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The Wishful Thinking About House Prices Smacks Of Dotcom Delusion

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http://www.telegraph.co.uk/finance/comment...m-delusion.html

It is amazing what you can believe when you really want to. Take this, from property website Rightmove: "With growing confidence that we've passed the bottom, buyers are more active, although they may discover that many of the best buys have gone". Or this lyrical offering from the Bristol Evening Post: "The steals have been stolen. The snips have been snapped up. Property going for a song has sung. The tide has turned".

Yes, there are some grounds for optimism. The average asking price in England and Wales rose by 0.6pc in the month to July 12, the fifth monthly rise this year. Asking prices are now up 7pc this year. There are 20pc more sellers. Agents are shifting twice as many properties a month as they were last summer. More of them now expect prices to rise than fall, for the first time since 2007. We are back to the races, aren't we?

I don't think so. I don't believe this rose-tinted view of the housing market for at least four reasons. First, house prices are still above their historical trend. Perhaps six times average earnings or about 4.5 times average household income. Given that the housing market spends hardly any time at the average but instead over and undershoots, the odds are stacked in favour of further falls from here.

Second, unemployment is heading relentlessly towards three million and, as this paper reported on Monday, the official figures understate the real situation because many people are reluctant part-timers. BA's Willie Walsh may be relaxed about working a month for free but for most people the 20pc pay cut implied by a four-day week is a serious disincentive to take on a large financial commitment. If you are not out of work, on short time work or worried about your work, you are lucky.

Third, the lifeblood of the housing market, credit, has drained away. The base rate may be 0.5pc, but that means nothing to someone looking to take out a fixed-rate mortgage. It is currently priced around 10 times bank rate and getting dearer, even if you can pull together the deposit. Lenders do not want to lend and prudent borrowers, with an eye on inflation, do not want to borrow at rates which will surely rise.

Fourth, the downturn in the housing market since its peak in 2007 is short by historical standards. It took six years from the peak in house prices in 1989 to the bottom in 1995. It is inconceivable that a housing downturn triggered by an as-yet unresolved credit crunch should last barely a quarter as long. Is it any more likely that a 20pc price correction has done the job of unwinding a 12-year, debt-fuelled bubble that saw prices rise three-fold?

The wishful thinking that is driving the housing market today is familiar territory for equity investors who lived through the bursting of the dot.com bubble nine years ago. Then the optimism that had underpinned the bull market of the 1990s did not evaporate overnight. The belief that shares could only rise meant that investors saw only buying opportunities to begin with. As Robert Shiller and George Akerlof note in their excellent recent book Animal Spirits, this belief underpinned the US housing bubble that burst with calamitous consequences in 2006. And this despite clear evidence to the contrary.

The property market is full of false beliefs. It is, for example, widely argued that house prices will hold their value because, as Mark Twain noted, they don't make land anymore. But in Japan, where land is even scarcer than in Britain, house prices fell by 68pc in real terms between 1991 and 2006. Anyone who sees their home as their pension could be in for a rude shock.

Another myth is that property is the best hedge against inflation. But according to Robert Shiller, real US house prices rose by just 0.2pc a year between 1900 and 2000. The real return from the stock market, by contrast, has been about 7pc a year over the past century.

There is no rational reason to expect property to always be a good investment and, as with shares, what matters most is the starting point. The reason shares have been a disappointment over the past decade is that they started out very expensive. It has taken 10 years for a combination of earnings growth and price falls to make them now rather cheap. I expect a similar process to unfold with residential property, especially as the end of the buy-to-let game sees a steady drip-feed of unwanted property investments into the market. I will continue to take talk of turning tides and missed boats with a large pinch of salt.

For me we are no where near bottom yet, currently we are in a lull and it's only going to get worse from here. There may be a bounce but during the 30's crash there where numerous bounces and this will be no different.

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