My Estimate Of When Prices Will Level And Rise Again

[markyh]

I think property prices will only rise again when the FTB /(&BTL to a lesser extent) can again drive the prices upwards to restart the pyramid scheme.

This will happen when house prices drop to a level that at current conditions, 10% deposit min 3x -4x max earnings multiple, that they are then cheaper to buy p/m on a fixed 2y - 5y IR% that the cost of rent.

By FTB properties i mean 1bed and 2 bed flats, houses and maisonettes etc. I got my FTB house in 1996 @ 27 years old was a large 2 bed semi with 3 car drive and garage in the SE for £55k, £50k mortgage and less than 2 x joint income multiple.

Our rise in wages and the drop in prices from 1993 to 1996 suddenly made it a no brainer to buy as the mrtgage cost even on a SVR 7% was cheaper than renting, so we bought.

This was Aylesbury, so I sold that house for £194k last August, and it wont even sell for £165k now since the Spring.

So the house I sold rents for about £650 - £675 p/m. Even if you bought via the nationwide now as a FTB with a 10% deposit of £16.5k, you would need a £148.5k mortgage @ 6.58% for a 2 OR 5 year fix, which is £1010 p/m repayment over 25 years. And you would need a household income of around £40k.

So there is no way with prices dropping any sensible FTB would pay £350+ p/m extra to "Own" rather than rent on a house still dropping in value.

But......... if this house dropped by 2010 to £100k , FTB would only need £10k deposit and £90k mortgage, which would be only £612 p/m @ 6.58% on a 2 or 5 year fix, £38 - £63 p/m cheaper than renting with security of no landlord whims etc.

Then the seller of this FTB property can go to a 3 bed, that person to a 4 bed etc and so the chains get going again. BTL will be a lot rarer as only the BTL who bought properties at less than £90k could offer rents cheaper than buying and those BTL who bought above £100k would slowly more and more be forced to drop rents to keep tennents leaving to buy, and eventually be forced to sell to the FTB as rents wont cover the mortgage.

It will be quicker or slower ro recover depending on how IR% , LTV ratios and income multiples relax or increase. But once it does get started the whole system will relax again more and more until 100% mortgages at x6 income arrives again in another 15-18 years and it goes pop again.

So from £194k at absolute peak to £100k to make buying viable vs renting I see 49% - 50% drops a reality until it starts to pick up again. How long this will take? who knows, but could be by 2010 easily now with the Banks so adverse to risk now.

M

Edit - Grammer errors

Edited August 7, 2008 by markyh

[right_freds_dead]

this is all assuming that

banks are in a position to offer lending.

unemployment is low

interest rates are low.

inflation is low.

[markyh]

this is all assuming that

banks are in a position to offer lending.

unemployment is low

interest rates are low.

inflation is low.

All true i guess, and things to consider. But where was they ecomony and inflation etc in 1996 from 1988 when I started my proper working life? I can't remember. What I do remeber is in 1996 I was on £18k+commision when I bought with a shiny new Astra 2.0 16v Sport company car and I started on £7k in 1988. So inflation was quite high as I also remeber fron 1988 to 2000 I never got less than an 8% annual payrise and left the company in 2004 on £32k+Commission.

So in 16 years with annual increases an promotions in the same company my wage inflation was around 10% YOY average, but mostly between 1988 to 2000. From 2001 to 2004 things slowed a lot and it was only about 3% average YOY pay rises.

I doubt we have seen anything like that in the last 5 years?

M

[blankster]

An article currrently on Bloomberg quotes Hanoverian Enterprises Inc,. one of USA's major housebuilders, as saying house and apartment prices need to fall by a further 50% before the market re-starts itself. That's on top of the average 18% falls in USA already from the peak. Any reason to suppose that the situation is much different here?

[Agentimmo]

When they start throwing in a house with every new car bought, rather than vice-versa, that's when prices will start to rise

[angrypirate]

I reckon they will level out in about 18months - 2 years time, roughly 35% down from peak. Let me explain my reasoning

Average salary data is varied - ive seen one website that says 22k for 06 and another one that says 30k in 07.

http://www.clickajob.co.uk/news/average-sa...1-969-8107.html

http://www.mysalary.co.uk/averagesalary.php

http://www.statistics.gov.uk/cci/nugget.asp?id=334

Wage inflation isnt that high, but I believe they are nearer 30k, so based on the higher figure,

30k x 3.5 x 1.1 (10% deposit) = 115k.

If they were to crash to the bottom today, i believe this is around the figure they would crash to. As it happens it will occur gradually (not overnight) and so we have 2 lines heading towards each other - house prices deflation (at 1% - 1.5% per month) and wage inflation up. I estimate this to be higher than 4% - maybe even 6%, so factor this in

115k * 1.06^2 (2years) = 130k

130k - 200k = 70k fall

70k/200k x 100 = 35% drop.

At the rate we are going, (10%already in 7 months) 25% fall over the next 24 months is easily possible. If anything it could be nearer 18months

I believe there is a huge demand for houses, its just that

a. people can only get 3.5 multiplier mortgages now and

b. they are waiting for the crash

So no one is buying.

Banks are still lending to people with 10% deposits who want 3.5 income multipliers and i dont believe they will stop. The second people can buy at these multipliers they will. Coz of this I dont think prices will overshoot (i should probably say undershoot) and they will take 18-24months to reach bottom which will be 35% down from peak (43% inflation adjusted)

Edited August 7, 2008 by angrypirate

[Extradry Martini]

Isn't this the third thread on this subject today?

For what it's worth, here's my post from a previous one:

I believe house prices are going to fall 35-50% peak to trough in nominal terms (i.e. after inflation). The graph below (Nationwide price index / ONS average earnings) demonstrates that outside of leveraged and irrational bull markets driven by equally leveraged and irrational bull markets in credit, real estate prices oscillate between 3 and 5 times earnings. I believe that the pain is going to be so great in the housing market and the accompanying recession so severe that we will return to at least 3 times average earnings. That translates into a 35-50% nominal fall in house prices.

OK, so how do I come to a 35%-50% peak to trough fall in nominal house prices? The first step is to see where it is likely to go in earnings-adjusted terms: I believe (because I have seen it time and again) that when bubbles burst markets fall to levels well below fair value – as the famous elastic band gets over-stretched one way, it gets over-stretched the other way in reaction. To me, that means 3 times average earnings – especially given that it went there after the much milder 1989-1994 bear market. From the peak of 6.86 times earnings a fall to 3 times earnings is in the order of 56%.

The next step is to estimate average earnings growth over the coming years: The MPC has one brief – to keep inflation as close to 2% as possible. We know that they are expecting inflation to remain high (even going up to 4%) before falling back to their target. Let’s assume, conservatively, that this doesn’t happen quite in the way they expect and consumer price inflation averages as high as 3% over the coming years (interest rates would almost certainly go up in that case, but let’s assume they don’t). To CPI, we add real earnings growth: that is rarely much more than 1% in a downturn, but let’s assume its 1.5%. These three conservative assumptions (i.e. that inflation remains high, that rates don’t go up in response and that real earnings growth is higher than is normal in a recession) give us nominal earnings growth of 4.5% per year.

The last step, and probably the most difficult, is to estimate how long the bear market is going to last. There are various scenarios here, and this is what gives me the range of falls. To begin with lets look at what happens if house prices fall the same amount every year over different timescales in order to fall by 56% in earnings-adjusted terms:

Years to trough from 2007 peak:.....8.................5.................3

Earnings adjusted total price chg:...-56%..........-56%...........-56%

Earnings adjusted p.a. price chg:....-9.8%........-15.1%........-23.9%

Nominal p.a. earnings growth:.........4.5%..........4.5%............4.5%

Nominal p.a. house price chg:........-5.3%.........-10.6%........-19.4%

Nominal total house price chg:.......-35.1%.........-43%.........-47.7%

Ok, so that’s how the 35%-50% range is defined. So which is the most likely? My view is that as house prices are so stratospherically far from fair value, there will be a big fall over the first 3 years to around 3.7 times earnings(a crash phase), followed by a longer slower phase of the bear market to 3 times earnings as it will take a very, very long time before confidence returns. (By “confidence” I mean something akin to 1996 confidence, not the feverish madness of 2006). Were these phases to take 3 years each, we would get:

“Crash phase”

Years to trough from 2007 peak:......3

Earnings adjusted total price chg:..-46%

Earnings adjusted p.a. price chg:....18.6%

Nominal p.a. earnings growth:........4.5%

Nominal p.a. house price chg:......-14.1%

Nominal total house price chg:......-36.6%

“Slow phase”

Years from end of crash phase:......3

Earnings adjusted total price chg:..-19%

Earnings adjusted p.a. price chg:..-6.8%

Nominal p.a. earnings growth:........4.5%

Nominal p.a. house price chg:.......-2.3%

Nominal total house price chg:......-6.6%

The calculations for the slow phase are taken from the end of the crash phase, so we have to adjust the final number to put it in 2007 peak terms, meaning that the entire nominal house price fall over the 6 years is 40%. That, representing a reutn to 2002 prices according to the Nationwide data, is my very best guess at this stage.

What are the risks to this view? I think the major risk is to the downside - i.e. to falls below 3 times earnings. Not only have I been conservative in my high forecasts of earnings growth and inflation without rate rises, but I haven't factored in at all a big rise in unemployment which ios very possible and whihc would have a significant impact on house prices relative to earnings.

[mbc]

so what is your prediction in the likely event that unemplyment does rise and IR do go up as this is what will most likely happen,

[Guest DissipatedYouthIsValuable]

Isn't this the third thread on this subject today?

For what it's worth, here's my post from a previous one:

I believe house prices are going to fall 35-50% peak to trough in nominal terms (i.e. after inflation). The graph below (Nationwide price index / ONS average earnings) demonstrates that outside of leveraged and irrational bull markets driven by equally leveraged and irrational bull markets in credit, real estate prices oscillate between 3 and 5 times earnings. I believe that the pain is going to be so great in the housing market and the accompanying recession so severe that we will return to at least 3 times average earnings. That translates into a 35-50% nominal fall in house prices.

OK, so how do I come to a 35%-50% peak to trough fall in nominal house prices? The first step is to see where it is likely to go in earnings-adjusted terms: I believe (because I have seen it time and again) that when bubbles burst markets fall to levels well below fair value – as the famous elastic band gets over-stretched one way, it gets over-stretched the other way in reaction. To me, that means 3 times average earnings – especially given that it went there after the much milder 1989-1994 bear market. From the peak of 6.86 times earnings a fall to 3 times earnings is in the order of 56%.

The next step is to estimate average earnings growth over the coming years: The MPC has one brief – to keep inflation as close to 2% as possible. We know that they are expecting inflation to remain high (even going up to 4%) before falling back to their target. Let’s assume, conservatively, that this doesn’t happen quite in the way they expect and consumer price inflation averages as high as 3% over the coming years (interest rates would almost certainly go up in that case, but let’s assume they don’t). To CPI, we add real earnings growth: that is rarely much more than 1% in a downturn, but let’s assume its 1.5%. These three conservative assumptions (i.e. that inflation remains high, that rates don’t go up in response and that real earnings growth is higher than is normal in a recession) give us nominal earnings growth of 4.5% per year.

The last step, and probably the most difficult, is to estimate how long the bear market is going to last. There are various scenarios here, and this is what gives me the range of falls. To begin with lets look at what happens if house prices fall the same amount every year over different timescales in order to fall by 56% in earnings-adjusted terms:

Years to trough from 2007 peak:.....8.................5.................3

Earnings adjusted total price chg:...-56%..........-56%...........-56%

Earnings adjusted p.a. price chg:....-9.8%........-15.1%........-23.9%

Nominal p.a. earnings growth:.........4.5%..........4.5%............4.5%

Nominal p.a. house price chg:........-5.3%.........-10.6%........-19.4%

Nominal total house price chg:.......-35.1%.........-43%.........-47.7%

Ok, so that’s how the 35%-50% range is defined. So which is the most likely? My view is that as house prices are so stratospherically far from fair value, there will be a big fall over the first 3 years to around 3.7 times earnings(a crash phase), followed by a longer slower phase of the bear market to 3 times earnings as it will take a very, very long time before confidence returns. (By “confidence” I mean something akin to 1996 confidence, not the feverish madness of 2006). Were these phases to take 3 years each, we would get:

“Crash phase”

Years to trough from 2007 peak:......3

Earnings adjusted total price chg:..-46%

Earnings adjusted p.a. price chg:....18.6%

Nominal p.a. earnings growth:........4.5%

Nominal p.a. house price chg:......-14.1%

Nominal total house price chg:......-36.6%

“Slow phase”

Years from end of crash phase:......3

Earnings adjusted total price chg:..-19%

Earnings adjusted p.a. price chg:..-6.8%

Nominal p.a. earnings growth:........4.5%

Nominal p.a. house price chg:.......-2.3%

Nominal total house price chg:......-6.6%

The calculations for the slow phase are taken from the end of the crash phase, so we have to adjust the final number to put it in 2007 peak terms, meaning that the entire nominal house price fall over the 6 years is 40%. That, representing a reutn to 2002 prices according to the Nationwide data, is my very best guess at this stage.

What are the risks to this view? I think the major risk is to the downside - i.e. to falls below 3 times earnings. Not only have I been conservative in my high forecasts of earnings growth and inflation without rate rises, but I haven't factored in at all a big rise in unemployment which ios very possible and whihc would have a significant impact on house prices relative to earnings.

Real earnings growth is going to be negative for most?

[Justice]

and wage inflation up. I estimate this to be higher than 4% - maybe even 6%, so factor this in

Prior to the last crash my wages went up quite a bit and then halfed during the crash ! Yes i was working in the building trade.

This time we have not seen any wages going up in the lead up to the crash due to mass immigration so what makes you think we will see any wage inflation in the public sector over the coming years unless inflation starts running at 20% (I think it's 10% plus now)

6% and pigs will fly.

Sorry but no way can i go along with you on this one.

[Extradry Martini]

so what is your prediction in the likely event that unemplyment does rise and IR do go up as this is what will most likely happen,

Like I say, house prices to fall more than 40% if that happens. But I don't see higher rates as the most likely scenario - just lower earnings growth.

[Extradry Martini]

Real earnings growth is going to be negative for most?

Possible but very rare. Why do you think this?