Jump to content
House Price Crash Forum
The Masked Tulip

House Prices Could Fall Another 40% From Here

Recommended Posts

The change in the value of the property is critical. Even small percentage changes in capital value far outweigh any considerations about rent, a fact that the property cheerleaders made the most of during the upswing. Even though we could see it would all end in tears because rents weren't covering outgoings, landlords were still enjoying total returns that were comfortably positive.

In the end, it wasn't just net rents that couldn't cover a 100% home loan – some landlords found that gross rents (before all costs, voids, etc) wouldn't even cover loans that were well short of 100%. Such warning signs went unnoticed by far too many people. Yet now, many still want to rush back into the burning building just because a temporary change in wind direction has blown the smoke away to one side.

HBOS, presumably a bit concerned by just how unaffordable its data was making UK houses look, stopped publishing its house price to earnings ratio in early 2006. This is just one of the problems with data on housing: it all comes from less-than-neutral sources such as estate agents and lenders. Still we can do a rough update by using HBOS house prices and weekly earnings from the government's ASHE (Annual Survey of Hours and Earnings).

Interesting article.

Although he does appear to fail to realise the importance of a lack of supply and massive pent up demand. :ph34r:

Share this post


Link to post
Share on other sites
The problem in the UK housing market is affordability – or the lack of it. We are nowhere near the levels where the market can start to resuscitate....

The downside could easily be 40% in real terms, even from here. Just look at what's happened in the US already (-32% and falling, judged by the Case-Shiller index) if you don't believe me.

SPOT ON.

Cue bulls with "yeah but, no but..."

<_<

Share this post


Link to post
Share on other sites
On the same basis, today, the ratio, based on an assumed average household income of £31,200 and an average HBOS house price of £160,869 is still a very high 5.16 times. To give you an idea of just how high that is, it's still above the 1989 peak ratio of 5.02 times.

I tried explaining about this to some dude and he just looked at me as though to to say that that was how it was now. I dont think he understood, but the fact that this doesn't outrage people makes me really angry!!! gggrrrrr

also, i mentioned that I thought average salery was £20k and he said, noooo more like £18k. So you can see how out of kilter his perception of it all was.

Edited by 50%deposit

Share this post


Link to post
Share on other sites
Good find. You can always rely on Ferguson for well grounded analysis, and after the bullish sentiment that has reappeared over recent weeks it makes for a reassuring read.

This bullish sentiment is just engineered spin ;).

Latest news is of 2,500 job cuts at Corus :(.

Share this post


Link to post
Share on other sites
This bullish sentiment is just engineered spin ;).

Latest news is of 2,500 job cuts at Corus :(.

Agreed re the spin. Sad news about the jobs, which just emphasises that the fundamentals are very weak indeed. Plenty more bearish news to come over the rest of the year I am sure.

Share this post


Link to post
Share on other sites
This bullish sentiment is just engineered spin ;).

Latest news is of 2,500 job cuts at Corus :(.

Yes but as we have learned there is no link between unemployment and house prices.

Job cuts are an irrelevance to the economy. ;)

Share this post


Link to post
Share on other sites
Agreed re the spin. Sad news about the jobs, which just emphasises that the fundamentals are very weak indeed. Plenty more bearish news to come over the rest of the year I am sure.

unless you work for an Investment Bank. :angry:

Share this post


Link to post
Share on other sites
I have a lot of time for James Ferguson - he was warning against having money in Icelandic banks a few years back. Warned about Eire and warned that a complete banking collapse was going to happen.

http://www.moneyweek.com/investments/prope...here-14923.aspx

I like the bit where he says

In the end, it wasn't just net rents that couldn't cover a 100% home loan – some landlords found that gross rents (before all costs, voids, etc) wouldn't even cover loans that were well short of 100%. Such warning signs went unnoticed by far too many people. Yet now, many still want to rush back into the burning building just because a temporary change in wind direction has blown the smoke away to one side.

I guess many bulls would argue they would save on heating bills.

Share this post


Link to post
Share on other sites

"In the end, it wasn't just net rents that couldn't cover a 100% home loan – some landlords found that gross rents (before all costs, voids, etc) wouldn't even cover loans that were well short of 100%. Such warning signs went unnoticed by far too many people"

Minsky would have noticed...

Share this post


Link to post
Share on other sites
I tried explaining about this to some dude and he just looked at me as though to to say that that was how it was now. I dont think he understood, but the fact that this doesn't outrage people makes me really angry!!! gggrrrrr

also, i mentioned that I thought average salery was �20k and he said, noooo more like �18k. So you can see how out of kilter his perception of it all was.

Yep - I just had the same discussion/argument with my colleague.

"But people can't AFFORD to sell at lower prices..." and "I can't see banks raising rates too much..."

Hmm.

Share this post


Link to post
Share on other sites
Yep - I just had the same discussion/argument with my colleague.

"But people can't AFFORD to sell at lower prices..." and "I can't see banks raising rates too much..."

Hmm.

Ask them if they know how interest rates are kept low?

Share this post


Link to post
Share on other sites

You bears just don't get it do you...

The population is almost 10% higher now than in the last crash.

Pensions were still seen as good investments in the last crash.

I'm writing this listening to the new BTL landlords redecorating their flat across the car park. Their 2 bed flat cost 110k, and they will let it for £6 to £7k a year.

Care to tell me what other investment will yield over 6% today?

Share this post


Link to post
Share on other sites
Interesting article.

Although he does appear to fail to realise the importance of a lack of supply and massive pent up demand. :ph34r:

I disagree, we had exactly the same demand and supply problems in Oct 1988 to March 1996.

Share this post


Link to post
Share on other sites
You bears just don't get it do you...

The population is almost 10% higher now than in the last crash.

Pensions were still seen as good investments in the last crash.

I'm writing this listening to the new BTL landlords redecorating their flat across the car park. Their 2 bed flat cost 110k, and they will let it for £6 to £7k a year.

Care to tell me what other investment will yield over 6% today?

Yup, yields are nominally up due to falling prices, still likely to be negative though if you deduct costs and capital depreciation.

I can think of more enjoyable ways of losing money than tying it up in an illiquid, depreciating, "asset".

Share this post


Link to post
Share on other sites

http://www.moneyweek.com/investments/prope...here-14923.aspx

Can't be bothered to fit the graphs in, follow the link if you want them.

There have been stirrings of excitement in the property market recently. Data on activity, such as home loan approvals, has been picking up ever so slightly. And I've seen it at first hand too.

I was a member of the panel at an investors' seminar hosted by PFP Group in Harrogate last week. Two investors came up to me at separate times and said they were trying to buy properties but the market had got very tight and the estate agents they were talking to had never been busier. Did I think we'd already seen the bottom?

I had to disappoint them. I don't think we've seen the bottom – in fact, I don't think we're anywhere close. Here's why...

Affordability is the problem in the UK housing market...

The problem in the UK housing market is affordability – or the lack of it. We are nowhere near the levels where the market can start to resuscitate. The Nationwide Building Society's first-time buyer affordability index (black line on the chart below), which measures initial home loan payments as a percentage of take-home pay (so the higher the index, the worse affordability is), is still five years away from a market trough if the last housing downturn is anything to go by.

The low on the affordability index was 46, in March 1996, which was around about bang on when house prices finally began to trend up again after the 1989-95 sell-off. House prices are of course part of the mix of the affordability equation and so it's no surprise to see that the index fell faster in the early days of 1989-93 than it did when house prices were much closer to levelling out in 1993-96 (i.e. still falling but at a much slower rate).

Bringing that analogy forward to today's market, the index (which is quarterly and lagged, so the most recent datum is December 2008) is currently 105.7, or less than a third of the way down to cycle-low affordability. As at end-December, the Nationwide house price index was 14.75% below its peak. Can we say that a drop of that size is likewise less than a third of the required correction? Probably not, but almost no matter how you look at the UK housing market – be that through the UK house price to history ratio; the house price to GDP ratio; the ratio of house prices to other assets, or house prices to earnings – you get the same sort of target fall: 40-50% in real terms. Given that 1989-1996 saw a real-terms drop of nigh-on 40%, that's not so surprising.

...but that's only half the story

Aha! Say some. Surely the late 1980s were characterised by super-high interest rates, so it was no wonder prices fell. Well actually, the super-high rates were at the peak of the market. Rates fell every year from 1990 to 1994 and again 1995-1996. Yet real house prices fell in each and every year. Because affordability (in terms of monthly outgoings) is only half the story. If I'm a buy-to-let landlord and my rental income now exceeds my home loan payments (for the first time in quite a while) that does not mean I make money, even after all costs.

The change in the value of the property is critical. Even small percentage changes in capital value far outweigh any considerations about rent, a fact that the property cheerleaders made the most of during the upswing. Even though we could see it would all end in tears because rents weren't covering outgoings, landlords were still enjoying total returns that were comfortably positive.

In the end, it wasn't just net rents that couldn't cover a 100% home loan – some landlords found that gross rents (before all costs, voids, etc) wouldn't even cover loans that were well short of 100%. Such warning signs went unnoticed by far too many people. Yet now, many still want to rush back into the burning building just because a temporary change in wind direction has blown the smoke away to one side.

HBOS, presumably a bit concerned by just how unaffordable its data was making UK houses look, stopped publishing its house price to earnings ratio in early 2006. This is just one of the problems with data on housing: it all comes from less-than-neutral sources such as estate agents and lenders. Still we can do a rough update by using HBOS house prices and weekly earnings from the government's ASHE (Annual Survey of Hours and Earnings).

According to HBOS, house prices peaked out in August 2007 at £201,000. Average weekly gross earnings in the UK in 2007 were £376 (£19,552 a year). Multiplying that by about 1.5 brings single person earned income up to (earned and non-earned, usually two-person) household income of around £29,900. The house price to income ratio would therefore have been around 6.72 times at its peak, using the HBOS measure.

So have house prices hit the bottom?

On the same basis, today, the ratio, based on an assumed average household income of £31,200 and an average HBOS house price of £160,869 is still a very high 5.16 times. To give you an idea of just how high that is, it's still above the 1989 peak ratio of 5.02 times.

Now if that looks like a fully mature sell-off to you, then I say go for it and pile back into the property market. Personally, I think I'll wait until either one of the affordability or the long-term house price to earnings ratios returns to 'buy' signal territory.

History says it may take a while; perhaps three to five years. But history also suggests it'll be worth the wait. The downside could easily be 40% in real terms, even from here. Just look at what's happened in the US already (-32% and falling, judged by the Case-Shiller index) if you don't believe me.

Share this post


Link to post
Share on other sites
You bears just don't get it do you...

The population is almost 10% higher now than in the last crash.

Pensions were still seen as good investments in the last crash.

I'm writing this listening to the new BTL landlords redecorating their flat across the car park. Their 2 bed flat cost 110k, and they will let it for £6 to £7k a year.

Care to tell me what other investment will yield over 6% today?

The point is, why would anyone buy a property for 110k now, when you could hopefully buy it for 80K in a few years.

I think you will find after costs the profit would be tiny.

I was in Commercial property so spare me the bull.

Edited by Tim Miller

Share this post


Link to post
Share on other sites
You bears just don't get it do you...

The population is almost 10% higher now than in the last crash.

Pensions were still seen as good investments in the last crash.

I'm writing this listening to the new BTL landlords redecorating their flat across the car park. Their 2 bed flat cost 110k, and they will let it for £6 to £7k a year.

Care to tell me what other investment will yield over 6% today?

or wait until tomorrow for a higher yield?..........flat £70k let for £5k

What happens when bond prices fall?

What would cause bond prices to fall?

Share this post


Link to post
Share on other sites
You bears just don't get it do you...

The population is almost 10% higher now than in the last crash.

Pensions were still seen as good investments in the last crash.

I'm writing this listening to the new BTL landlords redecorating their flat across the car park. Their 2 bed flat cost 110k, and they will let it for £6 to £7k a year.

Care to tell me what other investment will yield over 6% today?

The simple fact that they are redecorating it should tell you that 6% is illusory and will be significantly less once you take the cost of repairs, voids, letting agents' fees (or their own spare time if they do it themselves) into account.

Rents, especially for flats, are falling due to the glut of supply.

How much are their monthly mortgage payments now, and how much will they be if base rates reach 6, 8, 10%?

P.S. House prices can fall as well as rise, this is not a risk-free place to put your capital. £4k a year in net rental income is not a great return when the value of the capital is falling £10k a year.

Share this post


Link to post
Share on other sites
You bears just don't get it do you...

The population is almost 10% higher now than in the last crash.

Pensions were still seen as good investments in the last crash.

I'm writing this listening to the new BTL landlords redecorating their flat across the car park. Their 2 bed flat cost 110k, and they will let it for £6 to £7k a year.

Care to tell me what other investment will yield over 6% today?

I do recall that some years (pos. 2005) before the 'reduction' in house prices the average yield was c.3%. The above example would be nowhere 6% with all factors taken into account. Not to say it wasn't a bad buy though. Just that 6% is a little too rose tinted.

Share this post


Link to post
Share on other sites
P.S. House prices can fall as well as rise, this is not a risk-free place to put your capital. £4k a year in net rental income is not a great return when the value of the capital is falling £10k a year.

Agreed, however, the value of all other investments can fall as well. Cash is no good - we have negative real interest rates on savings, even if you actually believe the fiddled CPI numbers. Stocks and shares are full of risk and many companies are paying no dividend. Government bonds are paying crap yields and hold the same risks as cash.

If you are looking for somewhere for your retirement fund, even at today's prices, you can't beat property.

Share this post


Link to post
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now

  • Recently Browsing   0 members

    No registered users viewing this page.

  • The Prime Minister stated that there were three Brexit options available to the UK:   296 members have voted

    1. 1. Which of the Prime Minister's options would you choose?


      • Leave with the negotiated deal
      • Remain
      • Leave with no deal

    Please sign in or register to vote in this poll. View topic


×

Important Information

We have placed cookies on your device to help make this website better. You can adjust your cookie settings, otherwise we'll assume you're okay to continue.