Tuesday, November 10, 2009

Gravity defied

The mystery of rising house prices

The conundrum is this. Unemployment is close to 2.5 million and will go higher. Pay rises are rare. People fear debt. The credit crunch has hardly gone away, meaning that mortgage finance, especially for first-time buyers with slim deposits, and movers with little equity, is expensive, if available at all. Mortgage approvals may be up on last year, but the new money going into the market isn't sufficient to secure rising prices. Values are steep by long-term historical standards in relation to earnings, especially in London. So prices ought to be tanking. And yet ...

Posted by apophis @ 06:13 PM (2380 views)
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25 thoughts on “Gravity defied

  • I_hate_gordon_brown says:

    Can’t anyone see exactly what is happening? This is Gordon Brown’s strategy… It has been going on for the past 12 years… Gordon will continue to do everything he can to inflate house prices… And, in return, property owners will continue to support him.

    I am just amazed of how much damage this idiot can do to a “Great Country”, which is supposed to be a democratic and fair country for all its citizens… Not just for property owners.

    I have a feeling that we are back into the 16th century!

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  • Buying a house now would be risky. The upside is limited – prices can’t go up much more. On the other hand there is ample downside, for all the reasons we know.

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  • Values are steep by long-term historical standards in relation to earnings, especially in London….

    even more so in parts of Cornwall with income multiples in the mid teens.

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  • It’s amazing is it not. It’s almost as if somebody is creating billions of pounds from thin air to keep the bubble afloat….

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  • What you are all forgetting is the following:

    1. Everyone is now interest only because they know by the time thier mortgage gets to maturity, inflation will have made it seem small. If you take this into account mortgage payments relative to earnings are well below the long term trend

    2. Peoples expectations have changed. They expect to spend more of their income on housing. It’s a fact of life

    3. There is a net addition of 300k every year now in piopulation due to imigration.

    4. No one has been building houses during the recession.

    All in all this leads me to conclude that whilst there is no room for a boom, gentle rises are sustainable medium to long term.

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  • I liked this article because it was well reasoned. I’m surprised to find anything as good here at the moment and confess to thinking it is a one way bet on property now. This is the first newspaper article I’ve seen to explain simply the resistance to any falls comparable to the slow motion car crash the economy is getting on with. If you are shitting yourself about your job and the future yet think you are missing the boat by not getting mortgaged up to the max at the same time, you are in the same psychological state as half the population. Is tht what they mean by “fear & greed” driving the market. I suppose so unfortunately. I blame Thatcher.

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  • krustyatemyhamster says:

    @clockslinger
    Is getting yourself mortgaged up to the max the new insurance against unemployment? A similar function used to be performed by savings; but now, as long as you have a house, you should be alright. Not.

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  • I just want to buy a place to live in which is a huge upside for me. I’ve been reading this website and the postings since about 2003 and saving throughout that whole time , and a couple of years before that too. I’ve now got enough deposit to get the type of property at a price that is affordable to me so what should really stop me from purchasing now? I’m sick of renting in my 30’s.

    A lot of posters I read now on the site seem to believe they need to wait until the market has bottomed out , exhibiting the same tendancies as those buyers we blamed for the house price increases in the first instance – i.e. property as an appreciating investment rather than a place to live.

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  • The last bastion of the never-never mentality manifests itself by the government and lenders collectively in denial about the pain that will have to be stomachs in order to allow recovery. This is the lost decade in the making. Is the recovery still 6 months away?

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  • Krusty, I agree, it stinks. But, fact is, you are better off having a pretty big mortgage than savings if you are unemployed because in the first scenario the state pays for it and with other you disqualify yourself from any help at all…even having your rent paid.

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  • What an ugly circus.

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  • brickormortis says:

    The simple problem is this. Homeowners do not need to sell because interest rates are so low and a tenant can easily pay a mortgage even against minimum equity on a property bought in the boom. So problem one is a constriction of supply.

    People have bought on the back of media hype as the media is seen as a from of all knowing, wise God. Therefore, with all the current media ramping on Sky news (ah, I hate sky news), the BBC (argh), Daily Express and others, the bandwagon is rolling again and there is a perpetuation of the idea that property is on the rise by the Joe public masses who aer all starting to talk about rising prices again. So the second problem is that people believe prices are rising and therefore are holding on in anticipation of further gains (or reduced losses).

    Finally, banks (grrrr) and the government (argh) are desperate not to repossess and to hand out as much as possible in the way of cash and good will, again propping up prices.

    Interest rates are so low that money in the bank is perceived as wasted (especially against rising inflation). I will say it again, if you have 100,000, you can easily buy a place and rent it for a 5% yield which is much more reasonable that a bank (or has been until recent weeks) and actually far less volatile than stocks and shares.

    It is almost not worth blogging about the HPC until rates rise because until they do, I see very little possibility of prices falling.

    It hurts me to say because I have been around on this forum from the very start and had been predicting a crash 5 years ago, but prices are not going to fall unless we have:

    1) raised rates (since less inventive to save and easy to pay a mortgage)
    2) less interfering from gvmnt.

    At the moment it looks like none of these conditions will be satisfied.

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  • @Drewster 1.

    That is, as Titaniccaptain says, a very good comment. It sums up the entire situation

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  • charlie brooker says:

    There is no mystery.

    Price movements are determined only by those transactions that actually take place.

    In other words even if only one property sold and did so for more than its previous price that single increase is conveniently taken as a proxy for all properties – and that is an dangerous misleading fallacy vested interests have used to enrich themselves and impoverish others.

    Lets put it this way – if little Jonny improves his grades in school, does that mean that all children must be equally improving because of him? But that is the logic of the property market.

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  • Has anyone considered that all of the newspaper articles and comments from “experts” is no more than claptrap designed to talk up the market. I am a London solicitor and I am not aware of any pick up in the housing market. Sellers tend to be coy about admitting that they have taken a reduced offer but it is possible to pay a substantially reduced price. Unemployment will certainly rise and interest rates are likely to do so to protect the value of Sterling despite the present government not wanting this for political reasons. Prices have much further to fall before the housing market corrects itself and you cannot buck the market.

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  • This is less the government recapitalising the banks and more the refusal to push repossession, you lose your job and the government pays your mortgage – there is no limit to this scheme in terms of numbers, dunno why noone on here mentions it, except me – you take a pay cut and the Banks are under direct instructions from the government to reposses.

    As the US shows HPC is driven on the margin by foreclosure, repossessions to you and me and they are not being allowed to happen. For as long as this continues HPC is cancelled.

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  • sorry NOT to repossess, my typo was clearly wishful thinking!

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  • Good post apophis – best article on the subject for some time. It explains well how the scale of the financial crisis perversely has helped prevent houses falling further (though 20% odd is still quite a drop), through the support needed to prevent economic collapse.

    When I last moved I looked at the cost of houses and asked myself what the chance was of them continuing to rise against them falling: very small. That has not changed; in fact I’d say it is even smaller. So why would I borrow up to the hilt to buy a house in these conditions?

    No one knows for sure what will happen, but the economic situation is unique to us all. But given what has happened, the measures taken to prevent us from sinking, and the limitations of those measures, can anyone really believe all will be hunky dory the next few years?

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  • cynicalsoothsayer says:

    It still feels like the calm before the storm. With GDP dropping 6pc, how long can this charade be maintained? The government is fast running out of ability to bail delinquent mortgages.

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  • cynicalsoothsayer says:

    “Prices seem back on their long-term trend level now”

    Aye, but the long term trend tends towards the latest data.

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  • Bellwether – I suspect you are right. In the 90’s repossessions were high too.

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  • So what happens if we default on all this debt. Do houseborrowers effectively get a free house, whilst cash savers lose all?

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  • brownsters_billions says:

    Whatever it costs.

    Including devaluation and inflation. If another wave of financial crisis hits, I suspect there will be a ‘flight to assets’, as people move away from cash and shares. That’ll certainly help support prices.

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  • The situation now is based on factors which cannot be continued forever, and the necessity of ending government borrowing and QE becomes an imperative.

    I think we will double-dip, the W scenario. Cheap money will end and government support for the economy through the public sector will end. Or cheap money and and government support won’t end and we will hit inflate and default.

    House prices are the least of our worries, a big surge in unemployment is the main problem. For many different reasons what Brown has done is not going to work(IMO) and the big risk is that next year, we find ourselves at the beginning of a sharp downward spiral, without any fiscal ammunition left, with high inflation expectations. This would be a complete killer for the UK.

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  • keep heart boys and girls. cabon copy so far. check lifecycle of the bubble plotting out nicely

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