election is pretty dire too.

An excellant graph for you Bears. You carry on thinking House's will fall another 30% or so. While the rest of us snap up all the cheap property.

[yellerkat]

An excellant graph for you Bears. You carry on thinking House's will fall another 30% or so. While the rest of us snap up all the cheap property.

Yep, it's called the undershoot, bullsh!tter.

[Sybil13]

An excellant graph for you Bears. You carry on thinking House's will fall another 30% or so. While the rest of us snap up all the cheap property.

Why do you have to "snap up the bargains" exactly?

What "bargains" are they?

Oh you mean the hugely inflated property that is slowly falling back in line with sustainable lending levels.

But these are not bargains they are simply properties finding their post bubble value so PLEASE don't feel there is a need to RUSH to buy, property when it finally finds the bottom will stay there for a long time to come only going back up in line with wages / inflation.

As I say interest rates have only one way to go so they will ensure that there is no need to rush anywhere, why can't bulls chill a bit?

Edited May 23, 2009 by Sybil13

[Sybil13]

Nice work Sybil.

We're being told that the average house price has almost returned to its long-term price/earnings ratio. So, because of historically low mortgage rates, now would be a reasonable time to buy.

Let's examine the P/E ratio data from the Halifax house price series. They supply an earnings figure in their releases which is based on the ONS Annual Survey of Hours and Earnings, and the earnings number used is the mean earnings of full-time males. The use of this statistic has been criticised because it arguably overstates the average earnings level – for example, the median full-time earnings of all workers (men and women) is some £10,000 less than the mean male figure.

However, the Halifax has been consistent in its use of this earnings figure over the years, and therefore it does provide a like-for-like comparison with the past (assuming the general methodology used by the ONS over the years isn't too different).

The chart below shows the P/E ratio over time, and also the long-term average. Now, the important thing to note about this chart is that the long-term average P/E ratio is very much influenced by boom and bust. This is the same issue that we've seen with Nationwide's long-term price trend, where the trendline has inevitably moved higher because house prices went so high.

At the end of the last boom the long-term average P/E ratio peaked at 4.01 in Dec 1990 and stayed at that level until Mar 1992. It then fell continuously until it hit a low of 3.61 in July 2001. Since then it has risen again and is now at 4.00, almost the exact peak we saw in the last boom.

The monthly P/E ratio high in the last crash was 5.01 in Mar 1989, and the low was 3.09 in Oct 1995. In the latest boom the high was 5.84 in Jul 2007.

The present ratio is 4.26.

I've included a small table on the chart which shows where prices would be based on the current long-term average, the long-term median, and the low of the last crash. It strikes me that if we're going to have anything like a normal boom-bust cycle, then prices still have a considerable way to fall – another 27.5% if we hit the P/E low of the last crash (although that assumes earnings remain flat). And in terms of the economy and credit availability the situation is much worse today, although interest rates are lower. The outlook for disposable income after the next election is pretty dire too.

Thanks for that I do like a good graph even if I find it hard to understand them at times.

There are some really good ones at:

House Price Graphs stats

Don't know if you have seen them? Something I find interesting looking at the stats on the above link is:

Taking the Nationwide’s figures, the 1997 to 2007 boom saw prices rise by 147 per cent in real terms. Within that, prices rose 76 per cent between 2001 and 2007. In the developing bust, prices have fallen by 18.5 per cent since the third quarter of 2007.

The first boom and bust happened in the early 1970s. From 1971 to 1973, prices rose by 64 per cent in real terms. By the summer of 1977 they had fallen back by 30 per cent. The second happened between 1978 and 1982. Prices rose by 69 per cent between the start of 1978 and mid-1981, then fell 6.3 per cent in the next year. Boom and bust number three came between 1986 and 1995. This saw prices rise by 47 per cent in real terms between 1986 and 1989 and fall back 37 per cent by 1995.

These figures make it seem as though booms are always bigger than busts. But this is a trick of the maths: an increase from, say, £50,000 to £100,000 is a rise of 100 per cent; a slump back to £50,000 is a fall of 50 per cent.

So if prices previously going up say 64% saw falls of 30%, then 47% with falls of 37% what are we about to see with a rise of 147% and the RMBS market CLOSED?

Previous crashes did not have this HUGE problem with funding did they, the RMBS market drove the bubble from 2001 onwards resulting in nearly 2/3rds or £200bn in mortgage lending by 2007, that door is now closed that is a BIG gap which can't be filled. Interesting to see that previously we have seen 30 and 37% falls and the other crashes did not bring banks / building societies and the UK to brink of bankruptcy.

Edited May 23, 2009 by Sybil13

[wealthy]

An excellant graph for you Bears. You carry on thinking House's will fall another 30% or so. While the rest of us snap up all the cheap property.

Another bitter sheeple that failed to make any money out of the biggest property boom ever

There's never been a better time to sell son. Get out of your capital destruction position - before it's too late.

[NotAGuru]

An excellant graph for you Bears. You carry on thinking House's will fall another 30% or so. While the rest of us snap up all the cheap property.

You go and buy the cheap property. I'll wait for the bank to reposses you and then buy it from them at the value of the mortgage (i.e. what you paid, less your 30% deposit).

[spivT]

An excellant graph for you Bears. You carry on thinking House's will fall another 30% or so. While the rest of us snap up all the cheap property.

wow. what a great comeback.

[Jabberwocky]

Oh I know.

Lets dream about a 40% drop and put it in big red letters. Everyones bound to take notice and panic. I bet this time next week houses will have fallen 80%.

I didn't panic at seing the big red letters but it further increased my resolve not buy until house prices fall a lot a further. Maybe house prices won't fall by 80% in a week but I expect 80% of Estate Agents to go bust within a year

[spivT]

@FT - great P/E graph.

With GS predicting 10% further falls before bottom in 2010, and the potential to go beyond that if history is any judge of the severity of busts from booms, i'm really interested in what happens if/when bottom is called. OR does the length of time required to actually gauage the real bottom [particularly if there's a bit of volatility along the bottom] exacerbate any hopes of quick bouneback recovery.

I guess what i'm getting at, is will we get a bath shaped house price boom-bust. similar to the last housing crash, except perhaps not quite as elongated ? What's driving me to believe in that pattern is the lagging unemployment indicator which will continue on long after recession is over, even if recession lasts less than 5 quarters.

Also, i'm not convinced low interest rates or the ability to maintain low interest rates will and can act as the catalyst for a swift recovery....it can perhaps parachute and curtail the severity of the fall, but perhaps the desire to be less burdened with debt may override the infatuation with the monthly cost of servicing that debt in the minds of the mortgage debtors.

Maybe that switch in attitudes will be pressed somewhere along the way during the great deleveraging.

What i believe people do is use 2001 as the start of the irrational exuberance, when in fact the boom was well developed between 1997-2001. Perhaps 1997-2001 was the period required to make up for lost ground based an excessively bearish market in the mid-90's.