UK house prices set to tumble

37 comments from readers

katherine
19 November 2007 at 16:14

Jonathan Davis sold his house to rent fearing a crash in 2002. He has called the top of the market ever since and promoted this as spokesman for the website hosue price crash set up by other people who "sold to rent" to speculate on a crash. they have got it spectatularly wrong for years, lost a lot of money, and persuaded goodness knows how many others to do the same. i'm glad i didnt take that financial advice back in 2003, or every year since, for that matter. who knows what the future will bring, a stopped clock is right twice a day , i guess.

Simon
19 November 2007 at 19:06

Katherine resorts to an ad hominem attack on Mr Davis rather than look at the economic fundamentals. The sentiment, for it is nothing more than sentiment, that house prices only ever go up is precisely the thing that kept house prices rising long after any sane person would have expected them to stop rising and fall back slightly. Instead, we have seen prices rise much too far and now they have a long way to fall.

The so-called sub-prime mortgage problem in the US, where money was thrown indiscriminately at house buyers and property investors without any regard for the quality of the loans and then passing on the risk by securitisation, was what caused the bubble and subsequent crash in the US. People love to say that we don't have sub-prime in the UK. Well Northern Rock openly claimed they were "Open for Sub-prime" on their intermediaries website and today the FSA saif that they had closed some mortgage brokers and fined others for mis-selling of ... sub-prime mortgages. Yes, we have sup-prime in the UK and we are headed for the same fate as the US.

Andrew James
19 November 2007 at 19:19

I sold to rent in Feb 07 having profited by £214k in 4 years on UK property (simply by owning a home). Jonathan Davis and his website housepricecrash helped me come to my decision as a lot of evidence is collected there on a daily basis. What it does is help bring better information to the market which is very twisted by the spin of Vested Interests.

I look forward to returning to home ownership in around 2 years time. When I expect to spend around £600k on a house that today would be advertised at around £850k.

Every rational indicator this months points to a house price crash in the UK being underway. Jonathan Davis helped me anticipate this 9 months ago and take action which will save me hundreds of thousands of pounds. Many thank Mr Davies, ANDREW JAMES, Cirencester.

StuartLaw - Assetz plc
19 November 2007 at 21:04

Clearly wishful thinking by Jonathan. Economic fundamentals will prevail as usual - less houses built next year and the year after due to the credit crunch hindering developers finance, huge population growth, interest base rates falling by 13% over the next year and a fearful first time buyer market - not to mention apalling financial education in the UK - will all conspire to keep property affordable - proven by simple supply and demand. With interest rates to fall sharply, buy-to-letters getting cheaper finance than homebuyers (fact: Any Lender) and rents rising sharply (fact: RICS) things look promising for any aggressive investor getting a great deal from a scared vendor. Stuart Law, Assetz plc

Nelson Pimper
19 November 2007 at 21:33

Jonathan is something of a legend in the House Price Crash forecasting game (having been at it since 2002). Even on his ownwebsite Globalhousepricecrash.com he as a thread amongst fellow House Price Crash enthusiasts (in fact speculators who sold sometimes long in the past thinking that prices had reached their top) which ridicules his forecasting.

Ben Smith
19 November 2007 at 21:47

I too sold to rent. I followed the advice and example of Jonathan Davis shortly after he STR'd. I sold in January 2004.

Although prices have gone up massively since, t hen all the signs point to a house price crash coming and I fully expect to buy back in 2 years time at a cheaper price.

Ben Smith
19 November 2007 at 21:53

@StuartLaw

Since you work for a property investment company, it isn't surprising that you're banging the drum on property. But Northern Rock/credit crunch and the US housing market is showing that UK property is on its way down.

maijulia
19 November 2007 at 21:57

Stuart Law: I'm amazed you're so bold as to mention your company's name in your comment. Assetz is a company that is dependent on house price inflation for its bread and butter. Your comment is typical of all vested interests who use faux-economics to convince the masses that property will never fall in value.

However, you gave the game away by noting "the appalling financial education in the UK" as one of the fundamentals that will keep the housing market roaring ahead for the future. So the future of the UK economy rests on people remaining stupid enough to buy into housing? You've just proven Jonathan Davis' remark that property speculation is reliant on the existence of a Greater Fool. Clearly you and other property investment professionals hope that the British public will continue to be your Greater Fools for a good while to come...

Nelson Pimper
19 November 2007 at 22:29

Pretty much says it all, Ben Smith followed Jonathan's advice in 2004 and (so far) has lost a lot of money, Andrew James didn't follow his advice in 2003 and has definately made a lot of money. The proof of the pudding I would say.

jamie55
19 November 2007 at 23:20

I sold to rent in spring 2007. I'm hoping there will be crash, so I am am regularly posting on website like this one, trying to stoke up hysteria and panic and drive first-time buyers away from the market. Seems to be working (rubs hands together).

notavestedinterest
20 November 2007 at 00:28

It can't be him really? Can I cut and paste that comment about how stupid Mr Assetz thinks his customers are? Perhaps send it to the FSA?

So the economy will remain strong WHILE interest rates will plummet. I thought the BoE was only going to reduce them owing to the expected sharp fall in economic activity? Which is it? You can't have it both ways.

Building activity will fall...if we have such a shortage of development "licences"(prices rising at double digits when land banks of developers have never been higher?...interesting), why are builders worried if there are no problems with demand? Where is the simple supply and demand rule you mention?...it seems not to mention their falling profit projections owing to a lack of buyers who are apparently sleeping on the streets right now. How come there is no buyer interest and they are cutting prices...I though this could not happen?

Building activity will fall or the economy is strong? Which is it? Stable "economic fundamentals" will save the day just a year from now? The US has never had an impact on us, nor has its banking system (the City is owned by them)? Is population going to rise strongly (you saying this is a key basis for demand) or not? If it will continue rising why will building stop, or will all these people arrive, spend a year on the streets (along with the buyers mentioned above) as there is "clearly a supply problem" and then rent flats built a year after they arrive?

If building activity falls why will immigrants stay or arrive to boost the BLTers by renting i.e. why not stay at home where everything is cheaper? In particular, many of these immigrants come to work in the building trade, which you are saying is about to have problems next year.

Not sure whether this "fact" on rent is a "fact". I live in a nice part of London and rents have not changed in two years. In fact, there are so many two bedroom flats to rent and on sale here that I feel rather comfortable (waiting for some real price selling prices to be set).

If BLTers are the main support for the market price and they have flooded the market, why will rents not go down or stay as they are? And will you really be charging less than the inter-bank rate to BLTers? Do you get your financial advice from Northern Rock? What keeps property affordable is income and deposits. If deposit level requirements are rising and income multiples given falling, where exactly will new price inflation come from? You do not dictate rates, you have them set and then you take those! I am glad you know more about the credit crunch than the likes of Goldman Sachs and all these investment banks, who are all saying this is a disaster that will take years to play out.

I don’t recall any VIs arguing when newspapers talked up the market. The very fact that such comments are needed on web sites, sounds like panic to me:) With estate agents and mortgage brokers either downsizing or being forced to close down (because of the FSA), perhaps many are a little worried that their financial advice will also come under scrutiny?

p.s. I assume 13% means 130 basis points, I would be worried if the B o E reduces rates from 5.75% to minus 7.25% a year from now. It seems the appalling financial education in the UK has a broad definition in terms of who it includes.

Please see my other comments (on the story from the other “expert” at the CML) that actually give facts and numbers rather than some weak mantra (supply and demand, strong economy, lack of planning permission etc). It is almost admitted here by said Vis that it is about greed, ignorance and liquidity i.e. not housing shortages.

I bet there are quite a few people who are happy I found this site today:)

Nelson Pimper
20 November 2007 at 03:33

Yes we are indeed priviledgedand pleased to be visited by one of such insight.

F Magnet
20 November 2007 at 10:36

If you read web sites like house price crash it becomes obvious very quickly that it has taken on the status of a doom cult and people like Jonathan Davies have achieved almost celebrity Messiah status amongst the young, immature and impressionable minds there.

Websites like HPC really shouldn't be taken too seriously as it is mainly read by disillusioned IT workers and PhDs in their twenties who rue the day they went to university and missed out on the biggest free money bubble ever, namely house price inflation.

STRs who sold their house, dragged their families into grotty rented accommodation (and in the process helped to pay off their landlord's mortgage) have even helped further bolster BTL. How ironic as according

to the HPC cult, landlords are the devil incarnate.

Websites like house price crash are just full of sour grapes, the idea that they should be taken seriously is just laughable, even more laughable is the idea that people like Jonathan Davies should be portrayed

as "experts". If so, this for me, does cast in to doubt the credibility of all the "experts" you read about and see on TV.

RedDaybreak
20 November 2007 at 11:02

I'd be very happy for a 30 or 40% crash to come along even though I'm a home owner. Having said that I'm glad I didn't follow the path of all the idiot speculators who sold to rent! You have to pay for where you live and you have to live somewhere. Stop kidding yourselves you're financiers!

Serena Goode
20 November 2007 at 11:05

Just a minor correction. Globalhousepricecrash.com isn't Mr Davis's site as one poster suggested. It's a long-established house prices forum also used by many posters who have been banned from Housepricecrash for various reasons (usually for not toeing the party line or questioning the degree of censorship that goes on on HPC). There is indeed a thread on GHPC mocking some of Mr Davis's past predictions. Maybe a bit unfair, but if you present yourself as a Financial Planner and advise people to gamble by selling their homes you can perhaps expect a bit of opprobrium, especially from anyone who took your advice in 2002-04.

notavestedinterest
20 November 2007 at 11:52

Whoops. I take one part back. He is saying that affordability will remain ok as the people who are financially illiterate are those who do not want to buy. The question is still one of liquidity and whether people have access to funds. Not sure what his definition of affordability is, but I thought the idea was rental income to pay the mortgage and capital appreciation with income for profit. If affordability will suddenly be ok it implies rising incomes (where will that come from?). Or is he referring to falling interest rates (will effective mortgage rates really be falling below 5.5% anytime soon?)?

Does affordability relate to the return on investment? On re-reading, his statement was clearly aimed at his target audience (BLT) as their confidence is clearly disappearing…even excluding amateur landlords, would the "professionals"/ "aggressive BLTs" really be silly enough to buy in places like London (where much of the immigrant population is), when BLT competition has kept rents stable (I dispute his facts based on experience of looking and renting, and as they come from other VIs) at a time of high interest rates (I have done the maths and the cost of renting is clearly below that of buying in the areas I have looked)…do they really want to subsidise rents with properties bought at cheaper levels with no upside capital growth on anything they may purchase over the next two years, and a risk of it in fact falling?

If BLT stop buying would this be the tipping point/ trigger…every asset price bubble needs one before the virtuous cycle built on confidence becomes a vicious one? Supply and demand would imply a lack of supply over a lack of demand for a said product pushing up prices. This is important as BLTs have wiped out FTBs. The supply side argument is a red herring, all it will take is the artificial demand to disappear and the new cycle will begin? He assumes all time lines and sequences of events will play out in favour of this asset price bubble, I would suggest that talking up rental growth (now blatantly favoured over talking up capital appreciation) will not be enough to convince the real lenders to again become as free with their money. If I cannot put together £50,000 and get 7+ times (most FTBs require higher multiples than that) my income from a lender for the average house in London, please explain how it will rise above that level? Even if I rent out as a BLT at the market rate I would be losing £50 a month, while risking capital losses. There go both the FTBS AND the BLTs.

Fundamentally, this is an argument as to whether the business cycle is dead or not. It may indeed be smoother than 50 years ago, but it is not dead. The last time prices fell on average across the country (in the US) was during the 1930s depression...it is happening again, Vis in the US were talking up that market even up to spring this year.

Everyone has an angle. I would suggest that Mr Davis's predictions of falls over the last four years have been as accurate as those of VI. I am new to all this, but I get the impression that his magnitude of crash has risen in line with prices rising further away from fundamentals and as the credit fall will be equivalent. BUT, the VI economists have also been just as wide off the mark i.e. if you take the forecast from these Vis before the beginning of the year and then at the end of the year, then I get the impression that they under forecast by 30%. This means they have been just as inaccurate.

notaninterestingperson
20 November 2007 at 12:37

Blah, blah, blah affordability

Blah, blah, blah liquidity

Blah, blah, blah investment

Blah, blah, blah tipping point

Blah, blah, blah asset price

Blah, blah, blah red herring

Blah, blah, blah mummy didn't love me

Blah, blah, blah that's why I spend my life online

Blah, blah, blah rental growth

Blah, blah, blah recession

Blah, blah, blah isn't this a loveable persona?

Chris
20 November 2007 at 13:05

Stewart Law –

Fact: You need to do more homework before spouting about economic fundamentals.

Nelson Pimper
20 November 2007 at 13:11

Okay Serena its a fair cop. I purposely advertised Globalhousepricecrash as Housepricecrash is so heavily censored that the current members often post asking where all those with alternate views have gone. Any mention of GHPC means automatic removal from site - bit heavy handed and I thought this might be an alternative way of telling them where we are banished to! Apologies.

Serena Goode
20 November 2007 at 13:32

Nelson, quite right too. The level of censorship on HPC is outrageous, reminiscent of a tinpot military regime. I'm sure many posters there don't realise how many people have been banned or censored simply for disagreeing with the moderators' views.

Tremor
20 November 2007 at 13:43

No money is made in the housing market until you sell your house.

The average house price is now 8 times average salery. Reposessions are up, and rising. Banks are actualy checking peoples stated income on the mortgage documents, so the mass mortgage fraud that has helped so many onto the housing market is no longer available through the highly coruptable celf cert mortgage.

No more lie to buy.

Strangers are buying property together in order to get a foot hold on the housing ladder, just like at the start of the last crash and the recent credit situation is drying up liquidity so fast i would like to know where the money is going to come from to finance more HPI.

Their will be a house price crash in 2008.

This is 100% correct, guaranteed.

katherine
20 November 2007 at 14:59

Andrew James - lucky (maybe, maybe not, time and the market will tell) you didnt follow Jonathan Davis's advice - which was exactly the same to sell - four years ago, when he was saying this too. you'd have probably lost £200k by now, as many of those who greedily speculated and sold to rent bitterly regret doing now.

they cant wait for a crash. timing is everything in property, and some of these guys have lost out big time. but don't be fooled. everyone has an agenda and these guys are not friends of first time buyers, no matter what they or their "spokesmen" say.

people like the house price crash mob who sold to rent are speculators just like buy to let people and deserve no more sympathy when a crash doesnt happen, just as buy to let pople don't if it does. i cant see much of a difference. both are speculating on property - for a first time buyer just wanting a home, this must all seem like the actions of greedy cynics.

go on - just try and critisise selling to rent or question the facts as they are presented, and you'll soon be censored on houseprice crash. disgusting - and the public should be made aware what these fear mongers are doing before others get sucked in and lose money too.

Serena Goode
20 November 2007 at 16:06

Andrew James,

If house prices fall by over 25% in nominal terms then maybe you will have made the money you anticipate. Until then it is not even paper profit, it is purely imaginary, so thanking Mr Davis and HPC is a little premature. The money you have banked so far came from the HPI he denied would happen over the last four years. Many of those who did the same as you a few years ago are now desperate and have 'lost' a considerable amount of money in opportunity cost.

It might work out for you, your timing is better than Mr Davis's. But in an increasingly inflationary environment it is also possible that this crash will be more like the 1970s and 1980s crashes in which nominal prices didn't fall by much if at all.

Incidentally, Mr Davis's article starts very badly by trying to deny that the very high interest rates of 1989-90 were a significant cause of the crash. This is to support the ultra HPC view that prices will simply fall of their own accord. Yes, rates fell during the next few years (ERM blip aside) but not by as much as they would have without the ERM in place, and the high rates in the first place (together with high prices and the MIRAS cock-up) were definitely a contributory cause.

Not terribly surprising to see a HPC spokesman muddling the facts as it is a daily occurrence on the site, but not something that fills me with much faith in his prognostications...

John from London
20 November 2007 at 17:45

HPC is indeed a heavily censored site, where only people who sing the party tune are allowed to post. Others, who try to put a reasones counter-argument, are censored and eventually banned. Most then post on globalhousepricecrash.com, which is a far better site.

notavestedinterest
20 November 2007 at 23:40

Notaninterestingperson.

I am new to weblogs, so I am sure I will indeed one day emulate you and spend my life online:)

However, I suspect that I wrote the above faster than you could read it.

Please show me how this clever thing called cutting and pasting is done. Did you work it out by yourself?:)

notaninterestingperson
21 November 2007 at 09:19

Oh notavestedinterested what a funny reply. And how well you quote (at length) from the 'A guide to house prices for the not very bright'.

New to this game? I somehow doubt. Something tells me you are a very experienced hand. I can guess what the other is grasping.

jonathan_m
21 November 2007 at 11:07

Who is going to be willing to lend the money from now on then? Who is going to buy?

2003: The first time buyers are drained.

2004: First time buyers + bank of Mum And Dad - drained

2005: "Buy to let", or Middle class near-retirees coerced into buying £165,000 flats in Manchester so they can subsidise complete strangers to live there to the tune of ~£200/mth

2006: Super rich City boys buying with XMAS bonuses / rich foreigners buying with their amassed fortunes

2007: Well, as for 2007, let's just ask one question: Are all future prolific mortgage lending institutions going to require tax payer subsidy and Bank Of England assistance?

Serena Goode
21 November 2007 at 11:45

Jonathan_M

There are indeed problems and the credit crunch means that there will be a significant fall in sales volumes. It is however worth bearing in mind that most house price crashes in the UK have involved minimal nominal falls, and a real price correction. The boggle-eyed loons at HPC tend to deny this basic fact and (like Mr Davis) can only predict nominal falls that they expect to be even bigger than 1989-94. At this prospect they rub their hands in glee, imagining that they will nip in for a bargain mansion, while the rest of the country rots in hell.

That may turn out to be the case, but it is always wise to bear other possibilities in mind. And also worth remembering that the HPC zealots were writing exactly the same kinds of simplifications as you three years ago, with unfortunate consequences for those who made bad buying/selling decisions on that basis. They convinced themselves masssive price falls were imminent and inevitable then. They are still convinced of that now. More sensible people watch the market and react accordingly.

jonathan_m
21 November 2007 at 14:00

Serena - Thankyou for your reply at length about House Price Crash. I have heard that these people have been wrong, amongst others. Personally, I am indeed bearing in mind your point about minimal nominal falls.

My "simplifications" were aimed at succinctness about the past, but I am really interested in the future, hence my question "who will buy?".

As you expect a fall in transaction volumes, this implies that the answer is significantly fewer people, which suggests disappointment for buy-to-let investors who may be in for a very long wait, and for development companies and builders who must then see a downturn in sales too.

Looking to the future on a more positive note, do you see anything changing in the Economy which would mop up the expected job losses from such a downturn? This must play a part in the analysis of where we go from here.

Serena Goode
21 November 2007 at 14:21

Jonathan - good questions, and didn't mean to be insulting aobut simplifications. I think we are on a bit of a knife edge. BTL doesn't add up, and has been making up the lost FTB demand. The credit crunch is a huge factor as it will further reduce effective demand from both by making credit harder to get.

I find it impossible to see an outcome to this extended credit spree and property bubble that will be entirely benign. I'm concerned inflation may get out of hand (or the government may allow it to escalate as they would prefer that to the fall-out of a housing crash). Unemployment is a hard one to call, but one can expect a wide range of companies to suffer from the credit crunch.

It could be very ugly, or it could be a painful slow adjustment. People won't be able to MEW their way out of problems, so even more bankruptcies on the cards. Worth remembering though that a fall in transactions doesn't always turn into a big fall in prices. If there are insufficient forced sales (and bear in mind that IRs doubled to something like 12-15% in 1989-90, which really made mortgages hard to maintain) then we may see something like the late seventies. Grinding difficulties in the economy, creeping inflation, an erosion of real income, etc.

That kind of scenario is not pretty, but nor is it the dream scenario of the HPCers. Good luck anyway, sounds like you're worrying about the right problems.

(Oh and the question "Who will buy?" - well, in previous crashes there were buyers all the way through. People who have plenty of equity and need to move, a few forced sellers, some who find it hard to buy and sell but manage eventually, a few HPCers trying to call the bottom... - basically far less people buying and selling than now, but there will still be some even in a period of falling prices).

StuartLaw - Assetz plc
23 November 2007 at 22:13

In answer to a few points made above.

Yes indeed the Bank of England will drop interest rates sharply to ensure that economic activity maintains that suitable growth levels provided inflation remains under control. The US problems are already feeding into China and India and this will cause the continued importation of deflationary effect into the UK and Europe hence permitting the Bank of England to maintain lower rates hence supporting the economy. The assumption that the UK and the US are linked directly is very misplaced following globalisation - China and India act as a pivot back into Europe and we believe very much that weakness in the US can lead to economic support in the UK now. Of course with this being a relatively recent change this is still a theory but I'm quite happy to stand up and be counted when people look back at who spotted this effect first.

Building activity will indeed fall and we expect net new completions to fall to around 150,000 average for 2008 and 2009 - this is not a significant drop and hence will not particularly affect economic activity but will massively affect the support house prices as we probably need 250,000 to 270,000 new front doors a year to have any chance of keeping up with housing demand. Little chance of that following the credit squeeze hence strong rental growth and house prices well supported.

The fact on rents rising is indeed a fact but because it's only really begun properly this year it will take until next year for almost everybody in the UK to observe this happening properly and without question. We first spotted it happening late 2006 in certain locations and fur the RICS and Arla to now acknowledge this shows it is becoming mainstream but without a doubt it will take longer before every pocket of slight oversupply becomes undersupply and lead to rising rents. Failure to increase significantly the housing supply makes this a certainty.

As almost all buy to let investors are taking a 10 to 15 year view the answer is yes, investors are perfectly happy with minor cash flow losses three-year to compared to long-term investment results. No different really to any other financial investment in which fees cause effective losses in the first year or two of investment. Property has half the volatility of the global equities, fact.

Buy to let mortgage rates without any penal arrangement fees are around 5.8% at present and we will soon see that below 5.5%, yes.

As this article appears to be turning into house price crash forum this is my last comment other than to say those who wait forever to buy an investment hoping it goes down in price one day have never heard of pound averaging. Buy property every year over your lifetime and you will do very well indeed.

Trev
24 November 2007 at 13:23

Very good talking about economics, but the simple matter of fact is that everyone in the UK no matter how rich, how poor, should have the right to own there own home to live in, or bring up their family in, and still have enough money after the morgage every month to have some sort of a life.

The government have stood by and let the rich get richer and the poor poorer, all because most of them have second or third homes themselves.

This then causes problems in socitity, which there is evidence that the more equal a socitity is the happier we are, and our children are! Well I am up for that one!

So come on and Crash. and maybe it will do us all some good!

notavestedinterest
24 November 2007 at 18:44

My interest is that I am an Economist by training and profession. My ideas were born from pub arguments with friends and my interest in economic debate. My house price will move in line with anything I want to buy in the future, so I am not worried either way. But there seem to very few numbers used by VIs and this concerns me. So much cheap money has flooded into housing instead of industry that our long term productive capacity is being distorted/ undermined. There was no point in being on weblogs before as everything has been so steady. Only in the last 6 months have I decided the market is about to turn so no longer agree with VIs that the market will continue.

When moving away from economics (is the business/credit cycle dead or not?) the human argument is about FTBs and BLTs i.e. the former cannot afford a house so want a fall and the BLT brigade would lose money so want it to rise. A gradual contraction in prices (in isolation) over the next three years would do little to the broader economy (we have a far bigger economic storm gathering abroad to worry about).

The links in economics involve sequences of events. I am merely saying that forecasting best and worst case scenarios should be based on certain events taking place in certain sequences. Any of those can be of a different magnitude or in a different order and destroy the accuracy of a forecast.

But what I see is VIs get the most coverage and all of their scenarios seem to attach a 0-1% probability of the worst happening, where as I think this is substantially more and rising. Based on the coverage they get it is only right to give the alternative view where possible.

The core objective of the B o E is inflation control, not boosting the economy. It seems to think the link between house prices and private consumption has weakened. However, this in itself is a huge matter of debate (as to whether it is true, and if so, what magnitude are we talking about). If even this core issue in the debate about the direction of monetary policy is open to dispute (along with, among other relevant variables, where inflation is going, and how far Asia has decoupled from the US), then how anyone can say with certainty how bad it will be for us over the next two years is beyond me. Under conditions of uncertainty the default is to assume past evidence (and the evidence is that this is the more realistic default position)....

However, VIs, as in all previous bubbles, always tell us there is a new paradigm ("technology meant there was no dotcom bubble...it was a new era")…the no income no job, no assets people in the US were told interest rates would stay at under 2% because of the new China paradigm (it will deflate and buy US treasuries forever).

As for the point about buying a house every year would mean one would be up. That is true based on averaging returns and the market does rise over the long term (and I say that before in terms of cross-subsididing, just argue that even if they do not, at best, sell in this market they would not buy), but during a period of falling prices one could and should miss years where prices might fall, instead of walking into losses.

The initial costs involved in other investments (I assume pensions etc) are really just commission payments to those setting the policy up...but they are legally obliged to tell the investor that what they invest in can go down as well as up.

The comparison should be with pure share trading, not in a policy one has to keep for years and where it is known in advance there will be losses if they leave within the first 2 years. No long only investor buys shares when they are falling. They wait until they fall and then return to the market. They would probably sell in a falling market as well, although the difficulties in buying and selling a house means that I do agree that it would take more potential losses before a BLT would decide to sell.

When I see rents rising about me in this high demand area I will accept the data I cannot see. Until then I will stick to the FT view that the returns for BLT (including interest payments, management and maintenance fees, and periods when properties are not let…I assume people sleep in the streets between properties as the shortage suggests there are no empty properties or slack, and certainly not in London) have been well below mortgage rates for at least 6 quarters i.e. houses bought over that period. This has not been seen yet, as most were on fixed rates (and now they are coming off cheap rates over the next 14 months).

I will not go deep into the debate regarding India and China, inflation and the decoupling/boosting of the world economy. As I look at this stuff for a living I could write yet more essays on why those views are completely at odds with reality. But the City creates our wealth and it will be doing badly for many quarters, and if lending activity falls the other half of the financial pillar (housing loans) falls. We may not rely on construction relative to Ireland and the US, but our housing market boosts the economy just as much as we seem to be more reliant on people doing surveys, solicitors, mortgages etc than they do. The City relies on the US so their cold will arrive here….the dotcom burst led to an investment recession and that was a problem for Asia, the worry for us is a consumer-led recession, which would hit the world (consumer spending is the largest part of the US economy).

The effects noticed first are a few years old (one being the China over supply shock that allowed the West to have low rates and the China over demand shock that has already started and the subsequent upward pressure on rates this now brings to the West).

Since this article, sub-prime has reached auto loans in the US, Russia is about to cause our utility bill prices go up, oil prices have stayed up, the US economy is slowing even more sharply and quickly than thought. Paragon shares have collapsed and Kensington has withdrawn lots of credit products....all because of what is happening in the debt markets? UK money market rates have returned to September levels. Mortgage approvals also collapsed, although I am sure some would argue this is not a problem as it was unique to Northern Rock changes etc (this argument holds only if NR is the cause of the problem and not a symptom) There is so much bad news it is worrying.

A gradual decline for a few years would be great or neutral for everyone in the UK except BLT and mortgage providers.

gnuneo
26 November 2007 at 14:06

please, wages are falling, personal debt levels are unsustainable and a historic high, the wealth gap is increasing year on year, the State has recently had to throw billions upon billions of our money to bail out executive piracy in our financial institutions, the only ones believing the housing market can continue upwards (or even hold its value) are vested interests who monotonously parrot "its all ok, go back to sleep again", in the apparent hope that this mantra will have some magical effect and make it all go away.

in actual fact, the 'housing crisis' is really a market adjustment to far too high prices, entirely unsustainable with current incomes, and only created by the colossal growth in debt, ie removal of lending restrictions, 'sub-prime' etc, that has created this effect that is essentially identical to the eventual collapse of 'pyramid schemes'.

if the govt had any real belief in home-ownership, beyond sound-bites and selling off of social housing, then they would use this opportunity to push through policies that move people away from renting to owning outright even on the private markets, but guess what - many MPs (or their owners) have large vested interests in 'property rental', so i'm really not holding my breath for beneficent policies in this regard.

be nice though, if they acted in OUR interests for once.

GrahamH
29 November 2007 at 14:45

Panic!

That will make the fall happen, even if economic won't.

waitingforthecrash
03 December 2007 at 13:43

F Magnet:

I agree with what you said-

"Websites like HPC really shouldn't be taken too seriously as it is mainly read by disillusioned IT workers and PhDs in their twenties who rue the day they went to university and missed out on the biggest free money bubble ever, namely house price inflation."

I had to laugh, because its so true. I am 24 and didn't get on the ladder on time, now I'm sitting back and waiting.

Anyone else doing the same by any chance? I think so.

PS I think it will crash, otherwise I would buy right now, I know better than to risk getting into negative equity.

bigwhitehat
03 December 2007 at 23:12

Please excuse the long post, I find them a bit much to take in, but stick with this.

Typically of things in Britain, much of the argument above seems to be about having high status, in this case of being right in predicting whether house prices will go up or down, and someone else being wrong.

While many reasonable points are made about supply and demand, credit crunch and other factors, I suggest that the very idea itself that you can correctly say how property prices will definately go is itself misleading.

The comments here are like a discussion on whether a contestant on "Deal or no deal" made the correct decision in accepting the Banker's offer at a particular point in the game. While Noel Edmonds talk of strategy and making correct decisions makes for entertaining television, the game is basically an exercise in risk and probability.

Those people who sold to rent on the belief that house prices would fall are similar to those in the programme who took an early offer on the call that they would get a smaller offer in the future. And those who have bought properties expect to get a better offer from the Banker or market later on.

Posters here, and commentators in general, say that the factors which will drive property prices can be conclusively predicted. I suggest there are too many factors, several of which interact, which affect how property prices will go.

I won't go into the factors (some are mentioned above), but the interaction is important. The occurance of a house price crash will be dependant on how businesses and owners react and act at the start, or what they think is the start, of a house price crash. Predicting how such ideas propagate through a large of people is still a basic science (I recommend Malcolm Gladwell's "The Tipping Point) and stating that it will go a particular way I think is an over simplification.

Secondly, there are the effects of single events which trigger other actions that cause genuine financial circumstances that will lead to property prices falling (which would be amplified the effect mentioned above). An example would be that America and / or Israel attack Iran's nuclear facilities, leading to a medium intensity conflict in the Gulf. Oil, and other commodities, rocket (pardon the pun) in price, Central Banks raise interest rates to manage inflation, less credit, more house repossions. you can fill in the rest.

Depending on how well you know what goes on in President Bush's mind, this is something that you mostly could only guess at and leaves you with closed box model of what direction property prices might take as a result of such events.

Now, financial markets can manage this, to some extent, in that they can spread risk, not all of their eggs are in one basket. In some cases decisions can be reversed, if you sold early you can maybe buy again later without too much cost. With owning a house, you can't easily spread the risk, you either buy or sell (deal or no deal), and knowing when to change tack may not be easy to identify.

Perhaps what ought to concern us, is not so much whether house prices are going to up or down by a particular rate, but that so much of our personal financial well being is dependant on it and the biggest money decision you make of your whole life is whether to buy or sell a house. Some one is going to get it wrong, if an individual does it enough they may get it wrong at some point.

As personal spending forms such a large part of our economy, indeed our way of life as a state, are we now all locked into a huge game of "Deal or no deal" ?where the consequences of an unlucky call are going to much worse than listening to some of Noel Edmond's chat.

I know there are a lot of holes in the thinking here, hopefully you have the main point. thanks for your patience and attention.