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Sybil13

Q's Re Gdp And House Values

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Bear of little brain does not have a lot of time currently to keep up with latest news etc., but got a few Q's if you have the time to help?

It has been an interesting year for me in relation to wanting to make things black and white, an interesting year for watching how others and watching how I myself attempt to find some firm ground, some certainty where perhaps there is none.

It has been and is still an interesting year for me attempting to continue to see through the smokescreen of VI ramping that is feeding sentiment but is based on denial of simple facts but trying to keep those facts to the forefront has been very difficult for a bear of little brain and therefore I assume for the majority of the sheeples. So THANK HEAVENS that mortgage lending is severely restricted and is, as Rightmove said:

“After several months of activity and price revving upwards from last winter’s low point, both will start to hit the limiter without more mortgage finance. In spite of pent up demand, the market and pricing is boxed in by restrictive lending criteria put in place to ration mortgages given the lack of funds available to lendersâ€....

Future price and transaction growth is now controlled by the bottleneck of mortgage availability.

Mortgage availability is quoted in every article I have read of late as being the reason the market is not in recovery yet still the article continues ramping the illusion of a half full cup rather than the not only nearly empty but almost broken one!

Ernst & Young yesterday despite offering a moment of sanity in the midst of the continued madness still concluded property values will be up to 2007 levels by 2014 , but on what basis they came to this conclusion is beyond me ! Can you see the RMBS market being open by 2014 let alone ever going back to how it was in 2007? As the market could not have inflated to where it was in 2007 without the RMBS market , and as FTB's had been priced off the ladder in 2007 and those that took mortgages needed 125% LTV's and 7 x's wages , and as UK Lenders Ought to Cut Lending by £500billiion....it is hard to see how property values will re-inflate by 2014 let alone see why that would be considered desirable!

Blanchflower and others have used the loan to income ratio as the basis for further falls:

'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 38%. So far we are down 26%, 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.

And Moneyweeks House Prices Could Fall Another 40% said :

........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.

So my Q's are:

1. " Since 1930 Britain's homes have on average tended to be worth about five and a half times GDP per head. Even after the downturn of the past 12 months, this ratio still stands at a historically high 6.3 - and on that basis, prices need to fall by another 15% before they are fairly valued. Some analysts have suggested an even bigger fall may be necessary " .

So what is the current ratio , and what that would mean to house values ?

2." According to the annual world retail banking report from Cap Gemini, Unicredit and EFMA, mortgage lending has "exceeded reasonable limits" with the volume of debt running at 86pc of GDP – or about £1,200bn. The report recommended 60pc as a sustainable upper level.

Andrew Sheehan, a management consultant at Cap Gemini who contributed to the report, said: "The scale of mortgage lending in the UK is unmanageable. As GDP grows, mortgage lending should decrease to about 60pc over time." Mortgage growth shrunk by 26.6pc in the UK between the first half of 2007 and the same period in 2008".

I am not sure if they are saying the same as at Q1 but in a different way? But again, can anyone say what the current ratio is and how that impacts on house prices?

3. Not sure how to word this, its all a bit beyond me but ten years ago private sector housing assets were only three times higher than mortgage debt – with housing assets increasing by more than mortgage debt each year since 1995.

The combined value of all property in the UK reached £4 trillion during 2007, according to the findings of the latest Halifax Annual Review of the Value of the Housing Stock.

The figure increased nine per cent over the last 12 months according to the bank.

Freetrader posted a table here Housing Equity.

Freetrader said:

House prices are falling but the debt has hardly changed, so net equity is disappearing fast. The wealth destruction is quite dramatic, and we could well see �1.25 trillion disappear in the space of just two years.

What would that mean?

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