August 6, 2008 | posted by Michael Baxter in House prices | comments (1) |

So the government is considering temporarily lifting stamp duty on the first £250,000 of the price paid for a home. So that means no stamp duty for homes less than a quarter of a million. And stamp duty on the value of the home minus £250,000 for the rest.  It is a desperate gamble. The move will be expensive, and if it doesn’t work, it is money down the drain.

Actually, the move from the government will be the equivalent to it handing people buying properties an amount of money worth 1 per cent of the home’s value. Or if it is worth more than £250,000, £2,500. So that means buyers find themselves getting closer to the deposit they need all the quicker.

The snag is this. It is only 1 per cent. House prices are falling by more than that each month – it is not difficult to see why this may not work.

In the last house price crash, John Major tried something similar – his move failed.

But a more pertinent question is this.

Why does the government want to do this? When house prices were rising too fast, it stayed clear.

If you believe the current housing market turmoil is all a little odd, and solely down to this credit crunch which had nothing to do with us, then the move makes sense.

If you believe house prices are falling because they are too expensive, and the credit crunch is down to lending that was too high, based on property valuations that were not sustainable, then reducing stamp duty would be a fool’s errand.

It seems more likely that this move will just result in a short pick up in opinion polls, followed by the loss of taxpayers’ money – never to be seen again.

Quite frankly, the government would be better off using the money it would spend on reducing stamp duty, giving us all some kind of tax credit.

Vince Cable, the Liberal Democrats’ shadow chancellor, said: “The falls we are seeing in the housing market are painful, but necessary, if homes are to become affordable once more for those not on the property ladder.

“Ministers allowed house prices to get hopelessly out of control. They must not now artificially prop up the market for political expediency.”

August 4, 2008 | posted by Michael Baxter in House prices | comments (0) |

Now here is something odd. As you probably know, falling house prices mean that demand for rental properties is supposed to rise. This in turn is supposed to push up rent, encouraging buy-to-let landlords to re-enter the housing market, thereby pushing up house prices. This is the core argument put forward by property bulls.

If that is so, then explain this. According to Saturday’s FT, rents right across London are falling.

The pink’n’ quoted Tim Hyatt, head of lettings at Knight Frank as saying: “We have noticed a huge increase in stock in the last three to four months.”

The FT piece also quoted Knight Frank as saying rents in London were between 5 and 20 per cent lower than levels seen in the spring.

Yet, if you were to base your conclusions on the markets from the regular monthly reports put out by Paragon Mortgages, you could be forgiven for concluding the rental market is like a bed of roses.

Rental yields have risen to 6.4 per cent, says Paragon, the highest level since November 2006, and investment income for buy-to-let investors has risen by 11.7 per cent over the last year.

Paragon even has the average investment property rising in value over the last year and says that the average investment property generated an overall return of 13.6 per cent over the last 12 months, that’s adding rental income to property appreciation.

The best place in the UK to make a profit was the South-West which saw a total annual return of 26.1 per cent. Wales was the worst with a total annual return of 4.8 per cent.

Perhaps the most telling statistic from Paragon, though, was this one: “rents continue to rise in five out of ten regions.”

Now, it seems that if rents are rising in five out of ten regions, they are not rising in five out of ten regions either, suggesting the market is close to being flat.

When you think about it, a 6.4 per cent rental yield is not that special. After you deduct agent fees, the cost of periods when rental property is empty, maintenance costs, and of course the interest rates on the loan taken out to buy a property, it makes a fairly lacklustre return.

Is that a return sufficient to compensate for falling property values?

The argument that the credit crunch will push up rental yields overlooks a key point. Demand can only rise if people can afford to pay more.

Quite clearly, right now, people can’t.

True demand is a concept that is relative to price. As price rises, demand falls; it’s the most basic law of economics, and yet, the property bulls seem to overlook it.

July 31, 2008 | posted by Michael Baxter in House prices | comments (3) |

The last few days have seen a new level of pessimism in the prognosis for UK house prices. Well, at least, it’s pessimism if you are a property investor or a bank. If you are a would be first-time buyer, or believe in economic sustainability, it is good news.

According to the Nationwide, house prices fell by 1.7 per cent in July. They are now £15,000, or 8.1 per cent down on the level from a year ago. If you compare prices with Nationwide’s peak, seen last October, then they are now down by nearly £17,000, or 9 per cent.

House prices now only need to fall by just one more per cent, at any time over the next three months, for prices to be 10 per cent down from peak.

The Nationwide news follows a report from Standard & Poor’s predicting an additional 17 per cent fall in house prices between now and next April. It says that after this fall, 1.7 million home owners will suffer from negative equity.

But, even the Standard & Poor’s report seems optimistic compared to the latest predictions from Capital Economics, which reckons house prices will fall by 35 per cent from peak to trough, or by 40 per cent in real terms after taking into account the effect of inflation. They reckon prices will hit bottom in 2011.

But this is the prediction from Capital Economics to really make you sit up. Are you ready?

If prices fall by 40 per cent in real terms, then the rules of arithmetic mean they will need to rise by 70 per cent to get back to the levels seen at the previous peak. Assuming that once the recovery begins, prices rise by 2.4 per cent a year in real terms, it will take 22 years for prices to regain their 2007 level, or “or 25 years if we measured the duration of the correction from that peak.”

By the way, if Capital Economics is right, and house prices do indeed fall by 35 per cent, then according to figures produced by the FT in their April 26th edition, there will be 3.5 million people in the UK with negative equity.

To put that in perspective, in the early 1990s negative equity levels were less than 2 million.

Don’t worry, we have been told for the last few years that there will never be another 1990s style housing price crash again; house prices only ever go up.

Just remember, we have been predicting this crash for several years. And while house prices are now at the same level seen in August 2006, if Capital Economics is right, or indeed if Standard & Poor’s is right, house prices will fall way below the levels they stood at when we first warned an unsustainable bubble was in the making.

In many ways, the fall in house prices is a good thing. But there is a massive danger that it could lead to a deflationary downward spiral – as happened in Japan in the 1990s, and in the US in the 1930s. Few economists have woken up to this danger, yet.

July 30, 2008 | posted by Michael Baxter in House prices | comments (0) |

“I may yet recommend that the Government should not intervene in the market, on the grounds that such intervention would create more problems than it would solve” concluded Sir James Crosby in his letter to the chancellor yesterday, accompanying his report on mortgage finance.

The much awaited, and much discussed, interim analysis on mortgage finance from Sir James Crosby was published yesterday. “In my opinion,” said Sir James in the accompanying letter, the shortage of mortgage finance “will persist throughout 2008, 2009 and 2010, and I suspect that current forecasts for net new mortgage lending during this period will prove optimistic, perhaps significantly so.”

And in a nutshell that is it. The lack of mortgage finance will persist for some time, it may be that the government should just sit back and do nothing.

The report pulled no punches against the mortgage intermediaries either. “Faced with much lower volumes and lenders switching back to distributing through their branches, mortgage intermediaries, hitherto an important source of price competition on behalf of consumers, are under intense pressure and many will disappear.”

Sir James explained that by 2006 mortgage-backed securities had grown so rapidly that “such funding equated to around two thirds of net new mortgage lending in the UK. By the end of last [year] mortgage-backed securities were worth no less than £257bn.” To put that in context, total residential mortgages were worth £1200bn.

Banks can create credit. They have never been restricted to lending based solely on the amount of money their customers have deposited with them. But the new capital adequacy rules (Basel II) have in any case restricted their ability in this regard. Sir James said the new International Accounting Standards will force banks to operate with less leverage in their balance sheets.

So banks must adjust to lower leverage, and this, said Sir James, “will take years rather than months.”

Lenders are charging more for risk. This will have the effect of increasing their margins, and compensating the banks for any write-downs they may incur. “I expect,” said Sir James, “that the increase in prices will more than compensate banks for higher credit losses.”

“In the meantime, it is hard to see why banks will increase their currently depressed appetites for risk. While there is still good availability of finance for those borrowers who offer significant security (i.e. have reliable earnings and seek to borrow 75 per cent or less of the value of their property), the availability of finance to all other consumers is considerably reduced and likely to remain so.”

As house prices fall, presumably credit will become even more scarce. And on this Sir James said: “It is impossible to separate the effects of a shortage of mortgage finance from a correction in the housing market. Nor can anyone identify its effect on consumer spending with any precision. However, my discussions have identified a broad consensus that such a significant and prolonged shortage of mortgage finance must take its toll of both. That this is indeed the case is most obviously evident from the unprecedented reduction in housing starts we are likely to see this year.”

So that’s pretty damming stuff. What can be done about it?

“Banks and their trade bodies, notably the Council of Mortgage Lenders and the European Securitisation Forum, are looking at a number of ideas to stimulate the demand for mortgage backed securities. We will continue to engage closely with them on that work.” Ummm, so that means he is still thinking about it.

He added: “Much has been said about the case for launching a US-style agency but I think it unlikely that it would be right to tackle this century’s problems with last century’s solution. In any case it would take far too long to create any such agency.”

When the mortgage markets grew too rapidly and house prices were shooting up, the government did nothing. Now house prices are falling to a level that will ultimately make them affordable among first-time buyers, all we hear about is how the government needs to take action.

In other words, when a booming property market boosts bank profits and engenders an unsustainable boom, government intervention is a bad thing. When banks pay the price for their mistakes, and first-time buyers begin to think that within a year or two they may actually be able to afford to buy, we are told the government needs to act.

Sir James Crosby is right to be so reluctant to recommend some kind of a government-led bail out.

But, in the end, the banks will still be the winners. They will eventually have their cake and eat it.

They will, as Sir James pointed out, claw their money back through higher pricing of risk.

And yet, the case for government interference has not gone away altogether.

As has been pointed out here before, when prices are too high, it is easy to get credit. It’s the wrong way round, but that’s the way of the world.

The danger is that when prices fall to levels that do appear to be sustainable, banks are likely to be less willing than ever to stump up cash. They will be terrified that house prices will fall even further, and in the process, funds could dry up by even more.

That will be the ultimate lesson from this saga. Banks are run by humans, and just like humans they exaggerate the cycle, and make it more extreme than it needs to be. When prices are booming they jump on and push them too high. When they are falling they jump off and push them too low.

The housing market needs to be allowed to correct. But when the excesses of the last few years have been corrected, then, and only then, will it be appropriate for the government to step in. That time is not now.

July 29, 2008 | posted by Michael Baxter in House prices | comments (0) |

Are you familiar with that Russian pole vaulter Yelena Isinbayeva? It feels as if every time she competes she breaks the world record. In fact, her latest world record was set this Sunday at Birmingham. But after a while you get a tad confused. How many times is it exactly she has broken the record? Apparently, she has broken the world record at Birmingham three times alone.

Well, it’s a bit like that with mortgage approvals. What with the British Banking Association, Council of Mortgage Lenders and Bank of England all releasing regular updates on mortgage lending, it feels as if barely a few days go by without lending falling to a new all-time low.

For all that, the latest figures from the Bank of England are significant. So significant that they have moved Capital Economics to predict a 20 per cent or more fall in house prices this year.

UK mortgage approvals for new house purchases are now just 30 per cent of their level a year ago.

In all, just 36,000 mortgages for house purchases were approved in June, compared to 41,000 in May. To put that in context, back in November 2006, the total number of loans for house purchases hit 130,000. Mind you, even before the latest fall, mortgage approvals were below the early 1990s low.

Mind you, while the number of loans for house purchases fall, consumer credit continues to rise. The month saw a £0.9bn rise in consumer credit. By past standards this was a modest increase, but the point is, it’s still rising.

There is now £231bn worth of consumer credit outstanding.

Anecdotal evidence has suggested some have been putting more and more on their credit card just to get through to the end of the month. Some anecdotal evidence has even suggested some people have used their credit cards to pay their mortgage.

The rise in consumer credit can not continue, and there must be an additional concern related to what will happen when the consumer credit increases stop, or even go into reverse.

July 28, 2008 | posted by Michael Baxter in House prices | comments (2) |

Here is a question for you to ponder. If you throw a brick out of a ten-storey building, when will the brick stop falling and what will it do next? Will it stop at the second floor? Or maybe it will stop at the first floor, then rise all the way back up again. Or maybe it will fall for a while, then shoot up to the 20th floor or higher, in a trajectory that disproves the theory of gravity.

Most of us, however, would expect the brick to hit bottom with a thud, and stay there. Maybe it would shatter into pieces too.

Yet this is the strange thing. If you apply that question to house prices, many seem to think the market will follow some kind of extreme gravity defying act.

Take as an example, the National Housing Federation. It commissioned a report from Oxford Economics which has predicted a 25 per cent jump in house prices over the next five years. The NHF does expect prices to fall this year and next, but predicts a 1.3 per cent rise in house prices in 2010, followed by 5.2, 9.2 and then 9.3 per cent jumps in the following years.

It went on to predict average house prices in 2013 by region – with average prices topping £400,000 in London, over £300,000 in the South East, and over £250,000 across England as a whole.

It is quite impressive how they have managed even to predict house price inflation for five years ahead to fractions of a per cent. It is a shame they can’t apply their forecasting nous to the FTSE 100 too.

The NHF is the organization that rattles on about a shortage of houses. It says that right now only 75 per cent of homes that are required are being built. Presumably, with current conditions, the housing shortfall will be even further behind later this year and next.

David Orr, chief executive at the NHF, said: “Our report shows that despite concerns about the current housing market downturn, house prices will increase substantially over the mid to long term.”

But is he right?

And before we answer this question, consider this. Last week, the National Association of Estate Agents (NAEA) said that its members reported a rise in the number of first time buyers buying properties. Apparently, the proportion of sales to first time buyers rose by 1.2 percentage points from May to June to 11.8 per cent. The development was hailed as evidence we are reaching the bottom of the market.

The problem though with both these reports is that the house price growth of the last few years bore no resemblance to underlying fundamentals at all. First time buyers have been on the endangered species list for years, not just since the credit crunch began.

For years the market was pushed upwards by buy-to-let investors who had lost any sense of underlying value. They had lost interest in ensuring their investments were covered by yield. They were just interested in capital growth, and used the capital growth in their portfolio to fund each new purchase. This led to even higher house prices, which meant property portfolios rose even higher in value, enabling yet more leveraged investments in property.

This was only possible thanks to absurdly easy credit.

But house prices hit levels well in excess of what people could afford some time ago. And it doesn’t matter how great the shortage of homes is, there will always be a limit to what people can spend.

The only way house prices will rise by another 25 per cent is if there is a return to irresponsible lending and if buy-to-let investors totally fail to learn the lessons of the last few years, and jump on again, regardless of yield to price ratios.

Besides, the argument that there is a shortage of homes is itself suspect. For one thing, one assumes that as unemployment rises in the UK, immigration flow will go into reverse. In conditions of rising unemployment the government will come under enormous pressure to change the rules relating to immigration too. This will have the effect of reducing demand for property.

Earlier this year Capital Economics produced a report which suggested many home owners lived in properties that were bigger than they needed for no other reason than that they saw this larger than necessary home as an investment.

Over the next year or two this speculative motive for owing a home will dwindle, such that when some life starts to return to the property market, there is a good chance we will see a surge of conversions of larger properties into smaller flats.

The truth is that a brick does fall to the ground, and unless someone picks it up and carries it back to the top, it will stay there.

The main difference though with a falling brick is likely to be this.  With markets we often see more extreme action than that, as prices fall too far on the way down.

July 16, 2008 | posted by Michael Baxter in House prices | comments (2) |

“Strange days indeed,” said John Lennon once. Yesterday saw two new ideas for government intervention to prop up the housing market.

The Council of Mortgage Lenders wants to see the Bank of England provide guarantees for mortgage-backed securities and covered bonds.

Meanwhile, housing Minister Caroline Flint wants to see a scheme introduced to help would be first-time buyers save up for a deposit. The idea is this: the government will provide the funding so that families on a total income of less than £60,000 can rent for two or three years at a discounted rate, and then be able to buy the property at the end of that period.

Both ideas are interesting, but is it not the case they miss the point?

The scheme to help first-time buyers could equally be seen as a scheme to help buy-to-let investors. Presumably, if rent is subsidised, market forces will push it up.

CML’s Director General Michael Coogan said of his organisation’s idea for the Bank of England to guarantee mortgages and some bonds: “There is a window of opportunity here for the Government and the Bank of England to break the logjam in the housing and mortgage markets and underpin confidence in the financial system. The single biggest issue in the housing market that the authorities need to address is the lack of available funding to support new mortgage lending.”

CML insists its scheme would entail markets still taking the credit risk, as mortgage backed securities will still be sold in the market-place.

But whichever way you look at, the two schemes would amount to the government taking action to try and keep house prices up. The CML schemes would entail the government underwriting the value of property. Caroline Flint’s scheme entails a subsidy.

This begs the question, why didn’t the government take action to stop house prices from reaching such unsustainable levels in the first place? Of course, if it had taken action, organizations such as the CML, and the property industry, who no doubt are celebrating Caroline Flint’s plan, would have lambasted the government for getting in the way of market forces.

Then again, market forces are only a good thing when they benefit you. The market may be good for banks and investors when house prices are going up. But when they are falling, all of a sudden they are bad. So how can you justify such an uneven response to government intervention. Well, John Lennon summed it all up pretty well when he sang, “Nobody told me there’d be days like these.”

July 15, 2008 | posted by Michael Baxter in House prices | comments (3) |

The housing crisis may be coming to an end, infers the Royal Institution of Chartered Surveyors (RICS) this morning.   “Would-be-buyers are again showing interest in the market,” said RICS.  “Demand is weak,” it went on, “with the balance of surveyors reporting new buyer enquiries still well into negative territory. However, there has been a noticeable improvement in the trend with 35 per cent more Chartered Surveyors reporting a fall in buyer enquires compared to 50 per cent in May and 69 percent in April. Surveyors report that some buy-to-let investors are entering the market to take advantage of rising rents and equally that ‘predatory buyers’ are looking to bargain for reductions in a falling market.”

RICS spokesperson Jeremy Leaf said: “With demand so low, would-be-buyers are negotiating from a position of strength. Even in a weak market there are always opportunities for investors and buyers to profit and some are starting to circle for bargains. However, transaction levels remain incredibly low with many buyers cut out of the process by tight lending conditions.”

And yet, sometimes it is a good idea to apply common sense.  Why would a buy-to-let investor buy right now, when so many are predicting much further prices falls to follow?  Sure, yield may make investing profitable, but hang on another year or so and yield to price should be even higher.

The RICS headline index, this is the one that asks estate agents if prices are up or down and subtracts the percentage number who say down from the percentage number who say up, hit minus 88 in June.  Okay, it was minus 92 in May and  minus 94.7 in April, but don’t forget as this is a percentage score minus 100 is the lowest score you can possibly have.  When in March the index fell to minus 79.4, it was hailed as the lowest reading ever.

And don’t forget this.  The index is based on what estate agents are saying, and right now they have an incentive to try and talk the market up.

Completed property sales for the quarter to June fell to 15.3 per surveyor, from 17.4 in May. On year ago levels, they are down by 38.6 per cent compared to 31.6 per cent in the previous month.   

However, stock levels are falling  The stock of unsold property on surveyors’ books fell by 6.1 per cent on the month, but it is still up by 34.1 per cent on the year. Average stocks on surveyors’ books were 84.1 in June compared with 89.6 in May.   So that should help.

Falling inventory levels will help the seller, but it is just that sales are falling even faster.   The ratio of completed sales (over the last three months) compared to stock of unsold property on the market fell to 18.2 per cent in June, from 19.4 per cent in May. “Market conditions are the loosest since October 1995,” said RICS.

This ratio of sales to stock seems to be the key.  And as long as the ratio is falling, there are good reasons to believe the underlying trend in house prices will be down.  Even when the ratio stops falling, there will be a time lag of several months before the stock to sales ratio rises to a level that is compatible with increasing prices.

New buyer enquiries continued to fall, “but the pace of decline slowed for the second consecutive month” said RICS, busily clutching at straws.  

But for some home owners this is a waiting game.  Wait for the market to settle down.  But not all can afford to wait.  Some people have to move.  They have changed jobs, got a bigger family, can’t afford the mortgage, or even have their home possessed.  The longer this downturn lasts, the more people will be forced to sell.   And this could lead to even sharper house price falls.

July 1, 2008 | posted by Michael Baxter in House prices | comments (0) |

You can hear the bulls leaping for joy. Hacks at the Daily Express sharpening their wit. The house price crash is over. To put it in the Nationwide’s own words: “The pace of house price falls slowed significantly in June.”

So how significant was this fall in house price falls? In June they fell by a mere 0.9 per cent from May, compared to a whopping 2.5 per cent.

Even as these words are being typed, Jeremy leaf from RICS is being interviewed on the Today programme and saying they are bad, but there’s a glimmer of hope and we are getting near bottom. The problem he said is not that people don’t want to buy properties, it is lenders.

And yet, actually, a 0.9 per cent fall is by almost any standards huge. Sure, May was higher, April a tad higher (-1 per cent) but that is it. You have got to rewind the clock back an awful long way to find the last time prices fell so fast. Annual house price falls are now 6.3 per cent, but they are 7.3 per cent down from last October’s peak.

The Nationwide’s Fionnula Earley tried her level best to strike a note of optimism when she said: “Perhaps surprisingly given the poor affordability conditions, first-time buyers activity as a proportion of overall house purchase completions has held up fairly well. First-time buyers accounted for about one third of house purchase transactions in the first quarter of the year, exactly in line with the average over the last three years.”

Ummmm. So what? House price activity is falling off the edge of a cliff. According to the Bank of England, mortgage approvals for first time buyers are just 37 per cent of the level seen a year ago and way below the nadir seen in the early 1990s. If the ratio of first time buyers to total buyers is constant, then all that is telling us is that all buyers are feeling the pinch, equally.

Capital Economics says that the Bank of England data suggests house price falls of 15 to 20 per cent this year.

The BIS report, covered above, is clear. Wild optimism got us in this economic mess. Yet, wild optimism, at the very heart of the crisis, is still alive and well.

On Easter Island, trees were destroyed to create methods for transporting rocks to build those famous statues. Until, eventually, there was one tree left. What happened to that tree? It was felled, and the local economy was devastated, a result of the deforestation. It seems the UK property market bulls are similarly blind to reality.