Price Fall Mechanism

[Wannabebear]

Was just wondering what mechanism will actually cause falls in house prices.

Like any market, once sellers exceed buyers I guess. Well FTB's are priced out of the picture and transactions are through the floor. So not that many buyers about.

But what would actually make someone sell? The way I see it, no one is going to sell their house for less than they bought it for [neg equity], or indeed what they believe it should be worth now [uK property owner mindset]. So they would need to be forced sellers, with no alternative left, i.e - they cannot afford the mortgage any more and have to move to a cheaper place or downsize. If some one loses their job and gets another one and has to commute 3 hours a day instead of 1, they will do it. If they have another baby and it has to share a room with a sibling, they will do that. Anything but sell for less.

Unemployment vs IR vs Inflation

I think people can cope with inflation. They will adjust, shop in Asda and not Sainsburies any more, no foreign holiday, maybe negotiate a day working from home per week, no more take outs or eating out. You get the picture. It will hurt but people will cope.

IR - I really dont see these increasing much. They have been far too low for too long so we know inflation is not the target any more, its protecting home owners that counts. And although I hate to admit it I can kind of see why. People can handle inflation but as long as they can pay the mortgage, that's all that counts to keep the whole game going. If IRs raise back anywhere near 4% or 5% that's going to hurt everyone's mortgage payment and they don't want to risk too many mortgage defaults and repo's. Anyway, they want inflation to erode the debt we have.

Unemployment is the only solid mechanism I see for price falls. This may come about slowly through the effect of inflation effecting luxury purchases of course, but this is going to take time. Of course there are more public sector cuts to come. I know the last unemployment measure was 7.9% back in December 2010. Do we know what the forecasts this year for further cuts? Surely the govt know how much they can push it before it starts to effect house prices.

I really don't see huge house price falls coming, just because people adapt and can survive just where they are. They will stick it out until the last. I can see a steady downward pressure on house prices though, maybe 5% a year for the next 5 years or something. That will be the return to the mean. Houses are not like stocks and shares that can be sold in an instant, they are peoples homes that people want to hold onto.

Unfortunately this is the reality that I have come to understand. Us FTB's are going to be kicking around for a while yet, trying to save a huge deposit in a high inflation, low IR environment. Maybe i will be buying in 2015.

thoughts please

[J-Hi]

I tend to agree with a lot of what you have said. My only observation is that how long will people "make do". Many people have come to expect foreign holidays, meals out etc and don't necessarily see them as luxuries.

They might accept one or two years without but IMO when they realise they might not get abroad for a decade they will succumb, sell and use any equity they have to subsidise their lifestyle.

Unfortunately as you point out this will take years to really have an impact. Basically FTB have been screwed to support the irresponsible and over-leveraged. It makes me mad as hell

[Self Employed Youth]

The picture is a confusing one, there are many mechanisms at play.

Housing benefit for example.

If housing benefit is a benefit paid for lower end housing at a specific lower rate than the average price of housing, then surely it creates a minimum price level, and a mechanism of perpetual increase. Whereby a minimum value of the lower end product puts a premium on the higher end product.

Peoples desire the premium product and thus there is direction of their resources towards it, guaranteeing increases in the price of the lower end product which increase the desire to throw more resources (money) at the higher end product.

[fellow]

Was just wondering what mechanism will actually cause falls in house prices.

Like any market, once sellers exceed buyers I guess. Well FTB's are priced out of the picture and transactions are through the floor. So not that many buyers about.

But what would actually make someone sell? The way I see it, no one is going to sell their house for less than they bought it for [neg equity], or indeed what they believe it should be worth now [uK property owner mindset]. So they would need to be forced sellers, with no alternative left, i.e - they cannot afford the mortgage any more and have to move to a cheaper place or downsize. If some one loses their job and gets another one and has to commute 3 hours a day instead of 1, they will do it. If they have another baby and it has to share a room with a sibling, they will do that. Anything but sell for less.

Unemployment vs IR vs Inflation

I think people can cope with inflation. They will adjust, shop in Asda and not Sainsburies any more, no foreign holiday, maybe negotiate a day working from home per week, no more take outs or eating out. You get the picture. It will hurt but people will cope.

IR - I really dont see these increasing much. They have been far too low for too long so we know inflation is not the target any more, its protecting home owners that counts. And although I hate to admit it I can kind of see why. People can handle inflation but as long as they can pay the mortgage, that's all that counts to keep the whole game going. If IRs raise back anywhere near 4% or 5% that's going to hurt everyone's mortgage payment and they don't want to risk too many mortgage defaults and repo's. Anyway, they want inflation to erode the debt we have.

Unemployment is the only solid mechanism I see for price falls. This may come about slowly through the effect of inflation effecting luxury purchases of course, but this is going to take time. Of course there are more public sector cuts to come. I know the last unemployment measure was 7.9% back in December 2010. Do we know what the forecasts this year for further cuts? Surely the govt know how much they can push it before it starts to effect house prices.

I really don't see huge house price falls coming, just because people adapt and can survive just where they are. They will stick it out until the last. I can see a steady downward pressure on house prices though, maybe 5% a year for the next 5 years or something. That will be the return to the mean. Houses are not like stocks and shares that can be sold in an instant, they are peoples homes that people want to hold onto.

Unfortunately this is the reality that I have come to understand. Us FTB's are going to be kicking around for a while yet, trying to save a huge deposit in a high inflation, low IR environment. Maybe i will be buying in 2015.

thoughts please

What you are failing to realise is that as people 'make do' and cut back on unnecessary purchases, this itself creates unemployment as there is less demand for these goods and services. Also remember that thousands of people overstretched themselves when they bought at record prices and will not be able to afford an increase in their cost of living i.e. IR and inflation increasing whilst their salary remains stagnant or falls, so there will be many more repossessions.

[dances with sheeple]

Was just wondering what mechanism will actually cause falls in house prices.

Like any market, once sellers exceed buyers I guess. Well FTB's are priced out of the picture and transactions are through the floor. So not that many buyers about.

But what would actually make someone sell? The way I see it, no one is going to sell their house for less than they bought it for [neg equity], or indeed what they believe it should be worth now [uK property owner mindset]. So they would need to be forced sellers, with no alternative left, i.e - they cannot afford the mortgage any more and have to move to a cheaper place or downsize. If some one loses their job and gets another one and has to commute 3 hours a day instead of 1, they will do it. If they have another baby and it has to share a room with a sibling, they will do that. Anything but sell for less.

Unemployment vs IR vs Inflation

I think people can cope with inflation. They will adjust, shop in Asda and not Sainsburies any more, no foreign holiday, maybe negotiate a day working from home per week, no more take outs or eating out. You get the picture. It will hurt but people will cope.

IR - I really dont see these increasing much. They have been far too low for too long so we know inflation is not the target any more, its protecting home owners that counts. And although I hate to admit it I can kind of see why. People can handle inflation but as long as they can pay the mortgage, that's all that counts to keep the whole game going. If IRs raise back anywhere near 4% or 5% that's going to hurt everyone's mortgage payment and they don't want to risk too many mortgage defaults and repo's. Anyway, they want inflation to erode the debt we have.

Unemployment is the only solid mechanism I see for price falls. This may come about slowly through the effect of inflation effecting luxury purchases of course, but this is going to take time. Of course there are more public sector cuts to come. I know the last unemployment measure was 7.9% back in December 2010. Do we know what the forecasts this year for further cuts? Surely the govt know how much they can push it before it starts to effect house prices.

I really don't see huge house price falls coming, just because people adapt and can survive just where they are. They will stick it out until the last. I can see a steady downward pressure on house prices though, maybe 5% a year for the next 5 years or something. That will be the return to the mean. Houses are not like stocks and shares that can be sold in an instant, they are peoples homes that people want to hold onto.

Unfortunately this is the reality that I have come to understand. Us FTB's are going to be kicking around for a while yet, trying to save a huge deposit in a high inflation, low IR environment. Maybe i will be buying in 2015.

thoughts please

I had about ten points against what you said, but have been drinking, so here are two; 1) No credit means people can`t compete to pay the most anymore, so desperate sellers (elderly needing professional care for example) will have to take what they can get. This lowers the "value" of everything similar in the area. 2) The bit in bold, following your logic of hanging in until the end, must be a repo? that eventually follows the downward price trajectory of 1)?

3) is in relation to the idea that potential sellers will "circle the wagons" and wait out price drops. This to me is like the difference between mouthing off in the pub about what you would do to a burglar if you caught one, and actually disturbing a couple of tooled up burglars....... most people are likely to forget the bravado, and panic?

Edited January 16, 2011 by dances with sheeple

[voidal]

Was just wondering what mechanism will actually cause falls in house prices.

Like any market, once sellers exceed buyers I guess. Well FTB's are priced out of the picture and transactions are through the floor. So not that many buyers about.

But what would actually make someone sell? The way I see it, no one is going to sell their house for less than they bought it for [neg equity], or indeed what they believe it should be worth now [uK property owner mindset]. So they would need to be forced sellers, with no alternative left, i.e - they cannot afford the mortgage any more and have to move to a cheaper place or downsize. If some one loses their job and gets another one and has to commute 3 hours a day instead of 1, they will do it. If they have another baby and it has to share a room with a sibling, they will do that. Anything but sell for less.

Unemployment vs IR vs Inflation

I think people can cope with inflation. They will adjust, shop in Asda and not Sainsburies any more, no foreign holiday, maybe negotiate a day working from home per week, no more take outs or eating out. You get the picture. It will hurt but people will cope.

IR - I really dont see these increasing much. They have been far too low for too long so we know inflation is not the target any more, its protecting home owners that counts. And although I hate to admit it I can kind of see why. People can handle inflation but as long as they can pay the mortgage, that's all that counts to keep the whole game going. If IRs raise back anywhere near 4% or 5% that's going to hurt everyone's mortgage payment and they don't want to risk too many mortgage defaults and repo's. Anyway, they want inflation to erode the debt we have.

Unemployment is the only solid mechanism I see for price falls. This may come about slowly through the effect of inflation effecting luxury purchases of course, but this is going to take time. Of course there are more public sector cuts to come. I know the last unemployment measure was 7.9% back in December 2010. Do we know what the forecasts this year for further cuts? Surely the govt know how much they can push it before it starts to effect house prices.

I really don't see huge house price falls coming, just because people adapt and can survive just where they are. They will stick it out until the last. I can see a steady downward pressure on house prices though, maybe 5% a year for the next 5 years or something. That will be the return to the mean. Houses are not like stocks and shares that can be sold in an instant, they are peoples homes that people want to hold onto.

Unfortunately this is the reality that I have come to understand. Us FTB's are going to be kicking around for a while yet, trying to save a huge deposit in a high inflation, low IR environment. Maybe i will be buying in 2015.

thoughts please

Interesting post. Thought provoking....

I've notice pockets of strange (ie big) price reductions in places. There is no way of knowing what is going on, as the data is not available, but in some areas, where appararent, 'super drops' are occurring, it could be just one BTL dumping 5 properties on the market in a 'fire sale', or a small developer going bust. But everyone else carries on in denial etc...or do they, do they slowly realise that that 3 bed new build down the road 30K less than theirs will sell first.. or not.

I think all posts here are right to say it a slow process. But my scanning or areas seems to throw up price collapse in the mid-budget 3 bed area (East yorkshire), which is kind of odd, with all the supposed downsizing.. etc.

I'd love to have all the detailed information and shove it in a computer and analyse it.

Edited January 16, 2011 by voidal

[voidal]

I had about ten points against what you said, but have been drinking, so here are two; 1) No credit means people can`t compete to pay the most anymore, so desperate sellers (elderly needing professional care for example) will have to take what they can get. This lowers the "value" of everything similar in the area. 2) The bit in bold, following your logic of hanging in until the end, must be a repo? that eventually follows the downwrd price trajectory of 1)?

Touche. You beat me to it.

But I'm not drunk enough to admit I've been drinking

Edited January 16, 2011 by voidal

[catmandu]

I had about ten points against what you said, but have been drinking, so here are two; 1) No credit means people can`t compete to pay the most anymore, so desperate sellers (elderly needing professional care for example) will have to take what they can get. This lowers the "value" of everything similar in the area. 2) The bit in bold, following your logic of hanging in until the end, must be a repo? that eventually follows the downwrd price trajectory of 1)?

Yep, that alone is good enough for me. People can hang onto the their houses as long as they like as long as they can afford it, but there are always plenty people who need to sell, and it is them that determine the new market value. A temporary reduction in volumes is possible - 3-5 years of low volumes is untenable - people won't/can't wait forever to get on with their lives. It's a cold war at present, but it won't last much longer.

[OnlyMe]

Simple.

People are going to run out of money.

Renters, btl'ers, new owners, old owners, pensioners on fixed incomes, overpending middle aged, anybody who is on a stretched budget is going to get crippled by inflation.

[dances with sheeple]

Touche. You beat me to it.

But I'm not drunk enough to admit I've been drinking

think I had a third point to make, just dragging myself to the keyboard to make it now

[dances with sheeple]

Yep, that alone is good enough for me. People can hang onto the their houses as long as they like as long as they can afford it, but there are always plenty people who need to sell, and it is them that determine the new market value. A temporary reduction in volumes is possible - 3-5 years of low volumes is untenable - people won't/can't wait forever to get on with their lives. It's a cold war at present, but it won't last much longer.

Yes, that nails it, without returning to the ponzi/cheap money/ make loans to make bonus or commission system, house prices cannot survive at present levels.

and, when sentiment turns to debt aversion/property aversion, as it is doing now, nothing, absolutely nothing will stop prices collapsing.

Edited January 16, 2011 by dances with sheeple

[dances with sheeple]

Interesting post. Thought provoking....

I've notice pockets of strange (ie big) price reductions in places. There is no way of knowing what is going on, as the data is not available, but in some areas, where appararent, 'super drops' are occurring, it could be just one BTL dumping 5 properties on the market in a 'fire sale', or a small developer going bust. But everyone else carries on in denial etc...or do they, do they slowly realise that that 3 bed new build down the road 30K less than theirs will sell first.. or not.

I think all posts here are right to say it a slow process. But my scanning or areas seems to throw up price collapse in the mid-budget 3 bed area (East yorkshire), which is kind of odd, with all the supposed downsizing.. etc.

I'd love to have all the detailed information and shove it in a computer and analyse it.

First bold point; people do realise, and start to cack themselves almost immediately?

2nd bold point; sheeple jumped in with the best LIAR LOAN they could get, and took the best/biggest they could get (all the better to sell on later?)

Edited January 16, 2011 by dances with sheeple

[pandora's box]

I think the repossession process has been dramatically lengthened since the start of the credit crunch. Can anyone confirm this?

[voidal]

First bold point; people do realise, and start to cack themselves almost immediately?

2nd bold point; sheeple jumped in with the best LIAR LOAN they could get, and took the best/biggest they could get (all the better to sell on later?)

I have to say...... I havent got a clue. You could be right?

But here's the biggie..

The house price index is based on an AVERAGE, which includes prices in London, which are very high and 'worth a lot'.

What we might start seeing is collapse in specific areas, which ripples across the country.

I could buy a six bed victorian terrace near me for cash at a seaside town, but could just manage a 3 bed repo council house where I currently live (before I get flamed here, I'm 45 and have never property speculated, just paid my mortage on a 3X salary for 20 years)

[voidal]

I have to say...... I havent got a clue. You could be right?

But here's the biggie..

The house price index is based on an AVERAGE, which includes prices in London, which are very high and 'worth a lot'.

What we might start seeing is collapse in specific areas, which ripples across the country.

I could buy a six bed victorian terrace near me for cash at a seaside town, but could just manage a 3 bed repo council house where I currently live (before I get flamed here, I'm 45 and have never property speculated, just paid my mortage on a 3X salary for 20 years)

By that I mean........ Take London and the southeast out of the equation, and we are in the cack..

And to those in the southeast. ..Dont feel too smug and be careful my friends.

[dances with sheeple]

I have to say...... I havent got a clue. You could be right?

But here's the biggie..

The house price index is based on an AVERAGE, which includes prices in London, which are very high and 'worth a lot'.

What we might start seeing is collapse in specific areas, which ripples across the country.

I could buy a six bed victorian terrace near me for cash at a seaside town, but could just manage a 3 bed repo council house where I currently live (before I get flamed here, I'm 45 and have never property speculated, just paid my mortage on a 3X salary for 20 years)

Not sure I understand that without links/reference to areas.

[the flying pig]

good ramping.

it's always the same types who say 'well, yes, prices may go down by a percentage point or two, but think of the long term, they always go up' who think in a surprisingly short-term way when it comes to affordabilidee calculations.

[dances with sheeple]

By that I mean........ Take London and the southeast out of the equation, and we are in the cack..

And to those in the southeast. ..Dont feel too smug and be careful my friends.

Surely most of London and the South East is just as credit reliant, if not public sector reliant as the rest of the country?

[voidal]

Surely most of London and the South East is just as credit reliant, if not public sector reliant as the rest of the country?

Indeed, I hadnt thought about it like that. in the south east, its ALL propped up by credit, maybe I should NOT feel in awe of all the people driving inj 4x4 cars costing 3/4 times the price of mine, when I think I'm earning a good salery myself.... False envy..they just borrowed for it?

But its all about 'business confidence model' isnt it.

I do have this worry that I will be compleytely wrong, now that I have sold to rent, and that house prices will go up.

But SURELY, it's a crock of irrational SH*T we are living through with this bubble......

Edited January 17, 2011 by voidal

[voidal]

Not sure I understand that without links/reference to areas.

East yorkshire - Beverley seems stable (ie middle class afluent), outlying rural zones near coast, big drops in some areas, but hard to say any statistical meaning, as I a BTL landlord dumps a few properties in such a small market, it looks like a significant crash..

Except, well if 4 3 bed terraced houses come on the market at £69,000 would anyone look at similar £79000 3 bed terraced, let alone the 3 bed terrced up for sale two year ago at £100K plus.

Think the north might get it bad.... ?

[Wannabebear]

What you are failing to realise is that as people 'make do' and cut back on unnecessary purchases, this itself creates unemployment as there is less demand for these goods and services. Also remember that thousands of people overstretched themselves when they bought at record prices and will not be able to afford an increase in their cost of living i.e. IR and inflation increasing whilst their salary remains stagnant or falls, so there will be many more repossessions.

Fellow:

Well i do recognise this - "This may come about slowly through the effect of inflation effecting luxury purchases of course, but this is going to take time". Maybe I was not as explicit as I could have been.

But when they bought at record prices as you put it, IRs were not at 0.5. So now all mortgages are cheaper than they ever have been for existing home owners. So they already have a big cushion. My belief is IRs will be sub 1% for quite some time. Inflation will be through the roof, but I think this is all part of the grand plan.

[Wannabebear]

Yep, that alone is good enough for me. People can hang onto the their houses as long as they like as long as they can afford it, but there are always plenty people who need to sell, and it is them that determine the new market value. A temporary reduction in volumes is possible - 3-5 years of low volumes is untenable - people won't/can't wait forever to get on with their lives. It's a cold war at present, but it won't last much longer.

catmandu:

This is kind of my point - who really needs to sell? When houses were more affordable and we had a fully functional ladder, people could progress upwards. So settle down, have a kid, get a 2 bed. Have another kid, get a 3 bed. Once the kids are out of childcare etc maybe they have some more money available, move up and get a 4 bed until retirement with a view to downsize at some point.

All this is because they had the option to do so. Cant do that now so people will make do. Have 1 or 2 kids and put them in the same bedroom. My Job is now 2 hours away but so what, commute. None of this will kill people, it just makes everything a little harder.

Of course, everyone dies and those properties need to sell. And those type of properties (bungalow, old peoples homes) will be bought by people who have owned for like 40 years and have tonnes of equity.

Alright, you can make a case out of separations I suppose. Anyone have any stats on divorce rates?

Just what is going to cause a flood of properties onto the market - only forced sellers as I see it. These would be people who bought at 0.5% base rate (last 2 years?) and wont cope with small IR increases and high general inflation.

Last I saw repo rates were dropping due to low IRs. I think we were running at 10,000 in the 3 months prior to October in 2010. Maybe we will start to see these pick up again in 2011?

[W1zard]

With regards to forced sales. I know of three different couples who have split within the last few months and are now listing their properties in an attempt to go their seperate ways. I think if you were to have a serious look at forced sales there would be far more than people realise.

Another group of people who may try to escape by selling up sooner rather than later are the people who have a fair amount of equity having held something for six or seven years and who maybe reluctanct to watch that equity evaporate with the ongoing monthly falls.

[Guest]

Cautious banks will also play a part in bringing the prices down (in the same way they lead the market up, they'll bring it down).

Mortgages are all based on LTV (loan to value), whether they lend 80%, 95% or 100% LTV, it is always based on their valuation of the property at the time of the mortgage application. If banks think house prices will fall, the amount they offer to lend will fall too. So if they think 3 bed terraces in a particular town are going to fall 20%, the amount they lend for such properties will fall accordingly.

As a result of this, when people's fixed rate mortgages come to an end, their (previously) 200k house is now worth only 150k, but they have 175k of mortgage.... they have no choice but to stay on their existing bank's (expensive) standard variable rate, because no other bank will touch them with a bargepole.

This will lead to increased mortgage payments, which along with VAT, NI increase, base rate increase.... will cause forced sales, or repos.

[dances with sheeple]

Fellow:

Well i do recognise this - "This may come about slowly through the effect of inflation effecting luxury purchases of course, but this is going to take time". Maybe I was not as explicit as I could have been.

But when they bought at record prices as you put it, IRs were not at 0.5. So now all mortgages are cheaper than they ever have been for existing home owners. So they already have a big cushion. My belief is IRs will be sub 1% for quite some time. Inflation will be through the roof, but I think this is all part of the grand plan.

Not only luxury products though? easy to stop buying them, they are not the problem. Home owners who mewed, or didn`t pay down capital on their loan will have no cushion, there are plenty of pips about to start squeaking IMO. Inflation is just one more trigger for overstretched debtowners to put (especially second homes) on the market at way below peak prices.

Edited January 17, 2011 by dances with sheeple