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Times Goes Bearish For New Year


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Analysis

The Times December 29, 2006

Cassandras keep shtum on property risks

Patrick Hosking

The funny thing about the housing market is not that prices are starting to accelerate again, but that policymakers, regulators and lenders are so relaxed about it this time around, and so confident that it won’t lead to a painful reversal.

Prices rose 10.5 per cent this year, 3½ times faster than in 2005, according to Nationwide Building Society. Valuation measures are deteriorating. Affordability is again plunging, especially for first-time buyers. Average earnings rose less than half as fast as house prices. Borrowing costs are on the up. Even with rents rising, buy-to-letters are struggling to make the sums add up.

The occasional Cassandra issues a warning. David Miles, of Morgan Stanley, argues that a substantial fall in real house prices is likely at some point. The Financial Services Authority has quietly instructed banks to ensure that they could cope in the event of a 40 per cent crash.

Yet on the whole the attitude is sanguine. That’s in sharp contrast to the summer of 2002, the last time that the market was frothing upwards. Then, Sir Eddie George, Governor of the Bank of England, told MPs that house-price inflation was “unsustainable”. His deputy, Sir David Clementi, said: “The longer it goes on, the sharper is likely to be the eventual correction.” Sir Howard Davies, then head of the Financial Services Authority, said that he wouldn’t be surprised if prices fell.

That June, the average home in England and Wales cost £103,500. Fast-forward 4½ years and the average home costs £173,700. There has not been a quarter when prices have even paused for breath, let alone fallen. Prices have continued to grow much faster than incomes.

If Sirs Eddie, David and Howard were right to be concerned then, they, or rather their successors, should be thoroughly alarmed by now. If price falls then seemed possible, now they would appear probable. If buyers then were risking taking on too much debt, now they would appear to be positively reckless. But few believe that a crash is remotely likely. Partly this is rational. The era of permanently low inflation and interest rates seems more assured. Employment prospects look benign. The gap between supply (constrained by planning rules) and demand (boosted by immigration) is as wide as ever. Partly it is time. The era of negative equity is now 15 years ago and fading from memories.

But partly it is the fear of looking foolish. There are only so many times that you can warn of imminent disaster before being accused of crying wolf.

On most conventional valuation measures, however, house prices are looking more stretched than for a long time. The first law of rubber bands still holds: the more the elastic is stretched, the more pressure there is on it to snap back.

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Analysis

The Times December 29, 2006

Cassandras keep shtum on property risks

Patrick Hosking

The funny thing about the housing market is not that prices are starting to accelerate again, but that policymakers, regulators and lenders are so relaxed about it this time around, and so confident that it won’t lead to a painful reversal.

Prices rose 10.5 per cent this year, 3½ times faster than in 2005, according to Nationwide Building Society. Valuation measures are deteriorating. Affordability is again plunging, especially for first-time buyers. Average earnings rose less than half as fast as house prices. Borrowing costs are on the up. Even with rents rising, buy-to-letters are struggling to make the sums add up.

The occasional Cassandra issues a warning. David Miles, of Morgan Stanley, argues that a substantial fall in real house prices is likely at some point. The Financial Services Authority has quietly instructed banks to ensure that they could cope in the event of a 40 per cent crash.

Yet on the whole the attitude is sanguine. That’s in sharp contrast to the summer of 2002, the last time that the market was frothing upwards. Then, Sir Eddie George, Governor of the Bank of England, told MPs that house-price inflation was “unsustainable”. His deputy, Sir David Clementi, said: “The longer it goes on, the sharper is likely to be the eventual correction.” Sir Howard Davies, then head of the Financial Services Authority, said that he wouldn’t be surprised if prices fell.

That June, the average home in England and Wales cost £103,500. Fast-forward 4½ years and the average home costs £173,700. There has not been a quarter when prices have even paused for breath, let alone fallen. Prices have continued to grow much faster than incomes.

If Sirs Eddie, David and Howard were right to be concerned then, they, or rather their successors, should be thoroughly alarmed by now. If price falls then seemed possible, now they would appear probable. If buyers then were risking taking on too much debt, now they would appear to be positively reckless. But few believe that a crash is remotely likely. Partly this is rational. The era of permanently low inflation and interest rates seems more assured. Employment prospects look benign. The gap between supply (constrained by planning rules) and demand (boosted by immigration) is as wide as ever. Partly it is time. The era of negative equity is now 15 years ago and fading from memories.

But partly it is the fear of looking foolish. There are only so many times that you can warn of imminent disaster before being accused of crying wolf.

On most conventional valuation measures, however, house prices are looking more stretched than for a long time. The first law of rubber bands still holds: the more the elastic is stretched, the more pressure there is on it to snap back.

What no comments? I thought it was a great article to end the year on... :)

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It was a spineless article that stated the obvious but sat on the fence with regard to dates.

We all know that house prices will crash, we all know that the UK will be the subject of a terror attack, the question is not if, but when and that article does nothing to signify those dates.

Happy New Year to you too! :) I know what you mean but it seems to nod to Bootle's recent fence sitting article. It is fairly unequivovcal in saying it will burst rather than plateau or go on forever...

S.

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I think the fact that policy makers 'are relaxed on the issue 'is the key point.Mervyn King is giving this bubble greater impetus than anyone else currently.Would be buyers are taking this as a signal to buy and most believe that interest rates have peaked.Worse still the public see CPI as phoney and are hedging against inflation by buying property.Even the 2%CPI is not being shadowed,the committee is currently 35% off target at a time when they should have been under shooting to control HPI.

The article is right the 'elastic band' will snap and then the cretin King has some explaining to do.

Edited by crashmonitor
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Ok credit where its due, the article was covered the points we have all been discussing here for nearly five years.

Not revolutionary but highlighting the points we cover each and everyday. I give it a E for failing to supply a date such as which year, or even which quarter we can expect to feel a crunch.

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I think the fact that policy makers 'are relaxed on the issue 'is the key point.Mervyn King is giving this bubble greater impetus than anyone else currently.Would be buyers are taking this as a signal to buy and most believe that interest rates have peaked.Worse still the public see CPI as phoney and are hedging against inflation by buying property.Even the 2%CPI is not being shadowed,the committee is currently 35% off target at a time when they should have been under shooting to control HPI.

The article is right the 'elastic band' will snap and then the cretin King has some explaining to do.

Policy makers are not just relaxed they have to positively encourage. Without HPI the Uk economy , which has been wrecked by GB, has nothing else to offer. No pensions, a huge civil service with large pension liabilities, record levels of debt, record lows in productivity, failing NHS facing increased closures.

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