Saturday, April 26, 2008

Bullish analysis of the situation….

UK housing slump fears overplayed

''...Britain will escape a repeat of the negative equity crisis of the 1990s unless there is an unprecedented fall in house prices, according to Financial Times analysis that suggests talk of a disastrous housing slump is overplayed....''

Posted by hpwatcher @ 08:35 AM (2006 views)
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33 thoughts on “Bullish analysis of the situation….

  • So apparently a fall of 25% is seen as a laughable eventuality.
    Also the article states that this time round Mortgage lenders have been a lot more pudent/ responsible only offering LTV that can be comfortably repayed.
    Watched the BBC News this morning in which some guest announced the end of a very short crisis. Denial at its worst.

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  • so prices can go up 300% to UNPRECEDENTED LEVELS but cannot drop 25%?

    think 50% drops have actually already happened and drop of 60-70% on flats is not out of the question

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  • Gordon-is-a-moron says:

    hpwatcher,

    “analysis” is probably a bit too strong a word for what this is. This is a dim, long-winded description of what could be illustrated much more clearly in a single graph.

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  • they ought to look at the Northern Ireland Market. Values are already down about 10-15% and still falling in many places. Its just not feeding through into sold prices because nothing is selling.

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  • “If prices dropped 20 per cent, 1.2m families would be affected by negative equity. And 1.8m – or one in 14 households – would be underwater on a 25 per cent fall”

    underwater – what on earth does this mean? we best notify the environment agency

    Clearly some commentators are still in the denial stage.

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  • it_is_going_with_a_bang says:

    No doubt the same a-n-a-l-ysts that said a year or so ago that house prices would keep going up and up and up.
    20% unlikely or unwelcome?

    Note the use of the word “unlikely”. It basically means they don’t want it but it probably will happen.

    “Unlikely” is often used in the same context as “fundamentals”. Oh yes and the word “desperate”.

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  • As we’ve always said, no-one catches a falling knife – if prices drop 10% what exactly will stop them falling a further 15%?

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  • difference also between now and the last slump is last time very few people owned more than one property.Now its difficult to find anyone with just one!

    IIf you had 5 buy-to-lets you could easily be down £100,000 in the first year the start of personal financial crisis.

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  • Not sure about the figures quoted here. House prices fell by more than ~10% in the 90s, so where the more than double comes from…
    The belief that prices will settle to a permanently higher level makes no sense to me. Of course if inflation takes off then nominal falls may well be less. A careless piece by the usual standards of the FT

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  • I have downloaded from Datastream the statistics for the last house price crash. The Halifax index dropped by 15% from July 1989 to February 1993. However over that same period RPIX went up by 22% overall, and average earnings by 27%, giving a real-terms house price fall of 30% or 33%. In London (using a different index over a slightly different period), the nominal price drop from peak to trough was 21%, but the real price drop was 35% using RPIX, or 39% using earnings.

    RPIX averaged 6.3% annually over that period, and that took away much of the sting of falling house prices. Now RPIX is only 3%, which will give us inflation of only 11% in 3.5 years. So even if real prices fall now by only as much as they did then (and any graph of prices versus rents or average earnings will show you that houses are much more overvalued now than they were in 1989), we are looking at a nominal house price fall of at least 20%.

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  • Everyone seems to have a different set of numbers for this – these look bit low.

    By my ‘ready reckoner’, there will be one million in negative equity when the published Halifax price index drops to £185,000, and that one more home will drop below for every penny less..

    i.e. £1 = 100 homes, £1,000 = 100,000 homes

    The number going under will slow when the index drops below £160,000.

    The index currently stands at £191,556, which implies that there are about 340,000 currently in negative equity.

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  • These are the same fantasy figures that accompanied stories on the way up, backed by absolutely no evidence. As letthemfall says, there is absolutely no reason whatsoever to believe that houses should settle at a still unaffordable level – a turn in sentiment, BTL cashing in, tighter lending, recession etc etc. will ensure that doesn’t happen.

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  • Prices in Belfast are down by 20% + already.

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  • Well done monty032 and UT for getting some figures down on paper (so to speak)

    I’m predicting 20% nom, 30%ish with inflation over the next 2 years.

    I was beginning to doubt myself until last months 2.5% drop on halifax scale. I think there are some more significant drops in the system waiting to show up in the figures.

    What I find interesting in Monty032 figures is wage increases in the last recession outstripping inflation – I’m surprised people were getting much in the way of wage rises during a recession.

    It amazes me how BTL’ers who’s business model relies on re-selling to someone for more money and re-newing mortgages every couple of years to stay on teaser rates – still view it as a good investment.

    I’m not sure despite the headlines that sentiment has fully changed yet – but it will.

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  • A bit more work on my spreadsheet shows that, if real house prices drop by only as much as they did in 1989-93, nominal prices will fall by 23% peak-to-trough across the UK, and by 30% in London. This is because inflation and earnings increases are running at just under half the rate they did then.

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  • Personal and govt indebtedness is also much higher now than it was in the early 90s. People have debts other than mortgages to pay off.

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  • we also don’t have mobile phones(kids mobiles as well),gym membership,sky,broadband,home computers etc etc

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  • During the last slump, the phenomenon of negative equity went down extremely badly, and many homeowners threw in the towel when they would have been better advised to sit it out.

    Yet the combination of inflation and near universal repayment mortgages meant that the great majority were never in the red by more then £10k, and most were back in the black within two years.

    This time we will have large numbers of homeowners with six figure negative equity, many of whom will have interest only mortgages.

    If inflation is kept low, it could be fifteen years or more before they are back in the black.

    Politically, I think that will prove intolerably slow, which is part of the reason why I believe the optimal way out of the mess is to have inflation control (if posible…) regulated at a raised central target of 5-6%

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  • dohousescrashinthewoods says:

    – Two words: “Goldman Sachs” – read “crooked as hell”. These were the guys recommending and selling sub-prime bonds to clients as fast as they could short them.
    – Houses may have gone up dramatically, but sheeple MEWed dramatically, so it’s not just the many recent purchases (i.e. I disagree with the article) that will be “underwater”.

    Monty032, cracking stuff. If [only] 20-25% is the tipping point, I expect to see things tip fast. So these numbers look like a comfortable minimum, given, as pointed out abowe, property is now more overvalued, buyers are leveraged with more properties each, there is more MEW and both consumers and government are in more debt.

    Never has “sit tight, stay out or RUN AWAY” been a more financially prudent imperative – and this was supposed to be a “bull” article?

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  • There is a common argument that this time things aren’t as bad as the early 90’s. I agree, but only because this time we are seeing a very different cyclical unravelling.

    This time it is leverage (I’d much rather borrow £200k at 15% than £500k at 6%, because a 1% rise in rates would hurt me less), on the one hand, and liquidity, on the other, that are hurting people. The market is not repeating or even rhyming, but the majority of people I have spoken to were so fixated on the causes of the last downturn that they still can’t spot what is leading to the current one. We don’t have a one-morning leap in interest rates or MIRAS being abolished; rather, we have a chronic failure of the system.

    I very much hope that we are not going to see a disorderly house-price correction, but having thought about it in great depth over the last few years (I sold my dream flat 18 months ago and continue to rent), these points are on my mind:

    1. Loan-to-value ratios have in a lot of cases dropped from 95% to 75%. That means a £25k deposit used to be able to reach for a £500k house. Now it can only reach for £100k. That’s an 80% drop. With food and energy inflation running wild, people have less opportunity to save and build up larger deposits. I read that in the last two months, one third of property transactions failed because lenders wouldn’t lend the amount needed.

    2. Salary multiples have halved. So if you’re earning £80k (typical City salary), on a multiplier of 10 you could have borrowed as much as £800k and bought an £800k house (without adjusting for stamp duty and legal fees).
    Lots of people did this in 2003 at the bottom of the interest rate cycle, and took out 3 to 5 year discount or fixed-rate mortgage products. In the UK in 2008-9, a huge number of these will expire and need renewing.
    If you’re earning £80k and have an £800k mortgage to renew, what do you do? Nobody will renew the loan in these more cautious times. You will only be able to borrow on the new 5x multipliers i.e. £400k. Half of what you need!
    That leaves a £400k “funding gap” so unless you have a bonus to fill it, you will be unable to replace the old, expiring mortgage and will be forced to sell.
    Faced with a 50% funding gap, people who fail to remortgage will have to sell unless they can find a willing and able buyer.
    And what if salary multiples fall to “old” levels of 2 or 3? That’s a drop from 10 to 2.5, so 75%, but we’re not there yet.

    3. There are few others out there prepared (or able) to take out a loan to buy the house at £800k. If the existing owner can’t borrow that much, then who else can?
    With the credit derivatives storm, there will be no bonuses for a large number of bankers this year. Their bonus will be to keep their job, since there have probably already been 10,000 City job-losses, with more to come. And then there’s all the hedge funds that have gone under, or who are leaving London for Geneva, Monaco, Dubai or Sinagpore.
    So sellers will need to find someone richer (higher salary, or more cash), and since wealth is a pyramid there are necessarily fewer people in the next bracket of wealth. Many buy to let landlords are hurting and in many cases bleeding monthly, so the possibilities there are reduced too.
    Even if the rich suddenly developed an urge for altruism, they would not be able to buy all the houses for sale — would they have the desire, let alone the time or organisational capacity? I don’t think so. Not yet, anyway, as these things take time to set up.
    In any case the non-domiciled tax issue means there will be fewer Russians and Arabs to buy in cash. “Stupid Foreigner Theory” is over because even if they haven’t left the UK, they are now viewing the tax regime in the UK much more cautiously and as potentially hostile. Political risk means this is not a time to load up.

    So if lenders can’t lend, remortgagers can’t remortgage and buyers can’t borrow, because prices are in excess of what the market will support, and potential cash buyers being fewer, what does that mean? First it means that volume contracts enormously. That is what we’ve seen. Then, the people who have to sell (sick, elderly, unemployed, emigrants) will have to accept much lower prices, as above, even though they don’t want to. And since prices are set at the margin, that will set the new tone for the market. We don’t need a large number of distressed sales to move the whole market. And from a simple quantity theory of money perspective, it’s obvious that if the number of house sales falls, then this is a massive deflationary force on the economy as a whole. It’s not just a matter of price levels – if money stops moving, then the whole economy is imperilled in a way that we truly haven’t seen since the 20’s in the UK and 30’s in the USA.

    I really don’t wish for this, but there is a very real and increasing chance of a sudden step-down adjustment in prices that then becomes to a Japan-like or Germany-like stagnation of much longer duration than the last downturn of around 5 years.

    As one commentator I read recently said, this is not a credit crunch, but merely a case of everyone coming to their collective senses.

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  • Sadly many who have MEW’ed have done so to enable their children to get onto the ladder. So not only have they increased their exposure to debt they’ve poured the money into a debt pit for their children. Back in the very late 1980s I rented a room from a friend who had bought at the top of the market with her father’s help. At the time it seemed like a good idea because as a first home she’d be expecting to move up the ladder within 3 years, using the equity to help buy a new place and pay off her dad. Of course, within 3 years the market had collapsed but dad needed his money back. I wonder how many MEW’ed for their kids were expecting some cash back within 3 years this time?

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  • dohousescrashinthewoods:

    totally agree on Goldman Sachs.
    Its the equivalent of a used car salesman selling a car with faulty brakes, then taking out a life policy on the new owner.

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  • New to this website. Cant escape the irony of the front page graph and the website name. Given what history has shown may of your contributors are a little hysterical. If you cant afford a house now at a dip in the market you never will.

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  • “Britain will escape a repeat of the negative equity crisis of the 1990s unless there is an unprecedented fall in house prices”

    Which there will be, so the FT is talking out of its ar*e.

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  • withshire,

    You’re right – we can enjoy a little shadenfreude at the expense of the arrogant ‘portfolio’ brigade, blinkered money lenders, and the culpable Ms Allsopp, but the reality is that an awful lot of decent people are going to get badly burnt by this.

    Still, we were the guys who spoke out and went against the tide…

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  • Having now read all your views I am curious as to the need for you all to desire such a crash.

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  • Monty makes a very good point about inflation……………we have a very high level of secured and unsecured debt, much higher i would guess than in the early nineties, but with a very low level of inflation that debt is real debt and will take much longer to pay down than when you had high inflation rates helping you.

    One way out might be for central government to let loose inflation to pay down both government and personal debt, however that has a habit of getting out of control and destroying savings.

    If I see inflation incresing too much, this will be a buying signal for me and will want to invest my cash into real assets.

    chas

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  • hehehe a lot of desperate hopefull people still here i see 🙂 you lot will never learn, i bet the reason is you are all wipper snappers i guess between 19 and possible 30/35 years of age max, or maybe college degree graduates….. orr well you lot get a job that pays a measly wage and the investors will live the life of luxury….

    we may see a 10% drop purely from sentiment or maybe 20% on new builds, but im sorry to tell you mid next year we will see double digit growth again…….arrrrrrrr now where did i put my violin….

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  • Doesn’t seem to be happening quickly though does it?

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  • Every week there is another headline which reads, ‘the worst since the 90s’, yet this is nothing like the 90s.

    If the figures are the same or in many cases worse than the last crash, then it’s a crash.

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  • A Cowell – some people here desire a crash but I feel the majority don’t. In my case I realised about 3 years ago that HPI couldn’t continue growing at the rate it was for all the often discussed reasons. I believe people here don’t desire a crash but they see it as the inevitable result of the ridiculous financial policies of the western governments in recent years. Prior to the run on National Rock I believe many pro-housepricecrash.co.uk users still felt a little as though they were swimming against the tide. Families and friends were still looking at renters who could afford to buy as though they had lost their marbles. Well, the world changed quite a lot in September 2007 and it’s been downhill for the government, the bankers and all the other VIs since. Many of those families and friends are starting to realise that maybe the renters weren’t quite so foolish.

    Greenbay – double digit house price growth within 14 months?? Well, at least you’re confident. Deluded but confident. How can you honestly say that? Prices across the board have dropped 2.5% in one month. Do you think April will be better or worse than March? Don’t forget all the mortgage products people can’t access now and the increasing costs of those mortgages people do have and the increasing costs of petrol, food, electricity, gas, council tax etc. You are the Iraqi Information Minister and I claim my reward.

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  • “…If prices dropped 20 per cent, 1.2m families would be affected by negative equity. And 1.8m – or one in 14 households – would be underwater on a 25 per cent fall…2

    Don’t understand this. Didn’t Vince Cable say that a 10% fall would cause 3 million in negative equity (or was that 20%)? Perhaps he was wrong?

    Please?

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  • we may see a 10% drop purely from sentiment or maybe 20% on new builds, but im sorry to tell you mid next year we will see double digit growth again…….arrrrrrrr now where did i put my violin….

    Lets just wait and see what happens shall we? 😉

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