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UK house prices have begun their 50% decline-Paul Hodges calls it

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Paul Hodges Blog 12/12/16

'

London house prices start their collapse

By Paul Hodges on 12 December, 2016 in Financial Events

House prices Dec16

London’s The UK's house market has been slowing for some time, as I noted last year.  The issue is affordability.  Artificially low interest rates make the monthly payment seem cheap.  But the key question is whether your salary will allow you to repay the capital borrowed over time.

Sadly, this has become increasingly impossible for many actual and potential buyers, due to the Bank of England’s increasing use of stimulus policies since 2000.

The chart shows house prices on the left, and the ratio to earnings on the right. (Prices are adjusted for inflation since 1971, to enable long-term comparison):

  Prices used to fluctuate between ratios to earnings of 3x to 6x
  The market would bottom when prices were around 3x average earnings, and peak at around 6x earnings

But after the dotcom crash in 2000, the Bank deliberately allowed prices to move out of line with earnings  As the Governor, Eddie George, later told the UK Parliament in March 2007:

“When we were in an environment of global economic weakness at the beginning of the decade, it meant that external demand was declining… One had only two alternatives in sustaining demand and keeping the economy moving forward: one was public spending and the other was consumption….

“We knew that we had pushed consumption up to levels that could not possibly be sustained in the medium and longer term.  But for the time being if we had not done that the UK economy would have gone into recession, just like the economies of the United States, Germany and other major industrial countries. That pushed up house prices and increased household debt. That problem has been a legacy to my successors; they have to sort it out.”

Of course, as the chart shows, George’s successors did the very opposite.  Ignoring the fact that a bubble was already underway, they instead reduced interest rates to near-zero after the subprime crisis of 2008, and flooded the market with liquidity.  Naturally enough, prices then took off into the stratosphere.

Back in January 2015, I suggested in an interview with the UK’s Moneyweek magazine that:

“We’ve seen price falls in the housing market in the past in the early 1990s and they went down 50% in real terms, and I think that we’re at the start of that kind of decline now …it’s just something we have to go through to get to reality.”

The problem, of course, is that a bubble of this size, deliberately encouraged by a major central bank over more than a decade, does not just unwind of its own accord.  It needs an external catalyst.  And as I suggested at the end of June, the Brexit vote seems to have become such a catalyst:

  The interest rate rises that Brexit has already caused have now led major lenders to increase their mortgage rates
  Buy-to-let sales, which were the main force behind the ascent to such dizzying heights, have fallen by over 50%
  A further hit is on the way, as Airbnb has agreed to limit landlords’ London lettings to no more than 90 days/year
  Transaction volumes (usually a good leading indicator for prices) have also plunged from 15 to just 9 per surveyor

Prices have not yet started to fall on a widespread basis, but the top end of the market is already seeing falls of up to 40%, as a leading broker told Bloomberg last week:

“It’s a substantial reduction, fully reflecting the challenging post-Brexit market of today”

With prices now collapsing at the top end, it is likely that prices further down the scale will soon start to be impacted.

This is, of course, unlikely to happen overnight.  As in the past, it will take years for the full collapse to take place. The reason is that buyers tend to disappear when prices start to fall and interest rates start rising.  Anyone owning a home may therefore have to wait a long time until a buyer appears – even if the price has been greatly reduced.

This will be a disaster for many buyers, who believed the assurances of the experts that prices would always rise, due to London having now become a “global city”.  First-time buyers will be badly hit, as they have less equity in their homes, and will discover they have bought at prices which were up to double normal price/earnings ratios:

  They probably never knew that Nationwide data showed first-time buyer ratios in London were as low as 3.7 in 1983
  Nor did they know that ratios fell to 2.6x earnings at the bottom of the last major downturn in 1995/6
  Instead, they were encouraged to buy at ratios ranging from 6.2x in 2010 up to this year’s peak of 10.4x

Plenty of people are already angry about the housing market, due to rents having soared due to the bubble that has been created.  I fear this anger will seem like a child’s tantrum, however, if prices do now start to fall back to their normal ratios to earnings.'

 

Clearly,this will be nationwide.

Hodges is spot on.Brexit is the catalyst.The moment the renters bit back.

Guido Fawkes 7/12/16

'A report out this morning from the National Centre for Social Research ......70% of voters in local authority rented homes voted Leave, as did 68% of those in housing association accommodation.

report1.jpg?resize=540%2C145

66% of those earning less than £1,200 per month backed Brexit, as well as 53% in Wales, 58% in Yorkshire, 54% in the North West and 58% in the North East.

report2.jpg?resize=514%2C114

70% of people who said their financial situation was a struggle backed Brexit, as did 59% of those identifying as working class.

report3.jpg?resize=539%2C115

Even 40% of ‘young working class Labour voters’ backed Brexit.'

 

 

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I really don't see this ending with cheap houseprices, rather the destruction of the currency.  There are too many other issues that need dealing with at the same time.  

The mantra of the last 30 years has been extend and pretend. No way to reverse what they have done.

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5 minutes ago, TheCountOfNowhere said:

Paul Hodges calls it ...18 moths after it started.

Huh, prices arent falling anywhere apart from super prime London, and we know it is a totally separate market.  It takes time for sentiment to change natioinally, take your mate for example, he needs to feel pain before he throws in the towel. 

Edited by GreenDevil

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“We knew that we had pushed consumption up to levels that could not possibly be sustained in the medium and longer term.  But for the time being if we had not done that the UK economy would have gone into recession, just like the economies of the United States, Germany and other major industrial countries. 

This is the bit that always gets me. Recessions always used to be understood as a natural part of the economic cycle - even necessary, to some extent. When/why/how did government policy change to become "prevent recessions at all costs"? Quite simply, it seems to be this change of policy that has got us into the mess we are in now, and you can date this all the way back to the policy response after the dot com collapse.

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We're all controlled by what happens to the almighty dollar. That's what controls the market.

The value gap between the Dollar and Sterling is primarily controlled by interest rates. Everyone is selling off bonds in expectation of higher rates... it's going to be a painfully slow correction.

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8 minutes ago, mattyboy1973 said:

 

 

This is the bit that always gets me. Recessions always used to be understood as a natural part of the economic cycle - even necessary, to some extent. When/why/how did government policy change to become "prevent recessions at all costs"? Quite simply, it seems to be this change of policy that has got us into the mess we are in now, and you can date this all the way back to the policy response after the dot com collapse.

Recessions mean falling asset prices, and if you are in the 1%, you dont want that, after all recsessions can be avoided by printy Printy, you have an excuse to sell to the masses... Easy way to kick start your asset prices to the stratosphere.

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Just now, GreenDevil said:

Recessions mean falling asset prices, and if you are in the 1%, you dont want that, after all recsessions can be avoided by printy Printy, you have an excuse to sell to the masses... Easy way to kick start your asset prices to the stratosphere.

Yeah, I can agree with that to some extent but it doesn't really explain the policy shift. As far as I am aware we simply didn't get this "pull out all the stops" approach to preventing recessions prior to 2000. So why the change? Because they realised they could?

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1 minute ago, mattyboy1973 said:

Yeah, I can agree with that to some extent but it doesn't really explain the policy shift. As far as I am aware we simply didn't get this "pull out all the stops" approach to preventing recessions prior to 2000. So why the change? Because they realised they could?

Rise of the banksters.

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1 hour ago, mattyboy1973 said:

 

 

This is the bit that always gets me. Recessions always used to be understood as a natural part of the economic cycle - even necessary, to some extent. When/why/how did government policy change to become "prevent recessions at all costs"? Quite simply, it seems to be this change of policy that has got us into the mess we are in now, and you can date this all the way back to the policy response after the dot com collapse.

 

Forget your old fashioned thinking - the 'authorities' now exist to 'protect' people from any sort of disruption.

Don't question all the stuff they do behind the financial curtain, it's for our own good.  Like all those silly civil liberties they are removing to protect us from physical harm (evil terrorists) and the way they watch us 24x7 to keep us safe.  Only some sort of dissident would question it ....

 

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4 hours ago, mattyboy1973 said:

 

 

This is the bit that always gets me. Recessions always used to be understood as a natural part of the economic cycle - even necessary, to some extent. When/why/how did government policy change to become "prevent recessions at all costs"? Quite simply, it seems to be this change of policy that has got us into the mess we are in now, and you can date this all the way back to the policy response after the dot com collapse.

That would be Wrecker Gordon.

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4 hours ago, mattyboy1973 said:

 

 

This is the bit that always gets me. Recessions always used to be understood as a natural part of the economic cycle - even necessary, to some extent. When/why/how did government policy change to become "prevent recessions at all costs"? Quite simply, it seems to be this change of policy that has got us into the mess we are in now, and you can date this all the way back to the policy response after the dot com collapse.

Specifically it was the economic orthodoxy introduced by Alan Greenspan, who was a very senior advisor to all and sundry including the uk treasury via Gordon Brown.

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5 hours ago, mattyboy1973 said:

Yeah, I can agree with that to some extent but it doesn't really explain the policy shift. As far as I am aware we simply didn't get this "pull out all the stops" approach to preventing recessions prior to 2000. So why the change? Because they realised they could?

We haven't had it post 2000 either. Unless you missed it we have had 2 recessions since 2000, one of them the largest in 100 years, co-incident with the collapse of the global financial system

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Re asset prices (UK house prices) & OP we are already in the 10th year since the collaterised derivatives started to implode and are still along way from seeing the discount rate 'normalise' in post-war terms. It's not clear to me why anyone is expecting it to do so significantly in perhaps even the next 10 years. 

Perhaps someone who believe in this imminent collapse (they are apparently numerous & must have a rationale underpinning their thinking) could explain the process/channels/drivers 

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32 minutes ago, Grumpysod said:

Like me you just have a large dose of being desensitised to what should be reality. My head totally knows that people are now financially  stretched beyond belief, every weapon that was used to save us post 2007 is now not available, this bubble has been blown far bigger than anyone could have predicted, yet probably like you my heart feels like house prices will never go back to some kind of normality, but they will, it just feels impossible.

A few people on here have made the point "the markets can say irrational longer than you can stay solvent", how true that is.

There is an obsession in my generation (millennials) with property. They've been told house prices will go up indefinitely, it's the only way to acquire any wealth or savings (because we all know wages aren't going up anytime soon), and they've rationalised taking on huge amounts of debts because if they don't "get on the ladder" now, they never will. A friend of mine recently told me that her partner doesn't want to get a huge mortgage and doesn't think the properties for sale are worth that amount of money, but feels like he's not successful if he doesn't own something. He feels like he's "fallen behind" his peers. Another bought a house in Brixton last year and were distressed that it had lost x% of value since (why are you tracking the "value" of a house you just moved into if you purchased it to live in?). A lot of them truly believe the value some EA told them is actual money in the bank and so feel comfortable splashing out on holidays rather than saving. We can't underestimate the panic that will set in if prices start to drop and people try to sell in order to salvage some of their  "wealth".

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8 hours ago, TheCountOfNowhere said:

Paul Hodges calls it ...18 moths after it started.

Hodges called it in January 2015, near enough 18 months ago. He was right to call it then, too. The wheels nearly came off the market late 2014 / early 2015 off the back of MMR. We all called it then (some of us - you're always calling it so I'm sure you did :P).

Then we had the pensions withdrawal change in April 2015, Osborne announcing he was clamping down on BTL in July 2015, and the BTL stamp duty hike in December 2015 to take effect in April 2015 and between those dates the slowdown went into reverse and we had an 8 month long mini-boom, defying all logic, to my mind driven by BTL goons failing to understand that the period was an opportunity to get out of the game not to get in it.

I think the last 7 months performance despite the referendum result has been a wave of bullishness off the back of that liquidity injection, fuelled partly by the lack of new instructions (talking about outside London), partly by interest rate expectations, and partly by the money that has managed to get out of London before the market collapses.

I think that has ran it's course now. The PCL collapse is spreading out, highly leveraged BTLers are starting to realise they are going to have to sell (thanks to the sterling pr efforts of p118), article 50 is due to be invoked in March.

There will be no spring bounce. Calling it 18 months ago was a good call. It's not even a call so say it has started now imo, it's just confirming that the 2015 mini boom is over and we have begun the slide.

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14 minutes ago, ItalianV6 said:

All we need now is for HTB to be pulled and a slight interest rate rise... that would accelerate things.

Start with the mood music changing to a rate rise and that will help. Higher inflation reported today and the possibility of rate rises is all over the news. Compare that to 8 years when it's appeared that rates are heading down or at best remaining historically low and people are (perhaps should be) getting worried.

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6 minutes ago, ItalianV6 said:

All we need now is for HTB to be pulled and a slight interest rate rise... that would accelerate things.

The mortgage guarantee scheme is ending (this month?). We've just had Dame Barker declaring that HTB (she didn't say which iirc) has pushed prices up. I wonder whether that was the beginning of garnering public support for the withdrawal of the equity loan scheme. It'd be strange for her to be criticising the mortgage guarantee scheme when it's just about ended.

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1 hour ago, Snicks918 said:

There is an obsession in my generation (millennials) with property. They've been told house prices will go up indefinitely, it's the only way to acquire any wealth or savings (because we all know wages aren't going up anytime soon), and they've rationalised taking on huge amounts of debts because if they don't "get on the ladder" now, they never will. A friend of mine recently told me that her partner doesn't want to get a huge mortgage and doesn't think the properties for sale are worth that amount of money, but feels like he's not successful if he doesn't own something. He feels like he's "fallen behind" his peers. Another bought a house in Brixton last year and were distressed that it had lost x% of value since (why are you tracking the "value" of a house you just moved into if you purchased it to live in?). A lot of them truly believe the value some EA told them is actual money in the bank and so feel comfortable splashing out on holidays rather than saving. We can't underestimate the panic that will set in if prices start to drop and people try to sell in order to salvage some of their  "wealth".

Why wouldn't they - they've never seen anything else.  Well maybe apart from Apple/Google/Facebook share surges.

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