Tuesday, May 11, 2010

House prices will fall – whatever government we get

House prices will fall - whatever government we get

House prices will fall - whatever government we get Which coalition would be best for the property market? Linton Chiswick explains why all scenarios lead to falling prices.

Posted by fwiw @ 01:23 PM (1533 views)
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5 thoughts on “House prices will fall – whatever government we get

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  • …because one has to sign up to read it: 🙂

    Clarity is the goal. Events are moving by the hour, and there’s a real possibility that by the time you’re reading this a political deal, cutting the thread on Britain’s hung parliament, will have been done, and the situation will be a little clearer. If, however, like the nation of estate agents, it’s a clear view of the short-term future of the residential property market you’re seeking, it’s probably safe to say there’s time to leave the room and make a cup of tea.

    Before polling began, a series of statements by media-savvy estate agents made it pretty clear that among the key-janglers, a hung parliament was very much the least preferred option. The theory is that the resulting political uncertainty only exacerbates the existing pre-election tendency among the home-moving classes to do nothing. People – the argument goes – don’t like to commit to what’s commonly the biggest purchase and commitment of their lives up to that point, something that might lock them into a generation of debt, without knowing which manifesto pledges are most likely to be ignored by which party when they govern for a maximum of five years, and possibly less. If ever there was an era in which it’s clear that economic policy is determined by world events rather than national government, we’re living in it, but one can just about accept the logic. Big decisions are made emotionally, and people come over all jittery when they don’t know who they’re going to be blaming.

    The agents supported their argument by pointing to the huge drop in mortgage approvals in the first quarter of the year, as we approached polling. Some potential buyers apparently want to wait and see what will happen to Stamp Duty. But the Tories and the Labour party are pretty much in agreement on Stamp Duty changes, and although it’s possible, it’s less than likely that the LibDem mansion tax proposal will be high on the agenda during the current coalition negotiations.

    A big fuss is made about Home Information Packs; will they get ditched under a LibDem/Tory government? Will Labour insist they stay in a Labour/LibDem deal? More to the point, does anyone care enough to not buy the house they want? The real problem with HIPs is the hassle and the intellectual deceit. Once you’ve witnessed a homebuyer’s capacity to break through a previously-agreed budget once they’ve found the home of their dreams, it’s hard to believe a few hundred pounds spent unnecessarily on a HIP will put them off.

    Furthermore, figures out this morning – provided by the National Association of Estate Agents no less – suggest the traditional spring bounce is on track… with vendors, buyers and deals in the pipeline all up.

    Some analysts, taking a different view, point to the likely effect on the Pound of a weak, fractured Government, and its ‘positive’ effect on the London property market. A cheap pound might bring more Euro and Dollar buyers into the capital. Already, foreign buyers are at an all time high – as many as 70% according to some agents working in the city’s posher areas – and are keeping the market buzzing. The vendors tend to follow a well-trodden path out into sought-after country postcodes, pushing up property prices and increasing transactions in the trophy rural market.

    So which coalition would be best for the property market?

    Radical housing or building policies are unlikely under a coalition with bigger bills to pay. The housing market’s short-term future will rest ultimately on how the wider economy and the job market are handled. Some theories:

    The Tories’ thirst for reducing the budget deficit as quickly as possible, and its effect on public sector pay and employment, will ultimately pour water over recent property market gains and perhaps push down prices toward the end of 2010.

    The potential instability of a rainbow coalition involving Labour, and their slower rate of dealing with the deficit, might have a negative impact on the pound, ultimately adding to inflationary pressures and forcing interest rate movements, which – coinciding with pay restraint – would ultimately increase defaults, slow lending and push down prices toward the end of 2010.

    And what if the politicians just stayed in bed and did nothing? The story of the property market recovery has largely been about shortage of supply (which this morning’s NAEA figures suggest is coming to an end), a runaway London market which – in some instances reaching its 2007 peaks – can only run out of steam, unprecedented interest rate cuts and relief that the banking crisis didn’t prove terminal. Houses remain, by many measures, unaffordable and we’re heading toward a period of economic austerity, which is likely to… push down prices toward the end of 2010.

    Something, at least, looks clear.

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  • Couple of good comments:

    Daniel Meeks – 50 – 60% reduction from peak
    18:44 | 11 May 2010

    In his 1997 budget, Brown abolished dividend tax credits on pension funds. Companies saw the writing on the wall and immediately ended their final salary pension schemes to new employees shortly after the ‘Brown raid’. They also started to cut down on the number of people with long final salary pension service and worked towards ending a scheme which would no longer be viable.

    * The CBI opposed Browns Tax credit cuts. Even the treasury and No.10 opposed them. [But Brown made the cuts anyway.]

    2.] By abolishing the pensions tax credit, the yield for institutional funds across the entire market fell by 20 per cent. Few people outside the City understood the change and hardly any MPs protested. But Whitehall papers produced under the Freedom of Information act showed that Mr Brown was warned by his officials and by the Treasury that there would be dire consequences.

    They warned it would wipe £50bn off the value of funds, and that shares could drop by up to 20 per cent and public sector pensions would need topping up. [Brown chose to ignore this warning]

    * The value of pension funds have since lost around £5bn per year since the 1997 tax relief cuts. Pension funds holding the cash that almost everyone in the country had planned to use for our retirement have lost around £100 billion over the last 12 years.

    3.] The advice Brown was given by this Treasury Paper, in 1997 was as follows:

    ‘The changes in incentives are likely to lead to substantial changes in portfolios. Pension funds will find equity relatively less attractive, and will prefer other assets – particularly interest bearing securities and foreign equity – and may also be prompted to consider more direct property investment.’

    Those funds were then channelled into fuelling an unsustainable property bubble, BTL portfolios, which developed because of Labours complete lack of regulation of the Banks.This was followed by ever increasing toxic mortgage debt, and this was followed by the bank bailouts.

    This is just one example of Gordon Browns incompetent decision making which helped to create the cornerstone of the debt bubble.

    4.] In the ten years previous to Browns Raid on pensions, From 1987 to 1997 the Average House Price rose from £40k to £55k.

    A 33.3% rise over ten years.

    From 1997[post tax dividend cuts] to 2007, the Average House Price rose from £55k to £190k [Nationwide Building Society figures]

    A staggering 245% increase over the same period. [Ten years.]

    The UK debt bubble stopped inflating at the end of 2003.

    But then, Chancellor Brown removed housing costs from the inflation index (in December 2003, from RPI to CPI), despite Bank of England’s opposition, to force the Bank to keep interest rates low. Too low.

    The UK should not be facing the debt we are facing, and The Labour Party are guilty of gross fiscal mismanagement and criminal negligence.

    Why should a younger generation pay for your debt?

    Whilst keeping your house prices artificially inflated?

    We are in effect paying for your houses, whilst being unable to afford our own. That is called Indentured slavery.

    We have already been forced to waste tens of thousands in rent over the last nine to ten years.

    We are being forced into Debt Bondage.

    You will most certainly see taxes introduced on BTL.

    Many hundreds of thousands of disenchanted people, priced out of housing for a decade are looking at the Lib Dems and the tories, to tell the people about the debt transfer. Tell them how UNFAIR this is.

    A very large percentage of the hundreds of thousands of people, who voted for the Lib Dems are people who have been priced out for a decade, and have made it very very clear why they voted lib dem.

    There area number of scenarios which will lead to a 50% + reduction in houses.

    One of the key areas to consider at the moment is The risk of Solvency, [as a pose to liquidity of the banks] discussed in some depth, in the past, which has now been transformed into a Sovereign risk.

    The risk is still there you see. It never went away……

    It seems to me after a number of glances, that whether we follow an inflationary route, or allow deflationary, sooner or later we will come to the same end game?

    It is only the timing which is in question.

    50%-60% reductions from peak are most cerrtainly on the cards now, as there will most certainly be an overshoot on the way back down.

    The worm has truly turned.

    Nick Howell – Lets hope for a fall
    20:19 | 11 May 2010

    Daniel – I hope you are correct. We have left many young people with no hope of being able to afford to rent and certainly not able to buy a home. This has serious consequences; why would a young people aspire to form a family when they know it will not be possible to provide a decent home? How will we develop our manufacturing base when so much earned money is spent enriching property developers, Banks, Estate Agents & BTL?

    No-one should borrow more that three times annual salary for a mortgage.

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  • So… HPC: could it really finally happen, or is this cloud cuckoo wish-wish land?

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  • spot on mick…

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