Friday, Nov 20, 2009

Respite from the bullish news

Bloomberg: Overvalued UK market may not recover peak till 2014

U.K. house prices will probably fall next year, and it may take until 2014 to return to the levels at the 2007 peak of the country’s biggest housing boom, according to a Bloomberg survey.
“The market is still overvalued, whichever measure you use,” said Seema Shah, a housing economist at Capital Economics.
At the market’s height, banks were financing loans as large as five times a borrower’s salary. That lifted the average price to a record 6.2 times earnings, compared with the long-term average of 3.7 times income. The average price of an American home is 2.4 times income

Posted by little professor @ 12:43 AM (2259 views)
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1. little professor said...

Friday, November 20, 2009 12:49AM Report Comment

2. drewster said...

"That lifted the average price to a record 6.2 times earnings, compared with the long-term average of 3.7 times income. The average price of an American home is 2.4 times income."

I do wish people would stop quoting price-to-income ratios, they really are meaningless. In London the ratio is probably 9:1, in Hull it's more like 3:1. Does this mean that London prices will have to fall to Hull levels? Of course not.

Nice post otherwise. Does a one-bed flat in Ealing really cost £315,000?!

The key point is this:
"For some potential house buyers, low interest rates don’t matter if the deposit is unaffordable. Lenders burned by the financial crisis are typically demanding deposits of 25%. During the housing bubble, the typical down payment was 5%, and buyers sometimes didn’t have to make any deposit at all."

Friday, November 20, 2009 03:01AM Report Comment

3. phdinbubbles said...

According to mouseprice the p/i ratio is around 7x local salary in 'ull and somewhere around 12x local salary in Landan. I'm not exactly sure what they mean by average house price and average earnings and I'm not sure what they mean by average income and how accurate their figures are, but to me those figures suggest that prices will fall further as a percentage in London and the SE as the level of debt seems to be higher relative to income (whenever I compare p/i in areas of north/midlands to areas in SE, the SE is always higher), although obviously prices might be distorted more by supply constraint and investing forruners in the bottom-right corner of the Country.

The average income multiple on a loan for house purchase in September (according to the CML) was 2.8x income which, when combined with deposit requirements, suggests to me that housebuying at the moment is the preserve of a small number of rich folk.

Friday, November 20, 2009 07:27AM Report Comment

4. alan said...

"..suggests to me that housebuying at the moment is the preserve of a small number of rich folk".

All the people I know who bought this year did so with a really big injection from their families. This could be a sociological change from 15-20 years back when young couples organised their finances more independently from their parents. I suspect there are a lot of young folk out there waiting for their grannies to die. And maybe those grannies were the ones who bought using "right to buy" under Margaret Thatcher. Perhaps someone in the education sector will do a study someday?

An interesting, objective article.

Friday, November 20, 2009 08:47AM Report Comment

5. will said...


New York and Washington may be 10 X earnings and New Orleans 1.5X. The US as a whole is 2.4X income whereas in the UK as a whole is 6.2X. So the UK is is far more un-affordable than the US and almost every other country in the Western World. Of course it matters, but I am beggining to think this Government may like it to remain that way. It might just stop the flood of migrants into this country. Alternatively the UK may become a nation of renters.

Friday, November 20, 2009 08:52AM Report Comment

6. 51ck-6-51x said...

1. RICS pencil in a fall of 5% over 2010 and say prices will return to peak in 2012.
If prices return to peak at the end of 2012 after falling 5% from where we are now that implies 13% p.a. over the two years;
if prices return to peak at the beginning of 2012 that would be 28% over 2011... that's some serious rebound action.

2. Let me get this straight: A couple in Ealing bought a flat around the peak, March 2007, for 315K, had the cheek to ask 350K for it in August 2009 and eventually found someone who has said they will pay 318K? Furthermore this is in the public domain when "The transaction has yet to close."?
Is this some sort of huge one bed flat which they modernised?
What is this doing in a Bloomberg article?
I don't think I achieved my goal of getting this straight!

Friday, November 20, 2009 09:30AM Report Comment

7. will said...

Looking at Little Professor's chart above hightlights the vested interested parties - banks and estate agents - vs the economists.

During the 1990's house price correction the media were full of similar articles of ramping by the banks and agents, but it took 7 years to reach the bottom followed by a further 7 back to the top. So why should this 'peak to bust to peak' take half that time?

The Banks would like us to believe that we are on the road to recovery.

Friday, November 20, 2009 09:39AM Report Comment

8. phdinbubbles said...

I think that figure from the CML I quoted of 2.8x salary for average mortgage is a nonsense in the context of this discussion, as it will include people with substantial equity in one house moving to another house and taking out a new mortgage to cover the difference. Sorry.

Friday, November 20, 2009 09:41AM Report Comment

9. will said...

Have you seen the author's photo at the top of the article 'Peter Woodifield'. LOL

Friday, November 20, 2009 09:42AM Report Comment

10. bellwether said...

All of these calculations are based on such narrow criteria as to be almost meaningless.

Whether house prices rise of fall depends on whether the gargantuan debt burden means we enter a deflationary or inflationary period. At present no-one know, the former and price to income will matter and prices fall and fall VERY hard , the later and prices could go to the moon but the currency is trashed.

Friday, November 20, 2009 09:51AM Report Comment

11. mark said...

what is very interesting is this

UK market at peak was 6.2 times earnings
It is now 5.2 times earnings

Yet at peak USA market was 3.4 times earnings
and now it is 2.4 times earnings

Yet at only 3.4 times earnings the foreclosures caused world financial collapse

even a child could tell you something is seriously wrong in the UK, the slightest movement in interest rates will really drag it down..

Friday, November 20, 2009 10:07AM Report Comment

12. 51ck-6-51x said...

Are you serious? That's Seema Shah of Capital Economics.

Friday, November 20, 2009 10:09AM Report Comment

13. mark said...

the real truth behind the boom is a whole generation either can't buy a house at moment or will rent forever, this is very sad...

Friday, November 20, 2009 10:16AM Report Comment

14. will said...


No it's not, it's Neil Woodifield - it says so............

Got to laugh at something in the face of all this cr*p.

Friday, November 20, 2009 10:21AM Report Comment

15. letthemfall said...

High inflation does not necessarily mean steep price rises for houses. In the 70s prices stayed flat while inflation was high - restoring real prices to mean (supportable) levels. If we do get inflation, which is by no means certain, then interest rates will rise commensurately, putting big mortgage holders in trouble. And it is possible that real incomes will at first fall with inflation.

The only way I can see that prices stay higher than most people can afford is if recent growth in wealth inequality continues, returning us to a pre-War era. But I would be surprised if the population allowed that to happen. On the other hand, little has opposed it so far.

Friday, November 20, 2009 10:25AM Report Comment

16. will said...


I agree that we have yet to see any wage inflation to make housing affordable. In the 70's wages were rising 20% per year for several years, so can we expect this anytime soon?

Friday, November 20, 2009 10:35AM Report Comment

17. cynicalsoothsayer said...

The one thing you can take from the HPC graphs section is that house price swings have been increasing over the decades, and the current economic state suggests they will get even more unstable. The idea that they will return to the 'mean' or 'long term trend' is laughable.

Friday, November 20, 2009 10:55AM Report Comment

18. icarus said...

Don't underestimate the ability of governments to keep house prices high. They are doing this in order to shore up banks' balance sheets.

Don't forget that this is not a normal recession. Most recessions are caused by cutting capacity and inventories after businesses get ahead of themselves and overestimate consumption. Traditional countercyclical government policies are geared to this kind of recession. The current one is a correction of financial excesses, a bursting of bubbles, balance sheet contraction, deleveraging, debt elimination, a tendency toward asset liquidation and rising savings.

Given the latter kind of recession all governments are now are geared towards supporting asset prices at all costs. Larry Summers in the US put it like this: declining asset prices lead to a downward spiral of margin calls, deleveraging, further price falls, loss of bank capital, lower lending, yet lower asset prices, foreclosures etc. The financial system is further weakened, less borrowing and spending etc. etc. rarer-kind-of-recession/

To protect banks' balance sheets we have fiscal stimulus, the purchasing or guaranteeing of 'toxic assets', mark-to-make-believe accounting, low IRs and manipulation downward of longer-term IRs by the purchase of long-dated Treasuries, and the fixing of the game so that banks can 'earn' and recapitalise themselves through retained earnings. (this is why bonuses are so galling).

So, for the time being, at least, house prices will remain up there (even in a thin and sickly market) and relatively independent of average earnings. It depends on how far govts will go to keep the zombie economy bumping along at the bottom.

Friday, November 20, 2009 11:00AM Report Comment

19. bellwether said...

18 nails it.

Friday, November 20, 2009 11:08AM Report Comment

20. letthemfall said...

Yes, I think that's right. The sole intention of QE is to maintain asset prices, and so far it has worked, to the general detriment of cash savers, although it has, on the face of it, staved off depression. The big question is how will this play out. One thing that is impossible to imagine is that QE will be withdrawn and all will be back to normal in a year or two.

Friday, November 20, 2009 11:16AM Report Comment

21. mark said...


I dont think they can keep the zombie economy bumping along much longer, after all debt is now pushing the UK into a dangerous position only an insane person would borrow more, then again Gordon Browns bunch are not exactly sane...

Friday, November 20, 2009 11:17AM Report Comment

22. icarus said...

My best guess. It won't be a recession-recovery with any of theses shapes: V,W,U,etc. It will be www - bumping along at the bottom i.e. stagnation, short business cycles, uneven growth, higher structural unemployment, fits of recession and interludes with economists reading the tealeaves and finding new hope of recovery. The odd virtuous circle may appear and make it seem as tho' recovery is under way. The debt overhang will make this very precarious, the economy will be at perpetual stall speed and vulnerable to a rise in oil prices or IRs and especially vulnerable to withdrawal of govt stimulus. The political unpopularity of govt stimulus will lead to its withdrawal before the economy can cope. Some call this state of affairs depression with a small 'd'.

Friday, November 20, 2009 11:37AM Report Comment

23. mark wadsworth said...

Icarus "Don't underestimate the ability of governments to keep house prices high. They are doing this in order to shore up banks' balance sheets."

That may well be true in the USA but in England it is the other way round. The govt is fire-hosing all that money at banks, and nationalising them, in order to keep house prices up and thus win as much of the Home-Owner-Ist vote as possible. The Tories are cooking up even more plans to shore up house prices (like making it even easier to get the DSS to pay your mortgage).

As lousy as the economic fall out of all this is, who is going to vote for somebody like me who says we should introduce LVT, liberalise planning laws and build more social housing? A sizeable minority, yes, but the seventy per cent of Home-Owner-Ists will still vote for the Red, Blue or Yellow Wings of their own party.

Friday, November 20, 2009 11:38AM Report Comment

24. will said...

Maintaining asset prices which cannot be sold or borrowed against is pointless, it merely puts us back into the bubble with reluctant purchasers.

From an economic point of view, the Government may have beaten the recession but they have not addressed home affordability or reduced unemployment, and at some point the UK debt mountain will have to be repaid.

Friday, November 20, 2009 11:49AM Report Comment

25. icarus said...

mark w @23. I don't think the thinking of both govts is much different. It's all asset prices they're both supporting, and with similar measures, and 'saving the financial system' is a priority in both countries. If they can save the system and get the homeowner vote that's two birds with the same stone.

Friday, November 20, 2009 11:59AM Report Comment

26. bellwether said...

There are property bubbles across the globe, they just happen to be worse in the UK. If house prices drop even 10k you lose about £1.5 trillion of of potential credit money - capacity to leverage off property.

If they drop by say 30% (appx 50k) to something even approaching long term affordabilty you are looking at losing £7.5 trillion of potential credit money. The increased affordabilty would eventually create a positive feedback loop and some sort of genuine recovery but getting there would be crippling.

So what does a government do?

Friday, November 20, 2009 12:57PM Report Comment

27. mark said...

well the government had better invest in some wheelchairs as this will be crippling either way

Friday, November 20, 2009 12:59PM Report Comment

28. Coral Reef said...

It doesn't have to be complicated. Government and shadow government do want to and will do anything to keep house prices high in order to stop the younger generations from ever owning one. They do want them to have debts though, in the form of tuition fees and the "lucky" few who do borrow a large mortgage. It was not so long ago (especially in terms of wage rises), when only the rich could afford a 250,000 pound home.
Their motive really is that simple. The whole of UK is being crashed down into a 3rd world country and that is exactly what the intention is.

The only time that working people have been better off is the few decades after WW2. They needed for war and made promises to look after them afterwards. This they did not do after WW1 and the populace was at the point of revolting. This they wanted to avoid after WW2.

Friday, November 20, 2009 01:07PM Report Comment

29. bellwether said...

Coral Reef you are hallucintating conspiracies.

Friday, November 20, 2009 02:34PM Report Comment

30. mark wadsworth said...

Bellwhether, what Coral says is basically true. There's no evil "conspiracy" as such, but as soon as you have a high proportion of owner-occupiers, the Home-Owner-Ist vote is the easy one to go for. The knock on effects are to enslave next generation with debt, that's not the actual aim, but it is an inevitable side-effect.

Think about it, the countries with the biggest price bubbles (UK, USA, Australia, Spain, Ireland etc) have the highest % of owner-occupiers. As long as fewer than half own their own home, a government can concentrate more on keeping the economy going - as soon as it's more than half, homw-owner-ism and boom'n'bust take over - home-owner-ism only became the dominant ideology in the UK in about 1970 when owner-occupation had increased to half of all households (yes, it was that recent!!!).

Friday, November 20, 2009 02:56PM Report Comment

31. cynicalsoothsayer said...

The government, whatever flavour, just cannot afford to support house prices forever. The government is getting crippled trying.

Friday, November 20, 2009 03:55PM Report Comment

32. letthemfall said...

coral reef is correct about the effect of the Wars - they fostered greater equality in the country. I don't think people owning their own homes is the problem: it is a gradual slippage back to pre-War inequalities, partly through multiple home-ownership (I think most of us here agree that there is no shortage of dwellings for the size of population) and partly through the willingness of lenders to feed the false belief that houses make their owners a lot of money. Not everyone is unhappy about this: most wealthy people probably rather like it.

Friday, November 20, 2009 04:07PM Report Comment

33. tenyearstogetmymoneyback said...

letthemfall said at 32

"(I think most of us here agree that there is no shortage of dwellings for the size of population)"

I was watching Children in Need last night. At about 10:30 pm there was a short film in which a kid
was walking around streets of boarded up houses.He was in the studio afterwards so it was obviously recent.

It made me wonder what is going on. We keep being told about the great housing shortage yet there are
still of properties like that. I assumed they had all be snapped up by property developers. At a guess
the houses would need less than £50K each to do them up (after all in 1995 you could buy a brand new
Crest 2 bed in Hampshire for £52K.

Any comments. My guess is people will probably say the houses are in the wrong part of the country
and if they were in London would be worth £500K each.

Saturday, November 21, 2009 10:34AM Report Comment

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