Jump to content
House Price Crash Forum
Tired of Waiting

Wall Street Journal: " U K's Housing Bubble Put The U S's In The Shade"

Recommended Posts

From the Wall Street Journal:

http://online.wsj.com/article/SB10001424052702303657404576361491383794696.html?mod=googlenews_wsj

U.K. Housing Sits on Aspic, Not Firmer Foundations

By ALEN MATTICH

Little more than a year ago, Jeremy Grantham, co-founder of asset-management firm GMO, said U.K. residential real estate was one of the two bubbles to survive the financial crisis intact.

Fourteen months later, ballpark estimates suggest British residential property is still about a third over-valued.

Mr Grantham's contention may seem odd, considering U.K. house prices were down 20% from their August 2007 peak when he made it. But in truth, it merely reflected the degree to which British residential property became over-valued during its decade-long boom.

The U.K.'s housing bubble put the U.S.'s in the shade. At their peak, U.K. house prices were at around 5.8 times average earnings, against a normal ratio outside of bubbles of around 3.4 times. They're currently around 4.4 times. By contrast, the U.S.'s ratio of house prices to median income peaked at around 4.8 times, against a trend rate, like the U.K.'s, of around 3.4 times.

Indeed, the U.K. property bubble was more akin to that seen in Japan in the late 1980s. This is a comparison to chill British homeowners' blood, because Japanese property prices have slid for the best part of 20 years.

So far, the Bank of England has managed to underpin the market. Its zero-interest-rate policy and sterling's 25% devaluation from its 2007 peak have helped stabilize prices. But this stability is now looking vulnerable.

Indeed, the U.K. housing market seems to be set more in aspic than on firm foundations. The number of mortgage approvals by banks is running at a mere 40% of where they averaged during the five years leading to the market's peak. The current rate of approvals is only two-thirds of what economists say is necessary to maintain stable prices.

The BOE's commitment notwithstanding, the aspic is wobbling.

British household incomes are under assault on three fronts. Relatively high levels of unemployment are keeping a lid on earnings growth, while these lackluster pay rises are also being eroded by inflation. At the same time, the government's austerity program is pushing up taxes and cutting benefits, taking a further bite out of incomes. The Institute for Fiscal Studies estimates real household income has fallen 1.6% during the past three years and the Bank of England's own estimates are for further declines during the rest of this year and possibly next.

These effects have been most obvious in the U.K.'s regions. House prices in the north of England are down 27% on their peak, while Northern Ireland, which has also been bludgeoned by the Irish Republic's sovereign-debt crisis, has seen a 50% drop.

By contrast, prices in the South East are down only 12%. And, according to some surveys, the top end of the London market is back to record highs, having risen by a third in the past two years. London property has benefited from instability across the Middle East, sovereign-debt crises across the euro zone's fringes and newfound wealth from across commodity-rich former Soviet countries and, increasingly, China. It has long been seen as a safe haven; international plutocrats have always bought houses in the capital and country estates in its surrounding counties.

But as global growth slows, so too will the flow of cash into Knightsbridge (and Chelsea and Hampstead and Belgravia) bricks and mortar. At the same time, rising tax rates make the U.K. look ever less like a haven for the rich.

Eventually, even London property will start to reflect the reality of British economics.

The big risk is that U.K. real estate suffers a dramatic collapse. The second big risk is that it takes decades to return to normality, much as has happened in Japan.

With the former, the fallout would result in serious problems for the financial sector and consequently the wider economy. The U.S.'s most over-valued markets at the peak, like Las Vegas and Miami, show how crippling a quick price deflation can be. But a slow fall in prices would grind away at the economy for a long time. Zombie households predominate when young buyers can't afford to get onto the housing ladder, while those already on it don't want to discount their houses to make a sale. The less dynamic households are, the more the economy overall will struggle.

Another risk is that the Bank of England has left the U.K. with such a deep addiction to cheap money that it won't be able to raise interest rates even if high inflation becomes embedded. Last month, its governor, Mervyn King, made clear that U.K. households' burden of debt meant interest rates would stay low. By last summer, the proportion of interest-only mortgages had risen to 43% from 40% three years earlier, according to a recent report by the Daily Telegraph newspaper.

At the same time, the proportion of loans shifting to variable interest rates is also worryingly high. By the end of 2010, 43% of U.K. mortgages were on variable rates or linked to the Bank of England's base rate, while 48% were on fixed rates.

Of course, U.K. house prices have had a tendency to wrong-foot the bearish. Mr. Grantham has been skeptical about the U.K. property market for a long time. Just as he was skeptical about the tech and telecom bubble. And the U.S. housing bubble.

Edited by Tired of Waiting

Share this post


Link to post
Share on other sites

May as well add link to this article by Mish here rather than new thread.

US nominal house prices are down to their late 90s level.

Yes, nominal.

If our bubble is bigger than theirs...

Thanks tahoma.

Case-Shiller%2B2011-03%2BB.png

Though the scariest thing for the UK would be the "Japanese scenario". See below, from an old post:

Japan - Houses and Land prices falling for 17 years, since 1992, to the present. (And are still falling.)

Could it happen here? Why not?

Note that the argument "but Britain is a small crowded island" won't work this time, as Japan is also an island, and even more crowded - with a higher population density.

Charts: Japan, prices of land and housing falling for 17 year, 1992-present.

Source: http://www.globalpropertyguide.com/real-es...-house-prices/J

Note that the left-hand charts shows prices CHANGES, not prices LEVELS.

japanhousesandland.png

Left-hand charts shows prices CHANGES, not prices LEVELS.

Edited by Tired of Waiting

Share this post


Link to post
Share on other sites

Is my thread not good enough for you? :D

Hi hotairmail, I hadn't "recognised" you, changing name and avatar at the same time.

I've just looked around, found your thread, yes, very interesting, but I think the angles are very different. No need to be touchy though, nothing personal.

Share this post


Link to post
Share on other sites

ToW, you posted the graph of the most expensive areas. The least expensive areas are even more of a nosebleed.

Remember bulls, just keep chanting: It can't happen here, it can't happen here, it can't happen here.

Oprah pushed that book, The Secret, which stated that if you wish hard enough it will come true. You can't go wrong.

Share this post


Link to post
Share on other sites

ToW, you posted the graph of the most expensive areas. The least expensive areas are even more of a nosebleed.

Remember bulls, just keep chanting: It can't happen here, it can't happen here, it can't happen here.

Oprah pushed that book, The Secret, which stated that if you wish hard enough it will come true. You can't go wrong.

Yes, I know, exactly 'cause some people here think that "good areas" never fall... :rolleyes: whilst actually markets are usually frothier at the top.

.

Edited by Tired of Waiting

Share this post


Link to post
Share on other sites

"The U.K.'s housing bubble put the U.S.'s in the shade. At their peak, U.K. house prices were at around 5.8 times average earnings, against a normal ratio outside of bubbles of around 3.4 times. They're currently around 4.4 times. By contrast, the U.S.'s ratio of house prices to median income peaked at around 4.8 times, against a trend rate, like the U.K.'s, of around 3.4 times."

the average salry is around 25K

4.4*25K= £112K.

the actual average price is £160K (Halifax) or £165K (Nationwide)

3.4 times is about £85K....we therefore are 50% overvalued.

Share this post


Link to post
Share on other sites

I'm trying to make sense of this para:

At the same time, the proportion of loans shifting to variable interest rates is also worryingly high. By the end of 2010, 43% of U.K. mortgages were on variable rates or linked to the Bank of England's base rate, while 48% were on fixed rates.

So 43% variable, 48% fixed, leaving 9% doing what???

Also, variable and BOE-tracker are two different beasts. SVR is generally far higher than a tracker, especially if the tracker was set up before September 2007. What you really need to know is how many people are on ridiculously low rates but will be moving to SVRs in due course. Basically the low 2-year and 3-year trackers have expired. The 5-year trackers will expire next year, and the 10-year and full-term trackers are good for ages.

Share this post


Link to post
Share on other sites

"The U.K.'s housing bubble put the U.S.'s in the shade. At their peak, U.K. house prices were at around 5.8 times average earnings, against a normal ratio outside of bubbles of around 3.4 times. They're currently around 4.4 times. By contrast, the U.S.'s ratio of house prices to median income peaked at around 4.8 times, against a trend rate, like the U.K.'s, of around 3.4 times."

the average salry is around 25K

4.4*25K= £112K.

the actual average price is £160K (Halifax) or £165K (Nationwide)

3.4 times is about £85K....we therefore are 50% overvalued.

And there will be an undershoot.

Share this post


Link to post
Share on other sites

"The U.K.'s housing bubble put the U.S.'s in the shade. At their peak, U.K. house prices were at around 5.8 times average earnings, against a normal ratio outside of bubbles of around 3.4 times. They're currently around 4.4 times. By contrast, the U.S.'s ratio of house prices to median income peaked at around 4.8 times, against a trend rate, like the U.K.'s, of around 3.4 times."

the average salry is around 25K

4.4*25K= £112K.

the actual average price is £160K (Halifax) or £165K (Nationwide)

3.4 times is about £85K....we therefore are 50% overvalued.

IIRC the average earnings ( = salary?) was a bit higher than that.

Share this post


Link to post
Share on other sites

IIRC the average earnings ( = salary?) was a bit higher than that.

Nah, ons median national is around 25k. For males around 27.

Share this post


Link to post
Share on other sites

IIRC the average earnings ( = salary?) was a bit higher than that.

The bubblicious crowd like to perform a neat trick of looking at old time statistics and using what was then single income borrowing and then when they extrapolate more towards now start using joint.

Share this post


Link to post
Share on other sites

"The U.K.'s housing bubble put the U.S.'s in the shade. At their peak, U.K. house prices were at around 5.8 times average earnings, against a normal ratio outside of bubbles of around 3.4 times. They're currently around 4.4 times. By contrast, the U.S.'s ratio of house prices to median income peaked at around 4.8 times, against a trend rate, like the U.K.'s, of around 3.4 times."

the average salry is around 25K

4.4*25K= £112K.

the actual average price is £160K (Halifax) or £165K (Nationwide)

3.4 times is about £85K....we therefore are 50% overvalued.

+1.

Maybe they were referring to the average salary of a housebuyer, not the population in general?

Share this post


Link to post
Share on other sites
So far, the Bank of England has managed to underpin the market. Its zero-interest-rate policy and sterling's 25% devaluation from its 2007 peak have helped stabilize prices. But this stability is now looking vulnerable.

Jean Claude Rampancee, a famous French depressive, threw himself off the Eifel Tower on 23rd January 1924 and shouted out to shocked onlookers about half way to the ground: Everything is fine, so far.

The property market in the Uk proves that you can run but you cannot hide because they are going to get you in the end.

I think it is finally here.

Share this post


Link to post
Share on other sites

"The U.K.'s housing bubble put the U.S.'s in the shade. At their peak, U.K. house prices were at around 5.8 times average earnings, against a normal ratio outside of bubbles of around 3.4 times. They're currently around 4.4 times. By contrast, the U.S.'s ratio of house prices to median income peaked at around 4.8 times, against a trend rate, like the U.K.'s, of around 3.4 times."

the average salry is around 25K

4.4*25K= £112K.

the actual average price is £160K (Halifax) or £165K (Nationwide)

3.4 times is about £85K....we therefore are 50% overvalued.

That old HPC nonsense again, people never bought average houses at 3.5 x single average salary (not in the SE anyway). They got mortgages restricted to that - a very different thing as couples started on cheaper flats etc and graduated to 'ave 3-bed semi' when they had some equity and much bigger deposit. Average price was >4 x ave wage every place I've lived in SE even in 1994 at trough. Currently around 25% overvalued by my reckoning.

Share this post


Link to post
Share on other sites

"The U.K.'s housing bubble put the U.S.'s in the shade. At their peak, U.K. house prices were at around 5.8 times average earnings, against a normal ratio outside of bubbles of around 3.4 times. They're currently around 4.4 times. By contrast, the U.S.'s ratio of house prices to median income peaked at around 4.8 times, against a trend rate, like the U.K.'s, of around 3.4 times."

the average salry is around 25K

4.4*25K= £112K.

the actual average price is £160K (Halifax) or £165K (Nationwide)

3.4 times is about £85K....we therefore are 50% overvalued.

It used to be 3.5 x single earnings, not joint. If houses were as "affordable" as the 70's and (very early) 80's a single guy on the equivalent of NMR would just be able to buy a small terrace. (assuming he could raise the deposit or get a guarantor).

Edited by Sir John Steed

Share this post


Link to post
Share on other sites

That old HPC nonsense again, people never bought average houses at 3.5 x single average salary (not in the SE anyway). They got mortgages restricted to that - a very different thing as couples started on cheaper flats etc and graduated to 'ave 3-bed semi' when they had some equity and much bigger deposit. Average price was >4 x ave wage every place I've lived in SE even in 1994 at trough. Currently around 25% overvalued by my reckoning.

Sigh. Can we have a sticky please about house prices vs. wage multiples, so that every time this old chestnut comes up, we can direct the misguided there?

Share this post


Link to post
Share on other sites

That old HPC nonsense again, people never bought average houses at 3.5 x single average salary (not in the SE anyway). They got mortgages restricted to that - a very different thing as couples started on cheaper flats etc and graduated to 'ave 3-bed semi' when they had some equity and much bigger deposit. Average price was >4 x ave wage every place I've lived in SE even in 1994 at trough. Currently around 25% overvalued by my reckoning.

They did, as I did it and some did many of my friends. The only real difference was that in London you got a flat, in the Midlands NE money would stretch to a terrace on a below average salary. In the 80's I was on below average salary.

In the Northampton street I bought in, in the 80;s nearly all the houses were owner occupied by former shoe workers, not well paid by any means, on a single income, wives rarely worked, mortgages all paid off early.

Share this post


Link to post
Share on other sites

That old HPC nonsense again, people never bought average houses at 3.5 x single average salary (not in the SE anyway). They got mortgages restricted to that - a very different thing as couples started on cheaper flats etc and graduated to 'ave 3-bed semi' when they had some equity and much bigger deposit. Average price was >4 x ave wage every place I've lived in SE even in 1994 at trough. Currently around 25% overvalued by my reckoning.

nope...1981..we bought...my wage...5000, plus the wifes 4000 gave us a 23K three bedroom end of terrance ( now £165K)...and that was a staff bank loan with very strict income criteria...3 times main plus second AND a deposit.

Chelmsford.

Share this post


Link to post
Share on other sites

IIRC the average earnings ( = salary?) was a bit higher than that.

bit higher, bit lower, its still a long way to go.

Share this post


Link to post
Share on other sites

nope...1981..we bought...my wage...5000, plus the wifes 4000 gave us a 23K three bedroom end of terrance ( now £165K)...and that was a staff bank loan with very strict income criteria...3 times main plus second AND a deposit.

Chelmsford.

Our mortgage was on those terms in 1976 and because it was an old house, limited to twenty years. We went for an endowment mortgage which worked out nicely.

Share this post


Link to post
Share on other sites

I wonder if it's coincidence that GBP has been dropping steadily, against pretty much every other major currency, for the last few days.

Yes, the WSJ is probably the most influential financial paper in the world.

And as we still have a large trade deficit, the GBP will have to fall at some point. The markets must know that.

Share this post


Link to post
Share on other sites

Yes, the WSJ is probably the most influential financial paper in the world.

And as we still have a large trade deficit, the GBP will have to fall at some point. The markets must know that.

I was chatting to my French bank manager the other day (I'm in France for a few months) and asked him if, in his opinion, the EUR was in trouble over problems with the PIIGS and should I be concerned about my substantial EUR deposit in his bank. He smiled and said "If I were you I'd be more worried about your Sterling deposits in your UK bank".

Share this post


Link to post
Share on other sites

I was chatting to my French bank manager the other day (I'm in France for a few months) and asked him if, in his opinion, the EUR was in trouble over problems with the PIIGS and should I be concerned about my substantial EUR deposit in his bank. He smiled and said "If I were you I'd be more worried about your Sterling deposits in your UK bank".

In other news, ford car salesmen says ford cars are the best in the world.

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...

  • Recently Browsing   0 members

    No registered users viewing this page.

  • 312 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%



×
×
  • Create New...

Important Information

We have placed cookies on your device to help make this website better. You can adjust your cookie settings, otherwise we'll assume you're okay to continue.