To change the mood a little, yesterday saw the release of the latest property market report from the Halifax. And yes, of course, houses prices were down again; yes, it’s the longest run of house price drops ever recorded by the Halifax; and yes, we have seen the monthly round of denial. One media report published in The Times today, really does take the biscuit as, still, investors fail to get the point.
So, this is what happened. Halifax reported a 1.3 per cent fall in September. It now has the annual rate of house price falls running at 12.4 per cent, although when it calculates the data, it compares the average over the last three months with the average of the equivalent three-month period a year go. If, instead, you compare this September with last September, prices are down 13.4 per cent.
We have now reached that point when significant house price falls have been going on for over a year. Last October saw prices drop 0.8 per cent, and November 1.3 per cent. So the annual rate of house price falls is unlikely to fall by much over the next two months. Last December, however, the Halifax recorded a 1.4 per cent rise in house prices, the most recent price rise the bank recorded. So, annual house price inflation is likely to peak at the end of this year, and will then probably be around 16 to 17 per cent. Bear in mind that inflation is running around 5 per cent, so in real terms, by that point, annual house price falls will be over 20 per cent.
It is now a year since the Halifax index peaked, meaning that from next month onwards, we will be in the second year of house price falls, and annual figures won’t tell the story of the full peak-to-bottom fall.
The Halifax of course tried to paint as positive a gloss as possible, saying that September’s fall was the lowest fall since February. Well, that may be right, but 1.3 per cent is still a very big fall. And, by the way, the bank has now recorded eight months of successive falls, topping the early 1990s record of seven successive falls.
The Halifax had, in previous months, talked about the strength of the labour market underpinning the property market. Well, since HBOS is likely to see big job losses, it can’t very well continue to make that argument.
But the real madness relates to this story in The Times.
Apparently, investors are returning to property in their droves because they see it as a safe investment.
The Times quoted Robert Billson, head of Savills in Nottingham, as saying: “There are people with £50,000 who would rather buy a derelict house and board it up for a while than put their money in an Icelandic bank right now.”
The article went on in that vein.
So let’s run that past you again. House prices are seeing their biggest falls ever recorded. Many would argue the worldwide housing collapse lies behind the finance crisis. Now it has emerged that some billionaires are being forced to sell assets to meet their commitments. And investors are piling into property. No doubt we will be reading next that they are moving into swamp-land, the next big opportunity.
In a way, though, this story explains it all.
This crisis will not end until people get real, and see what is going on for what it actually is.
House prices were too expensive, and they will fall until they are no longer too expensive. Because of the worsening global economic outlook, the level of what is affordable will fall even further. Halifax says the average earnings ratio has fallen from a peak of 5.84 in July 2007 to 5.02 in July 2008 (latest available). This is the lowest level for more than four and a half years (February 2004: 5.01). It says: “We expect a further improvement in the ratio as prices continue to soften. The long-term average is 4.0.”
But in a recession, a very nasty recession at that, expect the ratio of prices to earnings to fall below the historical average.
In real terms, it seems house prices will have fallen around 20 per cent this year. It seems possible we have not even seen half of the falls yet.
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