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Times Online Article:

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http://www.timesonline.co.uk/tol/comment/c...icle6836017.ece

Early this year, when the housing market was still on its knees, a fellow guest at a Burns Night supper remarked: “Have you seen how house prices are falling? Soon I’ll be able to buy a house for what it’s actually worth.â€

This statement poses a number of challenges to any housing market analyst, but particularly to me, as I have been wondering whether to let or sell for the past nine months. The notion of a “correct†price for property is deeply ingrained in most homeowners’ (and some economists’) psyches. But it is self-evidently flawed: buyers nearly always think the market is about 20 per cent overvalued, while sellers think their home is 20 per cent undervalued.

One fact is clear: enough buyers have entered the market in the past few months to make prices bounce, as reflected in this week’s house price indexes. The canny “bottom feeders†who were waiting for distressed stock and repossessions to be flogged, US-style, on the courtroom steps have been disappointed. People like our Burns Night reveller are still renting, confounded to see prices once again climbing. So is now really a good time to buy?

First things first: no matter what the state of the market, there are always good reasons for some to buy. People with new or growing families, or relocating for work or schools, will always form the backbone of demand, just as death, divorce and debt always provide stock.

The three best reasons for buying, taken together, are that first, you love and/or need to live in the property; second, that you can afford it and third, that you will need it as a home for at least the next decade or so. Set against these criteria, no postwar house purchase has been a disaster for the individual involved — at least for market reasons. Even those who bought at the height of the 1980s boom in 1989, and those who bought in 2007, will walk away unscathed, provided they keep up their mortgage repayments.

For others the question is not whether house prices are at the right level, but whether they are sustainable. To answer that we must look at what is driving demand.

The very low rates of interest being paid on deposit accounts have lowered the opportunity cost of money for equity-rich buyers. Even relatively low rental returns from residential property look attractive set against them.

As a result, the market is seeing much more activity on the part of those with cash looking for improved income returns, and from first-time buyers funded with large slugs of cash from the Bank of Mum and Dad. They are either buying the sorts of family homes that aren’t made any more, such as Georgian rectories, or buying rental properties or first homes. In all cases they are searching for quality. New homes are selling only when the site and product meet discerning criteria.

It is these relatively low numbers of equity-rich buyers competing in a market with few properties for sale, who are driving up prices. But this will change if and when interest rates rise, perhaps in 12 months’ time.

If that is the demand side, what of supply? Exceptionally low levels of stock are creating something of a panic-buying frenzy in some locations. There seem to be parallels with the pre-Christmas rush in 1983 for the undersupplied Cabbage Patch dolls. Any competitive bidding in the present economic conditions is more the result of scarce supply and, perhaps, just a touch of hysteria than a true reflection of the market in a leading asset class.

This won’t last for ever, leaving a big question mark over whether price rises can be sustained as more sellers are encouraged on to the market. It may prove unwise to buy when competition is so fierce.

In the short term, the direction of house prices depends on economic factors — whether the prospects of recession, unemployment, lack of mortgage finance, repossessions, higher taxes, inflation and potential rises in interests rates have abated. Savills’ research department thinks they have not. We predict a second round of price falls starting this winter and continuing in the first half of 2010 and not growing until later in 2011. I am acting on this forecast. I have moved my family for lifestyle reasons but, even though I would like to own, I am renting until there are more homes to choose from.

In the long term, however, there is no escaping the inelastic nature of UK housing stock, especially of the best homes in the most desirable places. This makes price rises permanently in excess of general inflation likely. I don’t want still to be renting much after 2011 and, for my dream property, I would definitely jump earlier.

In the depths of the last recession, an astute Middle Eastern billionaire bought a spectacular house in Belgravia, just before the market plummeted. He said: “You can never pay too much for quality — you can only pay too soon.†He was proved right then and probably will be again.

***

So what is a house worth?

Although certain notions of housing worth are enduring and widely accepted, that doesn’t make them right (Yolande Barnes writes).

Some eminent economists have come unstuck in their belief that there is a “correct†ratio between house prices and multiples of household income.

The average house price, according to our figures at Savills, is at present 6.4 times the average household income, down from 8.1 at the market peak in 2007 and compared with an average of 5.0 over the past 39 years (these figures vary widely depending on whose statistics you use.) This has led some analysts to say that property values have to continue falling by another 20-30 per cent to reach a proper level.

But other analysis suggests that these ratios are perfectly serviceable. People may think it desirable that average house prices do not exceed certain multiples of income, but that doesn’t mean that it will happen. This may explain the surprise that greeted the recent bounce in house prices, which shows little sign of abating yet.

Market value frequently differs from academic notions of worth because housing is a composite good. It is part necessity, part utility, part amenity, part consumer good, part luxury good, sometimes a savings vehicle or income-producing investment and sometimes a speculative instrument.

Any and all of these factors can influence what someone will pay for a house. But so too will broader economic issues such as unemployment, tax rises and interest rates.

In the short term we do not think that the current bounce in house prices is sustainable. We expect further price falls over the winter, followed by a period of stagnation until late 2011, followed by a return to growth.

Yolande Barnes is director of research at the property company Savills

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the average house is 6.4 times average HOUSEHOLD income

that stat tells you something.

and they go on to say the norm is 5 times HOUSEHOLD income.

this tells you something about the spin too.

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Guest KingCharles1st

I "love" the opening line, where Yolande has to self value, and validate her standing as a wonderful writer and social wonderful person, by telling us that they were "talking to someone at a Burns Night. Does this piece of information make the other's comment somehow more laudable, believable, interesting, accurate, important?

No- I didn't think so. "I was talking with someone recently" would have sufficed.

Pretentious shite

NEXT

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I was about to post this myself.

Whatever she says about multiples, from the likes of Savils' Yolande Barnes this was something of a coffee-splutter moment.

'We predict a second round of price falls starting this winter and continuing in the first half of 2010 and not growing until later in 2011. I am acting on this forecast.'

Will she have to go and stand in the Naughty Corner?

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I was about to post this myself.

Whatever she says about multiples, from the likes of Savils' Yolande Barnes this was something of a coffee-splutter moment.

'We predict a second round of price falls starting this winter and continuing in the first half of 2010 and not growing until later in 2011. I am acting on this forecast.'

Will she have to go and stand in the Naughty Corner?

Didn't notice this and posted the same article myself hopefully mods will merge. However, just wanted to say that Yolande Barnes (along with Rightmoves director Miles Shipside), has been saying since the start of the year that sellers need to reduce prices 25 - 30%, indeed she said that the market had found a "new floor at around 30% from peak".

Despite the summer blip, what Savills and Rightmove have consistently said up to June this year, is obviously still very relevant , the current market only being driven by the cash rich, with anyone wanting a mortgage and a valuation anywhere near peak being excluded. That of course is not a recovery, but then we know that as do most of the people ramping the market.

May we PLEASE have a lot more articles now about how much the market needs to adjust before we see a recovery that includes property values falling back in line with sensible and sustainable lending levels.

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Guest KingCharles1st
Didn't notice this and posted the same article myself hopefully mods will merge. However, just wanted to say that Yolande Barnes (along with Rightmoves director Miles Shipside), has been saying since the start of the year that sellers need to reduce prices 25 - 30%, indeed she said that the market had found a "new floor at around 30% from peak".

Despite the summer blip, what Savills and Rightmove have consistently said up to June this year, is obviously still very relevant , the current market only being driven by the cash rich, with anyone wanting a mortgage and a valuation anywhere near peak being excluded. That of course is not a recovery, but then we know that as do most of the people ramping the market.

May we PLEASE have a lot more articles now about how much the market needs to adjust before we see a recovery that includes property values falling back in line with sensible and sustainable lending levels.

There is another problem. In some desirable areas, there are so few properties coming onto the market now, that they are fought over. As noted earlier in the other thread, school catchment areas, access to "higher living" and road networks all play a big part in this very high profile housing sideshow.

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the average house is 6.4 times average HOUSEHOLD income

that stat tells you something.

and they go on to say the norm is 5 times HOUSEHOLD income.

this tells you something about the spin too.

If its true is it spin... por are you just calling it spin becasue its a piece about housing in the times ?

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The point they miss about the supply side being held back considerably is that rates are very low now for existing mortgage holders, even when they have moved to an SVR (unless with a non-standard lender).... this relieves the pressure on households that are struggling financially ( one job loss, reduced hours, reduced overtime, reduced rates of pay, other debts to service etc etc )... and in turn restricts the number of repos you'd expect to see coming through in a recession.

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I "love" the opening line, where Yolande has to self value, and validate her standing as a wonderful writer and social wonderful person, by telling us that they were "talking to someone at a Burns Night. Does this piece of information make the other's comment somehow more laudable, believable, interesting, accurate, important?

Ah, but which Burns was it?

This one:

Robert%20Burns2.jpg

or this one?

simpsonmontyburns.png

I'm going with number 2.

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The point they miss about the supply side being held back considerably is that rates are very low now for existing mortgage holders, even when they have moved to an SVR (unless with a non-standard lender).... this relieves the pressure on households that are struggling financially ( one job loss, reduced hours, reduced overtime, reduced rates of pay, other debts to service etc etc )... and in turn restricts the number of repos you'd expect to see coming through in a recession.

add in "reduced income releif" and banks buying their own repos into that mix.

debt upon debt is not sustainable without serious inflation.

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the average house is 6.4 times average HOUSEHOLD income

that stat tells you something.

and they go on to say the norm is 5 times HOUSEHOLD income.

this tells you something about the spin too.

So the average Household income in the UK is £25k. Don't think so

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At face value, it seems strange for someone to be STR'ing now - particularly when that person is a director of research of a well known estate agents.

Very strange indeed.

Not in the light of this:

"We predict a second round of price falls starting this winter and continuing in the first half of 2010 and not growing until later in 2011. I am acting on this forecast. I have moved my family for lifestyle reasons but, even though I would like to own, I am renting until there are more homes to choose from."

More homes to choose from. Hmmmmm. 20-30% off then.

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Guest KingCharles1st
Ah, but which Burns was it?

This one:

Robert%20Burns2.jpg

or this one?

simpsonmontyburns.png

I'm going with number 2.

I don't think Mr Burns ever said "We is fu_cked innit" quite like SBN

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