Thursday, October 9, 2008

House-price-to-earnings ratio will keep falling

Finally, some good news on the property market

According to Halifax, the house-price-to-earnings ratio has fallen from its completely absurd peak of 5.84 in July 2007 to a slightly less absurd level of 5.02 this year. Better news still is the fact that the ratio will keep heading down…

Posted by damien @ 05:50 PM (1743 views)
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35 thoughts on “House-price-to-earnings ratio will keep falling

  • mark wadsworth says:

    … down to a ratio of three, let’s say, i.e. long term average plus overshoot, like in the mid/early nineties. That equates to a 50% fall, give or take.

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  • The good news on the property market I’m looking for is when channel 4 de-commission Location, Location, Location (2 more series planned – should be interesting) So we don’t have to endure that tubby sloanie Kurtsie Allopp and her mate Phrilly Spendalot from appearing on our screens ever again!

    The only thing that would top that would be finding out either (oh I would start believing in God if both) end up in the bankruptcy courts.

    I would settle for Crash Gordon resigning, but only if he took the whole cabinet with him.

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  • Well tc
    I don’t know what you’re timescale is, it might be right eventually if you’re factoring inflation into you figures.

    I’ve got this horrible feeling that they might just do a USA stile drop of interest rates. another 1.5% off would be 3% and give a mortgage rate of about 4%.

    That would equate to £333 per month for 100k interest only.

    Given that the intention of all the money being pumped in is for it to be lent then I think the sheeple will start to buy.

    I’m not saying it’s right but have a horrible feeling it could be the outcome.

    This outcome could well let inflation run up to 15% or so perhaps even 6 or 7% measured by the government.

    I wouldn’t fancy sitting with cash in the bank in that situation.

    If the sheeple start to buy (and there are alot of them) then the falls will stop and we’ll be bombarded with good news stories allround.

    I’m not saying it won’t go pop again but that could be another 2 or 3 years away at which point they’ll simply launch an even bigger rescue package.

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  • Nooneo
    Yes that would be highly amusing to see them both being repo’d.
    It makes me bloody mad that Crash has done the damage now. It would almost be poetic justice to see him get back in again rather than leave the mess for someone else. ala John Major in ’92.

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  • TC
    I haven’t explored what deals are available and I’m not an advocate of Interest Only (if we had that to fall back on now things would be different but to use in the good times – madness).

    But 100k repayment would be in the region of £550pm at 4% I’d guess. There for I’d say a young couple who could muster together 10-20k could buy a 2 bed apartment for £150k and be paying less for a repayment mortgage than they currently would in rent.

    And that’s why I think the market could hold.

    Also if mortgage rates were to come down to 4% then Joe Public can MEW again if the falls stop. Don’t forget there’s a million or so mortgage deals that need re-newing over the next year and if the banks aren’t lending the first batch of money they get given, they won’t get a second batch.

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  • Enough Already says:

    Better news still is that no one gives a stuff now that the govt are nicking all our money to prop up banks.

    House prices can now fall to zero – an still no one will buy because we’re all waiting for armageddon.

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  • str 2007…

    Just as the market was ” a safe bet” when prices were rising at +10% year on year, now they are falling +10% year on year have faith, there is simply no funding for the mortgages and the public are finally seeing what is happening. These sort of pecentage falls and rises can’t simply be turned around in weeks or months, and indeed, years !

    In the words of the elusive Cleese “It is a DEAD parrot”

    Stop worrying str 2007. It can’t take off – Because it is a DEAD parrot.

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  • str 2007

    And as for FTBs or young couples, unless they are in remedial class (or fully paid up members of the labour party) they have seen the writing on the wall. Yes a few might be tempted but it simply cant get of the ground. It needs more than a few, it needs sensible people, who, having sold their property for say 300k, getting themselves a mortgage that will allow them to spend 350k+ and spend it. In the time it takes to sell their home they will see the falls continue. It’s taken anywhere between 10 or even 20 years to get here it just isn’t possible.

    The property market is a DEAD parrot.

    Stop worrying and don’t even think of buying unless you want your pain to continue.

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  • Str 2007

    The banks are scared. The will repossess until they have had their fill.

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  • str 2007

    I saw many people think that they would “get ahead of the bottom of the market” and bought in 91-92 only to see the market really not increase until 96-99 depending on what part of the country you were in.

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  • Landedgentry says:

    A lot of BTLs will have their credit ratings damaged owing to their properties being repoed and with banks being especially choosy about how much they lend and whom to, they will not be able to participate in the bargain bonanza that will arrive shortly. It’s like the kid that wasnt allowed out to play with his nose pressed against the window watching the other children outside in the sunshine.

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  • mark wadsworth says:

    STR2007, that is why the gummint is doing all this – they have run the same calculations and reckon that by slashing interest rates and pumping money into banks, they can somehow prop up house prices.

    But it will not work, I could explain why at great length (or just refer you to my recent blog post) but take it from me, it won’t.

    And all the big parties are desperately cooking up new schemes to try and prop up prices – we have not heard the end of it yet. The Tories aren’t even in power yet and they are just as guilty!!

    But they will not work – all they will do is open up opportunities for speculators and arbitrageurs.

    Yes, inflation is a possible outcome (like they did during the 1973 – 74 HPC), but I doubt it.

    And if you don’t trust sterling, there are always other currencies (having said that, GBP is already down 15% on a trade weighted basis, so I doubt whether it can fall much more than another 5% or 10%).

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  • str 2007

    Listen to Mark W.

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  • Ouch my ears are bleeding.

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  • sorry.

    Just don’t want anyone we know getting burned !

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  • Good discussion here. I have the same worries as str 2007. There is a lot of manipulating here and there may even be a situation where banks are forced to lend under government control involving a cunning plan. So I hope you others are right.

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  • I promise you all people really are that stupid and would buy in again.

    The question to my mind is how low will interest rates go.

    If they do hammer them down I believe they could get a quick fix that will last a couple of years, long enough to get into power again.

    If they let inflation run riot then will the sheeple get a feel good factor of bigger pay rises. They tried to fight wage rises but the only realistic way to get through the next parliament is to have inflation back upto 10% and half the debt they’ve just created that way.

    Frankly I’m dissapointed that the conservatives and Lib Dems haven’t stood up and made a bigger song and dance about the mess labour have created. Through not doing so they can hardly complain if they get into power and have to clean up the mess as they’ve all backed it now.

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  • Sorry I missed tc’s comment earlier about low interest rates and America, also I can’t spell disappoint.

    Re: USA I think that is a different situation as their problems have largely come from heavy and reckless borrowing when interest rates were very low after 911.

    Dropping interest rates in America to 2 or 3 % is still higher than they were when alot of the reckless borrowing was done. So on a repayment basis their houses got alot more expensive very quickly and are still more expensive than they were.

    Our interest rates are now coming down towards their lowest levels.

    Look what it did to the market back in 2005 when they dropped them a bit, it quickly refuelled things. Now at the time money was freely available so the effect was for prices to rise.

    This time I don’t think the money will be as freely available, but if people are able to re-mortgage at cheaper or same as rates again then that takes away alot of forced sales which you need to break the current buyer seller stand off.

    And if purchasing with a repayment mortgage becomes cheaper than renting………………….

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  • The thing is if house prices are falling and my money in the bank is house money then inflation doesn’t matter too much so long as they interest rates to control it.

    The rule book has just been thrown out of the window. If house prices do stop falling and interest rates drop to 3% and inflation does go up then I don’t think the arguement for renting stands up.

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  • Great news indeed. No matter how much the fiddle and try to make things worse by slashing the interest rates, their beloved HP’s will continue their southbound journey.

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  • mark wadsworth says:

    @ Nooneo, thanks.

    @ STR2007, yes, the gummint (and the next one) will do all sorts of silly thing to prop up house prices, that seems to be in their DNA.

    But lending cheaply to commercial banks is pushing a piece of string, it will not result in lower interest rates paid to borrowers, as Titanic Captain pointed out this morning (does Nick Clegg visit this site?)

    Finally, if we look at the 73-74 HPC, inflation was 25% for two years, nominal house prices stayed flat and house prices halved. But banks aren’t totally stupid (all the evidence to the contrary) – they calculate interest rates at expected inflation PLUS 2% PLUS risk premium. So all things being equal, interest rates would not stay at some gummint decided target (if they did, this would lead to massive opportunities to convert GBP to other currencies and make a massive profit after GBP had fallen). And if the gummint tried to prop up sterling, well, 1992, Black/White Wednesday and all that!!

    And finally, if the gummint was incapable of propping up GBP in 1992 (losing £3 billion in one day) how on earth can they prop up house prices, which are falling in value of well over £1 billion per day in total*, each day, every day, and have been doing so for over a year?

    * 20 million houses x £30,000 fall in value = £600 billion, divided by 400 days = £1.5 billion per day.

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  • Thanks Mark W…………. I like what you say…….. Have you got G Soros’ number just in case?

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  • MW
    ”Finally, if we look at the 73-74 HPC, inflation was 25% for two years, nominal house prices stayed flat and house prices halved”.

    This is my point. In a situation where actual house prices stay flat and inflation is very high you may aswell own with a repayment mortgage than rent. Your mortgage payments over that peiod will stay flat, you’re savings (if interest rates are very low) just as well be in a house and over 2 years you will pay off a little capital.

    If you rent in this situation, with inflation at 25% your rent would almost certainly increase and you’re capital wouldn’t buy you anymore of a house in 2 years.

    And reference black wednesday etc. I am also very aware that could happen again. If my money is in a house it can’t be devalued by such an act as such, but in a bank ?

    It’s funny though £3 billion seemed alot of money then, I think it is now, yet we seem to get through 10’s of billions everyday now !

    If I’ve made a mistake on my predictions it’s that they seem to have used all their ammunition now rather than waiting a year to use it. Unless of course they have alot more ammo left.

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  • I might have to take it all back tc nooneo and mark w.

    Having just seen the Dow and Gold prices. All hells going to break loose tomorrow I think.

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  • The one thing I’m absolutely sure of is that the property market is stuffed and 50% of peak prices is a completely realistic scenario.

    Also the blubbermint are as good as finished, there will be no “John Major” bounce. Major only got back in because of one plain and simple fact:

    This country would never have elected the bald and ginger welshman as prime minister after he had already lost the 87 election. The will also, given a choice, not vote for this dour half-wit with a history degree.

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  • Can you imagine the next Conservative (or Liberal) General Election broadcasts constantly replaying the, now, ionfamous Crash Gordon quote from his first budget speech…

    “I will not let the property market boom and bust…..” on an endless echo,echo,echo…..

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  • Crash Gordon, like my latest can of St Ella, is finished…..

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  • Been watching that graph on your home page for 2 years +, keep pointing that ruler down! … thanks

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  • Well don’t open another, it’s going to be a busy day again tomorrow.

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  • dont worry str2007.
    Nooneo and MW are 100% right on this.
    The other factor, even if crash gordon can manipulate things to try to get the banks lending again by slashing IR etc is unemployment,which i am sure is about to rocket.
    Another one of the sound fundementals is going to go down the pan very soon.
    I run a small business and the feedback from the last 6 weeks from nearly all our customers is dire,they are all laying off people by as much as 60 to 70% of workforce.
    there is no way the housing market can recover now, not a chance.

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  • a drink up in Cardiff, will greenbay be invited?

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  • … and to add to all the debate here, I can see a lot more redundancies coming up in the big mass employment manufacturing industries from where I am looking. Expect a lot of emergency resourcing as suppliers evaporate.

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  • TC

    Cardiff, that’ll be handy for everyone then, there’s a recession coming don’t you know. I know the price of oils down but really. Think of the environment TC.

    How about South Bucks, bet I get Growlers vote.

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  • mark wadsworth says:

    @ TC, we can’t all meet in the bath! Our clothes will get wet!

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  • One of the more informative threads I’ve read, good stuff.

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