Pay No Attention To House Price Forecasts,

[Jimmy James]

Respected economics writer saying things are more complicated than the HPC view - comment?

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Pay no attention to house price forecasts

By John Kay

Published: November 7 2006 02:00 | Last updated: November 7 2006 02:00

Like those who tell the time from a stopped clock, the people who predict that British house prices will tumble will be right one day. But in the meantime, the rise continues and London estate agents are salivating at the prospect of City bonuses in January. Last week, the principal mortgage lenders announced that they would help new buyers by offering loans of five times income and 125 per cent of value.

If house prices have risen, so have the values of most other assets. Including the only asset category that really is safer than houses - long-term real government bonds. If the recently issued 50-year indexed stock had existed when Britain's housing boom began, almost 10 years ago, it would since have doubled in value. From that perspective, what has happened to house values is less remarkable.

Asset bubbles emerge when the dominant motive for purchase is the expectation of selling on soon to someone else at a higher price. Such bubbles necessarily burst, because that expectation must sooner or later be frustrated. In this sense, there has never been a housing bubble except in certain, very limited areas of the market: the overwhelming majority of those who buy houses plan to live in them.

In the absence of bubbles, prices oscillate around uncertain estimates of fundamental value. These speculative prices typically display positive serial correlation in the short term - if prices have just gone up they tend to keep going up - and negative serial correlation in the long term - periods of above average increase are followed by periods of below average increase. If we knew when the short term became the long, we would all be rich, but we do not.

This pattern is one of mean reversion - prices return to a historic norm. For five years now, the expert consensus that British houses are overvalued has relied on one central fact - the ratio of house prices to incomes is at a historic high. But while there are some good reasons for expecting the price-earnings ratio of stocks to revert towards its long-term average, there are no similarly persuasive reasons for expecting the same of house prices. Houses are both an asset and a commodity and the analysis required is much more complex.

A house provides space and shelter and, in the American mid-west, these are the principal attributes of a house. There is more land there than anyone could build on and usually not much to choose between the prestige or convenience of different areas of the spacious cities. House prices are low, stable and tend to move in line with incomes.

London, Dublin or Barcelona, like Manhattan, California and Hawaii, are very different. Most of the price reflects the location rather than the accommodation. You cannot make more houses on East 69th Street or in Belgravia. Nor can you make more houses at the most prestigious addresses, because it is in the nature of prestigious addresses that there are not many of them.

Well located houses are what the economist Fred Hirsch called a positional good. House prices are consequently a product of sociology as well as economics. That combination explains why it is Britain, Ireland and Spain, not France, Italy and Germany, that have seen the fastest rises in European house prices and why Hawaii, California and New York, not Idaho, Mississippi and Nebraska, have been the hot spots in the US.

The aspirant rich do not displace the very rich from the best houses but they make the very rich pay more for them. This is the self-defeating character of the search for the symbols of status and affluence. So it goes on down the scale. The level of house prices depends not just on levels of income but on social mores and the distribution of wealth.

Successfully predicting house prices involves good economic models, an appreciation of the sociological dynamics of aspiration and a trader's flair for the waves of market psychology. Not many people combine these skills. My files tell me I wrote about house prices in 2001 and 2004 and concluded that the only information anyone offering confident predictions about house prices gave was that you should not pay attention to them. It is still true.

[JustYield]

I don't think he is adding anything that hasn't already been debated here at some point. There is no "HPC view" as far as I am aware.

[LovingIt!]

So do I not pay attention to the people dissuading me from buying or do I not pay attention to the people encouraging me to buy?

Or do I just guess?

Flip a coin?

Live in a shoe?

[Bingley Bloke]

It would be really nice to one day read an article that doesn't begin with a paragraph that suggests the author does not realise that London isn't another word for England. My 'city bonus', as in Bradford city, will be £500 if I'm lucky enough to get one at all. There may well be sufficient fundamentals to prop-up the high end of the London market but I don't see how someone getting six or seven figure bonus in the square mile will prevent a significant slump in cities were you're lucky to be paid £18 grand a year.

[PropertyGuru]

So do I not pay attention to the people dissuading me from buying or do I not pay attention to the people encouraging me to buy?

Or do I just guess?

Flip a coin?

Live in a shoe?

you could maybe make up your own mind, if you have one!

[dogbox]

right.

the 15% rise in money supply here has had something to do with this "miracle"

And so has irresponsible lending.

Just take those words and recall them

Similar things were being said in the us about 12 months ago

Fly on, little pig, fly on

"Pay no attention to house price forecasts"

reminds me of:

"Pay no attention to that man behind the curtain"

Doc

Ive always pointed out to your good self that property cannot be compared to pure investments.

Im not saying a crash isnt possible, it most certainly is, Im just confused as to why people compare stocks with property?

[Guest Bart of Darkness]

"Pay no attention to house price forecasts"

reminds me of:

"Pay no attention to that man behind the curtain"

[polarbear]

This FT article assumes that we are not in a bubble because most people buy houses to live in. He defines a bubble market as one where partcipants are in it for short term capital gain.

Could he be more wrong? The housing market has always consisted of a lot people buying to live in a house, so does this mean prices could never be overvalued(1989)? In fact the proportion of new entrants buying to live in houses, i.e. first time buyers, is at an all time low.

BTL investors are currently prepared to take a monthly loss on their investment, and the only explanantion for this is that they are in it purely for capital appreciation.

What is this market if not a bubble? Of course it is hard to predict future prices , and bubbles don't have to burst , they can deflate slowly. But the reasons this guy lists are explanations of why we are at this price level today not reasons why prices should go on rising.

[sikejsudjek]

Makes no difference how many people want to buy if they can't afford it. BTL'ers are getting to the point where its only the possible increase in value that is keeping them hanging on, cause yields are too low to justify continued investment. Doesn't matter if you offer 5x or 10x income mortgages if the cost of living rises so much that you can't afford to pay the repayments.

This points to only one thing - the bubble is going to go BANG ! Being a journalist writing about economics and having a complete lack of common sense seems to be closely related.

[polarbear]

Makes no difference how many people want to buy if they can't afford it. BTL'ers are getting to the point where its only the possible increase in value that is keeping them hanging on, cause yields are too low to justify continued investment. Doesn't matter if you offer 5x or 10x income mortgages if the cost of living rises so much that you can't afford to pay the repayments.

This points to only one thing - the bubble is going to go BANG ! Being a journalist writing about economics and having a complete lack of common sense seems to be closely related.

Totally agree.

I also think that bubbles need ever rising prices to feed themselves. There doesn't need to be a big trigger like huge IR rises to cause a crash. I think as soon as prices stop going up the BTL investors will not tolerate monthly losses and will sell. And all the people desperate to buy for fear of losng out on price rises will back off. Then we will see how slowly the bubble deflates!

Makes no difference how many people want to buy if they can't afford it. BTL'ers are getting to the point where its only the possible increase in value that is keeping them hanging on, cause yields are too low to justify continued investment. Doesn't matter if you offer 5x or 10x income mortgages if the cost of living rises so much that you can't afford to pay the repayments.

This points to only one thing - the bubble is going to go BANG ! Being a journalist writing about economics and having a complete lack of common sense seems to be closely related.

Totally agree.

I also think that bubbles need ever rising prices to feed themselves. There doesn't need to be a big trigger like huge IR rises to cause a crash. I think as soon as prices stop going up the BTL investors will not tolerate monthly losses and will sell. And all the people desperate to buy for fear of losng out on price rises will back off. Then we will see how slowly the bubble deflates!

[tenroom]

BTL investors are currently prepared to take a monthly loss on their investment, and the only explanantion for this is that they are in it purely for capital appreciation.

But against all the odds and despite the constant barracking on here, they appear to be getting that capital appreciation.

[still_renting]

right.

Fly on, little pig, fly on

oink flap, oink flap, oink flap....

[Pluto]

London, Dublin or Barcelona, like Manhattan, California and Hawaii, are very different. Most of the price reflects the location rather than the accommodation. You cannot make more houses on East 69th Street or in Belgravia. Nor can you make more houses at the most prestigious addresses, because it is in the nature of prestigious addresses that there are not many of them.

Yeah right:

http://milwaukee.bizjournals.com/pacific/s...06/daily30.html

http://www.vvdailypress.com/news/20061116/...ws-state-trends

[Willy Weasel]

If traditional FTB houses are just transferred from BTL investors to FTBs then there doesn't appear to be any reason why this should affect 'rungs' further up the ladder immediately as there will be no chains in these transactions. It will only be when these FTBs are looking to trade up that the other parts of the market will be brought into play. Does this mean we will have a staggered crash?

[polarbear]

But against all the odds and despite the constant barracking on here, they appear to be getting that capital appreciation.

Yes they have got capital gains. And its totally rational to lose a little each month in exchange for a large , heavily geared capital gain.

But are they going to continue getting these gains? Without regurgitating all the classic arguments for a HPC, I would summarise the mistake in the investors outlook as follows:

We now live a lower inflation, lower interest rate world than in the past. This should also mean a lower HPI world because wage rises are slower too. But the transition from high interest rates to low interest rates has caused a huge one-off gain in the real price of housing worldwide. Investors have mistaken this one-off gain for a future outlook of ever increasing prices. Hence the contradictory association of low interest rates with high house price inflation.

Clearly these prices have now overshot and will eventually return to affordable levels. Those who are heavily geared will lose as spectacularly on the way down as on the way up.

[walktothewater]

Asset bubbles emerge when the dominant motive for purchase is the expectation of selling on soon to someone else at a higher price. Such bubbles necessarily burst, because that expectation must sooner or later be frustrated. In this sense, there has never been a housing bubble except in certain, very limited areas of the market: the overwhelming majority of those who buy houses plan to live in them.

Of course people are buying today with a view to selling on for a higher price. It is ridiculous to suggest otherwise. Perhaps not to sell on "soon" a la miami condo flippers, but the expectation is to sell on for higher price when they retire or trade-up the “ladder”. Why else are people stretching themselves, commuting for hours, buying X when they really want or need Z etc? Hardly because they see it as equivalent to renting? Whether or not its explicit in their decision, they are buying because they expect capital appreciation and for their purchase to fund part or all of their pension.

[Johnny Cash]

BTL investors are currently prepared to take a monthly loss on their investment, and the only explanantion for this is that they are in it purely for capital appreciation.

Or maybe they think that buying a BTL property is a good investment even if they have to subsidise the rent received by 50% to pay the mortgage.

Even if they end up paying for half the property themselves its probably a good deal given that over the long term property is a very good hedge against inflation (only 1 house price reduction in history where we actually had nominal falls in value).

Edited November 16, 2006 by Johnny Cash

[dipstick]

The article also suggests that the boom has been on-going for 10 years. Well I bought a property in 98 that had been for sale for 6 years. Surely the boom didn't start till around 2000, or have I got that wrong?

I also agree that he seems to think London = England.

It lost a lot of validity for me on those 2 points alone.

[Smarter than the average bear]

I suspect a lot of BTL-ers in their thirties and forties couldn't care less about yields. They've got an appreciating asset that, even if there is a crash in the near future, will still give them a nice pension when they cash in their chips and liquidize their assets twenty to thirty years from now. If any bear can cite a thirty year period in the UK over which property prices have ever failed to rise, and rise substantially, let's hear about it.

[haggis]

I suspect a lot of BTL-ers in their thirties and forties couldn't care less about yields. They've got an appreciating asset that, even if there is a crash in the near future, will still give them a nice pension when they cash in their chips and liquidize their assets twenty to thirty years from now. If any bear can cite a thirty year period in the UK over which property prices have ever failed to rise, and rise substantially, let's hear about it.

All assets are perpetually either underpriced, or overpriced. And the price you pay for an asset determines your returns. Your benchmark shouldn't be 'cool, it'll go up over 30 years' - your benchmark should be 'is this the most intelligent and productive investment for my (hard earned) capital'.

Any BTLer who is willing to invest in an asset yielding less than their cost of borrowing is a fool. And that includes many of the current BTL tycoons will ultimately be very much poorer for ignoring common sense rules of investment.

[polarbear]

Or maybe they think that buying a BTL property is a good investment even if they have to subsidise the rent received by 50% to pay the mortgage.

Even if they end up paying for half the property themselves its probably a good deal given that over the long term property is a very good hedge against inflation (only 1 house price reduction in history where we actually had nominal falls in value).

Johnny a good hedge against inflation is when the real price doesn't go down . Nominal prices do not go down much in times of inflation,but in the last cycle real house prices went down by 38% peak to trough. This is not a good hedge.

BTW inflation is low , so we are much more likely to see nominal falls this cycle.

[Johnny Cash]

Johnny a good hedge against inflation is when the real price doesn't go down . Nominal prices do not go down much in times of inflation,but in the last cycle real house prices went down by 38% peak to trough. This is not a good hedge.

BTW inflation is low , so we are much more likely to see nominal falls this cycle.

You're right of course PB.

Houses would be a great hedge against inflation were it not for the fact that they have already been so overbought.

Wish I knew which current asset class will (at least) hold its value.

Edited November 16, 2006 by Johnny Cash

[polarbear]

I suspect a lot of BTL-ers in their thirties and forties couldn't care less about yields. They've got an appreciating asset that, even if there is a crash in the near future, will still give them a nice pension when they cash in their chips and liquidize their assets twenty to thirty years from now. If any bear can cite a thirty year period in the UK over which property prices have ever failed to rise, and rise substantially, let's hear about it.

Can you name any thirty year period when you could put your money in the bank and it did not go up?

Can you name any thirty year period when high technology (of the day) shares did not go up? So why not buy dot com shares in early 2000?

All these people "in it for the long term" are just like the dot com investors "in it for the long term", until prices go down when suddenly they change their mind.

[Johnny Cash]

Can you name any thirty year period when you could put your money in the bank and it did not go up?

Can you name any thirty year period when high technology (of the day) shares did not go up? So why not buy dot com shares in early 2000?

All these people "in it for the long term" are just like the dot com investors "in it for the long term", until prices go down when suddenly they change their mind.

Ah but the current high technology of the day comes into and goes out of fashion (steam powered mine pumping equipment shares might have gone up a lot in the 18th century but would not be worth a lot today) wheras houses are a pretty constant through the ages (people still live in the same house which was around in the 18th century.

[Smarter than the average bear]

Can you name any thirty year period when you could put your money in the bank and it did not go up?

Can you name any thirty year period when high technology (of the day) shares did not go up? So why not buy dot com shares in early 2000? All these people "in it for the long term" are just like the dot com investors "in it for the long term", until prices go down when suddenly they change their mind.

That'd be "no", then.