Is There Still Hope For House Prices?

Fionnuala Earley is absolutely spot on IMO.
Its clear to anyone with even a modicum of imtelligence that the UK is in far better shape than it was back around 1990 and most definately in better shape than the current US economy.
We will manage to avoid a recession, we are infact already showing signs of improvement and the housing market will gently fall by single figures as per most economists predictions. By the end of the year there will be clear sight of normality although the hikes in house prices will not be seen again for a few years. But housing is and always will be a solid investment now and in the future. A crash my arse!...anyone sitting back waiting for a sharp fall is going to miss the boat yet again!

I think as ever predicting the exact nature of a crash is a mug's game. The same is true of the nature of the top or bottom of any market. The point that is worth making however is that until earlier this year most people were predicting 0-5% rises in house prices - the levelling off mentioned in the article - and these people are now predicting falls of around 5%.

I would also sound extra caution on a couple of counts. Nationwide house price figures are based on current expected growth of around 1.7% pa. I personally think that is optimistic given the potential contraction of the construction industry, the ensuing halt to government spending which to a large extent has fuelled growth until a year or two ago, and the fact that inflation is now a real problem for the Bank of England.

Finally, whilst comparisons with America are not accurate for a number of reasons, Spain saw far greater restrictions on lending and securitisation than in the US (and the UK) and is hence faring much better in the credit crunch - yet they are experiencing an equally sharp fall in prices to the US due to the simple fact that lenders are wholesale reassessing lending policy.

Laura,

Seeing as you clearly need help, allow me to do your job for you:

Reasons To Be Gloomy: 1, 2, 3

For a start, you are listening to the words of somebody whose job depends on house prices not falling too much.

1. Our Economy's not In Better Shape

Rising food and fuel prices are now putting the squeeze on many of us, and the economy is awash with debt.
Growth is slowing, and without the ability to recklessly borrow at the rates people used to, is likely to turn negative sometime in the next 12-18 months.
UK unemployment figures are fabricated in the UK and not to be trusted. If the Bank of England believed that employment levels were generally high then they wouldn't be cutting rates, since a high school economics student knows all this will do is cause inflation.

Crucially, interest rates are also far artificially low, and the inflation this is causing has been swallowed by the public so far since most of it has popped out in “nice inflation”, i.e. property. But now the genie has left the bottle - the CPI figure has lost all credibility due to people realising they are paying more for food, travel, heating, electricity, fuel. There are already signs that the central banks have lost the ability to affect the price of money since rate cuts are not being passed on to borrowers. Also, compounding the problem is the reassessment of risk - meaning that not only is the price of money higher, but it is harder to qualify to borrow. In short, the borrowers have had their party, now its time be an adult and stop complaining about having a hangover.

2. We've Speculated a lot more in property (And Borrowed more than ever)

The demand supply argument is now floored by the disconnection between wages and prices. People take the "small island syndrome" and run with it because they want to, not because they have any hard evidence that it makes property prices rise forever (Manhattan and Japan 1990 being two very good examples of when it didn't). Lax Buy to Let regulation and lending practices have meant that it was common for people to invest in property with little or no deposit. The level of gearing in this process makes a fully leveraged hedge fund look safe.

Everybody wants to buy a Porsche, but that doesn't make demand for the car very high because people can't afford them.

Moreover, while many people have strong opinions on 100% and 125% mortgages, lending has (believe it or not) been more cautious here than it was across the pond. But that doesn't change the fact that lending conditions in the post-crunch world are tighter, and will never return to what they were. Unless the banks want to write off another half a trillion of debt again that is of course.

In the UK, variable rate mortgages with introductory discounts were offered to borrowers, who were later hit with ‘punitive' price hikes. This will lead to vast numbers of homeowners defaulting on their loans, and we are already seeing the beginnings of a tidal wave of repossessions.

However, thanks to less reckless lending practices, the UK should avoid this fate, according to Earley , who is bound to say that because she is biased. It’s rather like asking an optician if you need glasses.

3. The Future's Bleak

Well, at the very least, it's full of potential disasters for the finance industry that could strangle the mortgage market for years to come.

Leaving the potential collapse of the shadow banking system triggered by lack of confidence in credit rating agencies and rising defaults aside, lets address some arguments that have been around longer than I have…

According to statistics from the Government Actuary's Department, the number of 25-34 year olds in Britain looks set to rise over the next four years. Consequently, there should be more people wanting to purchase their first property. This will of course be meaningless if they can't borrow to buy their property, which they will not be able to.

At the same time, the way we live in Britain is changing. With more people choosing to live alone or in couples, many homes have fewer people in them -- and this also heightens demand for housing. Unless of course people can't afford to pay 9.5x wages for a shoe box, in which case they will rent. People are more financially literate and these days, and can understand that renting an asset that is yielding 3% is more desirable especially when financing that asset is costing considerably more and that the "guarantee" of certain capital appreciation is now proven to be false.

Overall, the long-term ‘fundamental' prospects for the housing market can be summed up in a nutshell:

Buyers need to borrow money to buy. There is not as much money around as there used to be. The housing market transaction volumes will collapse (as we have already seen) until sellers move on from the denial stage to the fear stage.

After that comes capitulation. It is at this point that house prices will once again correct to be in line with the historical average of 3-3.5 times salary, which will end the biggest pyramid scheme of transferring wealth from young to old, and from lenders to borrowers that this country has ever seen.

And everyone will benefit, because a controlled economic downturn is the only way to contain the inflationary beast that has been awoken from its slumber by irresponsible and downright deceptive government/central bank monetary policy.

Only the stupid, greedy and selfish fail to see this, and it is at their whim that a whole nation will suffer if their misguided voices are heard.

Hi everyone! I'm glad to see this article has already stirred up some debate... :)

Please note, the arguments I'm setting out here don't necessarily reflect my own opinions. However, I do feel that in the interests of balance, it was right and reasonable to report them - especially since Fionnuala Earley was not the only speaker at the BSA conference who painted a more hopeful picture of the future of the housing market.

As you'll see from the final section of my article, I'm personally not convinced by Earley's case.

Nevertheless, I do think there's merit in the view that a mass panic will ultimately help no one, and in fact could precipitate a far more serious crisis.

As always, the question of house prices has got Foolish blood boiling.

Happy posting!

Hello Fools,

Just to give a bit of context here. We've published several bearish articles on house prices in the last few months. So I thought it was appropriate to air some of the arguments for saying that house price falls may not be as large as some believe.

And, anyway, Laura made it clear that she didn't agree with all of Ms Earley's comments.

I do not think Laura's article is rubbish.

Regards,

Ed Bowsher, TMF Editor

'she predicts just single-figure percentage falls in property prices this year.'
HAHAHAHHAH

'the UK is not headed into recession.'
HAHAHAHHAH

'it's less likely that there will be a high volume of forced home sales due to arrears and repossessions'
MAHUAU HAHAHAHHAH

'lack of available space'...only 11% of GB is built on??? One third is not farmed.

'that demand for homes in Britain is not outstripped by supply,'
when are you so called experts going to realise it's AFFORDABILITY that is the driving factor.

'lending has (believe it or not) been more cautious here than it was across the pond'
MAHUAU HAHAHAHHAH

'Overall, the long-term ‘fundamental' prospects for the market still look strong'
MAHUAU AUUAUUA HAHAHAHHAH (this is staring to hurt)

'I think there's little to be done but hope for the best...dream on'

'key ways to help minimise the effects of a potential crash are to plan ahead'.......I did.
I'm no ecconomist, and with no help from you, I still managed to predict the ever predictable boom and bust.
Gordan Brown said 'no more boom or bust' in the 1997 buget speach, so I new it was coming. Every 18 years.
So I sold and now rent. I'll dive back in when the 50% to 60% drop bottoms out and save meself 150 grand.
How many of you experts advised to do that 1 or 2 years ago.

'panicking about property prices is unlikely to do homeowners -- or the market -- much good'
No, the only thing that will do any good is for houses to become affordable again, so don't panic, things are getting better.

And from you comment
'As always, the question of house prices has got Foolish blood boiling.'
How dare you insult those who are intelligent enough to understand the sitution far better than yourself.

'And, anyway, Laura made it clear that she didn't agree with all of Ms Earley's comments.'
Well, why report them then? I would not want to associate my name with inacurate whitewash.

A good article apart from almost all of the facts being wrong.

our country is more indebted than the USA by a long way.

Our banks have written off billions before prices started dropping in the UK, this is much worse than the USA.

Our Property prices are 40% above the mean trend line. (fact of life, no matter what anyone says, everything returns to the trend line)

The default on non secured debt has not even started yet, this will destroy liquidity in our banks.

Japan had very similar property boom, credit crunch crisis in 1990, Japan was a country with Low unemployment, high borrowing and a supposed severe housing shortage. In 1990 Property prices were the most expensive on the planet, 78 years later they had lost 90% of their value.

House prices will drop by 40% in the uk over the next 5 years, and the country and allmost all of its people will be better off in the long term because of it.

neillark

Today's high house prices have been buoyed by people who weren't in the market in the late 1980's when property prices in parts of the SE fell by 30%. Talk of them falling by say 5% is based on little but hope, the simple fact is that measured against salary they are well above the trend and as someone said earlier things tend to return to the trend.

Were it not for historically low interest/mortgage rates could many of today's buyers really affors their homes? How many would default immediately if mortgage rates rose to say 10% (a long way below the levels of the 1980's)? I think that price drops of easily double digits and likely some 20% are well on the cards.