Sunday, April 12, 2009

David Smith thinks we may overshoot

A question of over-correction

Everybody agreed that house prices were overvalued before they began to fall more than 18 months ago [O RLY?]. The question was how they would work off that overvaluation: gradually or suddenly. The Nationwide building society suggests that, by the end of last year, the inflation-adjusted average house price was just £5,000 above the long-term trend . The further fall in prices during the early part of this year means that house prices are now back on trend. [the trendline having been dragged upwards over recent years by rampant HPI] Meanwhile Halifax says the house-price-to-earnings ratio has fallen to 4.34 - within 9% of the long-term average.

Posted by little professor @ 07:53 PM (2868 views)
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12 thoughts on “David Smith thinks we may overshoot

  • tyrellcorporation says:

    houses in exeter are still 12x the average local wage, the so called correction hasn’t even begun down here.

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  • little professor says:

    So many contradictions and errors in this article. First of all he says everyone agreed house prices were overvalued 18 months ago. But even 15 months ago he was saying a house price crash was off the cards:

    “Britain’s long run of growth, stretching back to April-June of 1992, represents a lot of momentum. Annual growth in the third quarter of this year was a buoyant 3.3%, and more if you believe the Bank of England, which thinks the official figures understate it. The brakes may now be on, particularly because of the credit crisis, but this is an economy that will take a bit of stopping.

    Too many people use the excuse of the credit crisis to throw the baby out with the bathwater. If you believe there is nothing else to the economic success of the past 15 years than rising debt and a big increase in house prices, fine, but it is hard to substantiate that with serious analysis.

    If you believe that a big, 10%-15% fall in house prices (which I don’t expect) would take us back to the negative equity of the early 1990s, and leave banks with dodgy mortgage books, fine, but it is not true.

    Also, in this article he states that we are close to the IMF’s prediction of 30% off, and close to the long term house price:earnings ratio, indicating we have hit the bottom. But he himself rubbished both the prediction and the usage of the ratio as a meaningful indicator back in May last year:

    How serious should we take his warning that where America leads, Britain follows? I was surprised he used the house price /earnings ratio as the basis for predicting that properties could lose a third of their value. Steve Nickell, his former MPC colleague, did an effective demolition job on it three years ago, and few serious analysts believe the crude ratio is a useful valuation measure.

    Constraints on housing supply (with housebuilding rates now in decline), more earners per household, lower mortgage rates, lower long-term real interest rates and other factors explain why the ratio of house prices to average earnings has risen. It probably has risen too much, but there is no good reason to believe it will return to its historic norm, established in very different economic and social circumstances.

    And thirdly, the trendline on the inflation-adjusted HPI graph has been dragged upwards by the huge bubble in house prices over the last ten years – the trendline will fall as prices continue to tumble.

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  • inflation is eating my savings says:

    tyrell- so you didn’t take my advice on DFL wives?
    probably for the best

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  • Small 2 bed bungalow, near to me, valued at £65k in 1999, sold for 78k in 2000.

    Is now on the market for the ridiculos sum of £240k.

    [Marketed as 3 bedroom, but its 2 bed, and a converted closet.]

    David Smith, I have some statistics for you. Every potential FTB in the UK has access to the internet.

    All of them feel the same way. None of us will be buying until they revert to 2000 prices.

    Bet you wish you didnt listen to those lying Estate Agents, and get involved in BUY to Let now, eh Smithy?

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  • tyrellcorporation says:

    LOL nope, they all look too unhealthy – like the pidgeons!

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  • And the chances of them printing any of the volley of sarcastic comments that this story doubtlessly sparked off?

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  • Wow looks like Noshbag has read our comments from a few days ago and actually changed his tune. Will he keep it up?

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  • You could be forgiven for thinking that Smith’s started reading this blog; but if he is, he still hasn’t really got the message yet.

    He rabbits on about the long term trend lines for house prices, without realising that those trends are really quite meaningless.

    The Nationwide graph shows a trend line that indicates real price growth of 2.9%, yet I can’t find any socio economic justification for such a rate of growth – there is a justification for modest real growth, but most of that results from houses themselves becoming better appointed.

    Much of the UK’s GDP growth of the last decade has been a product of debt, and not genuine economic advancement.

    I believe that our underlying real and sustainable economic growth is actually slowing, and is now less than 1% p.a. (taken over a number of years) – and that the ability of house prices to grow in real terms is similarly low.

    Forget price trend lines, and when looking at income multiples, disregard data from the last decade..

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  • japanese uncle says:

    LP

    Well done. This is no longer any hideout for irresponsible commentators these days.

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  • britishblue says:

    Uncle Tom @8. totally agree with your comments. However, we can now expect many commentators who ignored this index in the boom years to suddenly start using it as a reason why you should buy a house. How predictable! This ‘long term trend’ has been met so quickly in this crash, imagine what the bulls are going to be saying in six months time when prices are hanging well below it.

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  • Well found lp. We’ve always known Smithy to be a revisionist but its good that you’ve dug up the past posts to prove it.

    His last paragraphs where he says “Go Figure” (he keeps saying that too) reveal some extraordinary logic:

    “About 37% of landlords in the UK have tenants in arrears with their rent, according to research by the National Landlords Association (NLA), the leading representative body for private-residential landlords. This, in turn, helps to explain why a growing number of landlords are having problems meeting their mortgage payments – and, in extreme cases, defaulting.”

    Wow. What a breathtakingly crass assumption. The reason landlords are defaulting is not because they are losing capital value or because they are occassionally running off with the rental income and not paying the mortgage and not because they are asking for overpriced rents in order to cover overpriced BTL mortgages but because tenants aren’t paying up on time.

    Idiot. A leoapard really doesn’t change its spots when it come to being so wrong.

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  • The Nationwide tracking is a farce. We should all measure house price growth based upon a multiple of earnings. That way a bubble and excessive trends (over and under) would be readily visible. Just a thought.

    The blaming of tennants for missing payments is farcical. The survey was amongst registered landlords, who of course would report missing payments, even if something else actually happened to the maoney 😉 as the last poster inferred.

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