Monday, April 14, 2008

Prices down 10% according to Hamptons

Housing Market: The bubble bursts

When even the venerable Economist says that "the fall in house prices may be both deep and prolonged" you know it's bad news. Depending on your perspective, of course... :-)

Posted by dark_horse @ 01:01 PM (2570 views)
Please complete the required fields.



22 thoughts on “Prices down 10% according to Hamptons

  • C'mon Correction says:

    “The biggest monthly drop since September 1992 prompted widespread concerns in a country that still remembers its previous big bust, which started in late 1989 and from which prices did not fully recover for almost a decade.”

    That’s a big part of the problem – the UK public DIDN’T remember about the bust in the 90’s and the lost decade thereafter, and have (/will) gone straight on into another even more severe bust.

    Reply
    Please complete the required fields.



  • Prices down????????? Surely not!! Good Grief!! What shall we all do now?? Anyone for tennis???

    Reply
    Please complete the required fields.



  • planning4acrash says:

    This is a subscription article can somebody please copy and paste contents into a message? I would but am on a mobile!

    Reply
    Please complete the required fields.



  • The bubble bursts
    Apr 10th 2008
    From The Economist print edition

    Britain’s property boom turns to bust: prepare for a hard landing
    Reuters
    HOME renovation would seem to be as exciting a spectacle as, well, watching paint dry. But as Britain neared the peak of a decade-long housing boom, it became prime-time television as producers rushed to make shows like “Property Ladder”. Those happy days in which acquiring a house seemed a sure bet have now ended and even the boost of a quarter-point rate cut from the Bank of England on April 10th is unlikely to bring them back.

    Prices, which had been drifting slowly lower over the winter, have started falling more rapidly and dropped 2.5% in March, according to Halifax, part of HBOS and the country’s biggest mortgage lender. The biggest monthly drop since September 1992 prompted widespread concerns in a country that still remembers its previous big bust, which started in late 1989 and from which prices did not fully recover for almost a decade.

    Mortgage lenders and Labour politicians (see article) have talked down the significance of the drop, arguing correctly that monthly data is volatile and that other indices show a very different picture for the month. The Nationwide Building Society, another large mortgage lender, thinks that prices fell just 0.6% in March. What really matters is the annual rate of growth, which has slowed to 1.1%, the lowest since 1996, according to both lenders.

    Worryingly, both estimates may already be out of date. Their data, which show that house prices have fallen about 4% from their peaks, are based on mortgages that are approved by lenders. Yet mortgage approvals capture only a portion of purchases—about a quarter of properties bought each year are paid for in cash—and take place only some weeks after a price is agreed. “The Halifax is behind where we are in the market,” says Marc Goldberg of Hamptons, an estate agent. “The prices we’re getting now are about 10% down from the peak last summer.”

    The drop should be set in the context of Britain’s long boom in house prices; between the first quarters of 1997 and 2007 the price of an average home increased by 215% according to the Nationwide’s index. Most homeowners are sitting on large gains, and have enough equity to shield both themselves and their mortgage lenders from quite a severe downturn. Experian, a credit-scoring firm, reckons that if house prices fell by 20%, only 78,000 households would have mortgages worth more than their homes, a tiny figure set against the almost 12m mortgages.

    On the other hand, the big increases may mean that prices have much further to fall. The housing market has, in recent years, sustained much higher valuations than was previously thought possible. Compared with average earnings, homes are more overvalued than at the peak of the previous boom in the late 1980s (see chart below). They are also high compared with rents, which undermines the argument that the increase in property prices has been driven by low homebuilding rates.

    The International Monetary Fund reckons that Britain’s house prices are almost 30% higher than can be explained by fundamental factors such as disposable income, interest rates and the size of the working-age population. A crucial reason is that credit has been artificially cheap in recent years because investors have demanded too little return for the risks they have taken on. This has driven down the cost of borrowing and made loans available to many who might otherwise not have been able to borrow.

    Datamonitor, a research firm, reckons that borrowers with spotty credit records account for about 7% of outstanding mortgages in Britain, with another 5-6% held by people who did not have to prove what their incomes were. Another 10% are held by landlords, compared with less than 1% a decade ago. Although this has proved a safe form of lending in recent years, no one knows whether people who have invested in houses may be quicker to sell when markets turn down than those who have bought houses to live in.

    Turmoil in credit markets has now pushed up the cost of borrowing and forced many lenders to withdraw from the market. The most recognisable of these was hapless Northern Rock, but it is by no means the only one. Almost all lenders specialising in Britain’s subprime market had stopped issuing new loans by the end of 2007 because they were no longer able to fund themselves with money raised in the international financial markets.

    The number of different sorts of mortgages available to the riskiest borrowers has slumped from more than 9,500 to about 1,300 since August, says George Buckley, an economist at Deutsche Bank. This week Abbey National, part of Spain’s Santander banking group, became the final mainstream lender to stop offering mortgages that allowed people to buy homes without deposits. Lenders have been demanding tougher terms and have been especially harsh on customers whose loans exceed 90% of the value of their homes. “We have reached a rare moment when lenders have pricing power and borrowers have none,” says a senior executive at one large lender.

    The seismic shift taking place in mortgage markets suggests that the fall in house prices may be both deep and prolonged. Reluctant as mortgage lenders are to talk down the market, even the Halifax and Nationwide expect “modest” declines in house prices this year. But this seems Panglossian, to put it mildly.

    One gauge of future house-price expectations is found in the property-derivatives market. In it investors are betting on prices falling by some 10% this year and another 4-5% next year, says David Miles, an economist at Morgan Stanley. That would mean a fall of about 20% in real terms.

    Other forward-looking indicators also point to trouble. The Royal Institution of Chartered Surveyors reckons that in February the housing market—judging by the ratio of completed sales to unsold properties—was its weakest since 1996. Estate agents are having to work harder. Charles Peerless, who owns estate agencies near the City and in the West End, areas where prices are holding up relatively well, says each property is being viewed about 12 times before a sale, compared with just four or five viewings a year ago.

    The Bank of England’s cut in interest rates is unlikely to help the market that much. On recent form mortgage lenders are unlikely to pass on much of this week’s rate cut. More important, once people begin to expect lower prices, it is very difficult to reverse a self-fulfilling downward spiral in the housing market. About the only hark-back to the go-go years may be found on television: a new season of “Property Ladder” started this week.

    Reply
    Please complete the required fields.



  • mark wadsworth says:

    Brilliant! That graph is one to cut out and keep. They reckon that according to the Nationwide, house prices-to-FTB income ratio was 4 at peak of late 1980s boom, sank to 2 in mid-nineties and is now at 5! So if prices fall as low as in mid-1990s, that would imply a 60% fall from the last peak, i.e. another 50% to go!

    Reply
    Please complete the required fields.



  • 50% sounds about right!

    Reply
    Please complete the required fields.



  • I agree with all of the above. I would say a fall of 50%-60% is needed for housing to come back into line with fundamentals i.e. people’s ability to pay.

    Reply
    Please complete the required fields.



  • financial planner says:

    They are of course right. However they called the market timing totally wrong. They said it would crash since 2002.

    Reply
    Please complete the required fields.



  • “Experian, a credit-scoring firm, reckons that if house prices fell by 20%, only 78,000 households would have mortgages worth more than their homes”

    That is patently wrong – Vince Cable calculated that 3 million would be in negative equity if prices dropped by 10%

    I suspect neither is quite right, but Vince’s figure is probably much closer

    Reply
    Please complete the required fields.



  • Financial Planner, true but how many financial experts correctly predicted that the entire banking industry was prepared to commit suicide on the altar of cheap credit?

    “Reuters – Tuesday, April 8 10:28 am

    FRANKFURT (Reuters) – Asset writedowns at big western banks could exceed 400 billion euros (319 billion pounds) AXA Investment managers, part of French insurer AXA , said.
    (Advertisement)

    AXA’s figure is higher than the worldwide total of $400 billion (202 billion pounds) projected by U.S. investment bank Lehman Brothers but lower than the $1.2 trillion in global credit losses estimated by Goldman Sachs, another U.S. investment bank.”

    Reply
    Please complete the required fields.



  • voiceofreason says:

    There are 26 million households in the UK.
    11 million of which have mortgages.
    I can believe that 3,000,000 are above 90% LTV if we count all the ButToLose bregade.
    Only 78,000 at > 80% LTV sounds way too low. I wonder where they are getting their valuations from ?

    Reply
    Please complete the required fields.



  • mark wadsworth says:

    My magic fag packet says one million purchases a year in UK, of whom barely 400,000 are FTB’s or BTL’s with very little own equity, let’s assume
    1. prices fall (only!) another twenty per cent.
    2. This wipes out the last three years’ capital gains
    3. All those who bought in last three years have a capital loss
    4. Everybody has kept up with mortgage repayments so far.
    5. 3 years’ worth of FTBs and BTLers x 400,000 = 1.2 milllion.
    6. To which add an unknown figure who have MEW’d up to the hilt and people who are in severe arrears, I would be very surprised if it’s any more than 1.5 million.

    So Vince Cable was exaggerating wildly and Experian don’t have a clue.

    Reply
    Please complete the required fields.



  • @financial planner

    speaking as a very long-term economist subscriber – indeed, you are right, the Economist has been ‘one of us’ for a long time, talking about asset bubbles since at least 2004 and predicting a housing market crash for so long it (again, like us …) was getting a little boring.

    Having said that it was completely taken by surprise by the whole securitisation collapse – rememeber when people were talking about how a crash was always sparked by a crisis of some kind (oil shock of 73, ERM debacle etc), the economist at the time was asking itself if maybe this time the bubble would burst without this time an external event … of course, the spark to ignite the crash was actually starting them in the face all the time ….

    Reply
    Please complete the required fields.



  • Extract from the FT:

    Has Vince Cable slipped up?
    It’s a question worth asking of the Treasury spokesman for the Liberal Democrats after his claim yesterday that 3m families could end up in negative equity within a year. (It’s the front page of the Daily Mail today).

    The prediction came within an otherwise timely debate yesterday, prompted by the Lib Dems (see yesterday’s blog) about the state of the economy.

    Cable’s analysis was based on the very feasible theory that house prices could fall by 10 per cent over the year. But then his logic went haywire.

    “There are currently three million families – three million – who have loan-to-value ratios of properties in excess of 90 per cent, the Council for Mortgage Lenders confirms that.

    “If the numbers I have been describing, a 10 per cent fall over a year, are to materialise, all of those families, by definition, will find themselves in negative equity within a year, and many are now doing so.”

    The problem with Vince’s logis is that many of those 3m households bought years ago and have an equity cushion which could run into the tens or hundreds of thousands of pounds. His logic only applies to those who bought right at the top of the cycle.

    Incidentally, the Council of Mortgage Lenders tells me this morning that it disagrees with the 3m figure. It thinks the real figure would be rather lower. The CML also points out that Cable is presuming that home owners have not paid off any of their debt since taking out a mortgage.

    After months in which Cable has proven himself as a sharp Parliamentary operator – he excelled over Northern Rock – this seems a big mistake.

    Reply
    Please complete the required fields.



  • A large minority of homeowners have jumped on the bandwagon of successive two year fixed rate deals, on each occasion stripping out the spare equity.

    The scale of this has been huge – remember we have seen equity withdrawal running at ÂŁ50bn p.a. – so there’s a lot of people involved.

    It is perfectly credible that there are three million people who have taken out 90%+ mortgages in the last two years, but a person who took out a 90% mortgage 2 years ago is likely to have nearly 20% equity now.

    I’m comfortable with the idea of there being well over 2 million in this position, but I can’t quite reconcile 3 million..

    Reply
    Please complete the required fields.



  • mark wadsworth says:

    Vince Cable is top man, as Lib Dems go, but on this occasion it looks like
    Fag Packet -1; Vince Cable 0 (own goal, V. Cable, 84 mins)

    Reply
    Please complete the required fields.



  • I suppose it depends on what the figures mean. If their outstanding loans are 90% current value, then Vince Cable is presumably correct. If these are values at the time of purchase, then it would depend on time scales, the amount of MEWing, etc. Presumably these data are not available. I imagine VC means the former, but where the figures come from I don’t know.

    Reply
    Please complete the required fields.



  • Icepick Tony says:

    Just an observation for the “Lie to Bet” crowd of the last few years – when an asset price increases by 50% and then falls back by 50% it ends the day down 25%. Enjoy.

    Reply
    Please complete the required fields.



  • Vince Cable’s heart is in the right place but he’s a bit footlose with figures, this isn’t the first time.

    Reply
    Please complete the required fields.



  • planning4acrash says:

    Reply
    Please complete the required fields.



  • planning4acrash says:

    The graph is fascinating. It shows that prices are fluctuating all the time based on loan to value ratio. Prices aren’t going up now, nor did they go up in 1988 as a result of rapidly rising wages, or falling unemployment, they went up because banks printed more money and governments encouraged them, did nothing to stop them or both. Again, that audio file about inflation, for those who missed it.

    http://mises.org/multimedia/mp3/audioarticles/2914_Hazlitt.mp3

    Reply
    Please complete the required fields.



  • planning4acrash says:

    Reply
    Please complete the required fields.



Add a comment

  • Your email address is required so we can verify that the comment is genuine. It will not be posted anywhere on the site, will be stored confidentially by us and never given out to any third party.
  • Please note that any viewpoints published here as comments are user´s views and not the views of HousePriceCrash.co.uk.
  • Please adhere to the Guidelines

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes:

<a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>