Graph Of House Prices Vs Total Mortgage Debt

[Not Long Now]

The reason why we have lagged the U.S in the HPC is simply that they have a oversupply of housing, wheras in the UK we have a lack of supply which is holding prices up.

Some people really don't understand the fundamental issues at play here do they?

Was there a shortage of houses when the US was mid bubble and prices were at a stupidly high level?

The available housing stock is largely irrelevant. The fundamental factor at play was the amount of cheap and easy credit available, tempting people to buy a house that they would have previously never been able to, or buy MORE than the one property that they need.

As prices went up in the US, it became an easy sell for mortgage brokers...

"look don't worry if you can't afford it, house prices always go up anyway. If you hit problems, just sell up and you've made a tiddy profit. Luvlly jubbly." An easy sell. One which has gone on for years in the UK. Many have fallen for it on both sides of the Atlantic...and this is the sign that HPI (wherever it is) is in its death throes.

Is there now a gross oversupply of houses now prices have collapsed in the US? Should they run around and demolish hundred of thousands of houses to maintain prices....even though until recently there was a "lack of supply" which many people would have you believe was the reason why prices were so high initially?

Can you see the stupidity of the argument?

I could point you to at least 4 blocks of new build flats in and around the Birmingham area that are empty. Haven't sold. Why? Lack of demand? No. Aspirational demand will ALWAYS exist for housing, or for some to build huge BTL portfolios.

The reason is lack of credit, or appetite for credit to take out the huge loans required to afford the outrageous asking prices. Is this therefore oversupply of flats? Should they be knocked down?

No: prices just need to come down to a reasonable level given changes in credit conditions.

The fact of the matter is that some people in the UK have bought houses when they really shouldn't have been allowed the finance to do it. Borrowing huge multiples of income on IO mortgages. Other have bought a huge amount of properties without having to put down a penny of their own money. Why is BTL a recently new phenomenon? Because banks have allowed it with the products and credit terms that they have offered.

This whole argument of "supply and demand" gets on my nerves. It is just a fallicious argument spread by people who:

1) Try to sell you a house

2) ditto: a mortgage

3) People that have recently bought a house, know they've bought into a bubble and use the argument as a means to convince themesevles that they did the right thing.

One thing you should learn that demand for housing (that is real demand - not aspirational demand) is a DIRECT function of available credit. Nothing more. This is what effects house prices, and nothing else.

[beans on toast]

Everywhere. Not just everywhere in England, but pretty much everywhere in the western world.

Nationwide, the most widely recognised index has house prices falling for 4 months in a row. A good start, but not too great in the scheme of things when they doubled in the last 5 years.

In many parts of London prices have gone up 50% in 3 years.!!!

http://www.nationwide.co.uk/hpi/downloads/Monthly.xls

And why have you chosen to quote YoY figures? Because you KNOW all the indices have shown falling prices for several months now. Even if you use YoY figures then house have not kept pace with REAL inflation. Also, most of the 'official' indices track asking prices rather than selling prices and so dramatically understate the gravity of the housing slump.

Look at net monthly mortgage lending figures for a more current picture of what is happening. This is not even half what it was at the peak of the housing market.

Inflation is 2.5%, The latest figure from the Nationwide HPI is 2.7%.

Out of the big indices tracking prices only Rightmove and Prime Location uses asking prices. Like the Halifax figures, Nationwide's index is based on prices agreed for properties on which it has lent. Nationwide tends to have a bias towards the South. Nationwide's figures are also mix-adjusted and seasonally adjusted and take into account a number of housing characteristics, including the size of the property in square metres and the neighbourhood. Nationwide makes a number of other adjustments to its figures: it excludes buy-to-let properties and those which it deems “untypical”, such as properties worth more than £1 million. For me, Nationwide is the most relaible index.

Prices are not being held up (which is why you choose to quote YoY figures) and there is no lack of supply (see below)

Look anywhere on Rightmove and you do see pages and pages of house for sale, the are cramming in new housing anywhere they find a spare megebit . There are now more then ONE MILLION properties for sale on Rightmove. Some fvcking 'shortage'

And why do you describe yourself as a bear exactly?

The increased number of houses on rightmove doesn't mean that theres no lack of supply. If everyone in this country put there house up for sale tomorrow, you'd be saying that we've got a sudden increase in housing, wereas the situation in terms of supply/demand hasn't changed.

Just look at the market for flats in inner city areas - here they've oversupplied what the market can take and prices have fallen 50% in most cities like Leeds and Birmingham - this is similar to the US model. Its a totally different market for houses, especially in London.

Edited March 22, 2008 by beans on toast

[Dead Spider]

The Yanks have much more space so they can buy bigger houses for less.

I'm guessing it's also because the majority are just glorified wooden sheds .

[InternationalRockSuperstar]

Inflation is 2.5%, The latest figure from the Nationwide HPI is 2.7%.

Ha! Inflation at 2.5% Do you work for the Gov't?

Try 13.2%

BoE M4 Stats

Credit supply has tripled in the last 10 years and guess what...so did house prices. Surprise fvcking surprise!

And why the fvck do you say Nationwide are the most "reliable" survey. Can you not spot the blatantly obvious vested interest they have in overstating house price growth?

Listen mate, if you wanna go and invest all your money in property now then fine. But you'll be eating nothing but beans on toast for the rest of your life

[InternationalRockSuperstar]

The increased number of houses on rightmove doesn't mean that theres no lack of supply. If everyone in this country put there house up for sale tomorrow, you'd be saying that we've got a sudden increase in housing, wereas the situation in terms of supply/demand hasn't changed.

If everyone put there house up for sale then by definition demand must have dramatically decreased.

[quantinghome]

Nationwide, the most widely recognised index has house prices falling for 4 months in a row. A good start, but not too great in the scheme of things when they doubled in the last 5 years.

In many parts of London prices have gone up 50% in 3 years.!!!

Inflation is 2.5%, The latest figure from the Nationwide HPI is 2.7%.

Out of the big indices tracking prices only Rightmove and Prime Location uses asking prices. Like the Halifax figures, Nationwide's index is based on prices agreed for properties on which it has lent. Nationwide tends to have a bias towards the South. Nationwide's figures are also mix-adjusted and seasonally adjusted and take into account a number of housing characteristics, including the size of the property in square metres and the neighbourhood. Nationwide makes a number of other adjustments to its figures: it excludes buy-to-let properties and those which it deems “untypical”, such as properties worth more than £1 million. For me, Nationwide is the most relaible index.

CPI is 2.5%. RPI is 4.1%. There's been lot of debate about which is a truer representation of inflation. My conclusion is we could spend all day talking about it and be none the wiser.

I'm with you on the Nationwide figures. Halifax's data appears to be a lot bumpier, although they follow the same trend in the long run.

The increased number of houses on rightmove doesn't mean that theres no lack of supply. If everyone in this country put there house up for sale tomorrow, you'd be saying that we've got a sudden increase in housing, wereas the situation in terms of supply/demand hasn't changed.

It's important to distinguish total housing stock and housing available for purchase. The latter is the important one when it comes to determining supply/demand balance. If you're looking to buy a house, you're only concerned with the houses on the market, not all the houses that exist in the area. Similarly Demand is not the number of people who want to buy a house, or want a better house - it's the number of people who have finance available to purchase a house. House prices are determined only by houses which are on the market.

It will be interesting to see how much prices drop in different areas. Clearly city centre flats are going to take the brunt of it - they're designed more for speculation than living in. My guess is that posher areas with good schools will likely hold up better - no growth, maybe some falls. Transactions will drop to a trickle as mortgages become more difficult to come by and cash buyers no longer see the point in investing in risky, low-yielding assets. I'm assuming there are fewer sellers of necessity in the well-heeled 'burbs - although I'd be happy to be proved wrong.

[numpty]

i take it they didn’t teach you statistics at school

the graph is valid and there is no "cheating". Neither of the graphs need to start at zero nor do they need to have the same scaling.

Plot me a graph of temperate of water at room temp going to 100 degrees centigrade time both in Fahrenheit and centigrade.

You will need to start them both at different points and the scale will have to be different to get the same line.

Not if you start at minus 40 degrees

[EmpiricalBear]

Well... it should come as absolutely no surprise that house prices and total mortgage debt is correlated at about 1.0?

Its a tautology and says nothing about cause and effect (so hence the usual debate ensues).

Its so blatantly obvious that HPI cannot be sustained if credit expansion isn't also explained that its not really necessary to argue about supply/demand and all that stuff. You only need to look at the monetary relationship and what is happening to credit to see what is likely to happen next.

We will be able to move on from this debate very soon now as the numbers will be telling us some pretty obvious things.

The debate moves on almost imperceptibly, but the ground shift and change.

A year ago, bulls were telling us that HPI would be sustained because of the fundamental shortage of property in the UK.

Now that its clear that BTL/investment flats have flooded the market and new build is crashing we are told that the fundamentals mean that this won't spread to other property.

Now we see prices in East Anglia off from 5-20%...

Well... I think that if the fundamentals were going to support anything they would have done it by now.

Cat is out of the bag and yet the 'fundamentalists' simply move the goal posts.

Edited March 22, 2008 by 2MeterBear

[InternationalRockSuperstar]

CPI is 2.5%. RPI is 4.1%. There's been lot of debate about which is a truer representation of inflation.

They are both hideous understatements of true inflation.

House prices are determined only by houses which are on the market.

Bingo.

It will be interesting to see how much prices drop in different areas. Clearly city centre flats are going to take the brunt of it - they're designed more for speculation than living in. My guess is that posher areas with good schools will likely hold up better - no growth, maybe some falls. Transactions will drop to a trickle as mortgages become more difficult to come by and cash buyers no longer see the point in investing in risky, low-yielding assets. I'm assuming there are fewer sellers of necessity in the well-heeled 'burbs - although I'd be happy to be proved wrong.

Those glass rabbit hutches in London's Docklands will prob be hit the hardest.

London will experience a much higher proportion of redundancies in the next 12 months than the rest of the country as financial firms cut their losses.

[bendy]

"Nationwide is the most relaible index."

no index is reliable but for a VI like yourself then that is the most unreliable ever.

keep reading this place chap, prices do fall, if they didn't i'd be an inherited millionaire by now (from early 90's)

but life goes on as many will find out

[Its time to buy]

Its whats happening at the margin thats important. Credit criteria was being kneaded at the subprime end until a pet dog with three legs could obtain a 35 year mortgage. Houseprices valuations also the same. Fit a gold door knob onto that ex LA studio flat in Beruit, that increases the value by £25K.

This dynamic at the margins is finished. Its over. Houseprice values will go down until the level of mortgage debt is reduced to more sustainable levels.

[onlybone1]

Scott, do you have a link to your signature graphs please? I would like to use these in an article I am writing. They are a bit small as they are. Thanks very much.

[Scott]

Scott, do you have a link to your signature graphs please? I would like to use these in an article I am writing. They are a bit small as they are. Thanks very much.

Hi Onlybone1

I'll see what I can do today, although it may not be until later as the wife has given me a list of jobs as long as your arm (it must be bank holiday!). Will come back to you on this post.

Just so you are aware, I actually put the chart together myself using Nationwide house price data and government data for wages. It is in Excel format so I'll provide a link to the excel and pdf documents.

Cheers

Scott

[Scott]

Scott, do you have a link to your signature graphs please? I would like to use these in an article I am writing. They are a bit small as they are. Thanks very much.

Hi onlybone1

Here you go:-

http://www.bristolweddingcars.co.uk/housep...sesince1971.pdf

http://www.bristolweddingcars.co.uk/wages-...971-to-2007.xls

I saved them to my friends website hence the site name. Wasn't sure how to get them to you otherwise!

Just out of interest what is the article for? Are you an editor for The Sun and they've finally realised the crash is on and better get loads of proof as to why?

Cheers

Scott

[onlybone1]

Scott

Thanks for that, I am writing an article for a magazine called Invest It, I started a thread on it in HPC. It is a general economic article with a bias to houseprice debt. The graphs are the most powerful way to get the message across to the mases.

Cheers

Robin

[onlybone1]

Scott

magazine called invest today - used to be called invest it, mental block after weekend!

[Optobear]

The reason why we have lagged the U.S in the HPC is simply that they have a oversupply of housing, wheras in the UK we have a lack of supply which is holding prices up.

Look anywhere in London, you dont see rows of empty houses, quite the contrary, they are cramming in new housing anywhere they find a spare bit of land.

I think it is important to draw a distinction between number of houses, and number of houses available to buy.

If the number of houses were very much too low, then rent would have increased sharply (and matched house prices) over the last 10 years. Rents have hardly moved compared to house prices.

So the shortage is not in houses (which is why there aren't lots of empty ones around, but equally there aren't vast squatter camps outside UK cities). The shortage has been in houses to buy (at a reasonable price). The limit there has not been due to a lack of money (mortgages were cheap and easy to obtain). It was in people willing to pay historically very high prices. Many were prepared to buy, and we have seen a huge bubble. We've also seen a dramatic growth in BTL investors, again money has been easy to obtain, and people have been prepared to take on the debt. Furthermore, as prices have risen the BTL yields have dropped significantly, to the extent of rents not even meeting debt payments with BTL investors anticipating further capital gains.

The issue, of course, is about the future. The number of houses can't change rapidly, but that is okay, because there are approximately enough houses to go round. The availability of debt is very different. If there was a way of plotting availability of mortgages it would probably look like the 1929 stock market crash. Really huge changes in a very short time. No one really knows what the effects of the dramatic change in mortgage availability will be. It might be that transactions just stop, with the prices of the few transactions holding up. Alternatively the change in sentiment, might lead to a panic and a dramatic fall.

My guess is that the sellers (and I class myself as a potential seller) will take a long time to accept lower prices, and we won't see sudden falls, but with hindsight (in five year's time) they will look dramatic.

[lets get it right]

Nationwide, the most widely recognised index has house prices falling for 4 months in a row. A good start, but not too great in the scheme of things when they doubled in the last 5 years.

In many parts of London prices have gone up 50% in 3 years.!!!

Just look at the market for flats in inner city areas - here they've oversupplied what the market can take and prices have fallen 50% in most cities like Leeds and Birmingham - this is similar to the US model. Its a totally different market for houses, especially in London.

Housing is too regional a market to generalise. Prices doubled in the last 5 years! Not where I live. Prices now are about the same as they were 5 years ago.

London has gone up and if anything is proof of the argument that prices rise as a function of credit supply London is it.

I've been a participant in the housing market now for about 35 years. And if there is one thing I have learnt it is that house prices are a function of the credit available.

Supply/demand arguments are nonsensical.

There is always unlimited demand. We all want to own a house and we all want to own a better house. Demand is given.

Supply cannot be easily changed. It's not like a cocoa crop that fails because of the frost. And, in general terms, most people selling houses will buy another so supply/demand in a property chain produces an equilibrium. One person becomes a property owner, one person stops.

So, given unlimited demand, what causes house prices to rise? People will borrow more to own a nicer house. It is this that under pins house price rises. Take the credit away and people can't afford anything. Watch the prices fall then - no matter how many houses Barratts and Wimpeys build.

Investment properties seem to have a different dynamic. People were prepared to borrow and subsidise the rent in the hope of a capital gain. Take away the capital gain - by taking away the supply of cheap credit to other investors - and prices fall. Prices of new build flats are falling dramatically in places like Manchester and Birmingham where there is 'massive over-supply'. (I would argue that you could easily fill these flats with tenants if the rents were cheaper). But flats where I live, where new build is relatively rare, are also coming down in price. Why? Because credit is not as cheap and easy to get as it was.

To me it is completely self evident. House prices are a function of credit availability and price. Everything else is irrelevant.

[babesagainstmachines]

Scott - your graph of wage rises v house price rises is very informative. It's amazing how tiny the blip was which casued the 90s crash, compared to the current situation. That's almost certainly down to low interest rates, the very same thing which is causing our pensions crisis...

[Guest Steve Cook]

...This house price boom has nothing to do with supply and demand for purchasing a house. It's all about the credit available to buy. Increase in population may have had a negligible impact on the rental market, but not on the market to buy housing...

I agree. Also, I am sick and tired of this demand-driven argument for why house prices will hold up.

There are many places in the world where the population density is higher than here but where real estate is lower in price. I bet if you go to Bangladesh, you will pay a lot less for a unit of land than you will here. Increases in demand will fuel increases in price all other things being equal. However, all other things are never equal. The economy in Bangladesh is smaller than here. I am sure that in Bangladeshi terms, house prices are very high. But, in absolute terms they are not. As long as our economy remains bouyant, then one might expect the supply-demand argument to hold true. As we are all too aware, it is now far from bouyant and so the demand that some people speak of may well cause the liquidity of the market to be maintained, but not the price.

I should add though, in the short term, even the liquidity is going to be affected due to the current stand-off between buyers and sellers.

Edited March 25, 2008 by Steve Cook

[eric pebble]

I am afraid that those lines will not run parrallel for much longer - the debt levels will stay where they are, the house price levels will be shooting down.

Ahhhhhhhhhhh --- soooooooooh!

[roadtoruin]

I think it is important to draw a distinction between number of houses, and number of houses available to buy.

If the number of houses were very much too low, then rent would have increased sharply (and matched house prices) over the last 10 years. Rents have hardly moved compared to house prices.

You can only ask so much rent, and often those renting cannot access credit. Housing benefit will only pay so much, so rents have a ceiling and are not in a direct relationship with house prices. Rents don't go up because the supply of tenants is inelastic.

I think it is important to draw a distinction between number of houses, and number of houses available to buy.

The issue, of course, is about the future. The number of houses can't change rapidly, but that is okay, because there are approximately enough houses to go round.

If there are enough houses to go round, why does my local council have a seven-year waiting list ? On this forum we engage in this supply-demand argument mainly from the perspective of salaried people who will when HPC occurs mostly have a chance of buying. At the bottom of the market (if not already) there is an oversupply of cheaper properties, esp. flats. That doesn't mean they are affordable to a couple on a joint income of 15-20K, and perhaps they never will be. For them there is a real supply shortage, the huge increase on rightmove is irrelevant because it's vastly overpriced for them, a supply shortage probably only remediable with increased social housing.

When the govt say there's a lack of supply I think they're broadly right for the above reasons - for a large proportion of the lower paid. However, it will not be addressed by the private sector, at least not in the South East and certainly not by new-build. This sector cannot afford to rent (it's capped) or buy in the private sector, and the supply of social housing is inadequate. Do you agree this is a genuine supply shortage in the housing market? If you disagree (on the grounds there is oversupply in the 'private' market) then how are you going to match up one over-priced over-supply with the other underfunded excess demand? You would hope HPC might do it, but it would have to be a huge HPC to bring these two market distortions together...

[Scott]

Scott

magazine called invest today - used to be called invest it, mental block after weekend!

Hi onlybone1 (Robin)

Just looked it up and see that I can sign up for a free copy. I may just have to do that and look out for my graph (fame at last!!!).

Cheers

Scott

[Scott]

Scott - your graph of wage rises v house price rises is very informative. It's amazing how tiny the blip was which casued the 90s crash, compared to the current situation. That's almost certainly down to low interest rates, the very same thing which is causing our pensions crisis...

Hi Dazednconfused

I like the way it tells so many stories with two just lines. It shows how out of kilter wages are in comparison with house prices and the way credit is so lax.

But at the same time it shows how wages have hardly grown yet house prices have sky rocketed.

It also shows that during the last crash these lines came back together as they had been all the way back to 1971. I believe this will happen again.

And finally it shows that this time it really is different. It is just so much worse. As you say the blip this time is massive!

I was amazed when I put this data/graph together. When the graph had plotted it was like a Eureka moment and shocked even me!

Cheers

Scott

[_w_]

Do you agree this is a genuine supply shortage in the housing market? If you disagree (on the grounds there is oversupply in the 'private' market) then how are you going to match up one over-priced over-supply with the other underfunded excess demand? You would hope HPC might do it, but it would have to be a huge HPC to bring these two market distortions together...

I think you have answered your own question in so far as you are asking it on this forum. The likelyhood of such severe correction may be small. Still, you should have a look at the couple of japan threads that popped up over the week-end to see a real life and recent example of how bad it could get.