June 24, 2008 | posted by Michael Baxter in House prices | comments (0) |

Donald Trump says it won’t happen.  Lakshmi Mittal may not care.  But the latest figures from Rightmove suggest house prices have got a long way to fall yet.

You know the story of the UK housing market has come down to which will fall the most, demand or supply.

Demand is falling over the edge of a cliff.  But so is supply, which was in any case pretty low anyway.  So which will win out?

Donald Trump is in the UK at the moment.  He is, of course, the United State’s answer to Sir Alan Sugar – he is the one who does the hiring and firing on the US Apprentice programme.  He has said the UK wil not experience a US-style house price crash because of a shortage of supply in the UK.

He reckons the credit crunch will come to an end in about a year’s time, and then buoyancy will return to the UK market.

Meanwhile, Lakshmi Mittal, who is worth even more billions than Trump, has bought himself his third property in one street.  And the money he forked out?  Well, reports suggest he parted with £70 million. Mind you, the street is called Kensington Palace Gardens, and the normal laws of supply and demand don’t seem to apply there.

According to the Evening Standard, the house even needs modernisation.

But then again, it appears he wants the house for personal use; this is not an investment portfolio he is building. And if he was looking at the property as an investment, we would have some advice for the richest man on these shores: “stick with steel.”

And for that matter, we would like to humbly suggest Mr Trump has misread the signals this time.

According to the latest housing survey from Rightmove, the number of properties for sale has now breached the one-million mark, contributing to a ratio of 15 properties for sale for every successful buyer. Last year, the average was 7:1.   But, more to the point, average unsold stock per estate agency branch continues to rise to new record levels, to 75 homes per branch from 73 in the previous month. “Not only is this the highest ever in June,” says Rightmove, “it is the highest figure Rightmove has ever recorded.”

Inventory is the key.  In the US there are signs that sales are outstripping new supply, that’s houses coming on to the market.  But inventory levels are so huge it probably won’t be until well into next year, that inventory levels fall to a manageable level and prices stop falling.

But in the UK, there are no signs yet of inventory falling.  According to the British Banking Association, just 28,000 mortgages for house purchases were approved in May.     That was 20 per cent down on last month and 56 per cent down on a year ago. 

If the fall in house prices stops any time soon, it will be a miracle.

June 19, 2008 | posted by Michael Baxter in House prices | comments (2) |

Yesterday and this morning it was a double whammy for the housing market.

Mervyn King put the boot in, and HBOS gave its gravest warning yet.

In his Mansion House speech, Mervyn King said, “The squeeze on real take-home pay will arguably be an even more significant restraint on consumer spending this year than the credit crunch. And it will affect the housing market too – lower demand in the High Street will go hand in hand with lower demand in the property market.”

HBOS predicted a 9 per cent fall in house prices this year.  In a trading update, it also said transactions in the market will be 45 per cent of the 2007 level.

But here is the Bill oddity.

In May, the Halifax index, published by HBOS, had house prices down 7.8 per cent from peak.   In August last year it had average price as 199,600: in May, £184,111.

So, if the HBOS prediction is right, then the next four months will only see very modest falls.

By contrast, it had average price falling by £12,384 over the last four months.  If it records a similar fall over the next four months, the fall from August 2007 to August 2008 will be 14 per cent.

So actually, alarming as the HBOS prediction may seem, it is actually quite optimistic, and assumes the worst is over.  Are they right?  Just bear this in mind.  In February, HBOS said house prices would be flat this year; in April they predicted falls in the mid-single figures.

But how will falling house prices affect the economy at large?

In his speech yesterday, Mervyn King said, “I have said in the past that there is no causal link between house prices and consumer spending. That remains the case. How closely they move together depends on the underlying forces that are driving them both. This year, the squeeze on real income growth is likely to mean that both house prices and consumer spending weaken together.”

In other words, the factors that cause house prices to fall may cause consumer spending to fall, but falling house prices themselves won’t be the catalyst.  If you like, falling house prices and slowing consumer spending are cousins, even siblings.  But they both sit at the same level in the family tree of cause and effect.

Give Mervyn King and the Bank of England full marks for being consistent.    They have continuously insisted there is no direct link.    When house prices were rocketing they said that this was not causing consumer spending to rise. And now they’re falling, they say there will be no corresponding fall in spending.

This belief is based on data earlier this decade showing only modest changes in consumer spending at a time of rising house prices.

Look, Mervyn King is a giant among economists, and we are like David’s younger brother in comparison to the Bank of England’s Goliath.   But do you really believe rising or falling house prices do not affect consumer spending?

Surely this goes against common sense.  This goes against what we all know some people do.

If the value of our home is rising, many of us feel good.  We feel that if we push our credit card to the limit we are taking less of a risk.  We don’t need to save for a rainy day, because we have so much wealth tied up in our home.  Some even see their home as their pension.

If the data does not back up this argument, then we suggest the Bank of E needs to look closer at the data.

Maybe the real reason is this.

Consumer spending hit unsustainable levels in the late 1990s.

Under any normal conditions it would have fallen back.  But rising house prices mitigated against this.  Instead of cutting back, we just carried on.     In short, there is a direct link, but it was hidden by the consumer boom of the late 1990s.  
 

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

Mistakes were made in Japan.    Mistakes could have been avoided, they weren’t and that’s why the economy of the Rising Sun suffered ten years of economic sunset.    

Now policy makers in the UK, US and Eurozone need to ensure those mistakes are not repeated here. 

So what were they?  After the bursting of an asset price bubble, the government and Japanese banks went into denial, for years.     Asset write downs were a drip drip affair.  Banks refused to admit, maybe even to themselves, how bad things were.  Eventually, the government had to step in and bail out a number of Japanese banks, it had a series of Northern Rock style moments – over a prolonged time frame.

A similar, but not identical, problem sits in the UK today.  This time, though, the dangerous denial of reality relates to the price of land. 

It is still profitable to build houses.  Any losses that may be incurred by builders relate to the cost of land.     The trouble is, builders have already paid for this land.  Even though they could sell property on this land for less than the cost of build, they dare not, because then they would be forced to admit the true scale of capital loss.      

Fear is pushing builders into trouble.  At the time of writing, the Barratt share price is just 85p, down from over 1,200p 18 months or so ago.    Its market capitalisation is actually less than the projected profits for this year.

Meanwhile, HBOS has made the headlines, after whispers grew over the weekend that retirement homes specialist McCarthy & Stone is struggling with its £800 million debt, mostly with HBOS.

Meanwhile, the House Builders Association is making grave warnings.  It is worried about a building slump creating an even bigger shortage of properties in the future. 

Remember all that talk last year about a shortage of new homes leading to even higher house prices?  Well, some believe that predicted rise is merely on hold.  That once the credit crunch ends, house prices will rocket up.

But we are not so sure.   The truth is that house prices will need to fall a lot more, a lot more, before it ceases to be profitable to build, but right now, builders and banks are reluctant to realistically value land – that is to say, give it a value that is in line with historical precedent.  

Once they do, then house building will begin again.  Prices will fall to a realistic level, the credit crunch will inevitably come to an end, and a gradual and sustained pick up will be under way.   If they refuse to do this, if they develop the same habit which permeated Japan ten years ago, then not only the housing market, but the UK economy in general will limp along the bottom for many years.

The House Builders Association says only 110,000 homes will be built this year, less than half of Gordon Brown’s 240,000 target.      In 2009, it warns, building could fall to just 80,000.

Roger Humber, from the House Builders Association, said, “We’ve not seen anything like this post-war… It’s essentially a financial crisis, more like 1931 than anything else that we’ve seen.   House builders are not going to be starting new sites, they’re going to be laying people off, they may even be mothballing sites.  It really is on a scale we’ve not seen before.”

Yet a survey among the Society of Business Economists conducted for the ITV programme Tonight, found that 56 per cent of those interviewed reckon house prices will fall by 20 per cent, with another 20 per cent of that number predicting 30 per cent falls.

Almost two-thirds of the interviewees said house prices will not recover to the 2007 peak until 2012, but nearly 15 per cent said it will take until 2015.

So, on the one hand, you have got some saying a shortage of housing will mean that prices will soon shoot up again.  On the other hand, you have predictions of a slump lasting 8 years.

Who is right?

The shortage of houses in the UK is exaggerated.  As was told here on May 28, according to the Survey of English Housing, no less than 47 per cent of existing owner-occupier dwellings – that’s 6.8 million homes, are under-occupied.  Capital Economics described it like this: “Many owner-occupiers are engaged in a form of speculation, in that whether, when, and how much space they buy is heavily influenced by their beliefs about the future course of house prices.”   In short, they buy bigger houses than they need because they expect the price to go up.

So as prices fall, the speculative motive will disappear in a puff of smoke.     Space will be freed up, prices will fall some more.

But, the cost of build relative to average house prices is so low, that the market can afford big falls; it will still be profitable to build – it will still be profitable to convert biggish properties into two smaller properties.    But at lower house prices, it will become profitable for buy-to-let landlords, not because of the hope of capital growth, but because rental yield will be much higher than costs.  It will be tempting for first time buyers to move back in, too. It will be with realistic pricing that the recovery will begin.

The challenge will be to find a way of providing finance to those with negative equity.

The danger lies in the banks and builders who fight this trend, who refuse to admit to the inevitable; the longer they do this, the worse it will get.

June 10, 2008 | posted by Michael Baxter in House prices | comments (0) |

Your mission, should you choose to accept it, is this.  You have got to try and talk the gloom out of house prices.  The data says they are falling, you must strike a positive note, discourage people from panic-selling.   

Even before the tape has self-destructed, RICS knew it would accept the task.   But, is it a mission impossible?

“Still no signs of distressed selling said the headline from the latest RICS report.”     “Confidence in the outlook for sales and prices improves,” recorded the body text.   The RICS index, which is produced by taking the number of estate agents who say prices are down from the number who say they are up, is hovering around the lowest level ever recorded, but, “This is, crucially, a measure of breadth rather than depth and thus says little about the extent of the actual decline in house prices,” said RICS.

Warming to its theme, it added, “Significantly, this weakness is not being driven by new supply coming onto the market. Indeed, new instructions to sell property declined for the fifth consecutive month and at the fastest pace since last June, which reflects the continued absence of distressed sales. This is consistent with both the low level of mortgage arrears and the high level of employment at the present time.” 

“In terms of the outlook, the May survey provides a few encouraging signals. Confidence in the sales outlook improved fractionally, with the net balance of surveyors expecting a drop in sales over the next three months improving to -15 from -16 in the previous month. Furthermore, confidence in prices rebounded back from last month’s low, although there is a still widespread perception that prices will fall further in the near term. Looking at the data from a regional perspective, the improvement in the headline price balance was more or less evenly spread throughout England and Wales.”

Then, on his monthly tour of radio and TV stations, RICS’s answer to Tom Cruise (that’s a reference to Mission Impossible, not his height or taste in women) tried his best to dampen the natural tendency of the press to go for the bad news.

Now, queue that music – think of a squirrel walking the tight rope if you will: has the mission been a success?

The Telegraph headlines this morning: “House sales fall worst in 30 years, says RICS;” “Housing market hit by further setbacks,” said the Independent and “Recession fears grow as house buyers vanish,” said the Guardian.

Maybe this mission really is impossible.

Then again, you can’t prove 2 plus 2 equals 5 – and alas that’s how impossible RICS’s mission is.

Sure, the RICS headline index was slightly better than last month, then again it still hit minus 92.9.  Remember, the index is defined by taking one percentage score from another, so minus 100 is the lowest reading you can possibly have.  In April, the index hit minus 94.7, easily the worst reading ever recorded – and while May was slightly better, it was still way below any other score ever seen, and records go all the way back to 1978.

Completed property sales for the quarter to May fell to 17.4 per surveyor, from 18.5 in April. On year ago levels, they are down by 31.5 per cent compared to 31.7 per cent in April.

Perhaps more to the point, the stock of unsold property on surveyors’ books increased by 4.4 per cent on the month, and is up by 45.4 per cent on the year.  Average stocks on surveyors’ books were 90.1 in May compared with 86.4 in April.    So that’s falling sales and rising stocks.  This means the ratio of sales to stock is falling.

This ratio is important, because it gives a real feeling of inventory, and is the closest measure we have in the UK to the closely watched US inventory to sales figures.

In fact, the ratio of sales over the last quarter to stock is now 19.3 per cent.  That is the lowest since 1995, but, as RICS went to pains to point out, in the early 1990s this ratio dropped to 11.

The point though is this.  The ratio is getting worse all the time.  The fall in house prices is only being held back by the low level of supply.  But, if the economic climate worsens, which as you know it certainly seems to be doing, more people will sell.

Some investors will sell, some property owners will be forced to sell.  As the current level of activity is so low, it will only need a small increase in these properties coming on the market, and prices will fall like a rock, tumbling down from the north.   Stopping that fall is fast looking like the real mission impossible.

June 6, 2008 | posted by Michael Baxter in House prices | comments (0) |

Imagine you and a friend are running at Beachy Head, the famous cliff near Eastbourne noted for its steep drop.      The two of you mistime your footing, and you both go over the edge.  While you are falling, your friend keeps saying, “Don’t worry, this isn’t that steep, we will be fine.”

Okay, it isn’t very likely.  Presumably the last thing on your mind at such a moment is having a chat.  

But, it really does seem as though house prices in the UK are falling off a cliff at the moment.  Whether that is a good or a bad thing, in the longer-term, is a moot point.  But there is no doubt it is a bad thing for the property industry and mortgage lenders.  

And yet, it appears, things are really fine.

Take Martin Ellis, chief economist at Halifax.  Yesterday, the Halifax released its latest house prices survey – and as you probably know, confirmed the findings from the Nationwide that prices are seeing a very sharp decline indeed.  May saw prices fall by 2.4 per cent, compared to a 2.5 per cent fall recorded by the Nationwide.   The Halifax now has annual house prices falling by 3.8 per cent, although it is worth bearing in mind that when it measures annual house price falls, the Halifax takes the average price over the last quarter and compares it with the average prices over the  same quarter a year ago.   In fact, if you were to compare house prices in May with May last year, you will see a fall of 6.4 per cent.

But house prices did not peak until August last year, when the Halifax recorded £199,600 average price.  It has average price for May this year at £184,111, which means prices are now down 7.8 per cent from peak.

But this is the statistic that will really have you sitting up.  In the last three months the Halifax had prices down 6.3 per cent, and the bank has never recorded such a big quarterly fall.   And to paraphrase Barack Obama, that’s “never.”

“Never have prices fallen so fast.”

The Halifax data, by the way, goes back to the early 1980s.   And before that time, inflation distorted housing statistics.  So, while there were periods when house prices fell in real terms, because of high inflation there were only modest monetary falls.    So when we say biggest quarterly fall since the early 1980s, it is probably correct to say biggest quarterly fall since the 1960s or even earlier.

But this is what Mr Ellis said: ”Price falls should be measured against the significant gains in recent years. The average UK house price rose by more than £88,000, or 79 per cent, between August 2002 and August 2007… High employment levels, low interest rates and a shortage of new homes support housing valuations.”

Okay, by past standards this was quite understated.  But if you listened to Mr Ellis during any of his TV and radio interviews conducted yesterday, you would have heard a cautiously optimistic note.

It is a similar story at Hometrack.  Richard Donnell, Director Research, Hometrack said: “In order to get sizable price falls a large majority of transactions need to be ‘forced’ sales which are mostly prevalent in periods of rising unemployment and recession. The fall in buyer confidence over the last six months has certainly impacted on transaction volumes but we do not believe that this is a precursor to a major rise in forced sales and large price falls. It seems likely that in that short term prices will continue to edge down until they reach a level where buyers are prepared to commit.”

Meanwhile, at the Nationwide, Fionnuala Earley, their Chief Economist talked about how most borrowers are “better placed to weather the storm.”  She referred to the fact that most homeowners didn’t buy when prices were at top, that deposits have been higher recently than in the early 1990s, and finally referred to those endowment mortgages that caused so much stress in the early 1990s.  “In 1988-89 about 85 per cent  of loans were on an interest-only basis,” she said, ”reflecting the popularity of endowment loans at that time. In comparison in 2006-07 only 30 per cent took out interest-only loans and the majority of borrowers will therefore have repaid some capital and improved their underlying equity position.”

But the truth is, whichever way you look at it, house prices are falling fast.

Capital Economics has been predicting falls of 20 per cent for a couple of months, but is now saying this prediction may be too conservative.

You can do the maths.  If prices fell by 6.3 per cent in the last quarter, and they maintained that rate, then over a year falls will be over 25 per cent.  And many expect 2009 to see even bigger falls.

Admittedly, it probably won’t be that extreme – but right now, with the latest data from the Bank of England having mortgages approved for house purchases falling to a lower level than in the early 1990s, and with forward indicators from the Royal Institution of Chartered Surveyors hovering at an all-time low, it seems likely the falls will continue for some time.  

The Nationwide is still predicting falls this year in single digits, but frankly it seems likely that this prediction will be contradicted in the next few months.

For a couple of years we were told that house prices would carry on rising.   Just a few months ago, we were told to expect modest price rises this year. 

Comparisons with the early 1990s were ridiculed.

Yet, rather than wipe away the egg on their face, the property market’s economists continue to understate the reality.

Finally, bear this in mind.  The reason why most people can afford to see quite big falls until they suffer from negative equity is this.     First-time buyers have been an endangered species for several years.    The number of new property owners has been diminishing for some time.  Why?  Because house prices have been unaffordable for some time.

If prices fall to the level which does make them affordable, then we would need to see a rewind of price rises going back several years.

Arguably, they will only be affordable, when negative equity levels start hitting the levels seen in the early 1990s.

June 6, 2008 | posted by Michael Baxter in House prices | comments (0) |

So is it good or bad news?  House prices are falling – clearly there will be negative knock on effects upon the economy in the short-term, but looking beyond, it seems many will be celebrating falling house prices.

According to a recent report from Hometrack: “28.3 per cent of young working households in Britain are unable to access the very lowest rungs of the property ladder in their local market. The largest proportions of young working households unable to access the housing market are in London (41 per cent) and the South West (40 per cent).”

But then again, why would they want to?   Hometrack also found that: “Nationally the cost of renting is just 68 per cent of the cost of buying a typical 2/3 bed home.”

Hometrack says: “In terms of house price to household income ratios the analysis shows the highest ratio is in London (6.11:1) closely followed by the South West (5.38:1) and the South East (4.89:1). At a local level, the analysis reveals that there are forty-two areas with a house price to income ratio in excess of 6:1. The least affordable authority is identified as Kensington & Chelsea, with a house price to household income ratio of 12.04:1. In addition a further nine London authorities have ratios in excess of 6:1. Nineteen of the least affordable areas are located in the South West with house price to income ratios ranging from 6.13:1 in West Dorset to Penwith (8.37:1). At the other end of the spectrum in 2007 there were just ten areas where house price to income ratios fell below 3.00:1.”

Professor Steve Wilcox of the University of York penned the report from Hometrack, and he said: “While house prices are falling, access to the property market is being increasingly limited by the costs and more restrictive terms of a substantially reduced supply of mortgage finance. Without further measures to restore the availability and accessibility of mortgage finance there is the risk of a severe downturn, with all the harmful consequences that this entails. Alongside other measures there is a strong case for government to promote the selective use of mortgage guarantees. These would assist key workers, first time buyers and existing households in financial difficulties as a result of being unable to refinance to escape unfavourable mortgage deals.”

Many property market insiders are suggesting falling house prices will not help first time buyers, as the squeeze on mortgage availability is counteracting the effect of lower house prices.

This may be true.  But these things don’t work overnight.  House prices won’t fall to bottom one month, and then go up the next.    It seems more likely that when house prices reach bottom there will be a period of calm, mortgage lending will gradually be restored, and then first time buyers will climb on the ladder.

At that point, the government would be advised to gradually phase out the extent to which buy-to-let landlords can offset mortgage payments against rental income; that way, a repeat of the damaging boom we have just experienced can be avoided.

June 3, 2008 | posted by Michael Baxter in House prices | comments (0) |

Mortgage approvals are down – and have just fallen to the lowest level ever.  It is actually becoming a struggle to keep up, what with the British Banking Association, Council of Mortgage Lenders and Bank of England all releasing monthly data on mortgage lending, we have lost count of the number of times we have told mortgage lending has fallen to an all-time low, or the lowest level since such and such a time.

It feels as if barely a day passes without some new all-time low being passed.

The latest data from the Bank of England says this:

The value of mortgages approved, excluding re-mortgages, was £58 million in April. That’s half the level seen ten months ago, but, more to the point, even lower than the trough reached in the early 1990s.

Capital Economics has produced data which shows a correlation between year-on-year changes in mortgage approvals and annual house price inflation – but with a time lag of two or three months.

Or to put it another way, it appears house prices will follow the lending figures down – over the next few months.  The Nationwide’s 2.5 per cent fall in house prices in May is just the beginning – if lending data is any guide then even bigger falls could follow.

All of a sudden, it seems analysts are talking about this downturn being even worse than the one seen in the early 1990s – something most analysts said was inconceivable not so long ago – although Investment and Business News has given umpteen warnings for at least two years now.

Capital Economics now says its prediction of a 20 per cent fall by the end of 2009 could be conservative. In fact, it said, “Indeed, even if approvals do not drop further but remain at current levels for the next few months, we could be looking at house price falls that are well into double digits by the end of the year.”  And remember, it expects falls to be even greater in 2009. 

Yesterday, a report from Gocompare.com said that nearly half of respondents to a recent survey it ran said their financial situation made them feel trapped in their current home.   Only 14 per cent said they are likely to move in the next three years.

As long as people stay put, house price falls will be restricted – but the longer the downturn continues, the more people will be forced to move.

The cost of renting may well go up – as people stay away from buying houses.  Then buy-to-let landlords with modest borrowing will see yield cover costs.

Ultimately, it seems we are likely to see a scenario of falling house prices and rising rents.     Eventually, rent relative to a mortgage payment on an equivalent property will become expensive.  At that point tenants will conclude it makes sense to buy, investors will conclude that the yield on property investments is such that even without capital growth the investment is still worthwhile.  At that point, the market will turnaround. And the next cycle will begin.

May 28, 2008 | posted by Michael Baxter in House prices | comments (0) |

Imagine this.    You are a married couple with say two children – a boy and a girl.  You live in a four-bedroomed house.  What happens when the children leave home?

Do you sell up and move to somewhere smaller?    Do you say we will keep the house because it will be useful at Christmas time when the kids come home?   Or do you say we will hang on to the house because it’s bound to go up in value?

Alternatively, rewind the clock a few years and your kids are still at home, and you are looking to move. You see a house with five bedrooms – more than you need, but you buy it anyway.  No doubt a number of factors were taken into account – but maybe the clincher was this one.     Maybe you reasoned that while the house was bigger than you needed, and you could have got something more appropriate for less money, at least it would go up in value faster. At least you would make money out of it in the long-term.

In the UK, the idea that house prices go up in value seems to be so entwined into the British psyche that we sometimes don’t even question this reasoning.    We make assumptions about how the house will rise in value, in the same kind of way we assume the sun will rise tomorrow.

Capital Economics has released a report suggesting that actually many homes in the UK are under-occupied, and maybe, therefore, the argument that house prices are likely to be driven upwards over the long-term is contradicted by this finding.

It seems that actually there are two financial factors that could lead to a home being under-occupied.  Firstly, it’s the belief that house prices always go up – that there is this property ladder – always moving upwards – presumably, like Jacob’s ladder, all the way to heaven.

Secondly, there are tax advantages too.  If we were to sell our home, and invest the profit in stocks and shares, then we would pay capital gains tax when we sold the shares, and income tax on the dividends.  If we put the money in a savings account, we would pay income tax on the interest.  But, for as long as our money is tied up in our home, which is rising in value, then our rising wealth is tax free.

Now, those tax advantages disappear if house prices stop rising, or fall, but then, in the UK, we have just got used to the idea that house prices always go up.   Capital Economics put it this way: ”Many owner-occupiers are engaged in a form of speculation, in that whether, when, and how much space they buy is heavily influenced by their beliefs about the future course of house prices.”

So that’s the theory.  How does it work in practice?  Capital Economics defines under-occupancy this way.   It assumes one bedroom for every married or co-habiting couple, a bedroom for every single person over 21, and a bedroom for every pair of adolescents of the same sex between the ages of 10 and 20.  But, and this is the key bit, if there is one extra bedroom, the layout is described as “comfortable.”     The house would only be defined as under-occupied if there were two or more excess bedrooms. The house would be considered over-occupied if there was one or more bedroom under the standards described above.

Apparently, according to the Survey of English Housing, no less than 47 per cent of existing owner-occupier dwellings – that’s 6.8 million homes, are under-occupied.  Tellingly, only 18 per cent of private rented properties are under-occupied.

This discrepancy between owner-occupied homes and private rented homes is important, because there is no financial benefit to a tenant under-occupying a home, so maybe the difference is explained by this speculative motive.

In an environment of falling house prices, this could all change. 

But it will take a lot to shake the Brits of the belief that house prices always go up in the long-term, and it seems that it is not likely home-owners will start downsizing in significant quantities unless house price inflation proves to be very modest or negative for a number of years.

Mind you, if house prices were to stay flat until the ratio of house prices to GDP per capita returns to the historical average, we would have a long wait, because according to our estimate this would take 8 years.    That might just be long enough to drive an exodus from under-occupied homes – and maybe solve the so called under- supply problem.

May 22, 2008 | posted by Michael Baxter in House prices | comments (0) |

So the Council of Mortgages of Lenders (CML) have joined the “house prices will fall” club.  They now reckon house prices will fall 7 per cent this year.  Yet, as one bull turns bear, other bulls strike back.  According to the Daily Express, or as it likes to be called, “the Greatest newspaper in the world” – “House prices won’t crash.”  After leading with that headline it  proceeded to give us a lesson in economics that all economics professors should take note of.

Finally, the Royal Institution of Chartered Surveyors revealed data showing strength is returning to the buy-to-let market.

Not so long ago, CML was still predicting house price growth of 1 per cent this year, an odd prediction, but then as you know, those within the UK  housing market do seem be to the last to spot the signs.

Now it is predicting a 7 per cent fall in prices, and net lending to crash to around £55 billion this year, half last year’s £108 billion. It expects to see 45,00 possessions  this year, from 27,100 last year, but just 8,200 in 2004.

In all, CML is predicting 770,00 house sales this year, from 1.22 million last year. It is worth keeping an eye on that 770,000 figure.  For as long as demand and supply are both falling, prices may not drop by too much.  But if there is a jump in supply perhaps because, say, 57,000 second homes come on the market – as was warned  here yesterday, or because possessions this year end up being a lot higher than 45,000, then supply may exceed demand, and prices will fall quite fast.

But the real puzzle is this.  According to the latest figures from the Halifax, house prices are already 5 per cent down from last summer’s peak, so if the CML is right, then we are already approaching bottom.

Then again, according to John Wriglesworth, housing economist at Wriglesworth Consultancy, “There is no sign of a property crash and never has been. Predictions otherwise have been grossly exaggerated. What we have seen is a small correction from a massive peak and there is very little chance of falling into an abyss.”

At least that is what he told the Sunday Express.

For a good laugh read the comments alongside the article.  Since the Express says it is the greatest newspaper in the world, then clearly, since the media never lie, it must be.  And clearly they are right and house prices are fine.  As one comment on the paper’s own blog said, “I am quite sure the Daily Express headline writers can hold their own in any debate on economics. I am pretty sure some of them have GCSEs and can even spell it, which fills me with confidence.”

Finally, there was RICS.  Apparently, owners experiencing difficulty selling their properties, have turned to the rental market to take advantage of rising yields. Twenty-eight per cent more Chartered Surveyors reported a rise than a fall in tenant lettings, up from 17 per cent in the last quarter. Significantly, demand for both family homes and flats increased as many would-be buyers found themselves unable to step on to the property ladder. Rising yields may have stopped the recent retreat of landlords from the market. The percentage of landlords selling their properties when tenant leases expire fell from 4.6 per cent to 4.2 per cent.

RICS spokesperson James Scott-Lee commented: “The sales market’s loss is the lettings market’s gain. Some would-be sellers are retreating from selling and letting or re-letting their properties as they wait for mortgage lenders to offer buyers more favourable lending criteria. While transaction numbers in the sales market are weak, many are taking advantage of rising rents and yields in the private lettings sector.”

Some even argue that the buy-to-let market will save the housing market.  As people choose to rent instead of buying, yields will rise, making it more profitable to invest in properties.

There are two problems with that theory.  Firstly it is still a lot cheaper to rent than buy, and yield from rent only covers  mortgages if there is a substantial deposit.  Surely more buy-to-let investors were driven by a thirst for a growth in their property’s portfolio – yield was just their way of covering costs.

Secondly, in countries where renting is more popular, such as France, house prices are much lower.

May 21, 2008 | posted by Michael Baxter in House prices | comments (0) |

Why do people buy second homes?  Well there are lots of reasons, and the appeal in terms of quality of life is obvious.    But presumably, for most, investment did come into the equation.

Unlike staying in a hotel, when you are paying for a second home you are having fun, and seeing your wealth grow too; that sounds like even more fun.

According to the Survey of English Housing, there are currently around 240,000 second homes in England.  “But,” says Capital Economics, “Unlike a primary residence, a second home is a “non-essential” spend. As such, second home ownership is likely to be more sensitive to expectations about the future course of house prices than the demand to own a primary residence.”

“During the 1980s when property prices were soaring, second home ownership rose steadily. The number of second homes then fell by around 25 per cent in the early 1990s housing market slump, before recovering swiftly from the mid-1990s onwards as house prices rose rapidly.

“Now that the housing market correction is underway, expectations of house price growth have deteriorated significantly and the incentives to own a second home will fade. We could plausibly see a 25 per cent decline in second home ownership over the next two years. The downward pressure on prices will be greatest in those regions where properties are less likely to be bought as a main residence, and therefore ownership is more sensitive to the future course of prices.

“The South West, with the highest concentration of second homes and with many of them located in coastal towns where demand for a primary residence is weaker, is likely to feel the greatest impact.

“London and the South East, where a significant share of second homes are for work purposes, and are therefore less sensitive to house price falls, may fare better than the other regions.”

Seema Shah, a property economist down at Capital Economics, said this: “The SEH suggests around 10 per cent of second homes (24,000) have been bought for work purposes, and we assume that all second homes which were not bought for this purpose were bought for investment and holiday purposes (216,000 homes). Therefore, that would suggest 57,600 second homes are sold [(25 per cent  x 216,000) + (15 per cent x 24,000)]. This would result in a roughly 25 per cent reduction in second home ownership – comparable to the fall during the early 1990s.”

So that’s another 57,600 homes coming on the market.  Ummmm – so much for comments saying lack of supply should keep prices up.