Would Just 30% Off Peak Be Sustainable?

[Sybil13]

We have the June RM HPI out today, although it was released over the weekend.

As you all know Miles Shipside, RM's Director has been saying since January 2009 that sellers need to reduce 25 - 30%.

Savills and RM in February spoke of "30% being the new floor", with Savills saying something like , "we need to get prices down 30% and maybe there would not be a need for further falls." Recently :

Melanie Bien of Savills Private finance said two-year swaps rates were back to levels last seen in early January. "Nationwide has repriced all its fixes accordingly and we expect other lenders to follow," she added.

Mortgage brokers suggested that a sharp rise in borrowing costs could hit the recovery in the housing market. Melanie Bien, director of Savills Private Finance, the broker, said: "One of the things that has kept the housing market going is affordability. House prices have fallen and mortgages have been cheap. If mortgage costs rise it could act as a deterrent."

Despite Rinoa constantly telling me that there are no stats to confirm 30% falls we are told over and over and over that lenders are valuing realistically , that buyers do not want to pay more than 30% off peak and Simon Rubinsohn, chief economist at the Royal Institution of Chartered Surveyors said in March:

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 would 30% falls be sustainable?

Miles Shipside in the June HPI said:

With limited funds to lend, rationing of mortgages by raising interest rates and requiring large deposits is likely, as demand recovers with the increased number of sales. Unless the markets for wholesale mortgage funding re-open, volumes will remain muted due to a distorted reliance on equity-rich buyers.

We have been told recently that FTB's with large deposits stand a 2 in 3 chance of being turned down, and there were articles over the weekend about 16000 mortgage applications a month are refused.

It has been said:

One reason for the boom in cheap home loans was the rise in 'residential mortgage-backed securities' (RMBS). These were bonds made up of parcels of mortgages which were sold to major investors, such as pension funds and insurance companies. Alas, as the US and UK housing markets started to slump, the value of these mortgage bonds dived and the market froze. The effective collapse of the RMBS market means that this one-off credit event may not return for years, if not decades

The problem, according to a range of economists surveyed by The Daily Telegraph, is that the rise in house prices in recent years was due less to supply and demand fundamentals − the famous mismatch between the paucity of new homes being built and the glut of people wanting to buy − than to the cheap availability of mortgages. If, as some suspect, this credit super-boom will be followed by a long-term drought, whether because banks simply do not recover fully or because the Government imposes new regulations on lending, the implication may be that house prices simply never recover.

Given that Lord Turner's review last week mooted the possibility of a limit for loan-to-value ratios, Capital Economics founder Roger Bootle says: "What Lord Turner is suggesting seems to be a recipe for much lower house prices."

As you know there is talk that even if the RMBS market opened again it would never be in the same way that fueled the property bubble and subsequent crash. IPPR along with loan to income caps spoke of limiting how much lenders could borrow on the wholesale markets.

So if RM got their sellers to reduce 30% would that just put more of a demand on lenders who are already saying :

John Charcol said lenders had been surprised by the strength of the market and were using up mortgage funding faster than anticipated. Estate agents added that buyers were interested in bargains but transactions were falling through as they failed to secure funding.

We have also been told recently that the more lenders lend at 90% LTV the less they have available for lending overall :

Ray Boulger, of mortgage broker John Charcol, said the increase in price had been driven by a lack of competition and by new rules under which lenders have to set aside more capital to cover high loan-to-value mortgages. "The cost to the lender of making one 90% LTV loan available can be four or five times the cost of offering a mortgage at 60% LTV," he said. "We're in a situation where the more lending a lender does at 90% the less lending they are able to do overall."

Hamish and Rinoa have been raving on about mortgage lending increasing even though lending overall is falling due to the reduction in remortgages, but could lenders actually sustain a recovery with a fall at just 30% or would ANY fall simply increase the demand on a mortgage market that is severely restricted ?

In the good old days I am sure lenders had an allocated sum of money and when that went that was it you had to wait for the next year.

Hamish said that is it is "over simplification" to say that mortgage availability dictates property values, what do you think?

What would be the effect of sellers reducing their property prices to TODAYS value ?

Would it be sustainable and stop any further falls?

[Neil B]

In a simple answer: No

At a 30% drop from peak the average home would be £140k. As the average wage is £25k and banks are only lending upto around 4 x salary, the average home has to come down to £100k (= 50% drop) in order for the market to become sustainable.

[stuckmojo]

Good write up.

30% is nowhere near enough. Perhaps nominal falls will be hidden by inflation

[HumanAction]

30% of peak in real terms I think is unsustainable, the market simply rose too far for that. That said, if we get inflation then depending on how bad that inflation is 30% niominal falls might be sustainable.

[scottbeard]

In a simple answer: No

At a 30% drop from peak the average home would be £140k. As the average wage is £25k and banks are only lending upto around 4 x salary, the average home has to come down to £100k (= 50% drop) in order for the market to become sustainable.

There's surely a link between wages and house prices, but I'm not convinced its so simple. That equation only seems perfect if

- no one had any substantial deposits

- houses were bought in equal proportion by everyone across the income spectrum

- everyone borrows the maximum available

Which clearly isn't true.

A man earning 25k might well buy a £100k house. But a man earning £100k won't necessarily buy one for £400k - it could just as easily be for £300k or £500k - and a man on £12k probably won't be able to afford one at all.

A lot of people look at the charts of wages vs house prices and try to read too much into it, I think. What those charts don't show you are, for example

- cost and availbility of credit (i.e. how much can people borrow, and at what interest rates?)

- makeup of the supply of housing (for example, if I build a million flats and no houses, flat prices will come down but house prices won't fall as much - what is the "average house" you are pricing?)

- how much people have got saved up in deposits

- the distribution of incomes around the average

All those things change over time and make direct comparison difficult

[Guest DissipatedYouthIsValuable]

Good write up.

30% is nowhere near enough. Perhaps nominal falls will be hidden by inflation

You mean the negative, Japanese-style wage inflation coupled with the State's eagerness to quash any strike, protest or questioning of the validity of the current monetary model or demands for wage increases?

Edited June 22, 2009 by DissipatedYouthIsValuable

[Neil B]

There's surely a link between wages and house prices, but I'm not convinced its so simple. That equation only seems perfect if

- no one had any substantial deposits

- houses were bought in equal proportion by everyone across the income spectrum

- everyone borrows the maximum available

Which clearly isn't true.

A man earning 25k might well buy a £100k house. But a man earning £100k won't necessarily buy one for £400k - it could just as easily be for £300k or £500k - and a man on £12k probably won't be able to afford one at all.

A lot of people look at the charts of wages vs house prices and try to read too much into it, I think. What those charts don't show you are, for example

- cost and availbility of credit (i.e. how much can people borrow, and at what interest rates?)

- makeup of the supply of housing (for example, if I build a million flats and no houses, flat prices will come down but house prices won't fall as much - what is the "average house" you are pricing?)

- how much people have got saved up in deposits

- the distribution of incomes around the average

All those things change over time and make direct comparison difficult

My answer is about average wages and average house prices. A market cannot be called sustainable if it only applies to to a very narrow band - you have to take average values.

[Guest Parry]

You mean the negative, Japanese-style wage inflation coupled with the State's eagerness to quash any strike, protest or questioning of the validity of the current monetary model or demands for wage increases?

Yummy!

http://www.smoothiecast.co.uk/category/fuji

Fuji

Episode 11 Asian Pear and Papaya

In this week's episode of SmoothieCast we tell you how to make an asian pear and papaya smoothie and give you all the latest info about our new SmoothieCast t-shirts!!

To make the Asian Pear smoothie you will need:

* 1 Asian / Chinese Pear

* 2 Papayas

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* 3/4 Japanese Fuji (optional)

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* Handful of ice cubes

[judas]

In a simple answer: No

At a 30% drop from peak the average home would be £140k. As the average wage is £25k and banks are only lending upto around 4 x salary, the average home has to come down to £100k (= 50% drop) in order for the market to become sustainable.

What about inflation (I assume you are talking in nominal terms)?

Hard to predict, but clearly a big factor if this fall is to continue for the next couple of years or so.

And what about existing equity? Sure this is being eroded fast, but there will be those who have it and will be able to place deposits.

I think 40%.

[judas]

Yummy!

http://www.smoothiecast.co.uk/category/fuji

Fuji

Episode 11 Asian Pear and Papaya

In this week's episode of SmoothieCast we tell you how to make an asian pear and papaya smoothie and give you all the latest info about our new SmoothieCast t-shirts!!

To make the Asian Pear smoothie you will need:

* 1 Asian / Chinese Pear

* 2 Papayas

* 1/2 of a Fair Trade Mango

* 3/4 Japanese Fuji (optional)

* 300ml Fair Trade tropical juice

* Handful of ice cubes

[Traktion]

Good question, Sybil13.

It is an interesting point, isn't it? Where does the money come from to fund lending? It has to be from savings and the money markets (mortgage backed securities, bond markets?), ever loosening/diminishing capital reserve ratios or from the government purse. The MBS market seems to have dried up and the capital reserve requirements seem to be increasing, which leaves savings (which are increasing slowly as people are concerned about security) and government bail out money (which can't go on indefinitely).

I can't imagine the MBS markets recovering until house prices appear to be sustainable/increasing - it would be a big risk otherwise and the interest charged by investors would have to reflect this.

I also can't imagine the banks letting their capital reserves drop too much in this environment, especially after the government has made requests for them to keep this requirement high.

The government can't keep feeding these banks money either, as it will just increase the debt mountain further each time.

So we are left with historically rather low savings to prop up medium term prices. Is 30% off enough to allow this to happen? I can't imagine it is anywhere close and I could also speculate this is the real reason why 3-4x salaries are the average multiple, rather than anything to do with 'affordability'.

So in summary, I doubt it - I think we have a good way for real values to fall yet.

[Neil B]

What about inflation (I assume you are talking in nominal terms)?

Hard to predict, but clearly a big factor if this fall is to continue for the next couple of years or so.

And what about existing equity? Sure this is being eroded fast, but there will be those who have it and will be able to place deposits.

I think 40%.

Actualy its going in the opposite direction at the moment - average salaries are reducing, £25k is from a few years ago so even 50% may be slightly shy of the nominal level now.

With regards to equity - that is decided upon by the banks's valuation not what they seller wants - and there is a HUGE gap between the two now.

Heres a quote from an article last week:

"The most startling omission from the RM report and commentary is the lack of explanation for the disparity between the average asking price of £226K and the recorded average selling price of circa £160K. This suggests, with some certainty, that delusional vendors are still asking for prices 40% above the true market valuation. Until this bizarre artificial gap 'crunches' the housing market will continue to stagante and deteriorate"

Edited June 22, 2009 by Neil B

[50%deposit]

I think the main problem is not so much getting the average house down o £100k so the dude on £25k can afford it, its stopping the dude on £100k from buying all the £100k houses and then forcing Mr £25k to rent them.

Im aware that as house prices fall more and more investors will be buying them. Its perverse. Where in a market dominated by investors either BTL or flipping. Thats going to be the limiting factor. Whilst thats viable house prices will not fall to reasonable levels and remain so sustainably. If they fall it will be because the investors are blocked by an economic firewall, but as soon as the sun comes out they'll be back in droves.

Unless we shoot them all first like in the Zombie films.

[Emy74]

I doubt the average earnings of would be home owners would be 25k. I suspect its more like 30K and when you add dual earners I suspect the average income of potential homeowners would be more about the 40K mark. Therefore with deposits I dont think a figure of £140k is unreasonable.

The question is how bad will the recession be. If its as bad as some say on here then the average wage is likely to drop as some have already said. If though as many economists are saying the recession end by the end of the year then a 30% drop maybe sustainable. Unlikely though this will be figure will be bottom. I suspect prices to under shoot this figure by 10-20% for at least a couple of years.

[Neil B]

I think the main problem is not so much getting the average house down o £100k so the dude on £25k can afford it, its stopping the dude on £100k from buying all the £100k houses and then forcing Mr £25k to rent them.

Im aware that as house prices fall more and more investors will be buying them. Its perverse. Where in a market dominated by investors either BTL or flipping. Thats going to be the limiting factor. Whilst thats viable house prices will not fall to reasonable levels and remain so sustainably. If they fall it will be because the investors are blocked by an economic firewall, but as soon as the sun comes out they'll be back in droves.

Unless we shoot them all first like in the Zombie films.

I agree to an extent, though I dont think BTL's can support the housing market: I dont think there are enough of them. Again it goes back to the fact that a market cannot be supported by a narrow band and in this respect BTLs are a narrow band.

Shooting them is a good option though: But if it is to be ala George A Romero style, a helicopter blade decapitation is much more entertaining.

I also wonder how many landlords would be left if each tennant sent their details to the inland revenue to check if they have been paying income tax on the rent?

[50%deposit]

I doubt the average earnings of would be home owners would be 25k. I suspect its more like 30K and when you add dual earners I suspect the average income of potential homeowners would be more about the 40K mark. Therefore with deposits I dont think a figure of £140k is unreasonable.

The question is how bad will the recession be. If its as bad as some say on here then the average wage is likely to drop as some have already said. If though as many economists are saying the recession end by the end of the year then a 30% drop maybe sustainable. Unlikely though this will be figure will be bottom. I suspect prices to under shoot this figure by 10-20% for at least a couple of years.

i think its in the cornwall thread where it states average wage down there is £18k. the term average wage is nonsense as its skewed by all the bankers etc. Theres a huge proportion of the population unemployed or in education or otherwise not earning. £18k in the Southeast is not unheard of. However, many of these wages are temporary etc. I would wager that there are only a few people in actually stable employment such that they can sustain a mortgage or even apply for one.

Point is, house prices will never come down so they can afford something. They'll be picked up by speculators that cant loose.

[Jim B.]

30% of peak in real terms I think is unsustainable, the market simply rose too far for that. That said, if we get inflation then depending on how bad that inflation is 30% niominal falls might be sustainable.

+1

Even at 30% off the vast majority of FTB's won't be able to buy. And without any FTBs the market cannot function. It really is that simple, and those that think we are at the bottom now miss this completely.

[Rinoa]

We have the June RM HPI out today, although it was released over the weekend.

As you all know Miles Shipside, RM's Director has been saying since January 2009 that sellers need to reduce 25 - 30%.

Savills and RM in February spoke of "30% being the new floor", with Savills saying something like , "we need to get prices down 30% and maybe there would not be a need for further falls." Recently :

Despite Rinoa constantly telling me that there are no stats to confirm 30% falls we are told over and over and over that lenders are valuing realistically , that buyers do not want to pay more than 30% off peak and Simon Rubinsohn, chief economist at the Royal Institution of Chartered Surveyors said in March:

So would 30% falls be sustainable?

Miles Shipside in the June HPI said:

We have been told recently that FTB's with large deposits stand a 2 in 3 chance of being turned down, and there were articles over the weekend about 16000 mortgage applications a month are refused.

It has been said:

As you know there is talk that even if the RMBS market opened again it would never be in the same way that fueled the property bubble and subsequent crash. IPPR along with loan to income caps spoke of limiting how much lenders could borrow on the wholesale markets.

So if RM got their sellers to reduce 30% would that just put more of a demand on lenders who are already saying :

We have also been told recently that the more lenders lend at 90% LTV the less they have available for lending overall :

Hamish and Rinoa have been raving on about mortgage lending increasing even though lending overall is falling due to the reduction in remortgages, but could lenders actually sustain a recovery with a fall at just 30% or would ANY fall simply increase the demand on a mortgage market that is severely restricted ?

In the good old days I am sure lenders had an allocated sum of money and when that went that was it you had to wait for the next year.

Hamish said that is it is "over simplification" to say that mortgage availability dictates property values, what do you think?

What would be the effect of sellers reducing their property prices to TODAYS value ?

Would it be sustainable and stop any further falls?

A tired old topic already posted on numerous occasions and shown to be factually incorrect on so many levels.

Regurgitated yet again but with the copy and pastes in a slightly different order.

[tomwatkins]

+1

Even at 30% off the vast majority of FTB's won't be able to buy. And without any FTBs the market cannot function. It really is that simple, and those that think we are at the bottom now miss this completely.

Not strictly true. The top end can function, together with cash buyers picking up stuff for their portolio-in other words the true professional landlords. I agree that the FTB market is dead which means that the "norm" in terms of a functioning market and the historical average is decimated and will get worse. That, in the end, will kill all the market stone dead as nominal prices at all levels will fall and even the cash buyers will bid down properties. Until this last piece of the puzzle is worked through then good quality houses in good areas will maintain a false value. This happened in the 70's and 90's-I know because I lived through it. I was also doing a fair bit of residential valuation at the time. Wish I had kept better records now to back up what I say.

Tom MRICS

[Guest Parry]

A tired old topic already posted on numerous occasions and shown to be factually incorrect on so many levels.

Regurgitated yet again but with the copy and pastes in a slightly different order.

Sour smoothie

INGREDIENTS

* 1 cup cold milk

* 2 oranges, peeled and segmented

* 1 banana

* 1/4 cup sugar

* 1 pinch salt

* 1/2 (8 ounce) container vanilla fat-free yogurt

* 4 cubes ice

DIRECTIONS

1. In a blender, combine milk, oranges, banana, sugar, salt and yogurt. Blend for about 1 minute. Insert ice cubes, and blend until smooth. Pour into glasses and serve.

[Sybil13]

Actualy its going in the opposite direction at the moment - average salaries are reducing, £25k is from a few years ago so even 50% may be slightly shy of the nominal level now.

With regards to equity - that is decided upon by the banks's valuation not what they seller wants - and there is a HUGE gap between the two now.

Heres a quote from an article last week:

"The most startling omission from the RM report and commentary is the lack of explanation for the disparity between the average asking price of £226K and the recorded average selling price of circa £160K. This suggests, with some certainty, that delusional vendors are still asking for prices 40% above the true market valuation. Until this bizarre artificial gap 'crunches' the housing market will continue to stagante and deteriorate"

Ah now I made the same point yesterday as the Firstrung Article re RM HIP June 2009 as you rightly said pointed out the difference between asking and selling price and Rinoa said :

Sybil, The reason for the disparity is that Rightmove use mean averaging and Halifax/Nationwide use median.

Mean averaging is simply all the prices added up and an average price calculated. Median is the middle price in a list of prices. It is where half the prices are above this figure and half below.

Either works OK on its own to show rises and falls, but it looks odd when compared with other indices using another type of calculation.

Forget about the huge disparity, it's only a mathmatical oddity, not house prices selling at 40% off asking prices.

Now I may as well go and jump off the nearest cliff because not only was I merged with Rinoa yesterday with regards the RM thread but now I am quoting him.....hhhheeeelllpppppp!

[Sybil13]

A tired old topic already posted on numerous occasions and shown to be factually incorrect on so many levels.

Regurgitated yet again but with the copy and pastes in a slightly different order.

Sorry did I miss your answer? If I am going to get merged with you and then start quoting you the least you can do is give an good answer to whether the market is sustainable at 30%? It was as far as I am concerned the most BULLISH post I have made to date. This WAS A BREAKTHROUGH thread with regards what Hamish and yourself have said. I had a few hours at the weekend to really consider some of the points with regards remortgages etc and thought, "mmm I wonder if Rinoa and Hamish have a point, perhaps the market could just stabilise at 30% from peak, but could the lenders afford for it to do so"?

I would like to hear a reasoned argument from you as to whether the lenders could meet the demand if sellers finally reduced prices 30% .

Edited June 22, 2009 by Sybil13

[dalkent]

But First Time Buyers are buying houses at around the 120k mark. Is this not sustainable?

[Rinoa]

Sorry did I miss your answer? If I am going to get merged with you and then start quoting you the least you can do is give an good answer to whether the market is sustainable at 30%? It was as far as I am concerned the most BULLISH post I have made to date.

Sorry Sybil, just didn't read very bullish to me.

[Rinoa]

Ah now I made the same point yesterday as the Firstrung Article re RM HIP June 2009 as you rightly said pointed out the difference between asking and selling price and Rinoa said :

Sybil, The reason for the disparity is that Rightmove use mean averaging and Halifax/Nationwide use median.

Mean averaging is simply all the prices added up and an average price calculated. Median is the middle price in a list of prices. It is where half the prices are above this figure and half below.

Either works OK on its own to show rises and falls, but it looks odd when compared with other indices using another type of calculation.

Forget about the huge disparity, it's only a mathmatical oddity, not house prices selling at 40% off asking prices.

Now I may as well go and jump off the nearest cliff because not only was I merged with Rinoa yesterday with regards the RM thread but now I am quoting him.....hhhheeeelllpppppp!

To be fair to you, many others have made the same observation, although even you must admit it's stretching it to believe houses were selling at 40% discount to asking price.

Were you not just a tad sceptical that average priced houses were being discounted by £70k?