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House Prices: Misleading Averages Conceal "flight To Quality"

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http://blogs.telegraph.co.uk/finance/ianmcowie/100008595/house-prices-misleading-averages-conceal-flight-to-quality/

House prices: misleading averages conceal 'flight to quality'

By Ian Cowie Your Money Last updated: November 11th, 2010

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House price movements reported on a national average basis by Halifax and Nationwide create a misleading impression, claim estate agents who report a “flight to quality”. They claim prices are still rising at the top of the housing market while lower value properties continue to fall. With Bank of England base rate frozen at 0.5 per cent, a stand-off has developed in the middle of the housing market between buyers and sellers; both parties refusing to budge from their bargaining positions.

Despite all the talk of falling house prices, prospective vendors remain disinclined to consider ‘cheeky’ offers and can afford to shun them while mortgages continue to cost less than a third of what they did during the last property slump. But prospective buyers hope for better bargains next year, when Government spending cuts may prompt higher unemployment.

Mortgage lenders’ unwillingness to provide loans to first-time-buyers who need to borrow more than 80 per cent of purchase price is another factor that is dragging the bottom half of the market lower. Meanwhile, wealthy foreign buyers continue to pay top dollar – or rouble – for prestige residences, so it is no surprise that a two-tier market is emerging.

Philip Harvey, a director of the HSBC subsidiary, Property Vision, said: “In a bull market property prices rise at will but post-recession the market fragments and some sectors recover more quickly than others.

“Typically in the country house market, the most sought after locations will recover first. The post recession flight to quality means the greatest demand is for family friendly houses on the best roads in the area.”

It’s never been more important for buyers and sellers to be fully informed of local market conditions, rather than being distracted by potentially misleading national averages. Jonathan Haward, chairman of the County Homesearch Company, said: “Prime property is undoubtedly streets ahead of the rest currently in terms of buyer interest and ability to resist price falls and is set to continue to outperform the mainstream market in 2011.

“Ordinary properties will languish on estate agents’ books for longer than average as the public sector spending cuts and job losses take hold. Prices in the majority of areas are liable to fall, with only a select number of local pockets bucking the trend.”

Similarly, Giles Cook, director of the Chesterton Humberts Chelsea office, commented: “Mediocre properties that are overpriced and don’t tick the boxes are generating limited interest. The main problem is a lack of stock, particularly quality stock on the market.

“Highly sought-after homes come to the market rarely but when they do, we have seen buyers offer well over the asking price. One such property is an exceptional first floor lateral flat we sold overlooking a garden square which achieved 6.3 per cent over the asking price after around 45 viewings in one week with nine bids.”

National estate agents Savills expect the housing market to continue to fragment over the next five years, with the ‘mortgage famine’ depressing prices in the lower half of the market while more expensive properties become moreso. They forecast that average prices may fall by more than 7 per cent next year but prime properties will fall by half as much.

Yolande Barnes, head of residential research at Savills said: “Unlike the doomsters, we are not forecasting a deep double dip and there will be tiers of the market that may well escape the downturn virtually unscathed.

“It is the detailed forecast that counts. We expect markets rich in equity to operate very differently to those historically heavily reliant on mortgage finance.”

my comment :

I believe the averages are misleading since the "flight to quality" is in fact concealing the scale of the real house price falls.

If the market moves in a fragmented fashion, you will have transactions happening for cash - hence the low BBA data - and for a high value - hence the small falls reported by the indexes.

The reality is that the bulk of the stock is not shifting and will only shift at massively reduced prices (offers of 20% below asking price are not unheard of recently).

This is due to some buyers not being able to finance an unaffordable mortgage (good thing - not deliberate), potential buyers wising up and waiting for cheaper houses (good thing - deliberate) and sellers trying desperately to hang on (bad thing - for them).

This will inevitably unwind in the next 18 months or so.

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http://blogs.telegraph.co.uk/finance/ianmcowie/100008595/house-prices-misleading-averages-conceal-flight-to-quality/

my comment :

I believe the averages are misleading since the "flight to quality" is in fact concealing the scale of the real house price falls.

If the market moves in a fragmented fashion, you will have transactions happening for cash - hence the low BBA data - and for a high value - hence the small falls reported by the indexes.

The reality is that the bulk of the stock is not shifting and will only shift at massively reduced prices (offers of 20% below asking price are not unheard of recently).

This is due to some buyers not being able to finance an unaffordable mortgage (good thing - not deliberate), potential buyers wising up and waiting for cheaper houses (good thing - deliberate) and sellers trying desperately to hang on (bad thing - for them).

This will inevitably unwind in the next 18 months or so.

the article pretty much mirrors my experience, the best houses in good areas are still going quick at good prices.....then someone with a not so good house tries to get the same price, and fails as their house sits for a year unsold, and they are left scratching their heads...

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I think the writer of the article has been taking in by EAs sales pitches.

There are several prime property indices, Knight Frank, primelocation are too. From what I remember all are falling. Maybe not quite as fast as Haliwide.

Also read an article in the times home section last month about how prime country residences are falling in value. Had a massive double page spread showing all the reductions. Rich foreign buyers are a myth. Sure there are some but no where near enough to hold the high end of the Market aloft.

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No, it just means that good houses in good areas are still fetching insane prices and the bottom end of the market is either not shifting or is gradually being bought by investors who, no doubt, are negotiating hard. But the 'scale of the real house price falls' is still small and insignificant in the scheme of things.

Been saying that for 7 years or more now.

Your langauge is emotive too - 'inevitably UNWIND' - it won't UNWIND - the housing market has never UNWOUND. It can correct, yes - slowly and reluctantly - fought all the way by the government, Bank of England, the banks and the vast majority of the population.

Houses can go up 50k in a couple of months in a mad bull market. In a bear market the same fall takes 2 years.

Thanks for taking the time to reply.

I don't agree with you with this my th about scores of investor busy negotiating hard to claim the next "Slumlord" title. There aren't that many about. Surely nowhere near enough to prop up the market.

I also do take issue with the comment regarding the timescale of the future falls, since where we are now, from an economic stand point, is very different to where we where in the last 7 years. I deliberately used the verb "to unwind", to describe both the frenzy of speculation of the last 10 years and its inevitable unfolding.

This may happen through inflation or nominal falls, but the end result is the same. Houses will become more affordable than they are now, and that's the key issue here.

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I totally agree. The exciting part of the property market is that it is not homogeous. There is no average property. Each property is idiosyncratic qualities that differentiate from other properties. Never forget the first Location. Properties with certain qualities/characteristics are better able to weather a downturn in a property market. www.proprate.co.uk

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I totally agree. The exciting part of the property market is that it is not homogeous. There is no average property. Each property is idiosyncratic qualities that differentiate from other properties. Never forget the first Location. Properties with certain qualities/characteristics are better able to weather a downturn in a property market. www.proprate.co.uk

Or looking at it another way, these properties have been run up by a far greater amount in the boom years and therefore are currently more unaffordable than other less desirable properties on the Market. Therefore the fall could be even greater for such properties in percentage terms.

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http://blogs.telegraph.co.uk/finance/ianmcowie/100008595/house-prices-misleading-averages-conceal-flight-to-quality/

my comment :

I believe the averages are misleading since the "flight to quality" is in fact concealing the scale of the real house price falls.

If the market moves in a fragmented fashion, you will have transactions happening for cash - hence the low BBA data - and for a high value - hence the small falls reported by the indexes.

The reality is that the bulk of the stock is not shifting and will only shift at massively reduced prices (offers of 20% below asking price are not unheard of recently).

This is due to some buyers not being able to finance an unaffordable mortgage (good thing - not deliberate), potential buyers wising up and waiting for cheaper houses (good thing - deliberate) and sellers trying desperately to hang on (bad thing - for them).

This will inevitably unwind in the next 18 months or so.

I think the top end or the so called flight to quality is being fueled by downsizers downsizing with the middle ground buying {those with plenty of equity } and then the bottom end of the market is fecked because the lack of new blood entering it

I can not see how any market can function for any length of time like this as the gap between the bottom an top will just keep growing wider,and as the bottom end cannot rise due to the lack of funding{and affordable} so those that have got equity will sooner or later have to give some of it up

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Two thoughts on this story:

(1) The statistical model used for house price surveys can't possibly be sophisticated enough to take this 'flight to quality' into account. So it would probably mean prices are falling faster than the indexes indicate becuase the average property being sold is 'better' than before the slump.

(2) The idea that there can be a permanent premium for quality over and above the rest of the market is nonsensical. If crap houses aren't selling while s*****ier ones are, you'll quickly see developers moving in and sprucing up homes, converting flats back into family houses etc. As soon as supply increases, the premium for high quality properties will revert to the norm.

And to be honest, as someone looking for a property in the £1.5-2m range in North London, I'm seeing an awful lot of these supposedly premium properties sitting on the market for a year or more, so I'm not even convinced that it's true.

EDIT - You've got to love the way forum autocensors don't let you use the word s w a n k y!!!

Edited by Cherubium

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http://blogs.telegraph.co.uk/finance/ianmcowie/100008595/house-prices-misleading-averages-conceal-flight-to-quality/

my comment :

I believe the averages are misleading since the "flight to quality" is in fact concealing the scale of the real house price falls.

If the market moves in a fragmented fashion, you will have transactions happening for cash - hence the low BBA data - and for a high value - hence the small falls reported by the indexes.

The reality is that the bulk of the stock is not shifting and will only shift at massively reduced prices (offers of 20% below asking price are not unheard of recently).

This is due to some buyers not being able to finance an unaffordable mortgage (good thing - not deliberate), potential buyers wising up and waiting for cheaper houses (good thing - deliberate) and sellers trying desperately to hang on (bad thing - for them).

This will inevitably unwind in the next 18 months or so.

...article misses the point ....those in quality areas who buy and sell for cash will move with ease ....where a mortgage is involved there is inflexible pricing , smell of blood by hunters who become predators and play waiting games until the victim caves in ....the nature of recession...... :rolleyes:

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...article misses the point ....those in quality areas who buy and sell for cash will move with ease ....where a mortgage is involved there is inflexible pricing , smell of blood by hunters who become predators and play waiting games until the victim caves in ....the nature of recession...... :rolleyes:

I know what you mean but I don't think there's any evidence at all to suggest that buyers act anything other than individually... you paint a picture of some form of buyer colusion to sit on their hands and wait for a particular vendor to cave in.... in fact I doubt if any individual prospective purchaser even knows the identity of any other individual prosepective purchaser...... of course there will be a common reaction to news reporting and that's likely to produce actiosn which are similar where price is the most important purchase factor ( which it often isn't).

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No, it just means that good houses in good areas are still fetching insane prices and the bottom end of the market is either not shifting or is gradually being bought by investors who, no doubt, are negotiating hard. But the 'scale of the real house price falls' is still small and insignificant in the scheme of things.

Been saying that for 7 years or more now.

Your langauge is emotive too - 'inevitably UNWIND' - it won't UNWIND - the housing market has never UNWOUND. It can correct, yes - slowly and reluctantly - fought all the way by the government, Bank of England, the banks and the vast majority of the population.

Houses can go up 50k in a couple of months in a mad bull market. In a bear market the same fall takes 2 years.

Do you mean like these top end propertys that have been for sale all year

http://www.rightmove.co.uk/property-for-sale/find.html?locationIdentifier=OUTCODE^2516&insId=2

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I've said before recently that I'm seeing the same thing. Top-end houses are still in a boom, with prices rising, while the rest of the market looks stagnant. Builders are still falling over themselves to build luxury homes as quick as they can.

Do you mean like these top end propertys that have been for sale all year
But some sellers will always try and push for an unrealistically high price. Some strike lucky and the house sells, but others will sit and wait like a spider on a web. Edited by blankster

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I totally agree. The exciting part of the property market is that it is not homogeous. There is no average property. Each property is idiosyncratic qualities that differentiate from other properties. Never forget the first Location. Properties with certain qualities/characteristics are better able to weather a downturn in a property market. www.proprate.co.uk

please name a real market that IS homogenous

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Well, who knows how many investors there are ... one can only speak as one finds. I've been in the housing market lately, both looking for another place to rent and looking for somewhere to buy. As such I have actually spoken to a number of estate agents, letting agents, vendors and lenders. I, invariably, talk to whoever will listen about property. And if that person is 'in property' they seem to like to talk about it too. I have been very surprised how many people I've come across who are not only landlords but think their property investments are the best thing they ever did and are looking to expand.

From the mortgage adviser at a local building society with 6 buy to lets to the vendor of a property who is selling up a detached to buy two more FTB type properties - to add to the 3 he already owns.

I've lost count of the number of times I have said to my wife in the last few months 'Are we the only ones who didn't get into this BTL lark? Seems EVERYONE is at it'.

Well, obviously, not everyone is at it, but a surprising number of people are and have big portfolios with lots of equity. As long as rents are high, the ones I have met are keen to expand. If I were in their place, and I did not think that BTL is a poxy way to make money, I guess I'd want to do the same.

yawn

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  • 145 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
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