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House Prices Are Still Falling

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http://www.telegraph.co.uk/finance/5957481...ll-falling.html

Three of the last seven months of data from Nationwide have been down and four up. The latest data from the Halifax show four down months and only two up. So what is going on?

First, these data are seasonally adjusted by both the Halifax and the Nationwide. That is to account for the fact that there are regular monthly patterns every year. This is a problem now as patterns in the past when house prices were rising aren't very helpful in a period of falling prices.

Second, estimates of monthly house price changes aren't very accurate when the number of house sales are small, so you get lots of variation in prices each month. Over the period June 1989 to July 1995, for example, when average house prices fell from £70,095 to £60,965 there were 23 months where prices increased and three where they were flat and 48 when they fell.

How much further will house prices fall? The best guide is the ratio between average earnings and average house prices. This is a measure of affordability. Between 1983 and 2001, before house prices started to climb, the ratio averaged 3.62. By July 2007 the ratio had reached 5.84; it has subsequently fallen back to 4.33.

To get back to the long-run average of 3.62 from 5.84 implies a drop of 38pc. So far we are down 26pc, so it looks like there is more to go. The possibility is that house price falls will be even greater than that if the ratio falls below its long-run trend before recovering, as it did in the early 1990s.

House prices probably have a good way to drop yet. Lots of people may tell you otherwise − estate agents, mortgage brokers and bankers − because they have something to gain. My advice is just to look at the data.

An article where Blanchflower hasn't called for an interest rate cut, no call for one to prop up the market just that it will keep falling.

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'Danny' gets a lot of stick on here but he has been one of the most bearish commentators on the economy in the last 2 years. On a personal level I know most of us would like to see base rates go up, but its probably best in the long term for things to play out over a few years.

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Mostly good sense: However his wording regarding averages is a little odd:

I paraphrase:

He implies that believes the long term average multiple is 3. In the boom the multiple went up to 5. Therefore we can expect a return to 3. It is also possible we may go below 3.

Well, no, if he believes that the long term average is 3, then following a boom up to 5 we mathematically must go down below 3 in the bust to maintain that average.

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Guest Parry aka GOD
Mostly good sense: However his wording regarding averages is a little odd:

I paraphrase:

He implies that believes the long term average multiple is 3. In the boom the multiple went up to 5. Therefore we can expect a return to 3. It is also possible we may go below 3.

Well, no, if he believes that the long term average is 3, then following a boom up to 5 we mathematically must go down below 3 in the bust to maintain that average.

It's also a moving average. Surely the UK is looking at some serious wage deflation, structurally due to globalisation and not just normal recession cycles.

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It's also a moving average. Surely the UK is looking at some serious wage deflation, structurally due to globalisation and not just normal recession cycles.

Just think how worrying it is when consider what effect that will have on this graph.

totalcreditdebtpercenta.jpg

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Ok so this is REALLY Bear of Little Brain confirmation time BUT.....the % drop in loan to income doesn't equate to a % drop in property prices does it?

To get back to the long-run average of 3.62 from 5.84 implies a drop of 38pc. So far we are down 26pc, so it looks like there is more to go. The possibility is that house price falls will be even greater than that if the ratio falls below its long-run trend before recovering, as it did in the early 1990s.

OK I know it means people can borrow less ....but its not as simple as saying that at peak according to Halifax lending was close on 6 so if it drops to 3x's there would be 50% drop in property prices, or does it?

I find the whole "affordability" thing so confusing. When papers say "property is more affordable than it has been in 6 years", I think:

1. Asking prices are still at 2007 levels and sellers seem reluctant to accept less than 2007 or 2007 + some so how can it be more affordable ?

2. Why are we so keen to get property prices not affordable all over again if property has not been affordable for 6 years?

3. What does affordable mean?

In an article yesterday not related to property prices it said:

A husband and wife with two children and earning nearly £35,000 a year between them – well above the average income – are now the biggest losers for keeping their family together.

It's funny isn't it how the press seem more than happy to say that £35000 for a couple is "well above average" when the article isn't related to property prices, and I know this has been debated to death on HPC, but if £35000 is considered "well above average" I wonder how anyone can could have thought that an average property £200000 at peak was affordable to people considered to be on an "above average" wage ?

£200000 25 years 5% equals £1182 a month

7% equals £1430

Interestingly enough the mortgage calculator WARNS that at 12% it would be £2124

To be honest it makes me want to weep when I think what we have done to so many people's lives by allowing property to be seen as INVESTMENT instead of homes yet still we seem unable to learn the lessons.

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'Danny' gets a lot of stick on here...

Mainly because he repeatedly and aggressively advocated dangerously low interest rates when the bubble was inflating at its fastest rate, i.e. as others have pointed out, his theories were a big part of what caused the crash in the first place.

Taking him seriously now would be analogous to appointing the captain of the Titanic as head of the Maritime Accidents Investigation Agency.

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Mainly because he repeatedly and aggressively advocated dangerously low interest rates when the bubble was inflating at its fastest rate, i.e. as others have pointed out, his theories were a big part of what caused the crash in the first place.

Taking him seriously now would be analogous to appointing the captain of the Titanic as head of the Maritime Accidents Investigation Agency.

I thought is was all the Americans fault? :ph34r:

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I know most of us would like to see base rates go up, but its probably best in the long term for things to play out over a few years.

Why.

Even with base rates at 0.5% "normal mortages are availabe at 6-7% and savings rates are available at 3-4%.

If the Base rate went up to a more normal 4% mortgage rates and savings rates would probably not follow upwards.

tim

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Mostly good sense: However his wording regarding averages is a little odd:

I paraphrase:

He implies that believes the long term average multiple is 3. In the boom the multiple went up to 5. Therefore we can expect a return to 3. It is also possible we may go below 3.

Well, no, if he believes that the long term average is 3, then following a boom up to 5 we mathematically must go down below 3 in the bust to maintain that average.

does he actually have a clue?

He should know. He helped cause the bleeding problem.

+1

Mainly because he repeatedly and aggressively advocated dangerously low interest rates when the bubble was inflating at its fastest rate, i.e. as others have pointed out, his theories were a big part of what caused the crash in the first place.

Taking him seriously now would be analogous to appointing the captain of the Titanic as head of the Maritime Accidents Investigation Agency.

+1

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Why.

Even with base rates at 0.5% "normal mortages are availabe at 6-7% and savings rates are available at 3-4%.

If the Base rate went up to a more normal 4% mortgage rates and savings rates would probably not follow upwards.

tim

I also think base rate has become largely irrelevant,

as base rates came down, savings rates and mortgages were going up

Can anyone explain how base rate determines savings and mortgage rates?

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I think Blanchflower is right, but sadly he uses the flawed earnings theory and in the process wrongly atttributes it to affordability...... otherwise I'd take him more seriously.

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