The Great Property Crash – Is It Still Going To Happen?

[Timz]

So here we are July 2010, in parts of the country we are back to 2007 Q4 levels and above. For other parts of the country and for smaller properties we are still seeing price falls. One of the main statistics used to propose that we should see big falls, the first time buyer House Price To Earnings Ratio, which according to Nationwide, is close to 4.5 which compared to long term average of 3.5 now looks a bit of a lost argument since we are likely to see interest rates at very low levels for a long time. The cost of borrowing is not factored into the HPER so with such a drastic drop in interest rates we cannot say the long term average should remain constant. Government plans to pass new build decision making to local government seems to be aimed at ensuring that the UK doesn’t build too many thereby keeping supply constrained and hence banks balance sheets less under threat due to falling house prices.

Price falls seen through 2008 stooped abruptly in early 2009 when interest rates were quickly cut to 0.5%. We could see interest rates rising a bit but probably not back within the range 4 to 5% for a long time perhaps ten years. This is perhaps the key point. This step change in interest rates has created a more permanent environment of increased affordability.

Does this conveniently avoid the fact that interest rates are set to offset inflation? Yes, it does but even with inflation significantly above the 2% target interest rates have been held. So the target has in effect changed. Wider concerns such as growth of the economy, worries about deflation and the idea that we can inflate away our debts shows that the Government is content with higher inflation. Increases in inflation caused by government increasing VAT will not alone cause too much concern.

“But our government has got to be savage in its attempts to cut debt and this must surely raise unemployment to levels where forced sales are inevitable and so the supply will increase”. This is a convincing argument and one which I keep looking at. Some jobs and business areas are more recession proof than others but increasing unemployment is not a threat to all locations and to all property types. The effect of Unemployment rising to an uncomfortable 3 million compared to the Cost Of Borrowing staying low for all borrowers is perhaps less significant.

“The cost of renting is nearly half that of buying so people will rent until some balance is seen”. Realistically this argument only holds true for smaller properties typical of the rental market; a larger executive house or a pretty farmhouse has never been able to command a rent to reflect its value. Maybe this is less true for corporate let up-market flats in central London but it is the case in the country.

In 2008 I spoke to a number of old FRICS who could remember that last two crashes of the early 1980’s and 1990’s. “Surely” I suggested the nice farmhouse or rectory will hold its value better than a small 2 bed terrace. They all said “everything fell by 40% because there was no money about”. But is’nt that what a “credit crunch” means?

The UK market, most notably in the south, has been turned on its head. It is not now driven by first time buyers but from the top from London, by foreign buyers making the most of the low pound or by fear of there own currency crashing.

Is the government clever enough to cut debt or constrain banks without them leaving London and damaging the economy to the extent that all house prices fall to our expected levels of 40 to 50%?

We could see a sovereign debt failure affecting our banks. The global economy may not recover to the extent UK exporters would wish, but unlike Spain and Ireland, the UK does not have a glut of unsold new build property and this very thin market, 40% of volume seen in 2007 (I think), seems to be holding prices steady for the future.

So am I right in thinking its not looking quite that bad now? Are we still going to see a big correction? Reference The Times headline on the 18th October 2007 “The UK Market is heading for a Crash”, “Homes overvalued by 40% warns IMF”. Perhaps, but maybe over a much increased time scale, perhaps like Japan?

[Bruce Banner]

Yes.

[PropertyGuru]

OK, here's how it works.

There are only 2 ways to get resources to do something now that you actually can't afford to.

1) consume saved resources from the past

2) Use a pledge of future resource production as a basis for providing credit, i.e. bring back production from the future for consumption now, aka run a tab.

If you lose either of those options, what do you think happens?

They've deliberately disincentivized saving, so only (2) is now an option.

As people have a finite lifespan, there's a limit to this option.

So make a wild guess what will happen over the next 18 months.

Edited July 10, 2010 by PropertyGuru

[Timm]

It's already happening.

[winkie]

It's already happening.

Of course it is happening....everything else is going down, why would property be exempt....the time of growth artificially maintained by debt is over for now, reality will always eventually win.....even if they look like they are going up you won't get so much for your work or money

[Dorkins]

One of the main statistics used to propose that we should see big falls, the first time buyer House Price To Earnings Ratio, which according to Nationwide, is close to 4.5 which compared to long term average of 3.5 now looks a bit of a lost argument since we are likely to see interest rates at very low levels for a long time.

What interest rate is available to FTBs? And on what size of deposit? Ordinary young people simply don't have £60k cash lying around. I suspect the pool of 50somethings willing to add tens of thousands of pounds to their mortgage is growing smaller by the day too.

When the FTBs run out the pwoperdee Ponzi scheme must end. I think it already has, but we are still in the, "hang on a minute, oh shi..." realisation stage.

[expatowner]

Are we still going to see a big correction?

NO

[“Nasty Piece of work”]

It has already started to happen.

The talk of cuts has started to sink in. The Great Unwashed have realised they ARE Joe public. The Bank of Mum and Dad has shut down for the "duration". Lending like 2007 is not happening.- no more massive multiples to fund the obscene prices. The number of vendors is up. Inflation is starting to stalk.

Watch the long, drawn out race to find the floor.

[Pent Up]

We are seeing it now. House price rises have stopped abruptly and started falling again even though IOs are low, mortgage rates are comparatively high. Deposits still have to be huge and this is not going to end anytime soon with the end of SLS. Huge job cuts coming, disposable income falling. Also the pent up supply from the last 3 years is coming out in a big way with stock levels up 50% in Essex and a similar story in other areas too. There's is more hard evidence now then ever before.

Basically, it's kicking off big time, sit back and enjoy the ride down

[TheCountOfNowhere]

thats hilarious...musta taken that e.a. musta taken days to type all that in.

im so enjoy this now austerity/reality.

The last crash took 6 years...we are in the middle of the greatest crash in history...enjoy it.

[Kazuya]

As long as the bulk of the falls happen within a 24 month time period then I am happy.

If it all goes Japan then I ain't waiting that long.

[Laura]

As long as the bulk of the falls happen within a 24 month time period then I am happy.

If it all goes Japan then I ain't waiting that long.

No1 Tip:- Jump ship soon if you are able.

Why do folk seem to be thinking 'Recovery' means 'Things can only get better'. ? - It doesn't.

Hence No 1 Tip.

No2 Tip:- Take a quick look (from a distance) in thirty years time, there might be a green shoot or two worth noting.

No3 Tip:- Don't get too hung up. This is just another lifetime, go experience it any/everywhere you can.

[shermanator]

Wow, things must be quieter than even I thought in the estate agents' these days for him to write that spiel. You know, the EAs with 10 desks but only 2-3 employees......and they're looking bored out of their brain too!

For what it's worth, IMHO we will see a real estate correction more akin to Japan with untra low IRs and probably more QE. This is where it differs from 73-76 and 90-93. Result will still be the same though, if not worse as there'll be no 'bounce' due to the necessary evil of "creative destruction" being avoided by Greenspan &co.

[slacker]

I think we're in another correction currently, but it might be underwhelming for many on here.

Don't underestimate the demand. Many on here are sat on cash waiting to go back in, there are millions of FTBs.

A 10 or 15% could see a lot of people dive back in.

I don't think we'll see a vertical drop - price to avg. income is going to revert to mean, but it will do so over a period of 15% drops followed by bounces.

[silver surfer]

I sold to rent in 2007, and have been waiting to buy for nearly three years now.

For the first two years I was so busy patting myself on the back that I nearly broke my arm. Now I'm not quite so smug.

First, because there's lots of ways the crash could happen. Yes, we could see a 25% plus fall in nominal prices over the next twelve months...but then again we could see a 25% plus fall in real (ie after inflation) prices over the next ten years. And in the second scenario it could be that actual nominal prices don't really change all that much, or even increase a bit over where they are today. So that dream house we're all tracking on Rightmove doesn't actually get any cheaper, while the "real prices" graph at the top of the House Price Crash home page drops like a stone.

Second, and this is a bit more subtle. We could see a fall for the average property, but the kind of property we all want to buy and live in either doesn't drop much or doesn't even appear in the market. In other words the price of new build flats in run down areas absolutely collapses, which drives down the average; but well designed family homes in good areas, near good schools, with decent gardens, and good transport links, well these desirable properties either hold their prices or the owners decide not to sell.

I bought and sold during the 1989-95 crash and I saw something similar then, estate agent windows got choked up with slow moving crap, but even cash buyers were moaning that they couldn't find anything decent to buy.

What's worrying me is that I'm seeing something similar now. Let me illustrate with two properties that I've seen in the last month. One looked great in brochure, a section of an old mansion that had been broken up into five or six separate properties. But when I got there it was clear that it was an insane layout (the master bedroom could only be accessed through another bedroom!) and the service charges were more than the council tax. So, no surprises it had languished unsold since the start of the year and the estate agent was dropping heavy hints that they sellers would be very open to offers well below the asking price. Compare this with a second property nearby that I went to see on the day it came onto the market. A really great Edwardian home with a big south facing garden, it had been professionally extended and modernised but still retained lots of period features, and although offering lots of privacy it was a short walk to the village centre and the train station. I put in an offer that day, but by the weekend there had been two offers at the asking price. It went to sealed bids, so I offered 5% over the asking price as a cash buyer with no chain and also said I could wait up to twelve months before completion to give the vendor plenty of time to find somewhere else. I didn't get it, and I later found out my offer was the lowest of the bids, and they'd only accepted bids from cash buyers!

Like I said, I'm not feeling quite so smug now.

[RufflesTheGuineaPig]

You can't stop a property crash.

You ca only delay it, and delaying it makes it worse.

People simply don't have the money to buy houses at current prices, and the days of 125% liar loans are gone.

[NEO72]

Bottom line: prices need to fall, prices are falling, prices will continue to fall.

The only unknown is the rate of falls. FWIW I think given prices are already falling with record low IRs, relatively low supply, government support (eg stamp duty hol), availability of funding (SLS) and the impact of austerity measures yet to be felt, the drops will be v large and v fast (and will really get going this autumn).

[clockslinger]

As long as the bulk of the falls happen within a 24 month time period then I am happy.

If it all goes Japan then I ain't waiting that long.

There is a great big elephant in the room when we "compare to Japan", an elephant that was well covered two weeks ago on Newsnight by a Nomra veteran talking about the UK budget and coming autumn spending round. It convinced me, but hey, so what!

The analysis was pretty much as follows:

The UK is planning a massive round of spending cuts in the public sector believing "manufacturing", in particular manufacturing driven by a demand for our "exports" will take up all that slack and then lead to growth. Now, the Japanese didn't cut like we are about to do...and they already had a much more balanced economy than the UK (like, they manufactured a lot more anyway). Interest rates were really low (hence yen carry trade) and there was "quantitive easing" in place. The government of Japan reined in spending for one year (97 I believe) when things looked like they were a bit back on keel....with the consequence being an extension and aggravation of the stagnation already in place. And how long has Japan been in recession/ stagnation? Now, if that happened in an economy better balanced than the UK anyway and an economy focussed on exporting and manufacturing anyway, without swinging spending cuts...well, it doesn't look good, does it? Bigger, faster longer,deeper and worserere a distict possibility?

[LittleSteroid]

There is a great big elephant in the room when we "compare to Japan", an elephant that was well covered two weeks ago on Newsnight by a Nomra veteran talking about the UK budget and coming autumn spending round.  It convinced me, but hey, so what!

The analysis was pretty much as follows:

The UK is planning a massive round of spending cuts in the public sector believing "manufacturing", in particular manufacturing driven by a demand for our "exports" will take up all that slack and then lead to growth. Now, the Japanese didn't cut like we are about to do...and they already had a much more balanced economy than the UK (like, they manufactured a lot more anyway). Interest rates were really low (hence yen carry trade) and there was "quantitive easing" in place. The government of Japan reined in spending for one year (97 I believe) when things looked like they were a bit back on keel....with the consequence being an extension and aggravation of the stagnation already in place. And how long has Japan been in recession/ stagnation? Now, if that happened in an economy better balanced than the UK anyway and an economy focussed on exporting and manufacturing anyway, without swinging spending cuts...well, it doesn't look good, does it? Bigger, faster longer,deeper and worserere a distict possibility?

100% right

[silver surfer]

You can't stop a property crash.

You ca only delay it, and delaying it makes it worse.

People simply don't have the money to buy houses at current prices, and the days of 125% liar loans are gone.

Well some people clearly still have the money, this small estate of eleven houses in Lymington was completed in April, three months later and nine of the eleven have been sold (and at pretty near full asking price-I know because my offer was laughed at!).

http://www.rightmove.co.uk/property-for-sale/new-homes/property-27149132.html

My issue is that if house prices stagnate for the next ten years, and inflation goes up by 25 or 30% over that period, then history will record this as one of the greatest house price crashes ever to hit Britain...but it won't do me, as a sell to renter, much good, and I doubt it will leave many people on this forum satisfied either. And with interest rates so low, and likely to stay so low, I'm increasingly thinking that's the most likely outcome.

[Menie]

I think we're in another correction currently, but it might be underwhelming for many on here.

Don't underestimate the demand. Many on here are sat on cash waiting to go back in, there are millions of FTBs.

A 10 or 15% could see a lot of people dive back in.

I don't think we'll see a vertical drop - price to avg. income is going to revert to mean, but it will do so over a period of 15% drops followed by bounces.

Agreed on this forum there are plenty of people realistic, knowing the real value of money and able to follow their budget.

Where I am working in London (600 employees), when I tried to tell my colleagues to don't buy since the past 2 years.. they just laughed at me. I even got a friend who just bought recently as according him house price will always go up...seems crazy! Most of them bought a house they couldn't afford if rate goes up..

Unfortunately I am not really sure we got a lot of people with cash in savings/shares in UK (unless you are a banker, GP, surgeon..), often you can hear, «got a wedding, new car, baby or mortage to pay..» or « got children can't afford to save»..

Edited July 10, 2010 by Menie

[assetrichcashpoor]

I'm getting disenchanted with the property crash. The fundamentals say it should have happened a long time ago but it hasn't around my way. I'm planning on leaving the UK if at all possible, to Europe probably but anywhere will do.

[abharrisson]

I sold to rent in 2007, and have been waiting to buy for nearly three years now.

For the first two years I was so busy patting myself on the back that I nearly broke my arm. Now I'm not quite so smug.

First, because there's lots of ways the crash could happen. Yes, we could see a 25% plus fall in nominal prices over the next twelve months...but then again we could see a 25% plus fall in real (ie after inflation) prices over the next ten years. And in the second scenario it could be that actual nominal prices don't really change all that much, or even increase a bit over where they are today. So that dream house we're all tracking on Rightmove doesn't actually get any cheaper, while the "real prices" graph at the top of the House Price Crash home page drops like a stone.

Second, and this is a bit more subtle. We could see a fall for the average property, but the kind of property we all want to buy and live in either doesn't drop much or doesn't even appear in the market. In other words the price of new build flats in run down areas absolutely collapses, which drives down the average; but well designed family homes in good areas, near good schools, with decent gardens, and good transport links, well these desirable properties either hold their prices or the owners decide not to sell.

I bought and sold during the 1989-95 crash and I saw something similar then, estate agent windows got choked up with slow moving crap, but even cash buyers were moaning that they couldn't find anything decent to buy.

What's worrying me is that I'm seeing something similar now. Let me illustrate with two properties that I've seen in the last month. One looked great in brochure, a section of an old mansion that had been broken up into five or six separate properties. But when I got there it was clear that it was an insane layout (the master bedroom could only be accessed through another bedroom!) and the service charges were more than the council tax. So, no surprises it had languished unsold since the start of the year and the estate agent was dropping heavy hints that they sellers would be very open to offers well below the asking price. Compare this with a second property nearby that I went to see on the day it came onto the market. A really great Edwardian home with a big south facing garden, it had been professionally extended and modernised but still retained lots of period features, and although offering lots of privacy it was a short walk to the village centre and the train station. I put in an offer that day, but by the weekend there had been two offers at the asking price. It went to sealed bids, so I offered 5% over the asking price as a cash buyer with no chain and also said I could wait up to twelve months before completion to give the vendor plenty of time to find somewhere else. I didn't get it, and I later found out my offer was the lowest of the bids, and they'd only accepted bids from cash buyers!

Like I said, I'm not feeling quite so smug now.

I'd entirely agree that there are all sorts of ways a correction can happen....I personally don't believe the "great crash" will happen.... with all the attendant speed and severity and overcorrection most seem to think is a nailed on certainty.

In general I would go for inflation doing most of the work over the next five years with only very small nominal adjustments.... it'll look like house prices have corrected but it won't feel like it.

While everyone should and I'm sure will make their own minds don't be persuaded that there is only one likely future... there are several and not enough people recognise that fact, they all seem to trance like just trot out the same old charts and assumptions as if its the only likely eventuality... I juts don't believe it and I certainly think other eventualities are more likely.

[Guest Steve Cook]

OK, here's how it works.

There are only 2 ways to get resources to do something now that you actually can't afford to.

1) consume saved resources from the past

2) Use a pledge of future resource production as a basis for providing credit, i.e. bring back production from the future for consumption now, aka run a tab.

If you lose either of those options, what do you think happens?

They've deliberately disincentivized saving, so only (2) is now an option.

As people have a finite lifespan, there's a limit to this option.

So make a wild guess what will happen over the next 18 months.

nice post

[Guest Steve Cook]

I think we're in another correction currently, but it might be underwhelming for many on here.

Don't underestimate the demand. Many on here are sat on cash waiting to go back in, there are millions of FTBs.

A 10 or 15% could see a lot of people dive back in.

I don't think we'll see a vertical drop - price to avg. income is going to revert to mean, but it will do so over a period of 15% drops followed by bounces.

Demand has got sod all to do with price.

The amnount of available credit is what pushes prices up or down

Demand merely stimulates volume. People can want houses all they like. If they can't get credit or the credit is too expensive to service, prices will fall until they can afford them

Edited July 11, 2010 by Steve Cook