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Moneymorning Today Explains Halifax Figs.

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- We open Wednesday’s Money Morning with dire warnings about falling house prices and what happens? The Halifax comes out and says property prices in August rose by the most in almost a year, up 1.6% on July.

- Annual growth was just 2.5%, but that was still up on July’s rate of 2.3%.

- So do we eat humble pie? Is this where we turn around, call the bottom of the market and tell you to buy as much UK property as you can possibly get your hands on?

- No. This is where we delve into the black arts of house price statistics and point out why the Halifax is talking tripe.

- For a start, Halifax is way out of line with other reports for August - Nationwide and Rightmove have already said prices fell 0.2%, while Hometrack reckoned 0.1%.

- But why is there all this diversity between statistics that are meant to measure the same thing in the first place?

- Capital Economics, who agree that the Halifax data looks “too good to be true”, point to the gulf between data based on actual house sales (Halifax, Nationwide) and data based on surveys of estate agents and surveyors (Hometrack, RICS).

- Sales-based reports still indicate prices are higher than last year, albeit not by much. But surveys have pointed to persistent monthly falls over the past year or so.

- Geographical coverage (sales-based data includes Scotland and Northern Ireland, where house prices have been among the last to weaken) accounts for some of the difference. But the think tank also believes that sales-based data is less efficient at detecting turning points in the market. Why?

- Imagine you’re buying a house in early 2004. It’s the middle of a boom, you’re panicking. There’s only one property for sale in your dream street. It’s a one-bed flat with a hot pink carpet and a weird smell, but you know if you don’t buy it today for £100,000, then someone else will snap it up tomorrow. And it’s going to be worth 10% more in six months, so does it matter?

You buy it and resolve to do something about the carpet.

- Now imagine you’re buying in early 2005, as the slowdown becomes entrenched. There are several properties for sale in your desired street. The one-bed flat with the hot pink carpet has been sitting empty for six months and is now going for £90,000. A south- facing one-bed with restored wooden floorboards across the road has just come on the market priced at £105,000. But you like the ‘feel’ of the other place and reckon it’ll hold its value better – and you don’t need to get rid of the carpet. So you pick quality over price.

- The Halifax and Nationwide data don’t pick up on the difference in quality between the properties, nor do they include the fact that the poorer quality property is now on the market for less money. They just see a one-bed flat selling for £5,000 more than a similar one-bed sold for the previous year. Therefore, prices must have gone up.

- So the reason for the gap is that sales-focused reports don’t immediately pick up on the falling prices of low quality properties, which take much longer to sell as the slowdown hits and buyers can have their pick of homes. On the other hand, surveys of estate agents and surveyors give a better picture of the broader market, and so have been gloomier.

- Of course, as supply continues to outstrip demand, and people become more worried about the market, high quality properties will suffer too, so eventually the Halifax and Nationwide will catch up.

- But in the meantime, expect further monthly fluctuations.

- And if you still think we’re too bearish on house prices, why not ask a housebuilder? Wilson Bowden became the third UK housebuilder this week to report a plunge in house sales for the first half of the year.

Despite having 16% more sales outlets open than in 2004, sales fell 9%, while average selling price slid 8%. “These have been the most difficult trading conditions the market has seen for a decade”, said chairman David Wilson.

- Staggeringly, shares in the group closed up 3% at £11.55, because results weren’t as bad as the City expected. This sort of mindless optimism – something to with the summer heat, perhaps? - seems to be sweeping the market.

- Another beneficiary from the syndrome was electrical retailer Dixons. The high street is under siege, and companies such as Dixons which sell household goods such as plasma screen TVs and washing machines are feeling the pain even more sharply than the rest.

- Underlying UK sales fell 7% over the summer months.

Sales at its PC World chain dropped 7%, while mobile phone store The Link saw sales plunge a full 28%.

- But its shares jumped 1% to 155.25p. Broker Merrill Lynch said sales were above expectations and described the performance as reassuring, while WestLB said results could have been a lot worse.

- Brokers must be the kind of people who jump for joy when a doctor tells them: “It’s OK - we can save ONE of your legs.”

- Meanwhile, shares in broadcaster ITV remained flat at 114.5p despite sharp growth in first-half pre-tax profits. Investors were concerned by a 3.5% fall in advertising revenue at flagship channel ITV1 as competition from digital channels hit audience share.

Can ITV’s plan to launch a satellite version of the Freeview service with the BBC help fill the gap? See:

http://www.moneyweek.com/article/1270

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- No. This is where we delve into the black arts of house price statistics and point out why the Halifax is talking tripe.

Crikey did they really say that! Good on them.

- The Halifax and Nationwide data don’t pick up on the difference in quality between the properties, nor do they include the fact that the poorer quality property is now on the market for less money. They just see a one-bed flat selling for £5,000 more than a similar one-bed sold for the previous year. Therefore, prices must have gone up.

- So the reason for the gap is that sales-focused reports don’t immediately pick up on the falling prices of low quality properties, which take much longer to sell as the slowdown hits and buyers can have their pick of homes. On the other hand, surveys of estate agents and surveyors give a better picture of the broader market, and so have been gloomier.

- Of course, as supply continues to outstrip demand, and people become more worried about the market, high quality properties will suffer too, so eventually the Halifax and Nationwide will catch up.

We've been pointing this out for a long time on here, I wish the media would start picking up on it more.

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excellent points.

the variation in the quality of housing stock is surely at its greatest right now.

Many people have gone big into renovating their homes, DIY, new Kitchen, floors etc mostly paid by MEW while others have been content to just maintain their home and not get sucked into fashion.

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Can anyone confirm whether the halifax index is based on aking prices?

If it is then the current fad for vague pricing (price range, offers over, builder discounts) must be distorting the picture considerably.

Would the figures have any relevance at all.

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Guest The_Oldie
Can anyone confirm whether the halifax index is based on aking prices?

If it is then the current fad for vague pricing (price range, offers over, builder discounts) must be distorting the picture considerably.

Would the figures have any relevance at all.

I believe that it's based on agreed mortgage figures.

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The Curious Incident of the Dog in the Night-Time...or of the sales that aren't there

Why should the baffled British property investor look to Australia for clues? Elementary, says James Ferguson

Sherlock Holmes: “The curious incident of the dog in the night-time.”

Inspector Gregory: “The dog did nothing in the night time.”

Holmes: “That was the curious incident.”

I was sharing a beer with an Australian friend of mine last weekend, when he remarked that a great friend of his, who worked for Jones Lang LaSalle in Sydney, had told him that while you don’t see it in the statistics yet, the

prices of the houses they’re managing to shift are down 20% on last year. Even worse, he said, transaction volumes have halved: sometimes less than half of the properties at auction are making their reserve prices. Overall, he said, houses just aren’t selling.

The Australian housing market is important to us, because it is one of the few (if not the only) housing markets in the world that could arguably be said to be a stage ahead of our own. At the moment, those of us who think that property prices are taking a real tumble are still in the minority. According to Nationwide numbers, price growth is just slowing – it is, they say, now at around 2.6%. The industry pundits don’t see prices falling much either, but rather levelling off into a slow growth period. But I think their confidence is based on looking at the wrong numbers.

The statistics we have right now are all based on properties that actually sell, not the huge quantity, perhaps even the majority, that just don’t sell. As Sherlock Holmes noted, sometimes it’s the things that don’t happen that are more important than the things that do. In the case of house sales, it’s the transactions that aren’t taking place that are more important than the ones that do. Until potential house sales can be turned into actual house sales, we are nowhere near being able to see what is really happening in this downturn. Ross Clark in The Sunday Telegraph reports on two other middle-class families, unable to sell even after knocking £75,000 and £70,000 respectively off the price. In one case, the cut was equivalent to 18% of the original asking price. How much more will have to come off before it finally sells?

All this must be a genuine worry for developers in London’s Docklands, who are reportedly sitting on £80m worth of new but unsold flats, according to Mira Bar-Hillel in the Evening Standard. The paper counted 263 unsold flats at just three high-rise locations, with another 127 flats, that were initially sold to Hong Kong investors, also on their way back to the market. One resident has already lowered the price of their flat by £180,000, or 27%, yet still there have been no offers.

But the vast majority of transactions that aren’t happening at the moment are ones where the seller can’t or won’t bring themselves to lower the price down to the buyer’s level. This means that the current statistics on house prices are not a true reflection of the situation, but rather a Panglossian, best-possible take on the situation. None of the properties mentioned above, for instance, are yet included in the statistics, because none has sold.

A collapse of activity is a classic feature of the first stage of any downturn. Only once sellers come to realise that not only are they just not going to sell unless they lower their prices to the buyers’ level, but that the corollary is that the sellers of the property they are planning to move to will also have to sell for a lower price, can transactions start to pick up again. The next problem on the immediate horizon, however, is the dreaded “chain”. Because not every seller will submit to the reality of their situation at the same pace, many transactions that could otherwise have happened will be held up by someone further up or down the chain who still doesn’t get it and won’t budge. Selling your house even after you’ve finally found a buyer and agreed the price may still take months to complete, or even fail, as links in the chain find they have to pull out.

This is why first-time buyers are so important. If they can be tempted back into the market, unencumbered as they are by having their own property to sell, transaction volumes can start to rise again. Unfortunately, as they have built-up property equity and are possibly quite comfortable where they are renting, it may prove no easy task to attract first-time buyers back into a market that no longer offers guaranteed tax-free capital gains.

It should also be remembered that this seizing up of property market activity is also a classic harbinger of any property crash. While there are still many (almost all of whom are industry insiders with vested interests) who would have you believe that property prices won’t, indeed can’t, come off, the truth of the matter is that all markets’ main function is what is called “price discovery”. If the market seizes up and volumes collapse, then it is because the prices are too high. Not until prices have fallen sufficiently to reinvigorate the market and bring back the volume, can we say houses are back at the ‘right price’.

Worryingly, despite the fact that Sydney’s house prices may already be down 20%, there’s little sign of activity being stimulated in the market. I’m not sure that a 20% fall in prices would turn the UK market around either. With the average house price in the UK now £159,000, according to Nationwide, a 20% drop would bring the price down to about £127,000, still 6.5 times after-tax wages.

Just because a big hike in rates triggered the last house price crash, it doesn’t mean we won’t have a crash this time unless rates rise. It just means it will be more drawn out and painful. Japan’s residential land prices, for example, have been falling now for over 13 years and are more than 50% down from the 1991 peak. Official interest rates have also been falling or at zero for all that time. I’m not suggesting that we face anything like such a disaster, but to expect prices to just level off at the highs is just unrealistically optimistic and unsupported by any historical precedent. Perhaps the real-estate industry insiders should be calling for higher rates and encouraging much lower property prices so that the system can clear and we can start afresh?

Somehow, I just can’t see them accepting the pain.

Author: James Ferguson

Date: 05 August 2005

Moneyweek

Apologies if this article has already been posted elsewhere (and it is a month old) but in the light of the articles in today's Telegraph and Guardian trumpeting the Halifax's figures showing a "resurgence" in the market I felt it was worth revisiting.

I also continue to be amazed by the supposed lightning impact of a rate cut. how can a rate cut in one month produce an effect on home sales in the same month? It takes months from initiation to completion on a house purchase not hours.

I think as far as the Halifax figures are concerned there used to be a term for this type of "recovery" - it was called as I recollect a "dead cat bounce".

Fox

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  • 301 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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