Sunday, September 21, 2008

The word crash instead of crunch at last

Plunge in house prices outstrips the crisis of the 1990s

The crash in house prices is now the worst ever in Britain. HBOS, which has just been taken over by Lloyds TSB, will publish figures next month showing that the decline from last year's peak now exceeds the fall during the 1990s. From the top of the market in May 1989 to the bottom in February 1992, the bank's seasonally adjusted index of prices fell by 13.1 per cent. That fall has already been exceeded since the market peaked last August.

Posted by housebear @ 10:58 AM (2401 views)
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28 thoughts on “The word crash instead of crunch at last

  • I think the author of the article has not made any allowance for inflation. We have had about 5% of inflation since last August, whereas inflation from 1989 to 1992 would have eroded house prices by perhaps about 20%.

    Having said that, I think that the headline will become true within the next year.

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  • housebear,
    Congrats on posting the first article in ages that actually mentions UK house prices!

    nubbers,
    Depends what kind of inflation. I doubt wages are up 5% since last August.

    Wage inflation would help to erode mortgage-holders’ debts; but cost-of-living inflation would make it harder to meet their monthly mortgage payments. There doesn’t seem to be much wage inflation in the pipeline so I think the number of people in negative equity this time will be a lot higher than in the 1990s.

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  • In view of the apocalyptic development unfolding in front of us, 95% HPC in London (75% elsewhere) can no longer be ruled out.

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  • JU – you are becoming more bearish by the day ! – I’m sticking with 50% fall peak to trough (ignoring any inflation factors) but accept we will get an “overshoot” on the way down.

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  • @ Nubbers

    Strictly speaking, in nominal terms, (using Nationwide figures) house prices didn’t bottom out until Q41995 (although the bottom was very flat, as usual – getting the timing right when getting back in to the market os not overly critical), and the overall nominal fall was 19%. Adjusted for inflation (presumably RPI) the overall fall from 1989 to 1995 was 37%.

    In the 2007 crash, we are down about 12% nominal, plus 5% inflation = 17% in less than a year, so we’ve already achieved half as much as we did in six years last time. Another three years of this and prices will be down >50% in real terms. (+0.83^4=0.47)

    @ Drewster, wage inflation has been less than price inflation (even the artificially low CPI) for at least a year, possibly much longer than that.

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  • Geoff Hoon told Andrew Neill on “Straight Talk” last night that the nation shouldn’t worry as the Labour Party will soon be proposing a way forward.

    “Labour will be looking after those with mortgages, creation of new jobs”, they will be “encouraging the Financial Services industry”…and on and on. This is the “slightly delayed” vision that Gordon Brown had at the last Labour conference, this time last year.

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  • “Congrats on posting the first article in ages that actually mentions UK house prices!”

    I’ll second that, Drewster.

    @Japanese Uncle

    “95% HPC in London (75% elsewhere) can no longer be ruled out.”

    Stand aside ordinary bears. Make way for the Japanese Super Bear! Seriously, I cannot envisage that sort of outcome without widespread starvation, social breakdown, looting, 1984 style Big Brother government, etc.

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  • I think that is what JU means. Total breakdown of social order. I think it will happen very quickly too.
    It is quite conceivable that a demonstration over the next couple of months will get out of hand.

    All that is needed is a reason for a large number of people to be out on the street. (Queuing outside a bank…) and a spark.

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  • “The markets are looking to the Bank of England to cut rates to inject some confidence into the market.”

    Prices falling like a stone and the BofE making a stupid cut will inject confidence???

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  • Banzai !

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  • I think the rate of decline will remain rapid until the end of next year, and I’m sicking with about 40% as my prediction. After that I think the regulatory reform that will have to take place following the current turmoil will mean houses are viewed as a place to live not a way to make money. I am fast becoming a fan of the LVT argument.

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  • JU, 95% seems too big a fall, although my estimates are now a max of 60%

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  • @Japanese Uncle
    “95% HPC in London (75% elsewhere) can no longer be ruled out.”

    Hmmm… Respectfully.. Calm down JU! – Fall/Rise ratio is not a linear deal once past 30-40%.

    At 60% down, every for-sale property would get bought for Chinese, Korean, Norwegian, even Romanian holiday homes.
    Don’t forget that 75% crash would negate 300% of price rises (from £50K to £200K)
    £50K = 1988 NOMINAL prices! (or pre 1950s in inflation adjusted money)
    95% crash would negate a rise of 1900%! (London avg was £320K, becomes £16K)

    To negate 75% of rises you need a 43% crash, and to negate 95% of rises you need a 49% crash. These seem like more reasonable figures to me.

    Your thinking does, however, apply to Northern Ireland.
    100% fall negates Infinity% of price rises – which is about what has been observed.

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  • BOE cutting rates is not going to be as influential as it once was – the only residential mortgage holders who will truly benefit (IMO) will be those on genuine BOE term trackers. The lenders are already increasing rates, increasing fees and tightening lending criteria in the light of last weeks events for example FN (First National) and I group have already increased by 0.7 to 1.6 and increased the completion fees. Swap rates is the thing to watch.

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  • mark wadsworth says:

    Timmy T, glad to hear you’re coming round to LVT!

    The beauty of the tax is such, that irrespective of your other political leanings, you will find a group to suit your tastes, e.g. Green Party, Labour Land Campaign, Lib Dems Alter, a couple of Tories, several of us in UKIP (as yet unorganised), the Henry George Foundation (more of a Chrisian group, I think) or the LVT Campaign (intellectual and non-party aligned). The SNP are the only party that seems to be completely anti- LVT, I dunno about the BNP. They’d probably prefer a tax on melanin.

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  • Mark W,

    Thanks for the link on wages. There’s a line of thought which suggests that UK workers haven’t bothered negotiating higher pay because their houses have been paying them instead. It seems quite possible that pay demands will intensify as the credit tap is turned off.

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  • it_is_going_with_a_bang says:

    I’m still sticking with 35% from the top. Once it gets to that point those in charge will just do anything – and i mean anything – to halt the slide.
    BTL then looks viable as an investment and you will see properties being bought up in larger numbers by investors.
    50 % would be fantastic but I simply just can’t see that.

    Pay demands will only be made in the public sector. With labour in power I can’t see and serious action. However, pity any conservative party who comes to power to deal with unions ready for action.

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  • the northerner living in oz says:

    3. JU, 95% seems too big a fall

    For falls of 95% would required London to be flooded which may happen one day but it is unlikely

    In the near future.

    30 to 50% fall in prices is the most likely outcome

    That is even with the stockmarket crashing.

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  • In support of JU. I’ve just been watching – albeit with the sound, vituallly, turned off – the Labour party conference summary. Allegedly, Gordie is the best man to get us out of this mess, caused by problems outwith control………………..excuse me – got to go………….and throw up yet again!!!!!!!!!!!!!!!!!!

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  • Agree with jack c: 50% peak to trough seems more realistic, by which time this government will be out of office. It’s Tory successor will be no better IMO, but as Gordo is the crash personified it’s likely that the rate of falls will lesson and there will be a *slight* return in market confidence.

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  • JU, how might a fall of 95% be possible in London? That would somewhat affect my decision as to when to buy a house again, especially as the other half wants to move back into London again. Assuming any of it is still standing / above the high tide mark etc.

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  • Letsgetreadytotumble says:

    To get back to sensible lending, in simple terms, you’re looking at three and half times wages and a 10% deposit. That represents a 50% drop.
    However, I don’t think the amount of money that goverments can borrow/ print etc. can ever be enough to stop the banking collapse, therefore mortages could become unavailable for, say, a year or two. If this is the case, and people have to sell, you could be looking at 20, 30 grand for a house, something to tie them over.
    If deflation kicks-in, and that looks likely to me, there could be a steady decrease in prices over a number of years, and dropping from 50% as a starting point.

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  • titaniccaptain,

    “whats to stop it?”

    How about rent levels? When it becomes significantly cheaper to buy than rent then people will start buying again, even if properties are still falling. At some point it will make sense to buy a living space (rather than an ‘investment’). I suppose the trick is not diving in too soon.

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  • mark wadsworth says:

    QG, I suppose the trick is not diving in too soon.

    The bottom of the market it usually a long drawn out affair, see my comment above, whether you buy a year before or after the absolute all time bottom of the market is neither here nor there. So it is better to go on the safe side and wait until prices have been flat for a year or two.

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  • Hi all. Not been on here for a long time. I remember thinking -15% this year and -35-40% top to toe in a far quicker fall than the last time. I’m sticking to the “far quicker fall than last time” but I’ve got to revalue to 50%. The “spectre” of unemployment, the Pound getting a bashing and more nationalisation of credit providers will ensure there won’t be any negligent lending for a LONG LONG time. I can’t see any bank getting into the silly % mortgage and >4x salary loans market until all debts to Govt are repaid. That isn’t going to happen for a long time. I’d see an attempt to sell Northern Rock as the first sign that someone might be thinking recovery is not far away. Economics has a habit of repating itself. Just read the lyrics of “Road to Hell” from Chris Rea. Seen it all before.

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  • For the record, I’m sticking my pin in at 65% peak to trough, adjusted for RPI. If I’m right, I can link to this page, if I’m wrong no one will ever remember.

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  • Wow! With all these predictions of price falls, I’m hoping I won’t need a mortgage to buy in a couple years.
    That’s if the banks don’t nick my hard earned/saved deposit.

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  • @Mark Wadsworth

    “whether you buy a year before or after the absolute all time bottom of the market is neither here nor there. So it is better to go on the safe side and wait until prices have been flat for a year or two.”

    That sounds like a tricky business to me. Just how do you know you’ve hit the bottom? Many clever economists called the top of the market years too soon. I suggest that calling the bottom will be just as hard. I plan to use two basic measures:
    – Income multipliers
    – Rent vs mortgage costs
    As long as it’s significantly cheaper than renting, I am willing to lose a bit of money in the house price casino if I get my living space that I can do what I want with in return. The sooner we get this stupid HPC over with the better!

    P.S. I’m coming round to your way of thinking about this Land Value Tax business but how will you ever get it accepted by VIs such as the House of Lords who have a lot to lose?

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