Wednesday, October 8, 2008

Why house prices will keep falling – fast

Why house prices will keep falling - fast

The idea that there is a shortage of houses is complete and utter nonsense, says Merryn Somerset Webb. House prices up 25% from their current levels by 2013? In Graham Norwood's dreams perhaps. But only there.

Posted by damien @ 10:36 AM (1380 views)
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12 thoughts on “Why house prices will keep falling – fast

  • Merryn Somerset Webb didn’t quite hit the nail on the head this time. He/she is right to point out the ridiculousness of the NHF house price growth predictions. The market is indeed crashing and will fall much further before bottoming out.

    And yes, there are too many empty properties. But it is generally accepted that 3% of the housing stock needs to be empty to facilitate house moves and refurbishment etc. Given this only 1% of the stock is unnecessarily empty (somewhere between 200,000 and 300,000 homes in the UK).

    The reason for these empties is a lack of market demand at the prices asked and this is attributable to the over inflated price levels caused by what in retrospect was obviously unsound investment. It is not attribuatble a lack of households who would want to live in them. Just a year back ‘buy to leave empty’ was a common investment strategy for new build inner city apartments. The fact that the units could not be let for anywhere near enough to cover mortgage repayments was not considered relevant at the time.

    The core end-user market for these apartments is presumably single people and childless couples in their 20s. Roughly speaking these households can only afford about half the monthly payments required to meet 2007 market prices (whether renting or buying). Now that the investment bubble has burst prices will have to return to levels in keeping with end-user incomes before the empty apartments are finally occupied.

    What Merryn Somerset Webb failed to mention was the fact that more than a million households in the UK are living with parents or sharing with others despite wanting a home of their own, and many are suffering cramped and overcrowded housing conditions.

    Over inflated house prices are an important cause of this. In addition, an expanded supply of housing is required to ensure that everyone who needs a house is able to have one. As bringing empty properties back into use will not be sufficient to solve the problem entirely.

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  • There is a shortage of supply of affordable houses/flats where they are needed and an over supply where they are not. Hence there a big falls in some areas and not so much in others. Location, Location, Location… But once the mortgage market moves again FTB’s will be able to buy affordable flats in leeds, manchester, liverpool whereever. wont be so easy in nice areas of oxford, london, bristol, edinburgh, cheltenham etc etc

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  • can anyone tell me why shares in builders have shot up on news of bailout…. are people really that stupid thinking this bailout will fix a global depression……

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  • “This is a proper crash now – one caused by too much supply and not enough demand. ”

    ….she’s brilliant isn’t she? If only she were given a proper platform on the BBC.

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  • Builders are highly leveraged and any news on easier lending is good for builders… It is not surpising they are so leveraged as they have to invest huge sums in development before the houses are actually sold.

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  • The link doesn’t work

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  • thanks maddison

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  • yes, re builders, one of the big builders have been wanting to buy my parents’ “plot” for a few months now now, but because of their share price, they are so close to breaching their banking covenants that they cannot take on more debt to buy the land. The point is, they still actively want to buy the land and build lots of “executive” houses on it, its just liquidity and share prices that are holding them back ….

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  • One of the problems with working out the supply and demand numbers is this government’s abject failure to monitor migration, so that we now have very little idea as to how many people are in the country, how many are coming, and how many are going – The ONS figures are no more than inspired guesswork.

    There is a significant backlog of people, notably in their late twenties, who would like a place of their own but can’t afford one. Prices will fall until these people are realistically priced in, and the slack is taken up.

    Looking into the future, it is essential that government maintains a clear surplus of land available for development, so that only in the most sought after urban areas, where further development is not possible, will prices depart radically from the cost of construction.

    Houses, like cars and washing machines, are consumer durables. In a rational world, homes should be at their most valuable when newly built, and should then slowly depreciate until they are demolished to make way for new build.

    It is worth remembering that as recently as the early 80’s, old houses sold for much less than new ones..

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  • I live in Bristol Maddison, there are a hull of a lot of flats out there already for sale, and a lot more being built! Even in nice areas (noticed tons for sale in redland at the moment, and southville both studenty/young professional areas eg BTL havens).

    Maybe not as bad as Nottingham or Leeds, but I don’t think your theory of undersupply here is correct, or it won’t be soon, and surely the prices of nicer areas will be dragged down by the rest as people will be more than happy to compromise a little to save a lot.

    I looked at renting a flat recently. Interestingly last month (when the students came back) they went very quickly, but a very reasonable flat I looked at recently is still on the market, empty, weeks later. Even with all these former BTLs for sale…

    All this is, of course, anecdotal.

    I think for the time being I’ll stay in shared accom and save

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  • I agree uncle Tom, the government household projections are rubbish, particulalrly the migration component which simply projects net migration over the past 5 years forward. Given the economic slump net migration is likely to flatline or even go negative for a while, making the 3 million new homes target by 2020 unnecessary. But there is still a backlog that needs to be adressed, so a way needs to be found to keep building. I advocate an FDR ‘New Deal’ approach with non-profit caveats on the new homes.

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  • The lie about property was that the exponentual increases in property prices facilitated the desire to build never ending amounts of the stuff, all at the exhorbatent prices, and never creating any that people could afford.

    Peoples idea of supply and demand are suspect. Up until the middle of 2007, you could have filled Britain with houses and still they would have been on sale at ridiculous prices.

    Imagine that someone had put a 2bedroom flat up for sale in London, say somewhere not really desirable but where 2 bed flats fetched about 200k. If someone put one up for 100k it would’ve been snapped up and back on the market for 200k in about 25 minutes.

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