House price crash

[ska invita]

I'm predicting a serious house price crash anytime soon. The trigger could be just the cuts and tax rises inevitable by the next government (double dip recession etc.), but there could still be a Lehman Bros moment from a range of fragilities in the system. Greece for example may have some interesting domino effects.

Lets just have a quick look at the house price index:

prices went crazy from 2000 onwards, and needless to say most peoples wages didnt. in that graph you see a dip when the credit crunch kicked in, but with huge sums of tax payers money pumped into the system the market recovered and now it is nearly as high as it ever has been. insanity.

I remember hearing a few economists in 2008 saying that there needed to be a correction in the system as a whole, and house prices would need to come down - I think i heard will hutton say 20%. I think it could/should be even more...

Anyhow, in reality i know little about economics - what would a big drop in house prices do to the economy as a whole? Is it just a barometer of the economy as a whole, or would a big fall spur the collapse on at a much bigger rate? If so, why? whats the mechanism?

 

[ymu]

I agree - it will crash a lot further. The mini-bounce was due to investors taking cash out of the banks and putting it into property - there's still not a lot of money being lent out. The average house price is still 7x average earnings, against a historic average of 5.5, which is still high compared to most countries.

It'll have a knock on effect on the economy because people aren't sitting on tens of thousands of equity in their houses. Some are trapped in negative equity, so are less mobile in the job market. Those in negative equity or with very little equity will face punitive interest rates when they come to renegotiate their mortgages once their x year fix/tracker is over.

The effect of Thatcher's housing policies were to make homes vehicles for investments. It drags small money into the investment market. It's what helped to overheat, and sustain the overheating, of the stock market, as did PEPs and ISAs (IMO). There's a story about an investor on Wall Street in 1929 - possibly Rockefeller - who heard an elevator boy talking about his own portfolio and realised that if the market needed money from small-time savers to sustain prices, it was time to get out. He was right. And that's exactly what we just did again.

There's also a disaster yet to hit the US house market. Lots and lots of mortgages still to default. That will have another knock-on effect.

Grim times ahead.

 

[teuchter]

*

 

[Fruitloop]

Hard to predict exactly when because of the chronic undersupply in the market which distorts things, and the manic political attempts to shore it all up. Will definitely happen though, and probably b the catalyst for a major crisis in personal debt.

 

[ska invita]

thanks ymu - very clear and informative.

right on cue for this thread, todays headline on the bbc
\\House price inflation hits 10.5%, says the Nationwide
The annual rate of UK house price inflation has hit double figures for the first time since June 2007, according to the Nationwide.
http://news.bbc.co.uk/1/hi/business/10090047.stm
\

 

[JHE]

Mentioned on the Today programme this morning: house prices have increased by 10% in the last 12 months. (Admittedly, it was also mentioned that this would probably not last as more homes came on the market in the near future.)

 

[ska invita]

...im surprised affordable housing isnt higher on the radar of major gripes of people -its never reported as such in the media anyhow. never mind to buy, to rent rates in London at least are completely extortianate IMO. maybe the medai blackout is because it would be seen as talking down the market (whilst estate agents are doing their bit for the state economy by talking it up!)? house prices, a bit like the stock market seem to be reliant on both market conditions and guff from those who want to make money out of it.

 

[jusali]

The increase in house prices should serve as a warning. It's another bubble for sure, the double dip recession is manifesting itself.
Also see oil, the election and government debt for the perfect storm.

 

[kabbes]

The threads predicting imminent house proce crashes are as cyclical as the market itself.

The last such crop of threads, coming at the peak of the market when the crash started, had lots of people predicting 40%+ drops in prices and the market to never recover. And yet here we are a few years later with prices having dropped by 20% and then having recovered most of it back again. So now the doomsayers are saying, "Ah, but it is temporary and they will collapse yet again and this time it really WILL be permanent!" Well, we'll see. But I'm not betting my house on it.


House prices go up, house prices go down. If you buy at the trough and sell at the peak you will obviously make a fortune. But plenty more people have missed their own boat by refusing to buy a house, convinced that prices are going to drop, only to see themselves subsequently priced out of the market. You need somewhere to live, so you buy a house to live in. Financially speaking, that's called a perfectly matched asset. There's really no point worrying about whether you are doing it at the perfect time because that way madness lies.

 

[100% masahiko]

Anyone here selling/buying atm?

 

[g force]

I seem to remember people saying they'd crash by 50% two years ago and it didn't happen.

YMU - US mortgages defaults are still bad but the US economy has strength and depth from being far more diversified. The 'disaster' has already hit and is still being felt by many people out esp those in the suburbs.

Also negative equity has little to do with mobility in the job market - it's the job market itself that is massively fragile. Do you own a home/flat? Have you tried re-mortgaging recently because what you're saying isn't holding true from my parents, friend and my experience. Even with negative equity many firms simply aren't offering worse rates, certainly on fixed periods. Trackers are a slightly different animal but even they are still available to re-mortgage.

For new lends, however, they don't tend to be readily available.

I also sense you don't really understand how the stock market works if you think ISAs fuelled over pricing of shares.

 

[kabbes]

The plumetting base rate kept mortgage payments affordable for the vast majority, which meant that repossessions never remotely hit the heights of previous financial armaggedons. This has allowed people to sit tight, which stopped complete house price meltdown.

Who knows? If inflation starts going out of control and interest rates go from 0.5% to 8% in the space of five years, it could yet all unravel. But then again, increased inflation would tend to be associated with increased economic activity, which in turn would tend to mean that people are more generally able to meet their repayments anyway. Nothing is easy to predict in this game.

Ultimately, more households are created each year than homes. That's a supply/demand equation that creates an awful lot of upwards pressure. Throw a fear of being left behind into the mix and it's hard to see the long term direction being anything other than upwards, if you want a personal perspective on it.

 

[bi0boy]

That graph isn't adjusted for general inflation.

£12000 in 1975 is £90000 in today's money.

 

[kabbes]

That graph isn't adjusted for general inflation.

£12000 in 1975 is £90000 in today's money.

That depends on what inflation measure you are using.

In a way, that's the point. This graph is showing house price inflation. You don't inflation-adjust an inflation measure!

 

[Ae589]

I seem to remember people saying they'd crash by 50% two years ago and it didn't happen.

They were right, but the BOE has kept rates at historically tiny levels. People on tracker mortgages, including landlords who would otherwise be in trouble, have been paying very little. As soon as rates rise, it all comes undone. This is not a new paradigm, prices will not plateau at a high level or keep going up until only 5 people in kensington can afford a house. It will crash hard.

When will rates rise? Dunno, I guess the new administration would want it to happen sooner rather than later.

 

[Ae589]

That depends on what inflation measure you are using.

In a way, that's the point. This graph is showing house price inflation. You don't inflation-adjust an inflation measure!

Your measure (£) has devalued over that time, so you do.

 

[Idaho]

The threads predicting imminent house proce crashes are as cyclical as the market itself.

The last such crop of threads, coming at the peak of the market when the crash started, had lots of people predicting 40%+ drops in prices and the market to never recover. And yet here we are a few years later with prices having dropped by 20% and then having recovered most of it back again. So now the doomsayers are saying, "Ah, but it is temporary and they will collapse yet again and this time it really WILL be permanent!" Well, we'll see. But I'm not betting my house on it.


House prices go up, house prices go down. If you buy at the trough and sell at the peak you will obviously make a fortune. But plenty more people have missed their own boat by refusing to buy a house, convinced that prices are going to drop, only to see themselves subsequently priced out of the market. You need somewhere to live, so you buy a house to live in. Financially speaking, that's called a perfectly matched asset. There's really no point worrying about whether you are doing it at the perfect time because that way madness lies.

There's a lot of truth in that.

So many people talked about how they had 'made' £XXXX on their house that year/month. It was nonsense to think that a value that you hadn't realised on a house you needed to live in counted as money in your pocket.

 

[kabbes]

Yeah, or to put it another way: your asset (i.e. house) had increased in value, but so had your liability (i.e. your need to live in a house). The net benefit may have been positive, negative or simply zero depending on your future plans.

 

[Idaho]

Saying that - the relative and notional value of your house does have an impact on access to credit. So it does have some real value.

 

[ymu]

Also negative equity has little to do with mobility in the job market - it's the job market itself that is massively fragile. Do you own a home/flat? Have you tried re-mortgaging recently because what you're saying isn't holding true from my parents, friend and my experience.

I bought in 1997 and sold up in 2009 because we had to move to the South East and we can't afford the prices down here. We're buying a narrowboat instead.

I do know a couple of people who have had to remortgage since the crash and their monthly payments nearly doubled. They were both just 2 years into their first mortgage. If I'd needed to remortgage rather than sell, it wouldn't have been an issue because I had 12 years of rocketing house prices and a repayment mortgage as equity, on a house that was cheap to begin with. It's people who bought at the height of the market with little or no deposit who are struggling, IME.

 

[bi0boy]

That depends on what inflation measure you are using.

In a way, that's the point. This graph is showing house price inflation. You don't inflation-adjust an inflation measure!

The graph above is useless.

It's like producing one showing 100-fold inflation in the pound since 1900 and claiming the pound is about to crash and lose 99% of it's value.

 

[bi0boy]

Hey look, oil is going to crash to $20 a barrel soon. I'm gonna buy a hummer and some shares in BA.

 

[kabbes]

The graph above is useless.

It's like producing one showing 100-fold inflation in the pound since 1900 and claiming the pound is about to crash and lose 99% of it's value.

It's useless in and of itself, yes. But for specific purposes it can be useful.

If you want to inflation adjust it then what inflation measure do you intend to use? RPI? CPI? Oil prices? Wages?

 

[FridgeMagnet]

People certainly have been saying that house prices were stupid and unsustainable and just had to crash soon for as long as I can remember - at least ten years - and they were right that it was stupid then, and it's just got worse since. However I think the property market really is going to be the last possible aspect of neo liberal debt society economics blah to go partly because there is simply too much political motivation to keep it that way. This is also why it will never be on the platform of a main party to cut or restrict property prices, and why you pretty much never see the idea in the mainstream press.

 

[Chester Copperpot]

The threads predicting imminent house proce crashes are as cyclical as the market itself.

The last such crop of threads, coming at the peak of the market when the crash started, had lots of people predicting 40%+ drops in prices and the market to never recover. And yet here we are a few years later with prices having dropped by 20% and then having recovered most of it back again. So now the doomsayers are saying, "Ah, but it is temporary and they will collapse yet again and this time it really WILL be permanent!" Well, we'll see. But I'm not betting my house on it.


House prices go up, house prices go down.

This basically. The property market is cyclical like other markets. Prices will continue to crash and recover for as long as there's a market place.

 

[Proper Tidy]

People certainly have been saying that house prices were stupid and unsustainable and just had to crash soon for as long as I can remember - at least ten years - and they were right that it was stupid then, and it's just got worse since. However I think the property market really is going to be the last possible aspect of neo liberal debt society economics blah to go partly because there is simply too much political motivation to keep it that way. This is also why it will never be on the platform of a main party to cut or restrict property prices, and why you pretty much never see the idea in the mainstream press.

Spot on.

Housing is recovering, because of the emphasis society still places on owning a house, because lenders will always be keener on lending on secured debts than unsecured, and because there is so much pressure on housing, with fuck all social housing, that rents will remain high.

Basically, when housing goes the economy is in the shit. One of the last elements to collapse and one of the first to pick up.

 

[ymu]

Housing is recovering, because of the emphasis society still places on owning a house, because lenders will always be keener on lending on secured debts than unsecured, and because there is so much pressure on housing, with fuck all social housing, that rents will remain high.

Basically, when housing goes the economy is in the shit. One of the last elements to collapse and one of the first to pick up.

House prices bounced a little bit because interest rates are so low investors don't want to keep cash in the bank. We had two sales fall through because buyers with 30%+ deposits could not get a mortgage. Then we suddenly had 6 cash buyers fighting each other and sold it for more than the first offer we'd had nearly a year earlier.

First time-buyers do not have the sorts of deposits required nowadays. That has a knock-on effect right up the housing ladder.

The last crash was 1992 and prices didn't start rising until 1997. It's nuts to be talking about a recovery in prices now. It's not gonna happen.

 

[kabbes]

The last crash was 1992 and prices didn't start rising until 1997. It's nuts to be talking about a recovery in prices now. It's not gonna happen.

It has happened. It might yet crash again, of course. But that's what happens with markets -- boom and bust. Doesn't meant that you can pretend the ups didn't happen just because they came between two downs.

 

[Proper Tidy]

It has happened. It might yet crash again, of course. But that's what happens with markets -- boom and bust. Doesn't meant that you can pretend the ups didn't happen just because they came between two downs.

Well exactly. Housing has already bounced.

 

[ymu]

It has happened. It might yet crash again, of course. But that's what happens with markets -- boom and bust. Doesn't meant that you can pretend the ups didn't happen just because they came between two downs.

I'm saying that the bounce was not due to a substantive recovery - it was due to the rest of the economy going to shit and housing being attractive to investors with cash in the banks. Them withdrawing their cash is not going to help the banks any.