Turning Back The Property Clock

Given the prolonged nature of the boom; the unexpected prolongation and propping up of the boom by unexpected, unforecast immigration over the last ten years; the turning on of fiscal taps by the Labour government since 1997 and the growth of government debt and state employment - all of which helped flatter our economy and "grow" the property price balloon, I actually DON'T think a 70% drop from the peak is so unlikely.

Sadly, I think it is quite likely given that markets tend to overshoot in both directions beyond what seems reasonable or possible.

Cliff: I'd be interested to look back on this in say 2018 and from ten years distance I bet we don't see a bottom until 2013/4.

I think both the above posts contain a nugget. First, the UK has never really had a proper property bear market (forget 1988, that was a tax driven bubble) and the evidence stretching back to pre-WWII Florida is that property bears hit very hard. Second, we might be entering this bear just at the time of a fundamental shift in demand/supply (immigration, or more accurately, migrant workers, may have a stronger effect here than anticipated). Property is an asset that has escaped corrections since the late 1980s and is overdue for a very large one indeed.

The trouble with statistics - is statistics.

Firstly the average price I think is distorted drastically by developers and investors desperately ridding themselves of flats. The reports of flats going to auction and getting 50% of the purchase price must be really screwing the figures around Harwich.

I do believe in a long decline in prices but doubt it will go much beyond 30% in all.

Good properties will be bought before they reach the average and properties without any redeeming features or in areas of oversupply will go further down. And there are more dross properties than good ones.

Incidentally I am now purchasing myself and getting 20%[100K] off the headline price but then the "price" is one decided at the height of the bubble last year. Deciding on when was last a proper price is a help and the property I am buying is being sold to me at its last purchase price [2006]. This is not much different to the prices paid in the road since February 2003.

I could sit out for a while but with the cost and hassle of rentals,storage etc AND no guarantee that prices will sink to low levels we are buying now. After all you have to live somewhere : )

We had our buyer, who had frankly mucked about pull out in Feb, which means our house has been on the market a year. We are pretty sure that it wasn't the case that she didn't decide to move geographically, rather than we were scuppered by the deals that builders of new houses are offering to clear their stock. Even though we've now reduced our house by 10% and completely refurbished it for sale (new carpets, throughout decoration and refreshed kitchen and bathroom) worth another 5%, we still can't compete with builders discounting brand new houses with deposits paid, stamp duty, etc. It's just business for the builders, but disaster for us. We had to continue with our purchase and now have a house we are worried we cannot shift, and we are into negative equity if we reduce the price any further....

When I was a student back in the 70's I had a vacation job at the Nationwide in the department that compiled the statistics on house prices. It was new at the time and was, I believe set up following the dramatic rise in prices accompanying the mega inflation (remember 26.7% in 1975?) of the mid seventies.

My point is that on historical data average house prices to average income had alwways been in the range of 3 to 4 times with a long term mean of 3.11. Many factors have changed since then, including the availabilty of mortgages, we moan now but back then you had to have a savings account for x years before they would even entertain an application. However, and this is the main point of my post, average earnings are now £24k, average house price per above is £172k, or a touch over 7 times. To revert to the mean (which is probaly now say 3.5) would mean a c.50% drop, c.16years of stagnant prices or a combination of both.

Bubbles occur because of a suspension of belief in obvious facts, the most cliched being "Its different this time" or "the cycle has ended." As history has shown this has NEVER been the case in financial matters.

Thank you all for your comments.

I admit that, in a worst-case scenario, prices could fall >30% from their peak.

Indeed, in some cases (new-build city flats and other unwanted properties), we could see drops of 70%+. After all, if you can't rent out a BTL flat, how much is it REALLY worth?

Cliff

Rocket Scientist - I don't understand... Surely if the market is dropping - the wads of cash / equity, that the BTL's are sitting on is being eroded too. This equity also has to be released and at the current interest rates, how much further does the market have to fall before they come in and rescue it? (S'funny - I never really thought of BTL investors as white knights before). In all honesty, I do think that the BTL's are as nervous as the rest of us - Even if they invested at the right time 5 years ago.

Icelolly - your thoughts don't stack up. Just in case you haven't noticed, the banks are avoiding BTL like the plague at present so finding a lender at a decent rate is going to be hard for a good time. You may also be in for a long wait for those falling interest rates given that the UK's long term average is about 7 percent. The cheap money of the past decade was an anomaly, I'm afraid. As a final note, I can't see how rents are rising at present - a good percentage of houses for sale on Rightmove are also for rent now as their owners refuse to admit they can't get the price they want anymore. All that competition is bound to hurt?

analyse it all you want, you still dont have a clue what is going to happen!

Let's face some facts. Sellers today at auction are already experiencing over 40% price drops if they sell at all. A 4 bed bungalow I know of sold for £310k in 2006 (after being modernised/renovated) and sold two weeks ago for £176k at auction after being repossessed leaving the 2006 purchaser with no house and massive debt to the bank. This is not an isolated incidence - check out the auctions people!

So a 30% crash was realistically where we were some time ago and we've further to go.

The surveys from the BS' are currently being based upon not many sales - therefore distorting the picture upwards and they lag significantly the reality for sellers who have to sell now at the real market price.

Personally I hope prices don't drop more than 60% (vested interest) but I'm not convinced they won't given the evidence of my eyes and factual reality of what is happening at auctions right now.

I'm no financial guru, but... what happened to proportionality between earnings and value of property to obtain sustainability? Inflation in the price of property should be directly proportional to inflation in earnings which in turn is proportional to how much paper-money the government is allowed to print.

To bring my comment back to topic, wouldn't it be reasonable to deduce that the market may need to deflate to previously existing proportions relative to what earnings people can command today? If talking averages, one would need to exclude the mega-figures "earned" by fat-cat directors of mogul companies, as a matter of course.

Of all the analyses I have read here, I find comptroller99's the most compelling. Like many folk, I have experienced all the British housing market fluctuations, as both a purchaser and seller, since 1972. Aside of differences in key factors at the upper and lower margins ( inc the repossession element of the equation), I say that the fall in prices will be 45-50% and the timescale for this to happen will be dependent on so many wider social and economic factors that it is almost impossible to predict - however, my guess would be a 4-year window. Any artificial intervention into the market will have to be paid for in time and the best thing will be to allow prices to be dictated by the natural financial scheme of things - look what artificiality has done for everyone in credit crunch terms!

How many of the buy to let investors waiting for the crash so they can buy in cheaper on the way down or at the bottom actually have a pile of cash, as opposed to equity in their portfolios?

If prices fall dramatically, suddenly all their equity goes bang with it. Also, how many BTL landlords have their properties on lifetime tracker mortgages? Not many, I'll wager, so all these landlords will sooner or later need to refinance their loans as the old fixed rates expire. When they do this, all they will be able to get are the expensive selection currently on offer, the same as all the waiting FTB's out there. This also assumes that the falling prices mean that they don't exceed LTV limits for BTL loans - can you really afford to set rent at 120% of mortgage interest (maybe 7.5% - 8.0%) for your lender's underwriting purposes, when prices are falling fast?

I'll bet hardly any landlords have bothered to build decent cashpiles, having watched their enourmous paper profits accumulate during the boom years. They can't get the money out now without selling properties to consolidate their equity, or borrowing at current market rates, which are unreasonable.

Five years from now, a hard core of professional landlords will remain, and Joe Bloggs on the street will think that property is a terrible investment.

What happened to sensible & sensibility. I have been in the property market/industry 25 years. Yes there is a decline, yes it is dropping & yes it will probably drop further - BUT stop talking it down and half guessing, no-one is that clever to predict the UK residential property market. :-)

This market is going to go way down before it "recovers" and an awful lot of people will be driven into negative equity. However, provided that there is no need to move house, this isn't the worst thing in the world if the mortgage payments can be serviced — it just means that the house owner is paying a lot for the privilege of living in the house. That's still better than paying rent.
A serious factor which needs to be taken into consideration and which is influencing the domestic market is the fall in value of second homes bought abroad out of recent inflated values. Many of these homes cannot attract buyers and buyers who took out loans against the perceived rising values of their houses here are getting hit with a double whammy if they can't service, at least, the interest charges on them.
With the decline in the value of the pound against the Euro the situation worsens every day for people in this predicament and with Brown's Britain moving into recession the likelihood is that our currency will continue to fall until it reaches parity with the Euro. At that point we may expect the government of the day to accept the inevitable, discard the pound and adopt the Euro. At that point, properties will reach the bottom and level out.

I'm with Cliff on this. The present property price correction is very different because there is also 1)A banking meltdown
2) An equities meltdown, 3)Huge increases in fuel and food 4)Consequent pressure on personal liquidity, and value of investment portfolios. And finally, unpredictable conseqences from these factors. The old certainties (property always prices go up) are powerless against these major shifts in the tectonic plates of the world's economy. I think a 70% drop in house prices is not impossible in these circs. And I'm not alone - which is why Taylor Wimpey shares have dropped by 94% !

Re: houstonstewart

I'm sure Cliff is very flattered that you think his "propaganda" had anything to do with the falls in house prices.

Of course you are right though, there will be another property boom ....... just not for a long time.

Re: geoffaries

I sleep very well thank you. Certainly much better than I would if I took out a great big loan, speculated on the property market and then watched prices plummet.

I am currently renting, paying much less than a mortgage would cost on a similar property. When this stops being the case then property prices will be more sensible and buying won't seem as irresponsible.

Looking at the discussion on how far house prices will drop I remember my parents telling me that there was a sudden drop in 1955 during which they were able to buy their house at 50% of the original asking price. Statistics are naturally based on average figures and will tend to hide individual instances of this sort where there is a necessity to sell within a specific time frame, or where there is an incentive to do a deal at a low price to say avoid inheritance tax. Once these situations are resolved the lenders will find they have a great many staff with nothing to do and the market will revive.

Wrong seagull104 (although I agree with your last two sentences). House prices will be what the free market determines, whose factors are many and complex.

Re: downaswellasup

I hope that your landlord is not one of the BTL investors that most of you are decrying, because if he gets into financial difficulty and has to sell your home - and let's face it the majority of us have bought a house as a home and not an investment - then you may find yourself having to move with all the costs and disruption to family life that entails, of course if you don't have a family it won't matter to you, with regard to rent being cheaper than buying, that depens on where you live and the type of accomodation that you need, on the south coast where I live that is not the case.

houstonstewart, please rest assured that Cliff d'Arcy is not the supreme being. He can no more affect UK house prices than I can fly to the moon. The idea that he sold his house in the confidence that he would be able to single-handedly talk the market down and thus make a profit is so utterly ludicrous that it is difficult to take anything else you say seriously.

The housing crash is not being caused by imaginary problems. The problems are real, the lack of consumer confidence is justified, it is not down to simple doom-mongering, and today no amount of talking the market up is going to convince people to buy property at 7x+ salary multiples, even if they could get such a mortgage. Which they can't.

The long term trends were for annual growth in property prices of about 7% and the price/average earnings (of buyers)multiple to be 3.5-4. What changed was obviously the change of tactic by the (greedy) banks including the newly demutualised BSs to sucker more buyers in with lower cost introductory loans, when the chickens were bound to come home to roost one day with the real cost of buying a home. In the US the main losers have been the people who previously didn't expect to own their own homes, ie, the lower paid (and particularly afro-american) workers like factory workers , cleaners etc. In this country, the extra money available caused price inflation that then made the lenders offer mortgages at higher multiples of salary compounding runaway prices. So the central banks also have to take some of the blame by not regulating lending to the banks. The recent advice by lenders to the BTL market has been to make gains by remortgaging at higher property values to release capital to put down as the deposit on the next BTL property, also part of the inflationary process. We haven't seen enough data on the effects of recent immigration on property prices, but while the positive comments have been that our Polish friends are hard working contributors to the economy (for how long?) they will also want to have invested for themselves in guess what, buying houses. Predicting the outcome of the present crisis
can only be educated guesswork any way so my guess is that the crunch will take about 2 years to work through and at bottom the average house price will drop about 30% from recent peaks. I think London will be different and may recover sooner, maybe starting about next spring. There could be a long period of flat prices before they start rising.The really big issue is whether this crisis is a correction because of the issues mentioned above or a full scale recession, ie, with falling output across the economy,rising unemployment, rising energy costs and a real economic winter.

To credit that overrated auntie Margaret Thatcher with foreseeing anything (seagull104)is stretching it a bit far!! I seem to recall that she laid the ground for the last big problems in the late 1980s/ early 90s. One thing she would have done , however, would be to subscribe to the view that people should not get suckered into anything , but to think for themselves what will happen if 'cheap money' is too liberally avilable. It's no good blaming so-called 'greedy banks' when people are able to make their own assessment of the risks of over-borrowing ( and cause hyper house-price inflation in the process). Is nobody able to accept responsibility for their actions these days? Folk seem to cry 'nanny state' but then blame the government for allowing them to overburden themselves with debt!

A very interesting conversation, but I no one has spoken about how the banks can function if they do not lend money. That is their business and as such will need new customers. Over time money will be left hanging around with no where to go.