Evidence for a House Price Crash

[Bullish Bear]

I had a lengthy discussion with a colleague at work yesterday about the property market. He said that there would not be a house price crash and put forward the usual argument (low interest rates, housing shortage, immigration, etc).

I thought it would be good if we could list the reasons that the Bears think there will be one. I have checked out the FAQ but I thought it would be an idea to list out point by point the reasons for the crash.

Let me start:

1) Most people on an average income are now unable to afford a property on standard terms (3.5x income). In fact, many people on higher than average income are also priced out of the market.

[c_f]

The 3.5x multiplier was passed a few years ago, but prices have increased anyway.

[Casual Observer]

Another good reason is low wage inflation, preventing owners from trading up the propoert ladder. Another is the government target of giving half the future population high university debts.

[Harry Sacks]

2) Low unemployment caused by cheap credit is an integral part of the boom illusion.

[Bruno Powroznik]

Property prices crash when there is a recession, i.e. when the boom goes bust. Property prices are only high as a consequence of the boom, but booms are just a speculative and investment bubble founded on an inflationary basis and as such cannot possibly be sustainable in the long term. The longer the boom lasts the more severe will be the recession. It will be well worth the wait just to see the boom go bust, even if this means having to wait for a few more years. Booms have in recent times tended to last seven years and this boom has now gone on for over seven years now and my prediction is that the boom will go bust shortly after the next General Election in May 2005.

[RJG18]

3) Lack of inlfation, which has in the past been relied on the devalue the amount owed on peoples mortgages over time in real terms. Without high(-er) inflation there is effectivly no "property ladder" in the traditional sense.

[George Mainwaring]

Without high(-er) inflation there is effectivly no "property ladder" in the traditional sense

Exactly - in time the market will trip over itself.

[gilf]

The 3.5x multiplier was passed a few years ago, but prices have increased anyway.

You heard it here first. There will not be a crash because houses are totally unaffordable.

[Bubble Pricker]

Demand side:

1. Lack of first time buyers. These have been priced out and almost no-one can now afford a property on reasonable income multiples. The number of FTBs has dropped to its lowest level since 1980.

2. FTBs have been replaced by BTLs. However. late-coming BTLs (about the last two years) could not achieve reasonable yields. They are to a large part or almost entirely relying on capital gains for their investment. Once property prices begin to stagnate, as they have already done, the supply of BTL investors will dry up, as without the prospect of capital appreciation, BTL is no longer a viable investment. The combined effect of 1. and 2. will be virtually no more buyers at all.

3. The past boom has been fuelled by the availability of cheap credit. The combination of exceptionally low interest rates and loose lender practices combined have produced an unprecedented flow of credit into the market which has driven up prices. Without the availability of credit, demand would instantly evaporate at current prices. The supply of cheap credit will not continue for two reasons: a. Interest rates have already increased and will increase further, although possibly only slightly. b. From October this year, mortgage lending will come under FSA supervision, which has implications for lender's liability, among others. With this new regulatory burden and the fact that house prices are stagnating, lenders will tighten their lending criteria. The current loose self-cert practices will come to an end. Credit supply will reduce, dampening demand further.

4. Once prices start to sag, FTBs will not flood back into the market, as is widely predicted by the bulls. This did not happen during the last crash and there is no reason why it should happen now. Once prices stagnate/sag, the urgency to get onto the property ladder is removed. Buyers can delay their purchase and continue looking for their ideal house rather than buy in haste. Once prices start to fall more significantly, FTBs will be reluctant to buy for fear of further price falls and negaitve equity.

Supply Side:

1. BTLs with larger portfolios or who have bought earlier in the cycle and have large paper gains, will start liquidating some or all of their portfolio, once sentiment points to no further rises or falls. They will want to realise the massive paper gains they have achieved. I believe this process has already begun with lots of anectdotal evidence of "no chain" properties on the market.

2. The amateur/late comer BTLs will not sell initially. They will hold out for longer, hoping for a swift recovery in the market. As prices slide further, those who operate on negative cash flow will ultimately be forced to sell, as they are crippled by the continuing negative cash flow with the prospect of property prices recovering diminishing and disappearing into the distant future. Many of them will choose personal bankruptcy as a way out of the overwhelming debt they face.

3. The ordinary owner-occupiers will not sell en masse. Only FTBs that have come into the market late and who now realise that they are unable to service their mortgage, as initial fixed-rate and discount rate deals come to an end, will be forced sellers. This is often an argument cited against a crash. However, it does not matter what non-sellers do. The market will be determined by those who trade.

Overall, I believe that the lack of demand will drive prices down, as the BTL hype and the urge to get on the property ladder disappear. If there is a lack of demand, a significant increase of supply it is not required for a crash to happen. This is the fallacy of those who argue against a crash only from the supply side ("shortage of property", "people will not be forced to sell").

[Bullish Bear]

Excellent post Bubble Pricker! Printed off and ready for my next encounter with my colleague!!

[RJG18]

Excellent post Summed it all up nicely.