Realistically How Much Do Prices Need To Drop

[Guest Cletus VanDamme]

Not so. If we had bought over the last few years, we would have been repossessed by now as we simply would not been able to maintain the mortgage payments and would not have been able to have more than one child. I think our judgment was sound by not buying as we have two children, one just out of nursery and the other not too far off. We are positioned nicely to buy a house (rather than a flat) when the correction comes.

I guess this makes sense for you, as you imply that your household is currently on 1 full-time income but will be returning to 2 full-time incomes soon.

However, your optimism that you'll be able to buy a house for the price of a flat at today's prices is admirable, but misguided in my view. While there is a glut of flats in pretty much every area of the UK now, there is still a major shortage of quality family homes, and that's only going to get worse, which will unfortunately lead to continued rises in this sector, irrespective of whether the prices of flats fall.

[Wad]

For a long time I have felt that HPI cannot exceed the nominal growth rate of the economy (i.e inflation + underling real GDP growth) for more than a few years otherwise we would end up in a situation where the entire economy would be about buying and selling houses and nothing else.

On that basis and looking back over the last 75 years of data I estimate that house prices would have to fall by 35% relative to the current size of the UK economy to return to a sustainable long run equlibrium level.

There are therefore 3 basic scenarios under which house prices would return to that long run equilibrium level:

Bear Scenario: Nominal house prices crash 30% over the next two years, with RPI at 2% per annum and zero real GDP growth per annum.

Golden Scenario: No nominal fall in house prices, RPI at 2.5% per annum and real GDP growth at 2.5% per annuum would allow the economy to gradually grow enough in nominal terms to support the current nominal level of house prices but it would still take 6 years for the housing market to return to the long run equilibrium level.

Bull Scenario: Nominal house prices rise at 3% per annum, RPI at 3% per annum, real GDP growth 3% per annum but it would be a long drawn out painful process (especilly for FTBs) and take 9 years for the housing market to return to the long run equilibrium level.

The Bank of England is clearly attempting to engineer the Golden Scenario above. It is extremely unlikely to do so and I think the most likely Realsitic Scenario is one which no one is happy with:

Realistic Scenario: Nominal drop of 20% in house prices over the next three years, with RPI at 3% per annum and real GDP growth at 2% per annum. This would be painful for those who were forced sellers and some bargains would be available but at least the housing market would be back to normal shortly after the next election.

If nominal house prices were to fall 50% over say a 5 year period with RPI at 3% per annum and real GDP growth at 2% per annum then houses would be a raging buy. However, it would take something similar to the 2000 'dotcom crash' scenario to achieve this. You never know with a real credit crunch and catastrophic losses and repossessions it could happen.

[Topher Bear]

If things go well and the debt bubble doesn't burst too, then 50% is not an unrealistic expectation. We saw a 20% fall in the 80's and this bubble makes the 80's look like nothing more than weakly cheap party baloon. this one is a mega sized special sup dupa mega expensive baloon.

If the debt bubble bursts too (which IMHO the two are now inseperable and that is the only way that house prices are going to fall now), then 70 - 80% falls are on the cards...yeah we'll all be out of work and not able to get a mortgage for even that meagre amount which is why they will fall so far, plus the fact that mega amounts of people will be stuck in Negative equity or with no hosue but still huge debts. Its gonna be nasty...but the time to get buckled up and wear your crash helmet is this autumn. The summer might surprise you and defy all exepectations...but Autumn 2007 will be remembered like October 1929!

Topher Bear (to the last!)

[steve99]

One way to look at it is via the yield, currently BTL'ers are buying on the basis of capital gains and are totaly disregarding yield. Once prices start to obviously drop and everyone acknowleges that prices are falling, no BTL investors will buying on the basis of future capital gains, the amatuers will quickly dissapear and the more savy BTL buyer will be doing his/her sums correctly and comming up with figures that would only support maybe 50% of todays prices, this is the figure Ive come up with for my area of London, taking into account current interest rates, letting agents fees etc etc, and if interest rates are higher then even a 50% discount would not be enough. When/if we start heading in that particuar price direction the banks will be very unwilling to lend on the sort of terms they are doing today, imagine 20% deposits and 3X wages max, which would exclude a lot of potential buyers and also putting more downward pressure on the market.

[Wad]

When/if we start heading in that particuar price direction the banks will be very unwilling to lend on the sort of terms they are doing today, imagine 20% deposits and 3X wages max, which would exclude a lot of potential buyers and also putting more downward pressure on the market.

Yes I agree. That is indeed why price corrections tend to end up in crashes rather than just a steady return to a sustainable level. Unfortunatley, investors and lenders were not rational when prices were on the way up so perhaps we should not be surprised if they over react when prices start to fall.

[margamboy]

I cannot see why people here think that BTLrs are going to give up their properties, 2 guys at work both have BTLs......From memory 1 had 2 properties and the other 3.

I know they bought and sold at various stages, So cannot understand why somebody who bought last year would sell next year for a loss rather than keep renting it and if need be put some of their own money towards monthly payments to cover the mortgage, thats what I would do.....At least someone else is still paying off a large percentage of the property for you and if this was repeated then prices would not fall anyway, by selling up in mass surely BTLrs are causing their own property to devalue.

There are fixed rate mortgages for BTLs as well which should make IR rises irrelevant for many in the short term (2-3 years).

Many of the bigger landlords 15+ properties have been buying propertie over the last 10-15 years, So overall they should be ok no matter what happens with prices, many sportsmen have a side business buying/selling propertie.....Its more of a hobby for these guys to pass the time.

[talksalot81]

If one were to look in my area, rent is current a lot cheaper than buying. A 200k house will cost approx £500 per month. That is £6000 a year. For it to be better to rent from the bank (interest only) at the current interest rate, the price would have to be somewhere nearer £110k.

So whilst my gut feeling is that I would buy with a 20% drop in asking price (assuming asking = selling), if you were to calculate it based on a direct comparison of renting from bank vs LL, you would be talking about nearly a 50% decrease to even things up.

One may conclude from this that one of two things is highly probable:

a) HPC

massive rises in rent to cover costs

[Converted Lurker]

I cannot see why people here think that BTLrs are going to give up their properties, 2 guys at work both have BTLs......From memory 1 had 2 properties and the other 3.

I know they bought and sold at various stages, So cannot understand why somebody who bought last year would sell next year for a loss rather than keep renting it and if need be put some of their own money towards monthly payments to cover the mortgage, thats what I would do.....At least someone else is still paying off a large percentage of the property for you and if this was repeated then prices would not fall anyway, by selling up in mass surely BTLrs are causing their own property to devalue.

There are fixed rate mortgages for BTLs as well which should make IR rises irrelevant for many in the short term (2-3 years).

Many of the bigger landlords 15+ properties have been buying propertie over the last 10-15 years, So overall they should be ok no matter what happens with prices, many sportsmen have a side business buying/selling propertie.....Its more of a hobby for these guys to pass the time.

I would suggest that once rates reached 5% half of all BTL purchases, (which have in fact been bought since 2004), fail to 'wash their face'. I would also contend that practically all BTL bought since 2006 are failed even if they are 80% geared and you must remember that BTL saw an increase of 42% by capital and up to 50% by volume in 2006, that is very scary.

You also must remember that house price inflation stalled when rates were at 4.75% and only revived when a cut came in and kept rates at 4.5% for far too long, they are now at 5.5% so it's fair to assume that prices will fall back to that pre the 2005 rate cut in a heart beat, that could be as much as a 15% fall in prices 'over-night'

Half of rental properties are empty at any given time, a third of new build (since 2003) have never been lived in-these being the ones bought for capital gains only. There is an absolute mess out there waiting to unravel

[Guest Cletus VanDamme]

If one were to look in my area, rent is current a lot cheaper than buying. A 200k house will cost approx £500 per month. That is £6000 a year. For it to be better to rent from the bank (interest only) at the current interest rate, the price would have to be somewhere nearer £110k.

So whilst my gut feeling is that I would buy with a 20% drop in asking price (assuming asking = selling), if you were to calculate it based on a direct comparison of renting from bank vs LL, you would be talking about nearly a 50% decrease to even things up.

One may conclude from this that one of two things is highly probable:

a) HPC

massive rises in rent to cover costs

Unfortunately, I predict Case (-b-).

Edit: FFS, how do you prevent a parenthetical b becoming a f**king smiley?

Edited February 25, 2007 by Cletus VanDamme

[DoctorJ]

I cannot see why people here think that BTLrs are going to give up their properties, 2 guys at work both have BTLs......From memory 1 had 2 properties and the other 3.

I know they bought and sold at various stages, So cannot understand why somebody who bought last year would sell next year for a loss rather than keep renting it and if need be put some of their own money towards monthly payments to cover the mortgage, thats what I would do.....At least someone else is still paying off a large percentage of the property for you and if this was repeated then prices would not fall anyway, by selling up in mass surely BTLrs are causing their own property to devalue.

There are fixed rate mortgages for BTLs as well which should make IR rises irrelevant for many in the short term (2-3 years).

Many of the bigger landlords 15+ properties have been buying propertie over the last 10-15 years, So overall they should be ok no matter what happens with prices, many sportsmen have a side business buying/selling propertie.....Its more of a hobby for these guys to pass the time.

Troll alert!!

AWOOOGA

[Converted Lurker]

If one were to look in my area, rent is current a lot cheaper than buying. A 200k house will cost approx £500 per month. That is £6000 a year. For it to be better to rent from the bank (interest only) at the current interest rate, the price would have to be somewhere nearer £110k.

So whilst my gut feeling is that I would buy with a 20% drop in asking price (assuming asking = selling), if you were to calculate it based on a direct comparison of renting from bank vs LL, you would be talking about nearly a 50% decrease to even things up.

One may conclude from this that one of two things is highly probable:

a) HPC

massive rises in rent to cover costs

That is exactly what I'm seeing - 200K houses not renting out for 500 quid a month in nice parts of the Wirral..shame eh?

[margamboy]

Troll alert!!

AWOOOGA

Reality is hard to swallow I know...........

From where I am sitting its just a matter of time before rentals begin to rise

Edited February 25, 2007 by margamboy

[Without_a_Paddle]

Unfortunately, I predict Case (-b-).

Edit: FFS, how do you prevent a parenthetical b becoming a f**king smiley?

disable emoticons as an option.

a)

c)

d)

[Guest Cletus VanDamme]

disable emoticons as an option.

a)

c)

d)

Thanks !

[Guest Charlie The Tramp]

I would suggest that once rates reached 5% half of all BTL purchases, (which have in fact been bought since 2004), fail to 'wash their face'.

Saw a block of newly completed flats last June with 4 to let signs by the same agent. Passed there tonight coming back from the Chinese Take Away and much to my astonishment there were 3 For Sale signs by the same Agent.

Do Agents normally put up 3 signs to rent or sell one property ?

BTW the girl in the Take Away where I have been a customer for 23 years told me tonight that trade in the past 6 months is the worse they have known it since they opened 32 years ago and they are far from expensive.

[DaggaDagga]

I'd be happy to buy a BTL in a falling market. As soon as the yield is high enough I'll go for it. At the moment the figures don't add up. It just needs either:

1. A 10-15% drop in prices

2. A reduction in interest rates of about 0.75%

3. A rise in rents (already happening in my area)

We bought our own home in a "stumbling" market in 2005. It was a risk, is it did feel like the beginning of a crash. In the end it was a small jitter, and all the negative sentiment meant we could get a big discount. Bought my first BTL last year, but prices raced away shortly after I bought it, so it doesn't make sense to buy more at the moment.

As there are doubtless many others like me, a big crash is very unlikely around Portsmouth/Southampton at least.

[estateagent]

[Guest grumpy-old-man]

I'd be happy to buy a BTL in a falling market. As soon as the yield is high enough I'll go for it. At the moment the figures don't add up. It just needs either:

1. A 10-15% drop in prices

2. A reduction in interest rates of about 0.75%

3. A rise in rents (already happening in my area)

We bought our own home in a "stumbling" market in 2005. It was a risk, is it did feel like the beginning of a crash. In the end it was a small jitter, and all the negative sentiment meant we could get a big discount. Bought my first BTL last year, but prices raced away shortly after I bought it, so it doesn't make sense to buy more at the moment.

As there are doubtless many others like me, a big crash is very unlikely around Portsmouth/Southampton at least.

yes, I live in Wakefield & I think the whole of the UK will crash, but not the bit where I live. In the unlikely event Wakefield does get hit hard in the crash, I think the street I live in will be fine & not drop at all.

ps - if my street does get hit, I think all the houses will lose money, but not my house.

Edited February 25, 2007 by grumpy-old-man

[estateagent]

yes, I live in Wakefield & I think the whole of the UK will crash, but not the bit where I live. In the unlikely event Wakefield does get hit hard in the crash, I think the street I live in will be fine & not drop at all.

ps - if my street does get hit, I think all the houses will lose money, but not my house.

Old man, I am just on the other side of the hill from you and you are unlikely to lose your house but things are not looking good for the future. EA's are never seen such a drought of new homes. The houses we do have are pushing up prices.

[Sinking Feeling]

Old man, I am just on the other side of the hill from you and you are unlikely to lose your house but things are not looking good for the future. EA's are never seen such a drought of new homes. The houses we do have are pushing up prices.

I thought you didn't want to give away your identity, in 5 posts we know you are an estate agent (although there were some clues in the name) in the NE (probably Yorkshire)!! Another 5 and we'll no doubt know where you work and the name of your dog.

[Converted Lurker]

I'd be happy to buy a BTL in a falling market. As soon as the yield is high enough I'll go for it. At the moment the figures don't add up. It just needs either:

1. A 10-15% drop in prices

2. A reduction in interest rates of about 0.75%

3. A rise in rents (already happening in my area)

We bought our own home in a "stumbling" market in 2005. It was a risk, is it did feel like the beginning of a crash. In the end it was a small jitter, and all the negative sentiment meant we could get a big discount. Bought my first BTL last year, but prices raced away shortly after I bought it, so it doesn't make sense to buy more at the moment.

As there are doubtless many others like me, a big crash is very unlikely around Portsmouth/Southampton at least.

You bought your home in 2005 and your first BTL last year? OMG you have my sympathy...with the first purchase

Edited February 25, 2007 by Converted Lurker

[TeddyBear]

why not think about it in terms of affordability?

One would think for instance that a well paid London, City PA (that's about 30K salary, lets be generous and say £35k) should easily be able to afford a nice one bedroom flat in an area such as Hammersmith or Fulham. Let's say the parents are comfortably off and can hand over 20K for a deposit. Let's say we stick at 4x salary even. Therefore, the most this person is looking at being able to pay, under a very generous estimate, is £160k. However, said flats are selling around 280k at the moment. Therefore I would think these prices need to drop back by about 40%.

[cells]

3 bed semi currently 275k in outer London

Same homes are renting at £900-950PCM

Therefore would have to drop £75k or 27% for IO mortgage to equal rent.

Therefore id assume a 25-30% drop in price at lest!!

but if we get a hpc it will drop further than that, i would assume 40%

[talksalot81]

why not think about it in terms of affordability?

One would think for instance that a well paid London, City PA (that's about 30K salary, lets be generous and say £35k) should easily be able to afford a nice one bedroom flat in an area such as Hammersmith or Fulham. Let's say the parents are comfortably off and can hand over 20K for a deposit. Let's say we stick at 4x salary even. Therefore, the most this person is looking at being able to pay, under a very generous estimate, is £160k. However, said flats are selling around 280k at the moment. Therefore I would think these prices need to drop back by about 40%.

The difficulty people will have here is the use of multiples. In all honestly a salary multiple is useless in comparison because IR levels are ignored. What really is of more interest is the actual fraction of take home pay which is spent on a mortgage. My understanding was that 30% was about as much as would have historically have been advised (although I have no source and am happy for some referenced correction to this). If the average wage is about 25k, then take home is probably £1500 ish. For a couple this is £3000. Just a note on this - whilst the average individual income is £25k odds, I strongly doubt that the average income for a couple will be double this. Even still, 30% of this income is £900 a month. On interest only, that can afford about a £200k house - which oddly enough is somewhere around average. In reality, to compare to affordability in previous years, a repayment mortgage would be desired thus you may now only afford £160k. So to have the long term affordability (as denoted by my 30%), prices would have to fall 20%.

[Guest d23]

Something I've often wondered if there is a standard definition of what constitutes a crash as opposed to a correction / dip etc etc and if the speed with which it happens is a factor?

On this thread drops of 60%+ have been discussed which certainly sounds like a crash to me and most on here expect it to happen quickly and them trough for several years but just how quickly

Someone posted a graph on here showing that it took 10 years for prices to drop 25% in Japan so I'd be interested to hear anyones predictions for how quickly they anticipate the crash to occur