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House prices heading for a fall

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    House prices heading for a fall

    http://www.telegraph.co.uk/finance/c...-of-sales.html

    You can't trumpet a housing market revival on a low number of sales
    The housing market has sprung back to life. Both the Halifax and Nationwide house price indices reached a low point before the summer. Since then, according to the Halifax, house prices have risen by 4.2pc, and according to the Nationwide by 7.2pc.

    This bounce in the housing market mirrors the apparent revival in the economy, the recovery of confidence generally and the sharp pick-up in equity prices. Moreover, house prices have been recovering internationally too. In the US, the Case-Shiller index troughed in May and posted monthly rises in both June and July, leaving prices 2pc above their low point.

    The fact that just about everything seems to have been getting better suggests that the housing market recovery here may be justified – and it could be taken to imply that it will be extended in the months and years to come. In short, the housing-market downturn is all over.

    But is it? That's certainly not the message that you would get from looking at the ratio of average house prices to average earnings (the HPE ratio), which has long been my favourite indicator of value. True, it has fallen from a peak of 6.2 to 5.0, but this is around 35pc above its long-run average of 3.7. Indeed, the HPE ratio is only now just about back to where it stood at the previous peak of the housing market in 1989/1990. That hardly inspires confidence.

    Admittedly, measures of so-called "affordability" give a much more upbeat message. The share of a new borrower's take-home pay absorbed by mortgage payments in the UK has dropped to 35pc, just below its long-run average of 37pc. We all know why. Falls in house prices have coincided with record low interest rates and some continued, although modest, growth in earnings. But affordability measures are misleading.

    For a start, historical comparisons are grossly distorted by the change in the inflation environment. In the old days, the initial burden of a mortgage would be rapidly eroded by inflation as earnings rose sharply. But not now. The burden you start with does not get much smaller throughout the life of the mortgage. Moreover, although affordability may be favourable for those borrowers who can get a mortgage, not many can. Meanwhile, affordability only looks so good because interest rates are abnormally low. When they rise again, as eventually they must, affordability will look far less supportive.

    And the recent signs of recovery are not to be trusted. The number of houses actually changing hands is still unusually low because there are so few properties on the market. Just as with other asset markets, price movements that take place on small volumes are not dependable as indicators of underlying supply and demand.

    Indeed, we saw a similar brief respite in the early 1990s housing market downturn – only for house prices then to resume their downward path.

    Although prices may well rise for a few more months yet, a number of things could easily derail the housing recovery – even if the economic revival continues. As usual, unemployment will keep rising long after the recession has ended. It now stands at 2.5m, but I expect the total eventually to surpass 3m, and much higher figures are perfectly plausible. And partly because of this, the growth of average earnings has slipped back and has in some months been negative. Before too long, it could get stuck in negative territory. If that happens, then house prices would have to fall just to keep the HPE ratio constant. Meanwhile, the economic recovery itself could easily lose momentum, causing these adverse influences to intensify.

    Taxes are certain to rise as part of the looming fiscal squeeze, thereby reducing consumers' disposable income. We already know that high earners will be hit by a new 50pc rate of income tax. But the standard rate of income tax may be raised too, while there is a good chance that VAT will be increased to 20pc. Even if most of the fiscal tightening takes the form of public spending cuts rather than tax rises, widespread job losses and pay restraint in the public sector would reduce aggregate personal income.

    The upshot is that the UK housing market is currently in something of a sweet spot. The optimists believe that the bad times are over and the housing market will now return to normal. Meanwhile, the market – and the broader economy – are benefiting from rock bottom official interest rates. But these two supports cannot co-exist for much longer. Before long, either the wider economic recovery will falter, or interest rates will rise. My view is that the former is more likely. But if I am wrong and the economic recovery continues to gather pace, then I will also be wrong about interest rates. Either way, the housing market would suffer.

    Interestingly, the US HPE ratio now stands about 15pc below its long-run average. In other words, by historical standards, houses there are now cheap. That is a far cry from the situation here. So, despite the recent recovery, I still think that house prices here are heading for a fall.

    #2
    Houses are still well over priced. Why do the media seem to insist that ever increasing prices are a good thing anyway? I have teenage kids so I want prices to return to their long term, much lower compared to earnings, normal levels of affordability please.
    Public Service Posting by the BBC - Bloggs Bulls**t Corp.
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    Comment


      #3
      Originally posted by BrilloPad View Post
      The upshot is that the UK housing market is currently in something of a sweet spot.

      Comment


        #4
        "Originally Posted by BrilloPad
        The upshot is that the UK housing market is currently in something of a sweet spot."

        Originally posted by AtW View Post
        You may laugh, but it is true. I have said it time and again. There are several things propping it up that are unsustainable. We are eating ice cream between the cabbage course and the dog-poo afters.

        Comment


          #5
          Why is supply so low?

          HPE ratios are all well and good but, migration vs house building is probably a more important statistic. Everyone has to live somewhere.
          Cats are evil.

          Comment


            #6
            Originally posted by swamp View Post
            Why is supply so low?
            Because people, having failed to sell their houses at Aug 2007 prices, take them off the market rather than reduce the price?

            Comment


              #7
              Originally posted by swamp View Post
              Why is supply so low?
              Because the BOE is printing money to bail out the banks and stop repossessions. That's what your tax bills for the next 25 years will be paying back. And this "easing" of policy can't carry on for ever - we don't grow money trees in this country, unfortunately...something to do with our climate, apparently.

              And supply is also low because demand from people who can actually afford to buy at these grossly inflated prices is also low. This hasn't been a problem up until recently, as the banks would lend anyone a bottomless pit full of money as long as they could sign their own name on the mortgage application (if fact, I think even "X" was sufficient; and if you couldn't manage that, the mortgage broker would help guide your hand, in order to guarantee his/her commission.)

              Ps. I don't think the UK's raging employment over the next few years will solve this problem either. Or those rich young people who form the vast majority of our population.

              High house prices? Not for much longer...

              Nomadd
              nomadd liked this post

              Comment


                #8
                Originally posted by Fred Bloggs View Post
                Houses are still well over priced. Why do the media seem to insist that ever increasing prices are a good thing anyway? I have teenage kids so I want prices to return to their long term, much lower compared to earnings, normal levels of affordability please.
                Exactly. It's constantly trumpeted as a wonderful thing, but exploding house prices was one of the major causes of the current recession.

                A massive crash doesn't help either. But 5 years of flat prices would be the best thing the economy could have right now.

                Comment


                  #9
                  I`ve said it before, house price pricing based on low numbers is by no means an accurate measurement of current prices.

                  A friend has had two low value flats decent flats with character (18th centruary Chapel conversion) on the market for two years now and neither have sold. They even went over six months without any viewings on either property but then had one viewing in June and a few since.
                  To sell a property quick(ish) I think you have to price about 33% down from the peak, I say that because I have seen a few panic sells in the last six months and that was the % drop.

                  Comment


                    #10
                    Originally posted by centurian View Post
                    Exactly. It's constantly trumpeted as a wonderful thing, but exploding house prices was one of the major causes of the current recession.
                    Rumour has it that Brown is to blame for that too, by taking house prices off some inflation index or other. Might be unfounded rumour mongering though.

                    Comment

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