Also, there have been lots of topics hijacked by people who want to steer every conversation back to their agenda. This has had the effect of closing down price related topics thus shooting themselves in the foot. Some posters don’t even have the back bone to start a topic about prices preferring instead to pretend to be interested in a related topic in the hope of bringing the conversation round to what they really wanted to talk about. The effect of these types of ’trolling’ has meant little appetite for the topics you suggest.
This is an analysis carried out on another website explaining why the credit crunch is so significant, and considers a comparison between the last correction and this upcoming one. Thanks to Speedything from over on Singingpig.
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1. What caused the market to turn downwards?
Although it is tempting to try to find a single event that caused the turn unfortunately this is largely untrue. If you have to grasp at a single event then "Black Wednesday" is probably your best bet. However, as with any recession this event was itself triggered by a change in the markets.
In other words, the IMF are now backing up my personal view that prices are due a 30% correction as a minimum (remembering, markets overshoot by about 5-10% in a correction).
Why do I mention this? Well, there are a very large number of amateur BTL investors that levered off 5% equity in their houses, and now have 20+ BTL properties, these people IMHO, are in for a very nasty surprise unfortunately, and will further supress market prices with massive oversupply. Not all only bought newbuilds, many older props are currently included. As my sig below says,
Also, there have been lots of topics hijacked by people who want to steer every conversation back to their agenda. This has had the effect of closing down price related topics thus shooting themselves in the foot. Some posters don’t even have the back bone to start a topic about prices preferring instead to pretend to be interested in a related topic in the hope of bringing the conversation round to what they really wanted to talk about. The effect of these types of ’trolling’ has meant little appetite for the topics you suggest.
Oh, I have started loads, its just that the C4 mods have seen fit to delete them. Including one very significant one from 2006 that alluded to the major banks having big debt problems... I suggested that This was significant. Unfortunately it was deleted. I am guessing it doesnt help that much of the sponsorship for C4 seems to come from those with their sticky wickets deeply benefitting from rampant HPI.
As for Hijacking other threads, I think the most recent thread to be 'hijacked' was the "property prices still going up or some other nonsense, which of course, as you know I am going to disagree with!
I would be happy with a 30% drop in house prices, but unfortunately I don’t think it is going to happen. You make a great argument in you’re essay, but it's a bit one sided. It doesn’t include all the factors like for instance the number of immigrants entering the UK. The demand for housing is still strong and will remain so until immigration is capped, which only this week the Prime Minister said he won’t do.
Who says they are going to want to come here? If we go into a bad recession, you can bet your bottom dollar they will be going off back to whence they came. No offence to those who come and work hard for their cash, but its what I would do if I was them.
There are just as many arguments against supply and demand as there are for, for example, how do you explain the fact that if there were a real shortage of housing, there would be far more on the streets? Or the fact that EAs are up to the rafters with houses on their books but far too few viewings? Or that the increase in housing prices has a far stronger connection to M4 (money supply) than it does with population?
And, if Supply and demand was the be all and end all, why are there so many boarded up properties (many you can buy now for less than $1000) in the US yet thousands now find themselves living in tent cities across the states? Its all to do with lending, of course.
I must point out that the above isnt my work, Its from another forum (no, not HPC), I though I would post it because it explains quite succinctly what exactly imo is currently going on.
Although it is tempting to try to find a single event that caused the turn unfortunately this is largely untrue. If you have to grasp at a single event then "Black Wednesday" is probably your best bet. However, as with any recession this event was itself triggered by a change in the markets. All economies (at least those based on capitalist principles) go through a periodic but irregular business cycle. This is categorised by 4 stages,
- Contraction (A slowdown in the pace of economic activity)
- Trough (The lower turning point of a business cycle, where a contraction turns into an expansion)
- Expansion (A speedup in the pace of economic activity)
- Peak (The upper turning of a business cycle)
The exactities of what make a cycle change are far too complicated for me to explain (or even fully understand!) but usually the growth period ends with the failure of speculative investments. For example (and I apologise for this gross over-simplification)...
a. The economy is doing well. People are happy to lend money (and invest this money) as the economy grows at the expected pace and their investments yield profit.
b. As more money is invested the economy starts to overheat. The investments start becoming more speculative as people start overestimating the future economic growth.
c. Investors are now relying far too much on their confidence that the market will keep growing at this unsustainable pace and that there investments will still be returned (with profit).
d. Something happens. Last recession it was "Black Wednesday", this time it is the "credit crunch". Even though the specifics will change it all boils down to the investments not making the desired profit (or even making a loss). This stage will always happen - the market is growing purely on unsustainable speculation and is unhinged from economic fundamentals.
e. Investors and lenders now become bearish and reduce their lending. The economy, which has for a period been growing purely on confidence (and the associated investment), stops growing at the same pace.
f. As the economy slows so does consumer spending. Jobs are lost, businesses go under - and the economy worsens. Depending on the severity of this slowdown the country may find itself in a recession.
2. Do you see the same indicators triggering at the moment & if so what are they?
Very much so. Ultimately (as described above) it all boils down to confidence and the willingness to invest in the economy - both from individuals and institutions. The current mortgage market is an excellent indicator - 20% of all mortgages have been withdrawn in the last week, First Direct has pulled their enitre range, others have made themselves less competitive. Last time there was rampant inflation (another symptom of an overheated economy) and to attempt to slow this it was the BoE which raised the rates (again both reducing the desire to invest and making it impossible).
Although it may seem as though there are differences between the central bank raising rates and the mortgage lenders taking control (and there are!) they are both the result of an overheated economy that has become too dependant on speculation.
3. What effects did these times have on the property market?
Given my previous answers I think this has already been explained. Basically mortgages became more expensive and harder to get. This was exasperated by the slowing economy. In good times unemployment is low, and HPI means that even if something goes wrong the lender should be able to recoop their money. When there is economic slowdown the prices start falling and unemployment starts rising. Not only is there more chance of payments being defaulted on, but if it does go wrong the house may be worth less than the mortgage. We are seeing this now - 100% mortgages have all but disappeared as banks want people to have enough equity in their property from day 1 so that a drop won't make the price less than the mortgage.
The exact effect? REAL prices dropped nationally by 30-35%. Some here will tell you that it was only a 15% drop but they forget to factor inflation into their calculations. If the cost of everything doubles (wages, bread, taxes etc.) but your house stays the same price then it is actually now half of its previous value. If inflation had been lower then we would have seen the nomial prices drop by more.
4. How long did it take before lenders started offering cheaper credit again?
As already discussed, last time the BoE was more in control of the rates.In 1998 this was 7.5% (I think). This time? It will depend how quickly confidence is restored and how badly the banks get burnt. I think it's safe to say that cheap credit will probably not return (as we have known it) for a long time. There are remarkable similarities between the last decade and the roaring 20s in the USA. Although I don't believe we are heading for anything as bad as the Great Depression it could still be many many years before we see things like 100% mortgages again - the banks have been burnt and they won't forget it.
As I've already started this essay I'm going to include my prediction...
5. What will happen now?
With the end to cheap credit comes the end to an economy built on speculation. This is a natural and healthy part of the business cycle but it is not without pain. We are already hearing of job losses in the city but this is only the tip of the iceberg. As investment slows down more jobs will be lost. Spending will decrease and unemployment will rise.
How will house prices be affected? If there has been one market that has been the epitomy of this current economic bubble then it is the housing market. Only last year we were seeing headlines of "Average house price to be £250,000 by 2012 and this view was held by far too many (including those who should know better). Of course it now appears that banks won't be lending the 10x average salary that this would require. Prices have risen largely because of cheap credit and the belief that they will keep rising forever. Is a starter house really worth £180,000 (my area)? To be honest that question no longer matters, most people who want it won't be able to get the credit they need to buy it. Prices will drop (they already are) and then there is another reason not to buy. How far will it go? Personally I'm siding with the IMF who predict a 30% drop by 2011. Then there will be a year or two of growth at the rate of inflation. Prices back to where they are now by 2016.
Originally posted by Pflusk: Who says they are going to want to come here? If we go into a bad recession, you can bet your bottom dollar they will be going off back to whence they came. No offence to those who come and work hard for their cash, but its what I would do if I was them.
Would you really? So if you had grown up in an Eastern European country living in grinding poverty and you’d left all that behind to start a new life in the UK you’d pack up and head back home?
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Originally posted by Pflusk:
There are just as many arguments against supply and demand as there are for, for example, how do you explain the fact that if there were a real shortage of housing, there would be far more on the streets?
but I wasn’t talking about the homeless I was referring to people who have to live with parents or have to rent.
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Originally posted by Pflusk:
Or the fact that EAs are up to the rafters with houses on their books but far too few viewings?
I don’t know if they are, where I live there is not a great choice of homes on the market.
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Originally posted by Pflusk:
Or that the increase in housing prices has a far stronger connection to M4 (money supply) than it does with population?
WE agree !! Location is always a major factor in supply and demand.
Hmm, I will take your M4 comment with a pinch of salt, with a good dose of sarcasm! (I hope you know about M4, becuse its this thats really going to hurt...)
Interestingly, the argument that immigration means that there will always be housing demand in the UK was discussed in, I think, the Telegraph the other day. The comment was made that once large scale building slows the carpenters etc. from Poland may have to go home and others will not come as there will be no jobs for them to come to. There already seems to be a massive over supply of flats in Manchester, Leeds, Birmingham - with some large builders abandoning plans for certain developments and returning deposits to off-plan buyers.
Also, it doesn't matter what the demand is and where the demand comes from, if the money is not available to buy the product it remains unsold or has to drop in price to where it becomes affordable.
Or the fact that EAs are up to the rafters with houses on their books but far too few viewings?
I have to disagree on both points The press say EA's are flush with properties yet I have half as much as I did when the Gulf War was on. And viewing levels well they are off the scale. We are bextremely busy with viewings. But that is where it ends buyers are window shopping they are viewing without their properties being on the market and many of them will not commit to putting their properties on until that elusive dream home comes up. Then they change their mind and give up again reading disaster into young journalists attempt to make a story out of a downward trend in a market. Because a downward trend in a market sounds alot less interesting than a full on 'Great Depression' I 've said it before but repossessions are as rare as snow in hell in comparison to the early 90's. Oh and interest rates are 1/3 of what they were in the early 90's Lenders will soon tire of making no money!
"The greatest trick the Devil played, was convincing us all that he did not exist"
"mortgage rates are 1/3", oh apart from those stuck on the svr who will find themselves on the LIBOR rate instead...
and you are forgetting that prices are near 3* what they were back then, which rubbishes your argument. if the loan is 3* as much, the rate needs to be 1/3 of what it used to be just to be affordable! (which makes the property market even more vulnerable to even small increases in LIBOR!)
Actually I thought it was still 1.1% positive year on year.
However the report does suggest `suprise' in that its 6 times the expected rate of fall.
Why?
If I were to buy in a falling market where the banks are asking for a 25% deposit, I'd take that as the expected percentage drop in house prices. So would offer accaordingly.
Prices wont drop slowly, they will plummit. Its only logical. Who in their right mind would buy a house which will knowingly fall in value ? You might as well pay the value it will be worth in a years time now or just walk away.
Prices fell 1.3% in March with the Halifax having changed to 3- month rolling indices recently this allows them to say that they are still 1.1%.
Factoring in inflation house prices have dropped 5.5% in the last year.
March 2007: £194,094
March 2008: £191,556
And it will get much worse in April. Prices have to rise by +3.1% in April just to stay at 0% even on the 3-month rolling indices that they have suddenly decided to use.
With mortgage rationing I expect April will be similar or worse than March and so it will go heavily into the minus figures no matter which way they try to present it.
Prices wont drop slowly, they will plummit. Its only logical. Who in their right mind would buy a house which will knowingly fall in value ? You might as well pay the value it will be worth in a years time now or just walk away.
But that "logic" stopped people buying this time last year insisting there would be a crash, and the year before that, and the year before that. House prices are still above where they were this time last year, and significantly higher than this time two years ago and so on and so forth.
My estate continues to expand with new homes which are bought before they are finished. People are essentially moving onto building sites because the rest of their street hasn't finished being built!!
Everything else is just sensationalist propaganda by those who missed the property boat.
[QUOTE] House prices are still above where they were this time last year, and significantly higher than this time two years ago and so on and so forth. QUOTE]
Look at the figures in my post above. These are the correct figures as given by the Halifax.
March 2007: £194,094
March 2008: £191,556
There are far bigger forces at play in the banks, financial markets, wider economy.
Therein lies the problem for those of us who have bought property.
There is nothing to support prices for now or the forseeable future. The economics are so far off the page. Currently there is de facto mortgage rationing, banks have none or few funds to loan against etc...
Its a pretty pass that I wish I had become more clued up about before I bought 2 years ago.
Overall, we expect there to be a modest (low single digit) decline in UK house prices this year. Any declines, however, should be viewed in the context of the significant price rises over recent years. UK prices have increased by 171% over the past ten years and by 51% over the last five years. The average UK price has risen by £120,860 during the past decade from £70,696 to £191,556.
What did you think they were going to say? "Oh booger the worm has turned and our houses are going to drop in value 30-50%?"
That would cause a panic, mealy-mouthed soothing words are the only position they have in this complex web of economic fundamentals, public confidence & sentiment, and school of hard knocks.
Look through the vested interest and spin. Gordon Brown & Alistair Darling saying the UK is in a better position than anyone to withstand the downturn! Its not what the UK plc balance sheet says, far from it.
Spin, spin and soothing words. I feel mugged by simply going along with it before I started to twig the numbers didnt add up.
Although there is some amusing hypocracy that you will happily quote Halifax figures one minute, then claim they are lieing through their teeth the next.
Location is always a major factor in supply and demand.
