The House Price Crash Thread

[Gringo]

Ripping these posts from the energy behemoths thread, I thought it might benefit from it's own little home.

House prices mean it's close to impossible now for people to get onto the property ladder. Now, if they do manage to get there, they can't afford to run the home. Combined with petrol, people just can't afford to live any more.

Don't worry too much about that... I expect that the UK housing market will collapse fairly shortly. While the lending practices were nowhere near as reckless as they were in the USA, the underlying fundamentals (price to income, consumer debt levels to income) are far worse than they ever got in the USA and got worse faster than they did in the USA. When that happens, I expect that the BofE will try to prop things up by slashing rates (something they've generally avoided thus far), depressing the value of the pound.

I'm taking a long look at shorting the pound (probably against every currency, but I'd pay particular attention to going long on the dollar and the yen on the other sides of the trade... the dollar provides a decent hedge against the pound not falling and we should see the borrow-yen-buy-pounds carry trades unwind anyway this year); I don't see the Eurozone doing too well either, with shorting baskets of Euro heavy industry stocks (the auto industry in the guise of the DJ Stoxx 600 Auto ETF looks particularly appetizing as far as short opportunities go).

On the long side, I like sugar and cotton, which should see increased demand if oil prices rise and in any event are likely to see supplies constrained (Brazil and India, the two largest sugar producers, are currently producing sugar at a slight loss, which means that current production levels are not sustainable at these demand levels) in the short-to-medium term.

expect that the UK housing market will collapse fairly shortly

OT but never gonna happen ..

only thing that will bring on a collapse is us adopting the Euro as houses prices will soar initially before going imploding on themself

expect that the UK housing market will collapse fairly shortly

OT but never gonna happen ..

You've just given me all the encouragement that I've called it right.

Running, not walking, to the exits when more than a tiny minority of market participants say that a given investment will never collapse ranks up there on the list of successful investment strategies.

8 months ago, I thought property prices were as safe as houses, now I'm not so sure. I was quite happy that a 2-3 year period of stagnation would be required before the growth picked up again, with the exposed areas being the cheaper areas around london that had gone up 30% in the last couple of years whilst the rest of the UK had already moved towards stagnation.

The BTL market would pick up any slack, as rents were still strong, boosted by the lovely immigration that keeps the economy going. I was convinced it was going to take more than a change in sentiment for the market to change direction.

Well we've got more.

* Credit crunch, upping available interest rates and application fees,

* HIPS reducing the availability of speculative sellers (in a booming market the reduced supply would have helped boost prices, but in a struggling market it just reduces choice and lowers the transaction rate, meaning other sellers drop their prices)

* the threat of recession going from a 1 in 4 chance to a better than 1 in 2 - any recession will see the repos go up, which again flattens the market,

* and the threat of inflation which restricts what sterling mervyn can do with interest rates, if he cuts rates to help homeowners, inflation will bubble, if he raises rates, repos will bubble.

Somethings going to give, it isn't going to unwind in a soft landing as we saw 5 years ago.

[nrogers]

People, save more, spend less... sorted!

[drat01]

Gringo - I was in Spanish territory last week and noticed from talking with some of the locals that they are experiencing similar trends over there. Is this your experience and is it being reported like that on the mainland?

Your final para seemed to imply it was a UK only issue, when from discussions we have had recently it would seem to be a worldwide thing

[drat01]

People, save more, spend less... sorted!

Trouble is Nick people have to spend so that others can save

[nrogers]

Why, isn't interest rates and house prices always blamed on public spending... well **** the government over and stop spending.... see what happens!!

[drat01]

Nick - if it was as simple as that then why are other countries facing exactly the same prospects?

The banking sector has a lot to blame IMO. These are multi national organisations who basically gamble with countries and people's money all for the elusive big buck in their own back pocket.

[nrogers]

thats a point Ian and one I kind of agree with.... so why does the government, not just the UK's, but NZ's... continue to blame public spending!!

If you are interested, I will send you the response I got from NZ's finance minister to a letter I penned... I called him on many points, he responded, I called him on more points of that response, he has since failed to respond...

[drat01]

That's because he thought you were a stalker Nick :-)

There isn't a simple cause and fix for the financial issues the world faces. We have just been given target sectors and countries based on analyst views, which is interesting reading to see where people think there will be money and where there will be belt tightening. There will always be upward sectors just due to the nature of the way that business is now run and the way the world operates. Dependency on house wealth is a risky process as is dependency on other countries etc.

The old adage about America sneezing is still a very true one.

[Gringo]

Your final para seemed to imply it was a UK only issue, when from discussions we have had recently it would seem to be a worldwide thing

I don't think my final paragrah implies that at all.

"Somethings going to give, it isn't going to unwind in a soft landing as we saw 5 years ago."

It's not analysis, it's a prediction.

However, now you've raised the point, housing markets are by nature local, but constrained by national or international factors. The housing market in sheffield is very different to that in london, and the london market is very different from berlin.

Also the fact I list two global factors (credit crunch, global recession) and one that is massively influenced by other global movements (inflation) would indicate that I don't think it's a UK Only issue.

Again however - the Spanish housing market is distinct from the UK market and is distinct from the US market. The spanish market has been on it's arse for nearly 12 months, caused by massive over supply and generous valuations - loads of people who bought off plan are having to default and lose their property as the growth they were promised hasn't appeared and the banks are beginning to tighten up on valuations. The funny thing is, wherever you look they are still building, and they are still pushing up prices, just not selling anything. They are lucky that their demand is driven internally and from other countries further north, so if the german housing market picks up, people will use their newly found equity to buy second homes in the sun, just as many brits have been doing in recent years.

The US housing market is on it's arse because of mortgage misselling (some of it fraudulent) leading to overvaluations and an inevitable crash when the market tries to right itself.

The UK market is going to be brought to it's knees by global factors, but it doesn't make it a global phenomenon. Different markets have different cycles, and may parts of europe will see house price growth this year, but even in those countries there will be areas where prices fall.

The fundamentals that LR points to (house price vs salary) are wrongly balanced, and that is more of a typical UK problem - I can only think of dublin where banks lend on such multiples. It is - or it wasn't - inevitable that this would lead to a crash, a soft landing could have been experienced, as I said, with three years of zero or RPI level growth, but now that the four economic horsemen of the housing market apocalypse are saddling up, I can't see that happening.

So in conclusion, there are global problems that will cause weak and over extended markets to collapse.

[ianrobo1]

it won't crash in this country because the demand far outstrips supply and look at the number of houses that will need to be built

it will be a gentle one for most as £130k for my house represents good value

but at the higher ends isi where it could hit

[Gringo]

The banking sector has a lot to blame IMO. These are multi national organisations who basically gamble with countries and people's money all for the elusive big buck in their own back pocket.

Agreed - the banks have driven the markets in both the US and the UK - the US through the sub prime lending and the UK through ever increasing salary multiples.

[Gringo]

it won't crash in this country because the demand far outstrips supply and look at the number of houses that will need to be built

it will be a gentle one for most as £130k for my house represents good value

but at the higher ends isi where it could hit

I suppose how do you define a crash. My rule of thumb would be 20% decline in real terms over a two year period. This would be enough to lock many households into negative equity and cause the market to lock up for the next few years as happened in the 80s.

From today's gruaniad

House prices dip for fourth month as it takes longer to sell homes

House prices fell for the fourth month running in January while the average time it takes to sell a home continued to rise, according to a new Hometrack survey.

With turmoil in equity markets, fears of a global economic slowdown and speculation about interest rate cuts keeping potential buyers in wait-and-see mode, house prices slipped 0.3%. The less volatile year-on-year measure showed a rise of 2.3%, the lowest since June 2006.

The survey coincides with predictions that this year will see the first house price drop since 1995. Forecasters at the Centre for Economics and Business Research (CEBR) believe the average house price will fall 2.5% - or more than £8,000 - in 2008. This echoes other recent reports of a slowdown.

The survey shows the average time to sell a home was 8.5 weeks in January, the longest since it began seven years ago. Still, the property information group pointed out that the extent of house price falls decreased in January, with estate agents reporting lower prices across less than a quarter of the country, compared with 31% in December.

"Weak confidence among would-be purchasers continues to put downward pressure on house prices, although the scale of the recent falls is relatively small when put in the context of gains over the past few years," said Richard Donnell, Hometrack's research director.

Weak confidence is putting pressure on asking prices, with the survey indicating the proportion of the asking price being achieved has declined to 93.5%, down from an average closer to 96% a year ago.

Hometrack said the economic outlook was likely to remain the biggest influence on the market in the short term. "With most buyers also being sellers, households are waiting until there are signs of general stability before committing to the market," Donnell said. "Wait and see is likely to remain the default position of most homeowners."

Hometrack's forecasts are echoed by the CEBR's prediction that house prices will fall £8,300 to an average £187,900 in the fourth quarter of 2008, from £196,200 in the same period in 2007.

So the CEBR are predicting an actual fall of 4% or 6% in real terms. Nowhere near a crash, but not overly opimistic either.

[ianrobo1]

I suppose Gringo as I said the more expensive end will see the biggest % fall which distorts it, does it not ?

As usual I suppose it is likely the over heated SE will catch a fair brunt of this and whinge about it ...

[Jon]

it won't crash in this country because the demand far outstrips supply and look at the number of houses that will need to be built

it will be a gentle one for most as £130k for my house represents good value

but at the higher ends isi where it could hit

roughly my thoughts too ian.

It's hitting me a little bit at the moment. Have had my flat on the market for just over 6 months now, and not that much interest and only 1 firm bid wich was way to low so had to reject it.

I've just bought another property though, slightly more expensive than the one i already have but i reckon a good £15k lower than about 2 years ago, so just within my price range.

But now i am in a position of holding 2 properties that i can't really afford (have had to get intyerst only mortgages on them both), becuase i can't sell my flat due to the market really slowing/reversing.

i've had to remortgage my flat to get a bit of capital to put down as an advance on my new apartment, and have had to let my flat out to tenants. Tnankfully, just got tenant sin at the weekend, whcih covers my mortgage plus a little bit extract each month.

Not ideal, though i am hopeful of an upturn in year or so if interst rates get cut afew times. They've gone up continually for the last 3 years or so, so hopefully we might get 2 or 3 cuts in the next 12 months, whcih can only help the market.

Plus, demand still outstrips supply, whcih should ensure we don't have a market crash. People still need/want to buy property, the demand is still there IMO.

[Gringo]

i've had to remortgage my flat to get a bit of capital to put down as an advance on my new apartment, and have had to let my flat out to tenants. Tnankfully, just got tenant sin at the weekend, whcih covers my mortgage plus a little bit extract each month.

So why bother selling - if it's profitable, and if you're bullish about the market, it's now an investment. As long as it's in a good renting area, why worry. Over an average 20 year period, it should quadruple in value, so the mortgage reduces in terms of LTV without you having to pay a penny.

Plus, demand still outstrips supply, whcih should ensure we don't have a market crash. People still need/want to buy property, the demand is still there IMO.

Once prices start falling, people will delay their entry into the market (why buy now when it will be cheaper in 6 months), and demand will slacken.

[ianrobo1]

and peopel still feel safe in their jobs and will take out mortgages, the good thing will be that banks are more cautious to lend which is actually a good thing, the days of 6 times slaray are over (well at least for a while).

The problem with housing is that the SE distorts things and that is where policy is made, luckily governments are pretty powerless to stop a lot of what has gone on but crashes can be self fulfilling rather than actual fact.

[Gringo]

From the house price cash website who have been predicting a house price crash since 2002 and are all rather bitter as they sold up and moved to renting thinking they'd buy back cheaper when the market crashed.

But an interesting graphic nonetheless.

[Gringo]

and peopel still feel safe in their jobs and will take out mortgages, the good thing will be that banks are more cautious to lend which is actually a good thing, the days of 6 times slaray are over (well at least for a while).

But if people can't get the same mortgages, then people can't afford the same houses so demand is pushed down the price range and so utimately prices would have to fall.

The problem with housing is that the SE distorts things and that is where policy is made, luckily governments are pretty powerless to stop a lot of what has gone on but crashes can be self fulfilling rather than actual fact.

But also most of the demand that you claim will keep the market buoyant is down there.

[ianrobo1]

but if it brings prices down in the SE then that can only be good

I mean for £130k in Brum you can buy a good sized family home, that to most is affordable, which is why a price crash like in the early 90's if it happens is felt the most in the SE

But the demand down there is still there, so a simple price adjustment for the nexxt 12 months

[Jon]

i've had to remortgage my flat to get a bit of capital to put down as an advance on my new apartment, and have had to let my flat out to tenants. Tnankfully, just got tenant sin at the weekend, whcih covers my mortgage plus a little bit extract each month.

So why bother selling - if it's profitable, and if you're bullish about the market, it's now an investment. As long as it's in a good renting area, why worry. Over an average 20 year period, it should quadruple in value, so the mortgage reduces in terms of LTV without you having to pay a penny.

Plus, demand still outstrips supply, whcih should ensure we don't have a market crash. People still need/want to buy property, the demand is still there IMO.

Once prices start falling, people will delay their entry into the market (why buy now when it will be cheaper in 6 months), and demand will slacken.

agree with all that Grings - i think there could well be (and judging by it currently is) a short to mid term slackening of the market, meaning that house prices are indeed currently dropping slightly. I beleive this will be realtively short lived, IF the BofE are able to cut interest rates 2 or 3 times over the next 6-12 months.

the avaialabality of mortgages has been tightened, which i think is a good thing in terms of financial stability for the economy, but this will necessarily have a detrimental effect on the market short-term too.

longer term though i think that a continuing reduction in interst rates plus the demand > supply effect will stave off a housing marker crash. There will just be a slight short term re-adjustment IMO, whcih is what we are seeing right now.

as to your first point, you are correct.

it's just that a) i wanted the money from the sale to make my mortgage on my new pad more affordable and i don't like the hassle of being a "landlord".

But longer term if i hold onto it, it will probably make more economic sense, and should reap greater dividends. Selling right at this moment is not the right course of action anyway.