We Ain't Seen Nothing Yet
Nationwide claims we've seen the biggest fall in house prices since 1991. But actually, house prices haven't crashed - yet.
We've all seen those Looney Tunes cartoons where Roadrunner, Bugs Bunny or whoever goes charging off the edge of a cliff, then stops, looks down, looks back despairingly, stares at the viewer, defies gravity for a moment, then crashes to earth.
It reminds me the housing market. We've charged recklessly over the edge, stopped, realised what we've done, stared wide-eyed at how far we have to fall, and are now waiting for gravity to do its worst.
But it hasn't yet. If you look at the figures, the panic about falling house prices concerns what is to come, rather than what has happened. Most indices suggest house price falls have so far been surprisingly slight.
Just the facts
Nationally, the average house fell a modest -4.6% in the 12 months to August, according to Land Registry figures. In London, the figure was just -3.2%. In Windsor and Maidenhead, prices actually rose 2.4%. In Hartlepool, they were up 4.8%.
An average drop of -4.6% is a shock after all the years of dramatic growth, but it isn't the end of the world.
If you're in the mood for even more soothing news, Department for Communities and Local Government (CLG) figures show prices falling by just -0.3% in the year to July. The FT house price index puts the annual fall at just -2.2% to August. So what's everybody moaning about?
Well, this for starters. The most dramatic numbers come courtesy of Nationwide, which this week reported 12.4% drop in prices over the past year, leading to headlines like: "Worst Ever House Price Fall Since 1991!" Now that's what I call a housing crash.
Similarly, latest figures from the Royal Institute of Chartered Surveyors figures show the average house going for 10% below its asking price.
Chin up
But wait a minute. Every time Halifax and Nationwide publish their latest scare 'em to death figures I get an e-mail from property firm Assetz, reminding me that those two lenders base their data solely on their own mortgage transactions, which can be misleading.
Assetz says both lenders "have significantly raised their mortgage rates recently to boost their profits while transactions fall, which has resulted in purchasers haggling down property prices by a few per cent to compensate for their increased costs."
It claims this is why Halifax and Nationwide figures are notably more dramatic than other indices, such as the FT and CLG, which use Land Registry data, or Rightmove, which looks at asking prices (and recorded a modest -3.3% fall in the 12 months to September).
Assetz claims Rightmove figures can also be misleading, because there is evidence of sellers putting up asking prices, in anticipation of later negotiation by the purchaser.
Property company Assetz clearly has an axe to grind, but it does offer a more sober reading of the figures than most newspaper headlines.
The problem I - and I suspect many buyers and sellers - have is that I don't feel I can rely on any of these figures. Things feel much worse.
My friend Ben
So what about the anecdotal evidence? I think of my friend Ben, who recently sold his house three-bedroom terrace in Hither Green, south-east London. It went on the market for £435,000 last November. In May, after months of fear, loathing and gazundering, he pocketed £375,000, 13.8% below the original asking price. I don't think he's complaining about that now (it was overvalued anyway, sorry Ben).
Housebuilder Barratt is reported to be slashing 43% off the price of some new homes although only for people buying five properties or more in its Yorkshire East division.
Plus there are plenty of reports of new-build city centre flats being auctioned off for 40% or 50% below their original asking price, as buy-to-let investors abandon the market on fears of oversupply.
And then there is the frankly astonishing news that the value of mortgages fell 95% between July and August, from £2.99 billion to a threadbare £143 million.
Deep freeze
This final figure confirms to me that rather than falling, the property market is frozen. Buyers ain't buying, sellers ain't selling - unless they really have to (like housebuilders, or buy-to-let investors who jumped on the bandwagon too late and got their sums wrong).
Plenty of people still predict prices will fall 30% from their peak, and I suspect they might be right. When I trawl through property websites, I see humdrum houses for sale at unsustainably high prices, and can't imagine anyone paying those prices now.
The odds are still that we are heading for a serious correction, but I'll repeat, it hasn't happened yet.
We are all stuck in mid-air, like comedy cartoon figures, waiting for gravity to do its worst.
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matchmade, just wanted to say your analysis makes a lot of sense to me rather tha all the scaremongers.
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The standoff makes perfect sense now that we have a good-sized buy-to-let market which provides a new option for people compared to recessions in the past. Buyers lower down the chain perceive prices to be high and are finding it hard to get mortgages involving new capital, and sellers higher up the chain therefore aren't finding buyers. Sellers are responding by either dropping their price, or holding firm and deciding not to move. Sellers still in the market find they still can't get a buyer at the lower price, so how low are they supposed to go? They think "I could cut my price by 30% or 50% and I still won't find a buyer, and I won't be able to move up the chain myself", so they decide either to stay put, or - as we're seeing - if they need to move for reasons like employment, they look to rent out their house to someone else and rent a smaller place themselves in their new location.[br/][br/]As a result we have a lot of higher-end houses up for rent but not too many takers, as relocation people are scarce and the inadvertant landlords don't want to pay top price themselves - they want to save money in case *their* house doesn't rent. The result is over-supply and falling prices in large rented houses, but under-supply and *upward* pressure on prices for the smaller rented houses that are in demand, as the new entrants are competing with the existing people in the market for rental houses. This is why we hear simultaneously about "falling rents" and "rising rents" in the same part of the country - it depends what type of property you are talking about.[br/][br/]At the same time people are suffering with inflation on food and fuel. Obviously lower interest rates would ease the pressures on homeowners and most BTL landlords, but won't lead to a fall in rents. None of this will however ease the problems in the market, which are all about confidence and highly restricted money markets.[br/][br/]I can see the current situation going on for some time, as banks rebuild their balance sheets and the Americans try to cure their banks# "toxic" sub-prime debt and the contamination of good debt by bad debt in pooled securitised debt.[br/][br/]However this doesn't necessarily mean there'll be a crash rather than a relatively mild house price correction: BTL landlords will hold on - they have low debt-to-value ratios, a good supply of tenants, inflation is steadily reducing the real value of their debt, and interest rates are likely to come down stteply in 2009, easing the pressure on their incomes. Repossession rates on BTL landlords are still much lower than for regular homeowners.[br/][br/]In my experience the thing that will really spark a crash is a rise in interest rates coupled with heavy losses in employment amongst regular homeowners. At the moment, homeowners and BTLers can afford to hang on, but if the economy shows signs of a heavy recession, and we talk ourselves into a recession, and inflation refuses to come down, then we are in trouble. BTL landlords are mostly grown-up investors and will ride out the storm; it's the main economy I'm worried about, and that will include all those first-time buyers who are slathering with anticipation for 30% falls in house prices. They'll see the falls in price, but a good number of them will also be losing their jobs.[br/][br/]Meanwhile I agree with reason8 that in the medium time prices should recover, especially if existing social trends continue and the new-build market continues in its current bombed-out state. Why build a new house in this market? Unless you can get the land cheaply, and planning permission quickly, it makes perfect sense just to stop building or do the minimum needed to keep your key people in work, and wait until the money markets recover and we get through the recession. Meanwhile the houses don't get built, affordable homes aren't built either, and assuming we continue to have an expanding and increasingly single population, eventually demand has to pick up.
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I agree completely, things set far worse a year or two down the line.[br/][br/]Let's look at some of the facts concerning money supply and housing demand.[br/][br/]The effects of high fuel price, even higher energy costs and higher wage demands haven't filtered through yet. This will effect council tax bills, utility bills and tax bills, as well as prices generally.[br/][br/]Water rates are to rise by 60% over the next five years.[br/][br/]Then there's the added cost of borrowing for firms and people alike.[br/][br/]Then the far higher cost of living re food prices, all other prices and transport costs will lead to pressure for wage inflation, which in turn leads to even higher prices. The problem is companies will ANTICIPATE this and put up their prices IN ADVANCE in the present financial crisis.[br/][br/]It is VERY disingenuous of the government to impose drastic actual pay cuts, when people can't meet their present bills, The government is prepared for very serious rioting in the streets over the next few years. When/ If this happens this will hit markets very hard indeed.[br/][br/]All these price hikes and wage cuts amount to a massive amount of reduced 'cash in hand' let alone[br/]borrowed money (even IF available. people are now having to eat drastically into their savings to fund their current accounts.[br/][br/]Re housing directly, at a time of severest financial stringency, how many people are prepared (unless they have to by a job move)to risk very seriously 'burning their fingers' in very deep negative equity.[br/][br/]Put simply, people will wait where they can in the hope that the housing market will bottom out.[br/][br/]By the time this happens we will have seen a FURTHER MULTIFOLD increase in bills, and who knows how limited borrowing may be by then.[br/][br/]I honestly think things might get a LOT worse before things start to improve in housing. a recovery, if there is one may take 5 years or more to begin to happen.[br/][br/]There's also the fact that many people thought the housing market was VERY over-priced. We now have the combination of an extremely severe economic and financial downturn added to a more realistic property valuation market. [br/][br/]But readjustment is the least of the worries. If people can't borrow enough to afford even present prices, houses will not sell. Eventually home owners may have to reduce prices dramatically to sell(but may hold out for 5 years or longer. This might be against a flood of cheaper re-possession properties.
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05 October 2008