Monday, November 19, 2007

Same old same old

Will UK house prices crash?

No, says CML's Paul Samter. Prices realised may have dropped relative to asking prices, but this is a long way from a full blown house price crash. The balance between supply and demand, the strong UK economy, predicted falls in interest rates next year and a shortage of housing supply will help to support prices.

Posted by little professor @ 01:57 PM (719 views)
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3 thoughts on “Same old same old

  • ..” a strong economy, predicted falls in interest rates….”. The reason given for any future interest rate cut is the weakening economy, caused by consumer and government debt getting out of hand and layoffs in financial services etc. Inflation will limit the scope for cuts and will make ensure that any small nominal cut will hardly be a cut in real terms. “The balance between supply and demand” – the steep rise in house prices in recent years occurred with no appreciable rise in the ratio of households to houses, so prices can also fall irrespective of that ratio. To say that what’s happened in the last three months is not a “full-blown house price crash” is pathetic – the bears’ argument is that the HPC is just getting started. All this is well known to readers of this site, so why do these VI talking heads just keep trotting the same old stuff?

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  • The_harder_they_come says:

    Well don’t bother with a subscription to the New Statesmen. Let’s run through the supposed arguments of the Council of Mortgage Lenders “economist”, to show house prices will flatten not crash:

    “First, there has not yet been a marked shift in the balance between supply and demand.”

    He argues both supply and demand have fallen. But he’s supposed to be an economist so he should know that supply and demand are not absolute figures, they are curves with the actual price set where they meet. Prices only rise or fall when the supply or demand curve moves as a whole, and prices always rise or fall if one changes. The only time you can have changes in either or supply or demand and no change in price is in the odd case that the supply curve change just so happens to exactly match the demand curve change. He seems to be suggesting that this is what is going to happen i.e. although buyers are becoming more reluctant to buy at current prices, sellers are also more reluctant to sell at current prices than they used to be! His evidence is presumably the reduction in new instructions reported by RICS and co., but he’s forgotten that although new instructions have fallen, stock at estate agents has risen (8% in October according to RICS). This suggests that in actual fact it’s not that the supply curve has moved magically to match the change in the demand curve, it’s just demand has fallen. Uniquely in the case of housing most buyers are simultaneously sellers. If demand falls, sales automatically fall, (noone can afford to move “up”), and estate agents stocks rise as that part of the market that doesn’t need to buy another property, (buy-to-let, sell-to-rent, emigrants and some down-sizers), are the only ones left selling, but still noone buys! That’s downward pressure on prices, not some “invisible hand” balancing.

    “Second, the UK economy has grown more strongly than expected in recent years – so we are starting from a solid position.”

    Oops, another economic bloomer. It’s irrelevant whether we were growing in the past or declining in the past, that’s already factored into past prices, what determines prices today is only growth today. He expects growth to continue at a “reasonable pace”, that will “contain the number of forced sellers due to deteriorating personal finances”. But, for forced sellers at the margin, it’s the interest rates they pay that makes all the difference, not economic growth which in any case only helps if it boosts their income by significantly more than their personal inflation.

    “Thirdly, interest rates are now expected to fall over the course of next year, a significant turnaround from the position just a few months ago.”

    This is amazing, but he says it again more clearly: “Lower interest rates will make it less expensive to take out a mortgage”. So, no need to worry if you are coming off an attractive fixed rate mortgage from two years ago, you will be able to renew at an even lower rate. Official, from the Council of Mortgage Lenders own economist, net mortgage charges are going to fall! We all thought it was just the BoE that was rumoured to be reducing base rates a couple of times next year, but it’s not just that, all the gap that’s opened up between base rates and mortgage rates is going to disappear, mortgage lenders are not going to look for an increased risk premium at all! Surprised we haven’t heard more about this.

    “Finally, we have a severely constrained housing supply in the UK.”

    Oh no! After the astounding news about mortgage rates, he’s back to basic economic bloomers and self-contradiction. It’s totally irrelevant whether or not we have a severely constrained housing supply, it only matters if it is getting more or less constrained. It’s changes that change prices, not things that stay the same. We all know that there’s “pent up demand” from a long way back, but it’s already reflected in existing demand and prices. Is he saying it’s becoming even more pent-up? No, he’s already accepted in his first point that demand’s falling. So he’s just contradicting himself.

    His overall conclusion is a “softer” market but “a stable market, where prices are possibly even a little higher”.

    That doesn’t make sense. If mortgage costs are going to fall, as he says, and growth will continue with supply tightening plus pent-up demand, then prices should keep going up. What is the missing factor that makes him believe we are looking at a softer market despite all this good news? I can only imagine he’s factoring in expectations.

    Could it be that, despite all his good news, expectations alone are enough to soften the market and make higher prices only a possibility rather than a dead-cert. Just imagine what would happen to the market if it turns out that mortgage costs don’t fall, growth doesn’t continue and supply increases. To get really scared, imagine the feedback effects as expectations of price falls create further increases in supply (cashing in by BTL/DownSize/STR/Emigrants), further reductions in demand (negative equity, loss aversion, profit maximisation) and even reduced economic growth!

    And if you really want to be terrified, imagine that the best the New Statesman can do in terms of informed comment is a self-contradicting fantasist, and that the Council of Mortgage Lenders can’t tell the difference between an economist and a yes-man!

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  • financial planner says:

    If you click on the right of the page you’ll see the opposing view.

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