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Investors Chronicle Article On Housing Crashes

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A good analysis of HPCs.

http://www.investorschronicle.co.uk/Invest...n-shares-up.jsp

From the latest print edition - the first part of the article is online to general users.

The second part (registered users only) looks at other investments and concludes that during HPCs, shares and cash have done best (post-war).

An Englishman's home is his castle. But, having seemed impregnable just a year ago, that castle has now developed a very nasty case of subsidence. Since last July, the Nationwide UK housing index, adjusted for inflation, has dropped 11 per cent in value. Another deep, lengthy slump in UK residential property now seems almost inevitable.

Housing market crashes cause a huge amount of economic pain. They hurt building and construction, as well as many related businesses including home furnishings and DIY. And they make it much harder for consumers to borrow money against their homes to spend on other things such as cars and holidays.

It's no surprise, then, that housing recessions here in the UK have been associated with recessions in the wider economy. The last three major slumps in residential property have all coincided with a shrinking overall economy.

The latest outbreak of bricks-and-mortar mania had all the hallmarks of a classic bubble. Just like in the dot-com era, property groupies told us that "the rules of the game had changed" and that "this time would be different".

They delighted in telling us how the unprecedented immigration of the last decade would keep the market propped up. Russian billionaires would snap up every Mayfair penthouse and Surrey manor house, while Polish plumbers would be queuing up around the block for two-up two-downs.

At the same time, Britain's fiddly planning laws and the limited land supply prevent enough new homes from being built. In 2002, new housing completions actually hit their lowest level since the 1920s. Together with the new demand from migrants, the optimists could make a seductive case why there would be no repeat of past upsets.

Unfortunately, their reasoning totally ignored the experiences of Tokyo and Hong Kong. Both are more densely populated than anywhere in the UK and are also places that attract new residents. Nevertheless, each has suffered a catastrophic house-price collapse in recent memory, the Hong Kong market having shed two-thirds of its value between 1997 and 2003.

As well as a compelling story, every bubble requires a gushing supply of cheap credit to keep it going. And that's exactly what we've had since 2000, with interest rates in 2003 dropping to lows not seen in decades. Also, the banks and building societies lent more and more carelessly. As prices soared, many people borrowed high multiples of their income and offered little or no deposits. Lenders frequently demanded no proper evidence of borrowers' ability to repay their mortgages.

The latest bubble was far bigger than anything that went before it, as our 'Crash history' shows (see below). The average ratio of UK house prices to incomes has been about 3.1 since 1930. At the height of the recent madness, that ratio hit a record of six times average earnings. Whichever data series you use, the story is the same: house prices became more overvalued than at any other time on record.

Unlike in the 1980s, the recent bubble was a truly nationwide phenomenon. House prices went through the roof not just in London and the south-east, but right across the country. During the last bubble, the party was confined to the more prosperous areas, with London achieving double the increase seen in the north between 1983 and 1989. The pain today is likely to be much more widely shared.

Blueprints of a demolition job

• This is the fifth crash since 1945.

• House prices fall an average of 28 per cent in real terms during crashes.

• The three biggest crashes have lasted on average 66 months.

• At the end of crashes, the average house price/income ratio is 2.8 times, compared with a recent level of more than 5.

• The biggest quarterly drop in house prices was between March and June 1975 when the market fell 5.5 per cent in real terms.

• The biggest real monthly drop actually occurred during a boom: -4.2 per cent in December 2002.

• A bottom could occur in early 2013

House-price boom and bust is as familiar a feature of the British landscape as thatched cottages and pebble-dashed semis. There have been four bubbles since the second world war, each followed by a crash. This gives us a gorily graphic guidebook of what we might expect from the latest installment of housing horrors.

In the four post-war crashes, house prices fell on average by 27.7 per cent in real terms. If we exclude the mini-crash of 1979-82 – which followed hotly on the heels of the 1973-77 meltdown – then the average sell-off has been 31 per cent. The three most serious episodes have all been pretty similar in duration, averaging 66 months – or just under six years. The most severe was the last collapse in the early 1990s, although this record could easily be broken.

Whether you adjust for inflation or not, the Halifax index has fallen even further this time than at the equivalent point in that last crash. But just how far might house prices fall and over how long a period?

In inflation-adjusted terms, UK house price crashes have tended to last for about five years. If history repeats itself, the market might hit rock bottom in late 2012 or early 2013. The overvaluation of the market also points to big falls. According to Halifax, the average house cost 5.43 times average wages in April. Over the long term, the average has been about 3.97, around a third of where it is now. However, prices tend to overshoot in a crash – by 1995, the ratio had fallen to just 3.09 times.

Let's imagine that house prices continue to fall at their recent monthly rate. At the same time, let's say that average wages continue to grow at the pace they have for the past 10 years. Under this scenario, the Halifax house price/wages ratio would return to its long-run average in January 2011, with house prices having fallen some 17 per cent from current levels, or 25 per cent from peak to trough.

A 25 per cent drop in nominal house prices would easily qualify as the biggest crash yet in UK house prices. During the last housing bust, the Halifax index fell by 'only' 15 per cent. However, it's quite possible that the crash will be even worse still. Both the Halifax index and my longer-term UK housing series suggest that the price-to-wages ratio tends to fall below historic average levels during a slump.

How long could it last?

At the bottom of the last slump, the average UK house was priced at 3.09 times the median annual wage. If prices keep falling at the rapid rate they have lately, it would still take until April 2013 for the the price/wages ratio to return to 3.09 times. However, this still optimistically assumes that wages will keep growing at their 10-year average rate, when lately they’ve actually been slowing sharply.

The worst could well be to come for another reason. In the last three crashes, the steepest falls in prices tended to occur when the economy was in recession. This is most likely because recessions involve some people losing their jobs and a lot more people worrying that they'll be next out of the door. As yet, the UK hasn't officially entered a period of negative growth and unemployment is relatively low. If things get worse – as seems likely – the housing crash will accelerate.

There will be lots of false dawns along the way. Property cheerleaders will seize on any slight upturn in the data and tell us that the "worst is over". However, it's worth remembering that, during the last slump, the Halifax index actually went up in nominal terms about 40 per cent of the time. Even during 1991 – when the country was mired in recession and home repossessions hit an all-time high – there were two months when prices rose by around 1 per cent, month on month.

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Good post, particularly interesting that things will probably accelerate when GDP officially goes negative. Could we start seeing 3%+ MoM falls in early 2009?

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The main thing which keeps cropping up is that the average house price must return to 3 x average wages. This could be distorted by the joint ownership models, which could keep the prices artificially high. Are we ever going to return to the point where one parent works whilst one keeps home, without having to starve yourselves?

Either house prices come down, or wages increase.

Looking at an auction results on here the other day, 80% of repossessions (mainly HBOS and AMG) did not meet their reserve. When will they wake up, or are they still writing these down as assets, to prop up the finance figures?

Your call Gordo

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Good post, particularly interesting that things will probably accelerate when GDP officially goes negative. Could we start seeing 3%+ MoM falls in early 2009?

I agree, that falls should accelerate. I note that they said prices actually increased MOM a couple of times in 1991, which was immediately seized on by the VIs.

It's a shame that first graph is so small and blurry as it's a really good graph and I've not seen one like that on here before - I'm going to go and buy this copy just so I can see it properly and keep it for record unless anyone knows how to enlarge these graphs and de-fuzz them :unsure:

This was posted yesterday I think - has anyone got Pt2?

Anyone?

The main thing which keeps cropping up is that the average house price must return to 3 x average wages. This could be distorted by the joint ownership models, which could keep the prices artificially high. Are we ever going to return to the point where one parent works whilst one keeps home, without having to starve yourselves?

Either house prices come down, or wages increase.

Looking at an auction results on here the other day, 80% of repossessions (mainly HBOS and AMG) did not meet their reserve. When will they wake up, or are they still writing these down as assets, to prop up the finance figures?

Your call Gordo

If unemployment goes up enough, single earner households will be the norm again (either that or workless households).

I fully agree with the point on 3xAE. So a typical semi need to fall to around £75k today's prices (at the lowest point of the cycle). A long way to go, but going in the right direction.

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Excellent report.

The two most crucial numbers in this report are that house prices generally revert to between 2.5 and 3.0 times average earnings and that it takes about 5 -6 years from peak to trough.

Now imagine a world where average wages were actually not rising or perhaps even falling nominal terms over the next five years. Such a world could exist in a deep recession where bonuses were non existent and employers were sacking workers or threatening to unless they take wage cuts. Virtually no one alive to days has ever experienced such a sustained fall in nominal take home pay over such a long period - except in Japan.

I keep saying that Japan is our model for the future of house prices not the USA. In Japan the bonus culture was very strong. Even quite normal jobs had quarterly bonuses and very low basic pay. The total loss of bonus for many people and even redundancy meant that people in Japan suffered massive, sudden nominal and real falls in income that never recovered - hence house prices in Japan have still never recovered to previous peak and are falling again in certain places.

Under those sort of 'Japanese condiions' the nominal level of UK house house prices could fall by 50% or more as banks and potential buyers would be terrified by ever increasing capital losses.

Look at Japan to see what might happen. I have a close friend there who saw her parents lose 50% of their house value and were left with a huge negative equity.

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Found this over at GEI (posted by DrBubb) - an Investors Chronical slideshow presentation featuring that graph on page 13 but in a readable size - this is an excellent piece:

http://www.icroadshow.com/pdfs/Presentationweb.pdf

Thanks CATFLAP, I agree its an excellent presentation.

Excellent report.

The two most crucial numbers in this report are that house prices generally revert to between 2.5 and 3.0 times average earnings and that it takes about 5 -6 years from peak to trough.

Now imagine a world where average wages were actually not rising or perhaps even falling nominal terms over the next five years. Such a world could exist in a deep recession where bonuses were non existent and employers were sacking workers or threatening to unless they take wage cuts. Virtually no one alive to days has ever experienced such a sustained fall in nominal take home pay over such a long period - except in Japan.

I keep saying that Japan is our model for the future of house prices not the USA. In Japan the bonus culture was very strong. Even quite normal jobs had quarterly bonuses and very low basic pay. The total loss of bonus for many people and even redundancy meant that people in Japan suffered massive, sudden nominal and real falls in income that never recovered - hence house prices in Japan have still never recovered to previous peak and are falling again in certain places.

Under those sort of 'Japanese condiions' the nominal level of UK house house prices could fall by 50% or more as banks and potential buyers would be terrified by ever increasing capital losses.

Look at Japan to see what might happen. I have a close friend there who saw her parents lose 50% of their house value and were left with a huge negative equity.

I have also wondered about the "Japanese option".

The major difference I can see is an Anglo-Saxon preference for shock therapy tactics compared to the Asian gradualist approach.

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I think that the other thing we have to consider is the new information age within which we live. The interent has created a level playing field in terms of information, and this crash is going to have masses of online information (LR and RightMove) to show the falls occuring.

The Japanese option is interesting, but the majority of people in the UK are not on bonus schemes as they were in Japan (even in service jobs there were apparently bonus schemes). So I don't see that occuring, what I do see however is banks eventually having to look at the way risk and credit ratings are structured and lending on heavily revised more cautious principles. Clearly 100% IO and other models are going to go the way of the dinosaur in the rapdidly declining housing market. Plus as all this feeds back through the internet loop, the falls will become greater.

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  • 399 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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