Thursday, Oct 08, 2009

"rises in house prices for many people is their final hope – in some cases their only hope"

Citywire: Morning Line: Why house prices seem to be climbing higher

Forgot all those tired clichés about a long-term shortage of housing in the UK. That may be true, to a limited extent, but it doesn’t even nearly begin to explain away the phenomenal rise in house prices over the past decade – less still the mini ‘boom’ that seems to be under way at the moment. No, there is something else going on here, something less immediately tangible but more disturbing. For why on earth, one might reasonably ask, should house prices still be rising - despite the fact that they remain hideously overvalued by any reasonable measure and unemployment is climbing inexorably towards the three million mark?

Posted by jack c @ 11:23 AM (1640 views)
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1. japanese uncle said...

This fix is my only hope, says a junckie.

Thursday, October 8, 2009 11:39AM Report Comment

2. flashman said...

The crash has failed to live up to expectations because the preceding boom was not what it was cracked up to be. Most people do not understand that the true extent of the property boom and the subsequent crash were largely obscured by statistical quirks. The boom and bust happened … but not to the extent that most people seem to think.

It was only the low-end of the housing market and the super premium market that truly boomed. The middle and upper end of the housing markets enjoyed more gentle increases. The lower end of the market does not constitute the lion’s share of the nations housing stock (nearly 6 million houses in England and Wales have an average price above £250,000), but during the boom it was houses in this sector that experienced the most rapid turnover. The reasons for this are fairly self-evident (lower entry prices grant easier access to lower income buyers eager to join the boom and of course the btl craze). The sales volume domination of lower -end housing led to much steeper price increases in this sector. This, in turn, skewed the figures and gave a misleading impression of a universal boom. The super premium sector also enjoyed steep price increases because of rich foreigners and large bonuses. This sector skewed the figures, but not by much, because the volumes were very low.

The credit crunch naturally had a bigger effect on the lower end of the market, which is why prices in this sector quickly deflated. In turn, this gave the misleading impression of a universal crash.

Unemployment levels in middle market and upmarket areas are remarkably low. Some estimates state that unemployment levels in densely populated parts of the Home Counties and the South East are around 4%. 4% unemployment levels are normally associated with economic boom times, so it was always unlikely that there would be a property crash in these areas. Add in record low interest rates to the mix and a property crash in the middle and upper sectors of the housing markets is nigh on impossible. In fact, record low interest rates and low unemployment were always likely to add a small amount of impetus to the market

Only large increases in unemployment and/or higher interest rates will change this picture. Higher unemployment is the key but a base rate of 4% PLUS will do serious damage.

Australia is the first G20 country to raise interest rates in this cycle. The majority of economists think that this is the first of many interest rate ramp-ups by G20 countries. The remaining economists think that we will dip back into recession and interest rates will remain low.

If the majority are correct and interest rates increase, then house prices will fall. If the minority are correct and we dip back into recession, then unemployment will rapidly increase and house prices will consequently fall. For HPC’ers, it’s a tails we win, heads we win scenario …but there is no point hoping for a crash when the conditions are not yet right for one.

Thursday, October 8, 2009 11:42AM Report Comment

3. Neil B said...

"it doesn’t even nearly begin to explain away the phenomenal rise in house prices over the past decade"

...The reason the house prices rose so sharply is because lenders were giving out mortgages at upto 10x salary. Its simple: As more and more people could afford to buy expensive properties, the higher the price went to maximise profits and equity.

Thursday, October 8, 2009 11:59AM Report Comment

4. tudorian said...

Flashman @ 2
I both agree and disagree with the points that you've made

I afraid that I don't agree with you that the boom was not as 'boomy' as people believe due to 'statistical quirks'.

Mid range house prices (3 bed terraces - detached housed have tripled in my mum's corner of West Wales since 1997

In 1997 her 3 bed 'family house' was sold for 75,000 .......... on market recently for 260,000
In 1997 her 3 bed terrace house (she traded down) bought for 38,000.......similar on the same street now 140000.

Whilst I admit that one of these cases may be the lower end of the market that you refer to, I remember reading recently (sorry, cant remember the website to cite) that houseprice drops have been less severe in Wales than in many area (full of low end houses in wales) .

I live in North Somerset / Bristol. It is quite affluent area and to be honest, price drops have been meagre at best. The largest drops have been seen new development flats (as you correctly noted). The reason why there has not been wider drops throughout the market (imho) is that less quality house has entered the market. This may well be due to there being less financial pressure to sell in these areas (unemployment not so severe and interest rates low).

You are absolutely right, although pressure on houseprices has increased and current sales data is less meaningful through low transaction levels, the conditions for the crash are not here yet is coming though

Thursday, October 8, 2009 12:42PM Report Comment

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7. mdmick said...


A lot of house transactions take place in a chain.
If there is a reduction in the number of people willing to buy someone's 'low end of the market' property then that person finds it hard to move up to the middle end of the market; in that way, I am quite confident that the middle of the market is not as sound as a pound [perhaps a poor choice of words]

Thursday, October 8, 2009 01:08PM Report Comment

8. flashman said...

tudorian: yes, there are areas where the rises were greater and there are areas where they were more modest. I suppose houses in West Wales started low, so had more scope for growth. A friend of mine bought a house for £745,000 in late 1999. At the height of the boom it was appraised at £950,000. Hardly stellar growth. In the same area flats trebled in price from 2000 to 2007. My friend’s house has not lost a penny in value during this bust while the flats in the area have reverted to 2003 prices.

mdmick: I agree. The market is far from sound. It won’t take much to tip it over the edge

Thursday, October 8, 2009 01:50PM Report Comment

9. chrisa said...

'For why on earth, one might reasonably ask, should house prices still be rising - despite the fact that they remain hideously overvalued by any reasonable measure and unemployment is climbing inexorably towards the three million mark?'

Good question. Apart from the government rigging the system with artificially low interest rates, banks deliberately not selling repossessed properties in order to support the market and also being under intense pressure not to make repossessions in the first place, there remains the problem of the mindset of the UK population. Too many years of house price rises have created a mindset that any falls are an anomaly and will be cancelled out in time but also possibly more importantly that house prices must rise because too many people see house price inflation as the only way they can make some money in the UK.

IMHO the worst of the crash has yet to come, only now it will bring the UK to utter collapse.

Thursday, October 8, 2009 02:09PM Report Comment

10. mark wadsworth said...

@ Flash "The middle and upper end of the housing markets enjoyed more gentle increases."

Everyone has their own story to tell, but I bought an average Victorian semi in an average suburb of London for £95k back in 1998 (which was approx the average price for a London property back then) and sold it for £400k in 2007 (OK, I'd spent £0k on a loft conversion and other bits and pieces), the average price of a London property is now back under £300k as far as I am aware.

Whether you count me as "lower" or "middle" I don't know but I think that was pretty much about as "Middle" as you can get.

Thursday, October 8, 2009 03:26PM Report Comment

11. flashman said...

Hi Mark: Your comment "everyone has their own story to tell" gets to the nub of my post, which is that the boom story is surprisingly patchy.

In London terms your house is indeed very "middle" but in national terms, I suppose it's high end. If I take off the £50K loft conversion and subtract inflation and any presumed gentrification of the area, it still works out at a massive profit

Of course looking at a chart of house price increases, you bought it 6 months or so after the very bottom of the market, which exaggerates the story somewhat. If you had bought it several years earlier you would have been looking at a much smaller gain. The interesting thing is that despite the stellar gains we so often hear about, national house prices only rose by about 50% (nominal) in the 20-year period between 1989 and 2009. Using a trusty inflation calculator, it seems that in real terms house prices have actually fallen in the last 20 years! (can that be right????) I didn’t expect that result but it shows you how unreliable all the boom and bust tales can be.

Here's a link to a house price graph and an inflation calculator if anyone wants to have a go:

Thursday, October 8, 2009 04:38PM Report Comment

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