House prices..

[clv101]

I tell you what really tee's me off about talking house prices. Why is it that if you say you believe prices will fall 30-40% you are branded a doomonger, or depressive thats trying to upset the apple cart.

However if you speculate that prices will continue to rise, pricing every first time buyer and youngster out of the market forever. You know the "you waited too long and missed the boat" attitude you instantely are considered a hero and financial expert.

Sad that a happy medium can't be found.

Yeah, it’s illogical. Generally inflation is seen as bad, not for houses though which is strange as for most people house price inflation is most defiantly bad. If you don’t own but aspire to HPI is bad. If you do own but aspire to own a bigger better house HPI is bad. Those two categories cover the majority of the population, so why is rapid HPI almost universally welcomed?

On the other hand, except for people who foolishly bought in the last couple of years (after a rapid HPI) then falls are good news. Clearly for those who don’t own but aspire to but also for everyone who does own but aspires to own a bigger better house! Again these are the majority, the only others being those emigrating, downsizing or with large portfolios as investments.

If you own a £200k house but want a £300k house you need to earn/find/borrow £100k. After a 20% house price crash your house is down to £160k but the other one is down to £240k, the difference now only £80k. In real terms you’re £20k better off. Might even be better than that as more expensive houses tend to fall a greater percentage than cheaper houses.

So, on its own, house price inflation doesn’t deserve the positive commentary it receives in the media and falling house prices shouldn’t be seen as “doom and gloom”. However recessions are gloomy and are correlated with house price crashes. The important aspect is that house prices crashes don’t cause recessions, recessions are the big over-arching thing, and lower house prices are a symptom of the recession.

I believe we are entering a recession and one of the symptoms of which will be lower house prices.

 

[Bar]

Dolph - do you see the housing market as a single entity or do you differentiate between the various levels?

Reason I ask is that I feel in the upper parts of the market 3-4 bedroom+ detached houses there will not be that much of a correction. However when it comes to the first time buyer market I can quite easily see house prices falling considerably.

Once again I can refer to personal experience - a month before I put my house on the market an identical one sold for £120k. I cannot get an offer above £105k. So in a very short space of time I have lost £15k already and I can only see it getting worse.

 

[Haircut]

Reason I ask is that I feel in the upper parts of the market 3-4 bedroom+ detached houses there will not be that much of a correction. However when it comes to the first time buyer market I can quite easily see house prices falling considerably.

This is my opinion too, good houses in nice areas will not see much of a change.
It will be flats that will get hit hard IMO, especially the thousands of dismal city centre new builds that seem to be cropping up everywhere.

 

[clv101]

This is my opinion too, good houses in nice areas will not see much of a change.
It will be flats that will get hit hard IMO, especially the thousands of dismal city centre new builds that seem to be cropping up everywhere.

Also note the massive drop in buy-to-let, that and the over supply means city centre "luxury" flats will fall massively, 50% I'd say.

 

[aardvark]

Also note the massive drop in buy-to-let, that and the over supply means city centre "luxury" flats will fall massively, 50% I'd say.

i wouldn't be surprised if its a lot more than that - why anybody wants to live in those small overpriced flats amazes me - they are no different from the council flats in the 60/70's.

 

[Dolph]

Dolph - do you see the housing market as a single entity or do you differentiate between the various levels?

Reason I ask is that I feel in the upper parts of the market 3-4 bedroom+ detached houses there will not be that much of a correction. However when it comes to the first time buyer market I can quite easily see house prices falling considerably.

Once again I can refer to personal experience - a month before I put my house on the market an identical one sold for £120k. I cannot get an offer above £105k. So in a very short space of time I have lost £15k already and I can only see it getting worse.

The thing is, you haven't lost it, not really, you've simply not gained it. Yes, there are different areas in the housing market, and I'd agree with first time buyer properties (especially flats) taking a larger hit than some of the houses further up. Flats have a big tendancy to drop dramatically as they are normally bought by people who can't afford a house, rather than by people who want to buy a flat, and so as houses drop slightly, flats drop by a lot more as they become less desirable. It will also vary dramatically based on area (as it always does).

I still can't see the massive drops some people are forecasting though, precisely because there are too many people waiting in the wings to buy.

 

[Haircut]

I still can't see the massive drops some people are forecasting though, precisely because there are too many people waiting in the wings to buy.

That depends on sentiment though, if people jump in to buy at the first opportunity of prices falling then I would agree with you.

Markets tend not to work that way though, if prices are falling why would you buy now when it will be cheaper next year?
If people think like this then price falls could be larger than some expect.
Like most things it's down to sentiment for a large part.

 

[Bar]

The thing that people still don't touch on is that the extent of the damage will be firmly down to how the media (mainly the tabloid press) report it.

Joe public is far too sheepish for my liking and will do almost anything the Sun/Mail tells them to.

 

[clv101]

I still can't see the massive drops some people are forecasting though, precisely because there are too many people waiting in the wings to buy.

Why are they waiting? Because they can't afford? Well, a 5% drop or 5% pay rise isn't going to change that significantly. Because they see houses as bad value and expect them to fall? A 5% fall would make them even more sure that they are going to fall. I don't see how people waiting in the wings can stop large falls.

Anyway, demand has very little to do with the price of houses. The increase in house prices is determined by an economy’s money supply. End of. Money supply has been increasing at around 14% pa this decade, most of it going into house prices (the balance in the ~2% inflation (ex. mortgage costs) and equities). As money supply changes as do house prices - irrelevant of immigration, family size, desire for a 2nd house in Cornwall etc... The question regarding house prices is where money supply is going.

 

[Rotty]

I still can't see the massive drops some people are forecasting though, precisely because there are too many people waiting in the wings to buy.

absolutely and when/if any falls happen these people will enter the market

 

[Dolph]

Why are they waiting? Because they can't afford? Well, a 5% drop or 5% pay rise isn't going to change that significantly. Because they see houses as bad value and expect them to fall? A 5% fall would make them even more sure that they are going to fall. I don't see how people waiting in the wings can stop large falls.

I'm not surprised.

Anyway, demand has very little to do with the price of houses. The increase in house prices is determined by an economy’s money supply. End of. Money supply has been increasing at around 14% pa this decade, most of it going into house prices (the balance in the ~2% inflation (ex. mortgage costs) and equities). As money supply changes as do house prices - irrelevant of immigration, family size, desire for a 2nd house in Cornwall etc... The question regarding house prices is where money supply is going.

And we don't know yet whether the credit crunch is going to be short or long term yet. We don't know what the banks are going to be doing in 3 or 6 months time yet, it's all assumption.

 

[aardvark]

supply and demand may work for things that people buy with their own money but not for houses - for that people must borrow from the bank and so the prices are largely driven by the availability of credit. We have had an unprecedented credit boom in the last 8 years, one engineered by the central banks to stave off recession (they are on record as saying this) - that boom is winding up and the crunch is on - it doesn't matter what the demand is, if the banks will only lend 3.5 times wages with a 10% deposit (like they used to - the historical norm) then house prices will have to drop. Hundreds of billions have already been written off by banks and the true enormity of the bad credit is still unknown as the banks don't want to open their books, so its very likely to get worse.
Its simple economics - it was always going to end like this and people were warned several years ago but they decided that the credit boom route was the best option and they would deal with the consequences later - well its now later and banks can't get enough money to fund themselves, let alone continue lending in the way they have been doing the last few years.
its not doom mongering, its reality - with a boom comes a bust - it has always happened, and will always happen because people don't learn from their mistakes. Its not the end of the world but people who were rich will lose everything and people who were poor may get rich - its the way the world works. A lot of people got rich from property the last few years and i for one am happy to see them crash and burn for their selfish greed.

 

[clv101]

supply and demand may work for things that people buy with their own money but not for houses - for that people must borrow from the bank and so the prices are largely driven by the availability of credit. We have had an unprecedented credit boom in the last 8 years, one engineered by the central banks to stave off recession (they are on record as saying this) - that boom is winding up and the crunch is on - it doesn't matter what the demand is, if the banks will only lend 3.5 times wages with a 10% deposit (like they used to - the historical norm) then house prices will have to drop. Hundreds of billions have already been written off by banks and the true enormity of the bad credit is still unknown as the banks don't want to open their books, so its very likely to get worse.
Its simple economics - it was always going to end like this and people were warned several years ago but they decided that the credit boom route was the best option and they would deal with the consequences later - well its now later and banks can't get enough money to fund themselves, let alone continue lending in the way they have been doing the last few years.
its not doom mongering, its reality - with a boom comes a bust - it has always happened, and will always happen because people don't learn from their mistakes. Its not the end of the world but people who were rich will lose everything and people who were poor may get rich - its the way the world works. A lot of people got rich from property the last few years and i for one am happy to see them crash and burn for their selfish greed.

Well said. I'd just add this, we’ve been living beyond our means for too long, borrowed too much, the economy has been build on the quick sand of increased money supply fuelling cheap credit and house price inflation. This can trace its roots back to the dramatic global interest rate cuts after 9/11. We were entering a slowdown, minor recession then already but the fear that 9/11 would cause a greater economic crisis caused rates to be cut, credit to boom and set us up for a economic catastrophe now.

Also critical to the economic wellbeing of the country is the increased trade deficient North Sea oil and gas depletion represents. As we switch from being a major exporter to major importer we add tens of billions to our annual trade deficit. Interest rates will have to rise to maintain the relative value of the pound in order to support the growing deficit.

This isn't just about house prices. The house price crash is just one aspect, a symptom of the coming bust.

 

[Dolph]

supply and demand may work for things that people buy with their own money but not for houses - for that people must borrow from the bank and so the prices are largely driven by the availability of credit. We have had an unprecedented credit boom in the last 8 years, one engineered by the central banks to stave off recession (they are on record as saying this) - that boom is winding up and the crunch is on - it doesn't matter what the demand is, if the banks will only lend 3.5 times wages with a 10% deposit (like they used to - the historical norm) then house prices will have to drop. Hundreds of billions have already been written off by banks and the true enormity of the bad credit is still unknown as the banks don't want to open their books, so its very likely to get worse.
Its simple economics - it was always going to end like this and people were warned several years ago but they decided that the credit boom route was the best option and they would deal with the consequences later - well its now later and banks can't get enough money to fund themselves, let alone continue lending in the way they have been doing the last few years.
its not doom mongering, its reality - with a boom comes a bust - it has always happened, and will always happen because people don't learn from their mistakes. Its not the end of the world but people who were rich will lose everything and people who were poor may get rich - its the way the world works. A lot of people got rich from property the last few years and i for one am happy to see them crash and burn for their selfish greed.

The current problems haven't been caused by defaults though (at least, not in the UK), they have been caused by banks not lending money to each other following incorrect ratings of risk when packages were sold to investors. The money is still present in the system, it could be loaned, but until banks are happy with their book sheets, they aren't.

Still, I'm sure a few people on the forum know better than the world economists...

 

[Slam62]

aye it seems its time to batten down the hatches

I expect an undershoot in property prices, people will err on the cautious side.

 

[aardvark]

The current problems haven't been caused by defaults though (at least, not in the UK), they have been caused by banks not lending money to each other following incorrect ratings of risk when packages were sold to investors. The money is still present in the system, it could be loaned, but until banks are happy with their book sheets, they aren't.

Still, I'm sure a few people on the forum know better than the world economists...

but there have been lots of defaults in the US - house prices in some places have fallen the fastest since records began. And many banks in the UK have a significant exposure to US so-called 'sub-prime' - although they were so willing to buy US debt still amazes me - pure greed probably.
So all those AAA SIV's and CDO's turn out to not be AAA - in fact they are barely worth anything. This has had serious consequences throughout the world hence the credit crunch. the problem is, there is so much that is unknown - banks don't seem to know how good their loan book is and it may not be years before they really find out.
So its a bit of a disaster but one which they are reluctant to report on the news because its complicated and the last thing you want to do is panic people - but make no mistake - this is the worst financial disaster since 1929 and nobody knows how things will play out. If you look hard enough you can find many reports from respected institutions (BICS etc) warning of a potential financial collapse for the last year or 2 - the ECB has injected 500 billion pounds (half a TRILLION) in the last 2 weeks - you don't do that unless banks are in serious trouble.

 

[MHayes]

House prices are indeed silly. I really get depressed when I think i am going to be living in some crap hole for the rest of my life. (especially after iving in a good area/house throughout my childhood

Back in the early 90s my parents bought a nice 4/5 bed massive bungalow with huge garden and a great view. for not much more than 100k which was probably a little more than planned at the time but boy has it payed off.God knows how much it is worth now, probably over 300k -400k

It is crazy how the media/people in general seem to be bumming high house prices, how is it good for anyone other than people downsizing? or maybe people using the money the house is now worth to get a bigger mortgage and buy another house (abroad)


I think it is a major factor of our quality of life. we are paying 50% of our wages + in some cases on a house and half the time it is a piece of crap and working ourselves to death for it with a massive 25+ year mortgage.

If you could buy a decent family house for a reasonable price I would feel much better, probably work less, retire sooner, pay loads less interest and TAX. I think supply and demand does come into it to an extent, there is no spare land with planning permission, if there were it would be much cheaper. The land costs as much as the house if you can even find any and thats why you get all these tiny houses made from paper costing an arm and a leg while being swashed into some awful plot 5cm from the main road.
Other places don't have this issue.

 

[Dolph]

but there have been lots of defaults in the US - house prices in some places have fallen the fastest since records began. And many banks in the UK have a significant exposure to US so-called 'sub-prime' - although they were so willing to buy US debt still amazes me - pure greed probably.
So all those AAA SIV's and CDO's turn out to not be AAA - in fact they are barely worth anything. This has had serious consequences throughout the world hence the credit crunch. the problem is, there is so much that is unknown - banks don't seem to know how good their loan book is and it may not be years before they really find out.
So its a bit of a disaster but one which they are reluctant to report on the news because its complicated and the last thing you want to do is panic people - but make no mistake - this is the worst financial disaster since 1929 and nobody knows how things will play out. If you look hard enough you can find many reports from respected institutions (BICS etc) warning of a potential financial collapse for the last year or 2 - the ECB has injected 500 billion pounds (half a TRILLION) in the last 2 weeks - you don't do that unless banks are in serious trouble.

If so much is unknown, why inject your own personal beliefs (or desires perhaps) into the conclusion?

The situation isn't good, and has potential to become very messy, but that does not mean it will go that way. The reasons the banks stopped lending money to each other wasn't that they didn't have it, it was a precaution while they assessed what had happened. We're still in that precautionary phase at the moment, banks are still assessing the situation and once that has passed, then we'll know more. Is the ECB et al wrong to inject cash to cover what could be a short term issue?

 

[Rotty]

Also note the massive drop in buy-to-let, that and the over supply means city centre "luxury" flats will fall massively, 50% I'd say.

that is one area of the market that was always dodgy, the entire concept is built on dodgy foundations

 

[clv101]

The reasons the banks stopped lending money to each other wasn't that they didn't have it...

The money is still present in the system, it could be loaned...

What do you mean? The money doesn't exist until it is loaned.

One thing we can be sure of is that "the money" is not there anymore. Globally there are some $3 trillion of collateralised debt obligations - some banks have announced major writedowns of their share, Merrill Lynch declared 30% writedown, UBS with the $10bn on top of the early $3.5bn has lopped off ~39% for example. Many banks are yet to declare. Breaking it down into quality, the BBB/BBB- rated mortgage debt has, according to the ABX-HE index loss 80% of its value, A 70%, AA 50% and even AAA has lost 20%, all since the start of 2007. Understand why there's a credit crunch? Total global loss could be $1 trillion this year or over 2% of the world's $46tn economy, of course it's worse than that as it's concentrated in the OECD and especially the US and UK.

Just today we heard that Bradford & Bingley sold £4 billion worth of its loans – at a loss. How much loss they didn't say but given how hard it is to find a buyer probably at least 20%.