Tuesday, June 24, 2008

Let’s do the timewarp again…

Are we heading for a house price crash?

...to Oct 2007, back to what seems like a lifetime ago (last October). I particularly like James Ferguson's laying into one our our favouriteZ on the panel. By the way, last house price round table at Moneyweek (Jun 2008), John Wriglesworth now says "down 25% over three years". He's getting better at it, close but no 'Elvis' The Blog Monster won't let me post the link as it's in the archive elsewhere... http://www.moneyweek.com/file/36191/are-we-heading-for-a-house-price-crash.html

Posted by arseburger @ 09:41 PM (1390 views)
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10 thoughts on “Let’s do the timewarp again…

  • Yes, I can imagine old fatty Wobblesworth was spluttering like Eliviz (before he died on the toilet) at the latest MoneyWeek round table on UK property.

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  • crash bandicoot says:

    That’s the best thing I’ve read for ages, who is James Ferguson? He pretty much called it as it is.

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  • yeah thats a good read, any chance of posting the text of the latest one so I don’t have to sub to moneyweek

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  • @crash bandicoot: James Ferguson is a stockbroker who says Buy Stocks, Sell Property. Not sure what stocks he picks, mind.

    @mr_smith: It’s a big old PDF but some edited of June 2008 follows.

    Q: How far will prices fall?

    James Ferguson (Economist and stockbroker with Pali International) Down 50% over five years.

    Ed Mead (Director, Douglas & Gordon Estate Agents) Down 25% over two years.

    Henry Pryor (CEO of property website PrimeMove.com) Down 30% by 2012.

    Seema Shah (Property economist, Capital Economics) Down 20-25% by end 2009.

    John Wriglesworth (Managing director of Wriglesworth Consultancy) Down 25% over three years.

    Merryn Somerset Webb: So John, last year you said there was more chance of Elvis being found on the moon than of a British housing crash. What do you think has changed?

    John Wriglesworth: It is purely down to the shortage of funding available for mortgage finance”. This is causing the contraction in the housing market, in the same way as the expansion of funding and the relaxation of credit criteria over the last five or six years allowed house prices to go up. During the boom, most bears were fixated on house price/incomes ratios – but that seemed to be the wrong way to look at it to me. With interest rates at 5% and people being able to borrow increasingly large percentages of their income (first four times, then five, then six times by 2006), house prices were clearly just going to keep on rising to what I had thought would be a new plateau. I believed last year that there was no reason to go back to a historic house price/incomes ratio because we are just adjusting to a new plateau created by lower mortgage costs. But what makes me very worried is the fact that the credit situation of the last five years is now being totally reversed. Now you need perfect credit to get a loan and lenders want 25% deposits, and so on. Everything that produced the boom is going into reverse. If that doesn’t change, I’ll end up one of the most pessimistic around this table.

    Later…

    John W: It’s just about finance. The demand is still out there. Whenever any lenders put out a reasonably normal mortgage at relatively normal rates for normal credit criteria, it sells out immediately. Such is the rush that they end up withdrawing the products in a hurry. They can’t cope with the demand for good mortgages.

    James Ferguson: Nonsense. They put those mortgages out there and then withdraw them for political reasons only. If you’re a bank and you know that you are technically bankrupt (what banks like to call ‘undercapitalised’), you can do two things. You can get a capital injection and bring your capital up to the right size. Or – like Northern Rock – you can look to lower your asset base. That means deliberately trying to lose business. But the banks can’t be seen to be doing this.

    then…

    Henry Pryor: It seems amazing to me that there are still people out there pretending that things are fine when they just aren’t. It’s totally irresponsible for commentators to do this – it leads too many people into problems. All those who have persuaded people to borrow money they can’t really afford, on interest-only mortgages, are at fault here – they leave people reliant on inflation to pay off their debts. And worse, of course, are all the property clubs who have drawn people in on the promise of ever-rising prices.

    …meanwhile back at the round table…

    John: It’s pretty bad. I have to say I agree with James about the possibility of a 50% fall. But if the easy credit terms of the last five years continue to unwind completely – if we’re back to people only being able to borrow three or four times their income – then I can’t see anything other than house prices going back to what they were, because where then is the demand coming from? And house prices are up – what – 100% in the last five years?

    Merryn: So the only property bull we could find for this Roundtable thinks prices are going to fall by 50%!

    John: If lenders don’t go back to lending. That ‘if’ is so important. If the Government put a bit more into liquidity,
    it might not happen.

    Henry: It would be outrageous if they did.

    John: Why?

    Henry: Because the free market allows things to go down as well as up – you can’t change that.

    ..and finally…

    Merryn: Can I ask you all how far you expect prices to fall and how long you think it will take to hit the bottom?
    James: I’m pretty sure I’m right in saying that we have never had a property correction in any market that took less than five years. The last one took seven. So a minimum of five years. And I reckon it won’t be long before you can get it at 50% off at auction, or at a foreclosure.

    Henry: 30%. 2012 before we hit bottom.

    Ed: 25%, I think, and two years.

    Seema: By the end of next year, 20%-25%, but falls for at least another year.

    Merryn: John, are you going to go with 50%?

    John: No, 25% nominal over the next three years. Obviously in real terms it could be a bit more, but it’s more than I’ve ever said before.

    And on that note the house lights came up and the PA boomed “Wriglesworth has left the building”

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  • What Crash Bandicoot said. Ferguson really hit the nail on the head and he should be commended for being so accurate at a time when most others were carrying on like everything was hunky dory.

    I’m going to stick a couple of bits from it here, the first one is brilliant and sums up Stuart Laws perfectly –

    1)

    James Ferguson: Northern Rock grew its business 55% in the first six or seven months of the year (2007), and it’s so unprofitable that – well, look what happened.

    Stuart Laws: It was profitable, they just couldn’t refinance the debt.

    James Ferguson: My definition of not very profitable!

    2)

    James Ferguson: Exactly, like Northern Rock, and the next buyer is the owner/occupier who was left way behind. Do you want to know where the crash will go down to? It will go down to the price where it clears for first-time-buyer owner/occupiers. Do the maths and you come up with some pretty scary numbers. The historical downturn in house prices over the last three down-cycles has, in real terms, been exactly the same amount: 35%. But they were all owner/occupier downturns. This one has taken prices 40% higher again because the funding is 40% cheaper for buy-to-let than for owner/occupiers – we will presumably have to add that to the 35%. Now you may think that this is scare tactics, but right now anyone who bought a buy-to-let flat is being criminally advised by their financial adviser, or has not done the maths – because no buy-to-let flat you bought today makes any sense.

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  • Thanks arseburger, really nice read,

    It’s incredible how near the mark James Ferguson was. I really hope he’s right about the 40%.

    @Wiltshire

    What an ar5e Stuart Law is …. I almost choked on a cornflake when I read this bit …

    SL: Even the Royal Institution of Chartered Surveyors confirms the top rental growth is going to be in city-centre flats. I’m seeing it. I’m seeing rents for city-centre flats in Manchester going up 10% this year across the board!

    James Ferguson (Pali International): These 10% rental rises – what’s the yield on a Manchester flat?

    SL: It’s probably about the 5% mark.

    JF: Gross or net?

    SL: Gross – and 3.5% net.

    JF: So you’ve got a 3.5% net yield and that goes up 10%?

    SL: So it’s getting towards 4% net.

    JF: Ooh, ‘getting towards’ 4%. Let’s say I give you 4% – a nice, big rental increase because people are rightly going, “Oh my God, I would rather rent, thank you very much”

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  • Just read the latest MoneyWeek (June 20th Issue) round table. Wobblesworth got an absolute mauling. And he’s changed
    he usual bullish spin tune. Latest predictions:

    James Ferguson: Down 50%
    Ed Mead: Down 25%
    Henry Pryor: Down 30%
    Seema Shah: Down 20-25%
    John Wriglesworth: Down 25%

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  • holding out says:

    Do you also notice in the latest Moneyweek round table that Stuart Lawz is conspicuous by his absence.
    Now he would have got a well deserved mauling.

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  • oooh that sounds worth reading. maybe I should subscribe to moneyweek.

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  • Merryn’s opening gambit this time round was:

    “So John, last year you said there was more chance of Elvis being found on the moon than of a British housing crash. What do
    you think has changed ?”

    P1ssed myself. Well worth every penny of the £2.50.

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