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Ft - House Prices Could Fall 50% From Here

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FT article, by Philip Coggan ("Buttonwood" columnist at The Economist).

What goes up must come down

* Story by: Philip Coggan

* Magazine: InvestmentAdviser

* Published Monday , July 26, 2010

House prices are finally obeying the laws of gravity. The Halifax measure has fallen in four of the past five months, the Royal Institute of Chartered Surveyors survey shows new buyers are starting to dry up, while even the Rightmove survey of asking prices suggests seller optimism is starting to evaporate.

Depending on the measure, house prices have risen 5-12 per cent from their recent trough. This recovery has been achieved despite a very weak economic rebound and the lack of mortgage finance. The Bank of England recently reported that demand for secured lending for home purchases fell in the first two quarters of 2010.

So what has been holding house prices up? At the very top end, the weakness of sterling in 2008-09 seems to have attracted foreign buyers. But with sterling having stabilised, non-domiciled residents now facing a levy, a 50 per cent tax rate on high earners and new tighter EU rules on hedge funds expected, it is hard to imagine an endless supply of rich foreigners is going to materialise.

At the bottom end, the sharp fall in interest rates has relieved the pressure on homeowners’ budgets. Unlike the US, few have been forced out of their homes by crippling mortgage costs. That has reduced the supply of foreclosed properties for sale, the factor that has weighed most heavily on US house prices.

These two factors explain why house prices did a remarkable thing; they were in a bubble, the bubble popped but prices never fell to distressed levels. Nationwide’s index that links house prices to first-time buyers’ earnings peaked at 5.4 in 2007, before falling to 4.1 in the first quarter of last year.

The low for this ratio, first calculated in 1983, was 2.1 in late 1995. So house prices could have fallen another 50 per cent.

But they didn’t. The ratio has risen again and was 4.6 at the last count, still well above the historic average. To show how remarkable this is, Jeremy Grantham of fund manager GMO has catalogued more than 20 historic bubbles, defined as markets getting a long way ahead of their average valuation. All of them subsequently fell to a below-average value, except British houses.

Give it time. First-time buyers are the great weakness of the market. Not only are house prices very high relative to their earnings, they are now required to put up much higher deposits than they were in 2006-07; 25 per cent as opposed to 10 per cent. That is a lot of money to find when times are hard.

Who is going to have the confidence to buy their first house? Not public sector workers, who face a pay freeze and job losses. Not private sector workers, who are not getting pay rises either and are facing higher taxes.

To go back to the Nationwide ratio, what does a high price/earnings measure imply? We know what it means in stock market terms; investors expect profits to grow rapidly. So do we expect wages to grow quickly? Clearly not.

What about low interest rates? They clearly imply that the Bank of England is very worried about economic growth. So low rates are not a sign of strength but of weakness. Even if the economy recovers enough to allow the Bank to raise rates, the resulting rise in borrowing costs will help existing homeowners.

The lack of new housing supply is a very slender reed on which to hang hopes of higher house prices; even in boom times, new houses are a very small proportion of the total housing stock.

What matters is demand, and demand is very likely to be weak. If the mood of clients is driven by their housing wealth, advisers are going to have cautious clients for some time to come.

http://www.ftadviser.com/InvestmentAdviser/Investments/Comment/article/20100726/5db5ad22-941b-11df-8de6-00144f2af8e8/Philip-Coggan-What-goes-up-must-come-down.jsp

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I love an optimist but he doesn't say they will fall 50% only that they "could have". In other words, but for artificial low IR's, QE, props for the market never seen before, then most likely they would have. His statement on US house prices is plain BS. 30 year rates in the US can be had for around 5%. What "crippling mortgage costs" is this guy talking about?

Edited by tomwatkins

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Good reading and mostly true but unfortunatley I believe interest rates will stay very low for 2 to 3 years. I have a property on the market with no mortgage, I have been looking at larger properties for a few years and I have been willing on a price correction for the last 12 months even though I bought at the peak in 2007 at 335 K and I am happy to take 275 K currently. I have an offer on the table for that. Looking at the bigger properties it is an excellant time to get a fixed mortage at 4 to 5 years. Even with the pending price reduction if you get a nice house in the right area I beleive you could be doing a nice deal at the right time. The big crash is coming for the middle of the road houses and apratments but not for the larger properties in good areas that the sellers have very little mortgages on. For example. I have viewed 4 properties in an excellant area in Cardiff and 3 out of the 4 vendors have no or very little mortage and have villa`s abroad etc etc and they don`t need to drop the price a silly amount as they have nothing else to do with the money. Two of the vendors even offered to take my house at full value in part exchange as they both have said they will only be re investing in property. Trust me people still have money in Britain, they just don`t want to spend it yet. 50 % will never happen. It might happen to a 2 bed apartment in the wrong side of town but no way in regard to the right property. These are troubling times but what people are missing is these are the exact times to play on the fear and reduce the price to a reasonable amount and get up that ladder. Get a nice 5 yr fixed, pay down your 10 % every yr and in 10 yrs when the market gets going again, happy days. If you wait to long then it will pass you by !!!!!!

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Good reading and mostly true but unfortunatley I believe interest rates will stay very low for 2 to 3 years. I have a property on the market with no mortgage, I have been looking at larger properties for a few years and I have been willing on a price correction for the last 12 months even though I bought at the peak in 2007 at 335 K and I am happy to take 275 K currently. I have an offer on the table for that. Looking at the bigger properties it is an excellant time to get a fixed mortage at 4 to 5 years. Even with the pending price reduction if you get a nice house in the right area I beleive you could be doing a nice deal at the right time. The big crash is coming for the middle of the road houses and apratments but not for the larger properties in good areas that the sellers have very little mortgages on. For example. I have viewed 4 properties in an excellant area in Cardiff and 3 out of the 4 vendors have no or very little mortage and have villa`s abroad etc etc and they don`t need to drop the price a silly amount as they have nothing else to do with the money. Two of the vendors even offered to take my house at full value in part exchange as they both have said they will only be re investing in property. Trust me people still have money in Britain, they just don`t want to spend it yet. 50 % will never happen. It might happen to a 2 bed apartment in the wrong side of town but no way in regard to the right property. These are troubling times but what people are missing is these are the exact times to play on the fear and reduce the price to a reasonable amount and get up that ladder. Get a nice 5 yr fixed, pay down your 10 % every yr and in 10 yrs when the market gets going again, happy days. If you wait to long then it will pass you by !!!!!!

I respect your comments... and you may be right... but I recall people saying the same in the early 90s.

I recall a TV documentary around 1992/93 showing house prices in Brighton selling for half the price that people had bought them for in 1988/89... good houses in quality parts of Brighton.

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yes I agree with what you are saying but you need to make a decsion. It might be wrong but it might be right. The only good thing with it being wrong is you are still living in a house that you enjoy and want to be in. You have to make mind one day.

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People.

Low interest rates are not there to help the housing market. They are there because without such a low rate, an already stifled demand for loans would be even lower. Its a sign of weakness in the economy....

so, if you think they are staying low, then the economy is going to get weaker....then when there is any sign of recovery...and inflation returns, THEN is time to buy...at a sensible price, with a sensible loan and a fair chance of keeping a job with which to repay it.

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yes I agree with what you are saying but you need to make a decsion. It might be wrong but it might be right. The only good thing with it being wrong is you are still living in a house that you enjoy and want to be in. You have to make mind one day.

If I'm wrong I'll still be living in a good house I enjoy. The question is whether I'm paying rent to a landlord ( or hopefully) much less rent to a bank. So take a risk and lose and pay the same or take a risk and win and pay much less.

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<br />FT article, by Philip Coggan ("Buttonwood" columnist at The Economist).<br /><br /><br /><br /><a href='http://www.ftadviser...t-come-down.jsp</a><br />
<br /><br /><br />

It's also the first time in housing history (for decades) that first time buyers are entering the market with £20,000+ students debts to pay off each month.

Their first-timer house affordability will be much reduced compared to previous decades - bringing prices far lower for small terraced and flats.

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People.

Low interest rates are not there to help the housing market. They are there because without such a low rate, an already stifled demand for loans would be even lower. Its a sign of weakness in the economy....

so, if you think they are staying low, then the economy is going to get weaker....then when there is any sign of recovery...and inflation returns, THEN is time to buy...at a sensible price, with a sensible loan and a fair chance of keeping a job with which to repay it.

It's a bit of a catch 22 fir the housing Market really. If we get strong economic recovery we get surging inflation and higher rates = lower house prices

Or we slip back into recession unemployment surges, banks won't lend, confidence plummets = lower house prices.

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yes I agree with what you are saying but you need to make a decsion. It might be wrong but it might be right. The only good thing with it being wrong is you are still living in a house that you enjoy and want to be in. You have to make mind one day.

Fortunately the majority are not in a financial position to make such a calmitious decision , they rely on the banks giving them loans. Making the wrong decision today on property could mean decades of financial ruin. DON`T TOUCH PROPERTY WITH A BARGEPOLE even Dringo`s bargepole.

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Fortunately the majority are not in a financial position to make such a calmitious decision , they rely on the banks giving them loans. Making the wrong decision today on property could mean decades of financial ruin. DON`T TOUCH PROPERTY WITH A BARGEPOLE even Dringo`s bargepole.

:lol: A brillant reply. I totally take on what you are all saying and I agree with alot of what is said on this site. hourses for courses. I just wanted to put an alternative view accross. Most views on here relate to the housing market as a whole but trust me the regional differences are massive. I have no doubt that prices will come down, but crash 50 % - IT WILL NEVER HAPPEN. So don`t base your decsion around that figure. Maybe 10 % , 20 % even 25 % in the next 2 years, but long term everybody still loves property, otherwise we would not be discusing it right now, every day, every newspaper artical etc etc.

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Their first-timer house affordability will be much reduced compared to previous decades - bringing prices far lower for small terraced and flats.

Yes, which will slowly filer up through to the more desirable houses as people will have less equity in their starter homes for upsizing, especially if they've bought in the last few years.

I wouldn't be surprised if prices fell 50% in total, although I, unfortunately, think it'll be drawn out over a few years and will be a mix of real and nominal falls. I, for one, hate paying more than I have to for anything, so I won't be buying a house any time soon :)

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:lol: A brillant reply. I totally take on what you are all saying and I agree with alot of what is said on this site. hourses for courses. I just wanted to put an alternative view accross. Most views on here relate to the housing market as a whole but trust me the regional differences are massive. I have no doubt that prices will come down, but crash 50 % - IT WILL NEVER HAPPEN. So don`t base your decsion around that figure. Maybe 10 % , 20 % even 25 % in the next 2 years, but long term everybody still loves property, otherwise we would not be discusing it right now, every day, every newspaper artical etc etc.

its already crashed nearly 40% (sterling falls are immaterial from a financial/investor perspective), ultimately i think it will probably crash more than 80%* and there will be a better return from a pint of fresh room temperature gold top milk than property over the next twenty years. The fact that everyone still loves property is exactly why im confident it has so far to fall. I might agree with 10% falls if everyone hated it.

i.ll agree some places will hod up better than others though and i think the biggest falls percentage wise will come in the bottom 20% of properties whatever they are and the top 20% of properties whatever they are and the largest county falls percentage wise will be London when the enronesque banking sector collapses in on itself again

*Except Maidstone

As you say horses for courses time will tell

Edited by Tamara De Lempicka

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I really don`t want to start sticking up for house prices because they are overpriced but I really do think if you do your home work and offer say 15 % to 20 % below asking price for the house you really really want to live in and fix your rate then I believe you will be ok. The trouble is on here is everyone`s judging it on how much you can gain on the property price. Also I would guess that 80 % of the members on here are renting.

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:lol: A brillant reply. I totally take on what you are all saying and I agree with alot of what is said on this site. hourses for courses. I just wanted to put an alternative view accross. Most views on here relate to the housing market as a whole but trust me the regional differences are massive. I have no doubt that prices will come down, but crash 50 % - IT WILL NEVER HAPPEN. So don`t base your decsion around that figure. Maybe 10 % , 20 % even 25 % in the next 2 years, but long term everybody still loves property, otherwise we would not be discusing it right now, every day, every newspaper artical etc etc.

It's true. Everybody loves property ... right now. The thing is we haven't seen a dramatic correction yet. When it happens and people lose lots of their money, then the love affair with housing will be like J. Terry and Vanessa Perroncel, a fun ride while it lasted, and then a bitter relationship that no-one ever wants to repeat.

As for 'never 50%. Well that's presumptuous. Nobody can predict the end value. Could be less, but equally could be more. They have been doing that for the last two years in the US and they still haven't seen the bottom of the market.

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I really don`t want to start sticking up for house prices because they are overpriced but I really do think if you do your home work and offer say 15 % to 20 % below asking price for the house you really really want to live in and fix your rate then I believe you will be ok. The trouble is on here is everyone`s judging it on how much you can gain on the property price. Also I would guess that 80 % of the members on here are renting.

I will not disagree that if buying with a mortgage that an optimal purchase time may well be if there is a further 20% off if its the house they want and as long as a long term fixed interest rate at current less than 5% is applied and the person is lucky enough to keep their job over the coming years, it may well save more in the long term than a further 50% off at say 15% rates. It really depends whether a mortgage is required or not, the best time for both will be completely different because of the financing and for cash buyers i dont think the timing is going to matter really because i think theyll stay real terms low for decades

Edited by Tamara De Lempicka

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It's true. Everybody loves property ... right now. The thing is we haven't seen a dramatic correction yet. When it happens and people lose lots of their money, then the love affair with housing will be like J. Terry and Vanessa Perroncel, a fun ride while it lasted, and then a bitter relationship that no-one ever wants to repeat.

As for 'never 50%. Well that's presumptuous. Nobody can predict the end value. Could be less, but equally could be more. They have been doing that for the last two years in the US and they still haven't seen the bottom of the market.

Good to here your views but you cannot compare the US to the UK in regard to housing. Such difference I would be writing all night !

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I really don`t want to start sticking up for house prices because they are overpriced but I really do think if you do your home work and offer say 15 % to 20 % below asking price for the house you really really want to live in and fix your rate then I believe you will be ok. The trouble is on here is everyone`s judging it on how much you can gain on the property price. Also I would guess that 80 % of the members on here are renting.

I agree actually. I think if you can find something with 20% off - I think it has to be at least 20% off current asking prices - and you can fix a low IR for a good period then jump in, get on with your life.

I have been chatting with numerous HPCers via email in the past couple of months and I know there are numerous people waiting to do this - all are waiting for another dip and then I think we will see quite a few HPCer plunge in and buy.

But most of us are not even seeing a dip.

All are waiting to see how the public sector job cuts play out over the coming 6 months - if 6 months from now there is not massive job cuts then it will be a case of when will the HPC happen.

They are obviously going to keep IRs near to zero for years so it is only a massive loss of jobs forcing people to sell or maybe another global banking crisis resulting in a massive IR surge that will now do it. Oh, and a big war with Korea or Iran.

I really do not want people dying so I can buy a house.

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I agree actually. I think if you can find something with 20% off - I think it has to be at least 20% off current asking prices - and you can fix a low IR for a good period then jump in, get on with your life.

I have been chatting with numerous HPCers via email in the past couple of months and I know there are numerous people waiting to do this - all are waiting for another dip and then I think we will see quite a few HPCer plunge in and buy.

But most of us are not even seeing a dip.

All are waiting to see how the public sector job cuts play out over the coming 6 months - if 6 months from now there is not massive job cuts then it will be a case of when will the HPC happen.

They are obviously going to keep IRs near to zero for years so it is only a massive loss of jobs forcing people to sell or maybe another global banking crisis resulting in a massive IR surge that will now do it. Oh, and a big war with Korea or Iran.

I really do not want people dying so I can buy a house.

Again, rates are low because people dont wish to borrow. the CBs want to stimulate demand...Its not working.

what does this mean....it means business wont be investing, it means jobs are going to continue to go, and public sector is going to cull even more than they are proposing.

tough times indeed.

and banks are like sharks....they MUST lend or die, like a shark has to keep moving to breath. as they find their cash flow gets tighter, they themselves will need to protect reserves....this means some are going to the wall...about time too.

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Again, rates are low because people dont wish to borrow. the CBs want to stimulate demand...Its not working.

what does this mean....it means business wont be investing, it means jobs are going to continue to go, and public sector is going to cull even more than they are proposing.

tough times indeed.

and banks are like sharks....they MUST lend or die, like a shark has to keep moving to breath. as they find their cash flow gets tighter, they themselves will need to protect reserves....this means some are going to the wall...about time too.

Yes, I agree.

What has been conveniently forgotten by the politicians and indeed the bw ankers is that the public now no longer trust either - for decades people have joked about not trusting those two groups but in the last 18 months it was rammed home to become a reality for hundreds of millions.

People are afraid and afraid people hunker down, save and when they see the banks doing it and big companies doing it they do it all the more... and hence you get deflation and eventually depression.

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Again, rates are low because people dont wish to borrow. the CBs want to stimulate demand...Its not working.

what does this mean....it means business wont be investing, it means jobs are going to continue to go, and public sector is going to cull even more than they are proposing.

tough times indeed.

and banks are like sharks....they MUST lend or die, like a shark has to keep moving to breath. as they find their cash flow gets tighter, they themselves will need to protect reserves....this means some are going to the wall...about time too.

indeed, spread accounts or find an 80%+ deposit ratio Bank,

Im not sure why zirp for the first time in 300 years is seen as a sign of health, its a sign of desperation, the last piece of kit in the bag. Its just a warning of a terminally ill economy, theres no amount of bshit from the govt or media that is going to get people spending again which is whats needed, people are just being rational and exhibiting fear and hoarding and paying down debts.

That is game over for the economy and most of the banks as far as i can see, and a few govts too now because of their stupidity in throwing away tax payers money into a black hole. its just ticktocking off a cliff, but its no doubt been a very enjoyable and progressive 80 years getting here

Edited by Tamara De Lempicka

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indeed, spread accounts or find an 80%+ deposit ratio Bank,

Im not sure why zirp for the first time in 300 years is seen as a sign of health, its a sign of desperation, the last piece of kit in the bag. Its just a warning of a terminally ill economy, theres no amount of bshit from the govt or media that is going to get people spending again which is whats needed, people are just being rational and exhibiting fear and hoarding and paying down debts.

That is game over for the economy and most of the banks as far as i can see, and a few govts too now because of their stupidity in throwing away tax payers money into a black hole. its just ticktocking off a cliff, but its no doubt been a very enjoyable and progressive 80 years getting here

Yes, has not worked for Japan has it. They could print another Trillion and it would do no good.

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Yes, has not worked for Japan has it. They could print another Trillion and it would do no good.

thats right, because, its not about the figures...its about the wealth creation...and there isnt enough.

Its like we have a team of 100 people, but the food they produce only feeds 80.

the other 20 they import....worse, 10 of the people take 5 times the food of the other 90.

they could buy the food with £10 or £10,000, the quantity they produce is just the same.

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I love an optimist but he doesn't say they will fall 50% only that they "could have". In other words, but for artificial low IR's, QE, props for the market never seen before, then most likely they would have. His statement on US house prices is plain BS. 30 year rates in the US can be had for around 5%. What "crippling mortgage costs" is this guy talking about?

Well, compared to 0.5%, I guess 5% could be called crippling, at least for the sub-primers who should never have been given a mortgage in the first place as they couldn't afford it.

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  • 238 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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