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Sybil13

House Prices Too Good To Be True

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BBC House Prices Too Good to be True?

.....if you'd wagered a year ago - when the world was ending in the financial markets - that house prices were going to stabilise about six months later and be back to the same level within a year, you would have found plenty of people happy to be on the other side of your bet.

Is it too good to be true? I know better than to try to call the market - though, from the number of times I'm asked about it, it seems that many people think it's the most important part of my job. But here are two reasons to think the rally may run out of steam: one from Nationwide and one from the IMF.

Reason number one is well known but important: house prices are rising in a market where very few properties are changing hands. As the Nationwide points out in today's report, the housing turnover rate - the percentage of the private sector housing stock changing hands on an annualised basis - is still only 4%. That's not much higher than it was at the end of last year, when literally no-one in the market wanted to do anything. Before the crash, turnover was 7-8%.

You might expect prices to carry on falling in a market with such little activity - because usually low turnover reflects the fact that everyone expects prices to fall. But the relationship breaks down if there's only a tiny number of houses up for sale. That seems to have been true for most of this year and it's still true.

Nationwide thinks a lot of people have become "accidental landlords": with interest rates so low, they've been able to buy a new place but rent their old home, rather than selling outright. The authors say the resulting increase in the stock of rental properties explains why house prices have been rising for five months now - while, if anything, rents are now lower than they were last year.

The signs are that this stock of rental properties is now starting to fall off. If that happens, they think prices could go down again.

But that's the short-term dynamic. The more fundamental reason why prices might start falling again is that, by most measures, they are still significantly over-valued.

That's the IMF's conclusion in its latest World Economic Outlook, out yesterday. It says the typical housing boom lasts six years and sees house prices in real terms go up by about 50%. Downturns last five years, during which time house prices in real terms fall about 24%.

The IMF folk compare that historical picture with what's happened in individual markets so far. They then go back and run more complex models with measures of affordability and other data. The conclusions are broadly the same: prices in the UK, Spain and Denmark all probably have quite a long way further to fall - in the UK's case, maybe another 12-13% in real terms. Whereas the US and Gepercentage of the private sector housing stock changing hands on an annualised basis - is still only 4%. That's not much higher than it was at the end of last year, when literally no-one in the market wanted to do anything. Before the crash, turnover was 7-8%.

rmany are probably close to the bottom. Remember this is about house prices in real terms, after inflation. You could get that 12% real decline if prices stayed flat for a while - but if inflation stays this low, you're talking quite a few years.

Capital Economics have a similar analysis (see graph below). They reckon prices would need to fall by at least another 20% in nominal terms to reach fair value. And many agree

Reasons for market to fall :

1. percentage of the private sector housing stock changing hands on an annualised basis - is still only 4%. That's not much higher than it was at the end of last year, when literally no-one in the market wanted to do anything. Before the crash, turnover was 7-8%.

2. affordability - IMF "prices in the UK, Spain and Denmark all probably have quite a long way further to fall ".

Moneyweek recently House Prices Could Fall Another 40% :

....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 LETS ADD SOME MORE:

3. Funding Not Enough Money to Support a Recovery in 2007 Terms

The mortgage market in 2007 appeared to have ample capacity to offer a loan to anyone who wanted one. Debt was cheap, house prices were rising and the perception was that there was little risk. There was also a mass of money in the system. In actual fact, there wasn’t enough money available, at least not money from the lenders’ own resources.

A lot of the money being lent was only available thanks to something called “mortgage securitisation”. At the peak of the market in 2007, about half of all new mortgages were destined to be securitised, that is, bundled with thousands of others and sold off to external investors.

Assuming there were always buyers for the bundles, a lender could continue to lend, almost without limit. But with the banking crisis in 2008, demand for securitisations dried up. Any lender wanting to remain active could now do so only if it had resources of its own.

In 2007, banks made 800,000 mortgage approvals, but only 400,000 were made from their own resources. Banks today are already offering mortgages at an annualised rate of about 375,000 approvals – nearly as much as at the peak of the market.

So, how much more can banks realistically do? Perhaps they can lend another 20%, to reach a total of 450,000 mortgages. Add in the struggling building societies at 100,000 loans (a third of their peak) and 20,000 from specialist lenders (down 75%) and the total may be just 570,000 a year.

What does this mean for house prices? History suggests the balance point lies at about 900,000 approvals; below this, prices fall and above it prices rise. So, there may not be enough money in the system to keep house prices rising.

4. Approvals -

the earliest records – dating from April 1993 when the UK was recovering from the last recession – show mortgage approvals at 87,291, the Bank says.

Healthy activity is around 100,000 approvals month, according to Boulger, but he adds: "We may not see this for some time." It took until October 1996 for approvals to hit 100,000 after the last recession – almost four years after it had officially ended.

5. FTB's -

According to Peter Bolton-King, chief executive of the National Association of Estate Agents, a healthy property market requires between 25% and 33% first-time buyers. "Currently there is nothing like that level and, as second-time buyers need first-time buyers to sell to, the market can't recover until lending improves

6. Interest Rates -

Given that the base rate is now at its lowest level in the Bank's 315-year history, there's only one way it can go: up. This means that the huge boost to house prices provided by ultra-low rates is over,

7. Regulation - and Capital Ratios

8. US Why US House Prices Will Keep Crashing

[

b]Why should Britons worry about imploding US home prices? [/b]

Firstly because whatever our politicians are telling us, many banks won't want, or even be able, to lend very much while the losses on their dodgy US dabblings keep growing.

And secondly because what happens in US housing is a good guide to our own property market. The US crash started a good 12-18 months before ours, yet it's continuing. There are more than enough domestic reasons why British property prices will keep dropping, as we've pointed out several times recently: Longer dole queues are bad news for house prices. But while the housing market keeps imploding on the other side of the Atlantic, there's even less chance of a turnaround over here.

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Nice one Sybil, nice one Steph.

The main point everyone is missing is interest rates. All asset prices should be inversely proportional to the rate of interest, other things being equal.

So if interest rates are at 1/2 percent, then asset prices are going to soar. Increase the rate of interest to 10%, then asset prices will fall as people sell assets to move into savings.

Interest rates in the UK were slashed last year as an attempt to stem what could have been a cataclismic collapse in property prices. It worked. Those in house are now paying paltry mortgages on the SVR. They have no need to sell.

That will change if and when interest rates rise. No one has any idea when that will happen, but probably not til after the June 2010 election in my opinion. The winners of that election might like to try and get a lot of pain out of the way as quickly as possible, so the year from June might be when the long lost correction comes along.

Til then, those owning houses wait nervously, and those without wish they had more patience.

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The main point everyone is missing is interest rates. All asset prices should be inversely proportional to the rate of interest, other things being equal.

So if interest rates are at 1/2 percent, then asset prices are going to soar. Increase the rate of interest to 10%, then asset prices will fall as people sell assets to move into savings.

Interest rates in the UK were slashed last year as an attempt to stem what could have been a cataclismic collapse in property prices. It worked. Those in house are now paying paltry mortgages on the SVR. They have no need to sell.

That will change if and when interest rates rise. No one has any idea when that will happen, but probably not til after the June 2010 election in my opinion. The winners of that election might like to try and get a lot of pain out of the way as quickly as possible, so the year from June might be when the long lost correction comes along.

Til then, those owning houses wait nervously, and those without wish they had more patience.

I doubt interest rates will rise after June 2010. That has not been a policy pursued by the newly elected Obama administration.

There are far more fundamental issues affecting the long term price of housing. Steph has done well in identifying the factors behind this illusory rise.

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