UK Property prices to drop 30-40% - Here's why
US Real Estate still has a 5-10% drop ahead
=============================

A RETURN TO BALANCE ... of 21 years ago?

US & UK property prices - the Rallies will soon stall
.
(Source: US Case-Shiller Index-20 Cities x1,300; and UK: Average of Halifax & Nationwide prices, NSA)

The charts above and the figures below tell a dramatic story.

House Price Inflation ("HPI") soared far beyond rises in CPI, but may now need to correct back to meet the CPI increases, which are more closely correlated with incomes.

=====

Here's what I have done to calculate "expected drops" ...

The figures at the bottom of the page show the annual inflation rates for the US and the UK.
(In the case of the US, they are CPI. And for the UK, I have both CPI and RPI data.)

Over the 21 years, 1989 through 2009,
I made comparisons of House Price Inflation (HPI) with Consumer Price Inflation (CPI),
on the theory that they should return to a consistent ratio from time to time, as the Property cycle bottoms.

================ The US : The UK
Cumulative % in HPI : +69.3% : 111.6%
Cumulative % in CPI : +59.3% : +56.3%
. . . . . . Fall needed : - 14.5% : -49.5% - based on cum'l annual percentages

I then work out how much house prices would have to fall,
to bring them back into line with the changes in CPI, using different methods.
Essentially, I am assuming that prices will return to the balance they had in Jan.1989
by the time the present housing correction is done:

Start 1/89 Housing : $101,387 :#59,347 :
End 12/09 Housing : $190,000 #164,681:
. Change % in HPI : + 87.4% : +177.5%

:: 1/89 - CPI index . : . 121.10 : .. 65.0 : 111.0-rpi2
: 12/09 - CPI index. : . 215.95 : . 112.6 : 218.0-rpi2
. Change % in CPI : + 78.3% : +73.2%: + 96.4%

. . . . . . Fall needed : - 4.85% : - 37.6%
== ==

Inflation Data: US and UK

Yr. cpus cpuk Rpuk Hpuk Hpuk
1989 4.65 5.40 7.71 2.84 6.15
1990 6.11 7.61 9.34 0.52 -3.61
1991 3.06 7.21 4.46 -3.43 -1.75
1992 2.90 2.54 2.58 -7.13 -1.68
1993 2.75 2.23 1.94 2.20 -1.26
1994 2.67 2.30 2.89 0.46 1.69
1995 2.54 2.96 3.22 -1.90 -0.40
1996 3.32 2.30 2.46 8.42 1.88
1997 1.70 1.69 3.63 8.09 5.36
1998 1.61 1.55 2.75 5.70 9.12
1999 2.68 1.20 1.76 13.49 10.79
2000 3.39 0.75 2.93 6.05 12.13
2001 1.55 1.07 0.70 14.66 7.93
2002 2.38 1.69 2.94 24.19 12.22
2003 1.88 1.25 2.80 16.43 11.35
2004 3.26 1.64 3.49 13.43 15.91
2005 3.42 1.92 2.21 4.31 15.78
2006 2.54 2.97 4.43 9.40 0.54
2007 4.08 2.12 4.05 5.60 -8.97
2008 0.09 3.11 0.95 -17.47 -18.50
2009 2.72 2.83 2.40 5.74 -5.38
2010
'89-09
Chg: 59.3 56.3 69.6 111.6 69.32

Possible Target levels:
================ The US : The UK
End 12/09 Housing : $190,000: £164,681:

Upper End
. Change % in HPI : ... - 5% : ... -38%
Targeted Low ...... : $180,000 #102,102:

Lower End
. Change % in HPI : ... -15% : ... -50%
Targeted Low ...... : $160,000: £ 82,340:

Middle of Range
. Change % in HPI : ... -10% : ... -44%
Targeted Low ...... : $175,000: £ 92,221:
Low so far ........... : $181,000: £153,477
:

Value at the Peak :: $268,500: £192,490:

Change from Peak : ... -35% : ... -52%
. . .

I have to admit that the -38% to -50% drop for the UK does seem amazingly large, and the UK may seek some new way of creating inflation in incomes to prevent such a massive and destructive drop. But whatever happens, I do think large drops in the UK, potentially to the top end of the range (Pds.102,000) that I have calculated with these figures do lie ahead.

Here's a chart to help depict what I am talking about:


In the previous cycle, there was big jump in HPI which peaked over 34% per annum in late 1988. Price CPI and RPI rose afterwards, peaking at near 11% in late 1990 and at over 8% in mid-1991 respectively, along with incomes (which are not shown). The rising cash flows associated with surging incomes helped to "inflate away" the dangerous House Price Inflation (HPI). In other words, much of the increased mortgage debt was absorbed by UK householders precisely because people's incomes went on rising rapidly after HPI had slowed down. What wasn't absorbed through rising incomes was handled through a price drop, which reached 13% by early 1993, falling to near that level again in early 1996, as incomes rose.

The same inflating-away mechanism has not occured in the latest UK house price cycle. Incomes have hardly risen. Instead, the balance between house prices and incomes was being restored through house price falls, which hit 20.3% in early 2009. But this was proving too painful as many UK householders fell into negative equity. And the Labour government lost its nerve, fearing that dissatisfaction amongst homeowners would undermine its chances for re-election.

So, as a desperate measure, the UK has pushed interest rates down to historical lows in the hope that people will be able to cope with their heavy debt service obligations until "the economy recovers." What they are really hoping for is a renewed economic expansion and an inflationary episode which will pull incomes upwards. But the UK economy is now so riddled with malinvestments (thanks to Brown's incredibly inept stewardship), that UK economy remains soft. Jobs are being lost, and incomes are not growing for the vast majority of people. Instead, the government is being forced to contemplate salary cuts and budget cuts in the state sector. That will do little to enhance incomes, and make the burden of high mortgage debts lighter.

The UK's debts are now so heavy that they are facing the serious risk of a currency collapse, which would carry the UK straight into the jaws of a stagflation similar to what Iceland has been going through since 2007/8.



================== US-cpi : US-hpi : UK-cpi : UK-rpi : UK-hpi
Sum of annual amounts : 59.3% : 69.3% : 56.3% : 69.6% : 111.6%
Average annual amount : 2.89% : 3.57% : 2.71% : 3.38% : 5.85%
Total change - as a Pct : 78.3% : 87.4% : 73.2% : 96.4% : 177.5%

In 1989-91, CPI inflation averaged 6.74% in Britain and 4.61% in the US. The higher British inflation, which I presume also showed up in income rises of a similar magnitude, helped to correct for higher House price inflation in the prior years of 1986-88. In those years of sharp house price increase, HPI was 13.1% and 11.1%, respectively in the UK and the US. After the "catch-up" period into the beginning of 1991, CPI has actually grown less in the UK. From Jan. 1991 to the end of 2009, CPI was up 53.1% in Britain, versus 60.4% in the US. But house price inflation has soared again in the UK, far ahead of the US rises.

Start 1/89 Housing : $101,387 :#59,347 :
Start 1/91 Housing : $102.089 :#60,509 :
End 12/09 Housing : $190,000 #164,681:
. Change % in HPI : + 86.1% : +172.2% (1991-2009)
To Housing Peak :: $268,476; #192,490:
. Change % in HPI : +162.9% : +218.1% (1991-2009)

Slightly slower British inflation, has not stopped UK home prices from shooting up much more than CPI, and even more than US house prices, which Prime Minister Gordon Brown has (opportunistically) blamed for the 2008/9 credit crisis. From Jan. 1991 to the August 2007 peak, UK house prices were up 218.1%, versus only 162.9% in the US to its July 2006 peak.

The more rapid UK house price inflation was associated with a particularly strong housing mania in the UK, and a lack of lending restraint by its banks. No wonder several UK banks have needed to be taken over by the government.

...Gordon Brown has claimed to have "saved the world" by getting British banks to lead the way in introducing Quantitative Easing. But all he has succeeded in doing is temporarily propping up an overvalued housing market. British homeowners have not reduced their overall mortgage debt levels. Instead they have renewed their love affair with expensive housing. And so, the delay has come at the costs of vastly increased debt levels, if we add in the debts at the sovereign level. With no noticeble improvement in incomes, and probably a decline in the sustainable level of income, Uk borrowers and taxpayers are significantly WORSE OFF than they were 2-3 years ago.

Brown's hubris has been associated with a dramatic worsening of the UK's financial situation.

I'm not sure the calculations are correct. I get 5% and 30-38%

CODE

                          US-cpi US-hpi UK-cpi UK-rpi UK-hpi
% change, '98-'09           78.3   87.4   73.2   96.4  177.5
Index 1989                 100.0  100.0  100.0  100.0  100.0
Index 2009                 178.3  187.4  173.2  196.4  277.5
Houce Price fall required
  to meet "inflation"      4.86%        37.59% 29.23%

Do you have any time scale in mind Doc?

Why do house prices relate to CPI figures. House prices rise when it is high or low. I am beginning to believe that the housing market does not depend on anything other than sentiment. If house prices were rising at 5% per month every month people would buy them regardless of money supply. Foreigners with wealth move money to the new best investment, people will lie about there worth, borrow from family, sell other assets so they can buy the property. If you look now there is not a single economic indicator which suggests house prices should be rising, but the only indicator that matters to sentiment, Haliwide, calculates that one highly desirable property sold and since there were three people desperate to have a house it sold at a higher price. If you consider a demand curve it makes the assumption that at least one person will buy at very very high prices and millions will buy for a penny. Therefore a house will sell at the extremes and usually at a good price.

Sorry for the rant.

I agree most people are blind to whats comming!!

Two sets of friends both middle aged couples with reasonable equity ie 250k it's quite a lot up north, have spent the last three weekends looking to move up the chain taking out fixed rate mortgages!! Both couples are convinced now is the time to buy, viewing days on run down in need of renovation propeties they have attended have had large amounts of people turning up!!

Whilst QE is keeping banks solvent, REPOS are kept down and at bay, IR are 0.5% in the Uk.

The pound may tank against other currencies and Gold

BUT UK PROPERTY IN STERLING TERMS WONT GO DOWN IT WILL ONLY GO UP!

Much as it irks me to say it!


Property is a one way bet whilst psychotic Brown is steering the ship flat out into the icebergs .

Regards

ML

Hi Bubb, cheers for all the work here.

If you take these figures and rebase againt the world currency " the Dollar" how much have the uk properties dropped in % terms if you factor in the sterling Dollar fall from peak prices ?

Or in oz/gold price drop? Ie. How many oz of gold has each market dropped from peak to trough?

Regards

ML.

(Columbo, posting here? A polite question, deserves a response.)

I'm sticking with this:


...because of the UK Home builder shares are off their highs, and have remained stagnant.
Let's see if UK home prices fall away in Q1.2010.

Actually, I wish I had some good data on monthly incomes. (!)
If I had that, I would use it rather than the CPI & RPI data. The inflation data are being used by me as a proxy for incomes, since I reckon that the CPI inflation is being "accomodated" by rising incomes, so they are staying in line with each other. (Another possibility is that rising HPI depresses CPI, since money may flow out of consumer items into housing, when house prices shoot up very fast.)

I agree that sentiment, and easy lending, together create Bubbles. But at some point, prices have to come into reasonable balance with incomes. Because people cannot go on (for long) spending more than their incomes allow on housing. However, as you have pointed out, when they are in the middle of a mania, they will use the mechanisms that you have described, to "stretch" and buy a more expensive property than their incomes would normally allow.

Here's another statistical exercise:

I multiply Houseprices by Base Rates, and divide by CPI:
UK-Homes x UK-Base / UK-CPI

........ And get this chart: ............................................ : ........ And "as adjusted", I get this one:
..

The chart (on the left) above shows how completely unprecedented was the huge drop in Base Rates, from 5.25% in Sept.2008 to 0.50% in March 2009. This has transformed the numerical argument for homeowning, especially for those with plenty of cash. The Cash no longer earns any sort of reasonable return, and so some are willing to gamble that homeprices will hold up (or rise), and take their cash out of the bank and buy property. But there are not an infinite number of such buyers. They will become exhausted at some point. For the other chart (at right, above), I have added 2.50% to the Base rate. Virtually no one can find a new loan at the base rate these days, so adding on a 2.50% premium may be a more realistic exercise. Even on this basis, which perhaps reflects the situation for those who must borrow-to-buy, the low Base rates make homeowning look cheap.

Personally, I regard this as a "trap", which has been set for those without a historical perspective on rates, and their relationship to home prices and the general economy.


I suppose that is what is happening now, when there isn't much activity.
A few people look at low rates (and maybe the pathetic returns they are getting on their cash in the bank), and they are duped into buying. The purchase is at a high price, because of the prevailing bullish sentiment. But the vast majority of people want to see a reasonable balance between their incomes and house prices when they buy. They are not foolish enough to fall for the "lure" of temporarily low interest rates.

When lending standards do eventually return to normal, once the foreign investment surpluses have found a new home and all the government QE money has been frittered away, then people will be faced with the grim reality of just how thin the ice is, upon which they have staked their future.

They are so far out on the thin ice, that there is no ice. Just an over leveraged borrower walking on the waters of cheap credit, held up by a single strand of hope that interest rates will never rise. The strand itself attached to a huge over-streched crane, at full tilt, that the government has borrowed but can no-longer afford to make payments for, without laying off the staff that keep the crane from falling through the thin ice upon which the crane is based. I could go on, but I think you get the picture.


http://www.building.co.uk/story.asp?sectio...3156727&c=0




To put the above figures in perspective here is the past data on total mortgage lending that I found searching google mainstream media news articles. It took me twice as long to get hold of the 2005 figure that it did for me to find data for all the other years, although I can't think why the media would suppress a negative number.


2002 £219bn
2003 £271bn
2004 £292bn
2005 £287bn
2006 £346bn
2007 £364bn
2008 £256bn
2009 £143bn

Does anyone have a chart showing house prices and volumes of sales or total mortgage lending?

This is where it generally amuses me. If house prices are continuing to rise on speculation, would not one consider all the other factors that are at play? For example if over 50% of income (whether combined or single) is being used to service the debt, this will certainly have a negative effect on their capacity to spend. So to fill the void they use their home as their ATM credit line, in the hope house prices keep raising. Surely this game cannot survive if wages/incomes do not move in line with house price inflation? At some point the credit will run out leaving many home owners with a severe hangover. I can remember not so long ago banks offering the masses holidays via using the equity fairy to finance the holiday. I see this as irresponsible reckless behavior that will end in total pain.

If your prediction is going to be as severe (38-50%) in the near future (and not a slow process) I can see great unrest for future times.

That is very well put, Enrieb, and I may want to quote you in an article I am writing.
Can I have your permission?

By contrast, here's a ridiculous quote from the article:
"But there is every reason to expect a gradual improvement in the latter part of the year. With a gradual pick up in economic growth and wider access to credit, 2010 will almost certainly be a better year in the mortgage market than 2009.”

Instead it should read:
"... there is no reason to expect an improvement in the latter part of the year. Unless the optimists are right, and there is a gradual pick up in economic growth and wider access to credit, 2010 will almost certainly be a worse year in the mortgage market than 2009.”

Let's see who is right: the maverick, Bubb, or the "conventional wisdom."
+ + +

BTW, I added some technical lines to the chart above:


I find it interesting how well this chart would have "nailed the top" (£192,490) in July 2007.
It also nailed the "major lows":
1/ March 1984 at 62.33 : £28,913
2/ May 1994.... at 52.75 : £57,246
3/ March 2009 at 42.08 : £154,006

And three good buyable dips after 1994:
+ Jun. 1996.... at 55.05 : £58,989
+ Jun. 1999.... at 60.24 : £74,382
+ Nov. 2001.... at 65.01 : £94,511

Of course you have permission, and for future reference you don't have to ask. I just try to simplify economic predictions as I go along. You guys with your technical knowledge and experience build the foundations for the case on behalf of the economic prosecution, I just dumb it down into simple phrases and analogies to get my own head around the issues in the hope of being able to explain it better to others, a bit like a tabloid newspaper reporting on a fraud case.

A good chart, but what about principal payments? Dont't they matter too?

And is CPI truly a good proxy for incomes?
I thought "wealth" rose over time, meaning that Income should rise faster than CPI,
especially when governments fudge the basket, holding reported CPI down to below what people really pay.

You will find some income data here: http://www.economicindicators.gov/

EMAIL reaction to a Bloomberg Report...
to Rishaad Salamaat / rishaad@bloomberg.net
cc to Mark Gilbert / magilbert@bloomberg.net
Report on UK property, leaves me seeing red
==============================

A very poorly informed report on UK property, leaves me seeing red.

No where did Bloomberg mention "ultra-low interest rates" (with base rates down from 5.25% in Sept. 2008 to 0.50% in March 2010) , and the massive over-valution of property in relation to (falling) after-tax incomes in the UK.

Who is going to buy all these over-priced properties?
Surely, even the few foreigners who are buying luxury properties in Londond will wise-up when interest rates get pushed back up to more normal levels. If they do not, then it will be because UK incomes continue to fall, and what is that going to do to rents in the UK? And what are the foreign buyers going to do, when they see their property taxes being pushed up and up, to recover all the massive stimulus that the Labour government has wasted propping up its failing banks and its sick property market since the credit crisis ?

I do believe that before we are into the second half of 2010, UK property will be back into freefall, or the pound will crash. Even that is no solution, since it is likely to lead to higher rates to protect the Pound. Just look what happened in Iceland!

Here's my argument as to why UK prices might fall by more than 30% in the next 3-5 years:
http://www.greenenergyinvestors.com/index.php?showtopic=9306

Regards, Michael, from Hong Kong

P.S.
I regularly send in questions to Bernie Lo's Asia Confidential.
And it would not be unfair for you to categorize me as an "unreconstructed Bear," but let's see where markets are in about 12 months time.
Here's a recent article of mine about why we are headed into another depression:
http://financialsense.com/fsu/editorials/h.../2010/0210.html

The market is back to fair value.


http://www.ft.com/cms/86a30e34-dfd5-11dc-8...amp;fromSearch=


Interesting, wrong I think! But worth a listen?

Regards

ML.

Thanks for the Link. I will take a look.

Meantime, I think you have a good point about most mortgages requiring principal repayment.
and so I have redrawn the chart as follows:

Payment/CPI-UK, where Payment = (1/25 x Houseprice) + (Houseprice x (Base Rate + 2.50%)
Chart


Another thing is the I think it may be useful to show the chart of the Ratio between Houseprices and CPI
over a long stretch of time, so here it is for both countries

US Ratio: Houseprices to US-CPI ... : Latest: R-880


To me, this suggests the the US ratio may have further to fall than 5%. From the current level (R-880)
+ Back to R-837: is - 4.9% / that was the ratio of Jan.1989
+ Back to R-800: is - 9.1%
+ Back to R-700: is -20.5%
+ Back to R-635: is -27.8% / that was the Low in early 1997 as the last cycle bottomed

UK Ratio: Houseprices to UK-CPI ... : Latest: R-1464

+ Back to R-1000 is -31.7%
+ Back to R-913: is -37.6% / that was the ratio of Jan.1989
+ Back to R-800: is -45.3%
+ Back to R-640: is -56.3% / that was the Low in early 1996 as the last cycle bottomed

Obviously, the UK ratio may have much more to fall.

In Dollar terms,

Approx dates.

Peak USA $270,00 Dolllars in June 2006 down to low of $180,000 dollars in Sept 2009.

Peak Uk market in £ converted to Dollars.

Peak $384,000 Aug 2007 =(£192k(2.00/GBP)) To low of $201,00 in Jan 2009=(£150k($1.35/GBP))

So please tell me again which market has fallen most and fastest in Dollar terms ?

USA 33% Fall UK 47% Fall

Regards

ML.

There is no correlation between base rate and real mortgage rates. The spread has got bigger to pay off the banks balances via the back door. The benefit difference between the real rate an OO is paying and what they would have paid without the extraordinary low base rate is only about 1%. Assuming the base rate goes up progressively slowly over the next three years as described in the BOE inflation report then it is possible that the banks will absorb the increase and not pass on the full increase to the mortgagees (to help the government, especially if they are still part owned by them)

I have made my case for the 1% in another thread.

OFAH

10 yr Gilt Yield has perked up
charts added by DrBubb

Longer term - a break upwards !

Good article.

Some questions:

1. Regarding the situation in Iceland, they are a small country with a population a fraction of the size of the UK's. Are there any figures which give proportion of imported goods per head? What I mean is, do Iceland import a higher percentage of essential goods per head than the UK does? Or did the people in Iceland live less extravagent lifestyles. Is a currency devaluation going to cause as much pain to individuals in the UK, or do we still make enough of our own items over here (I'm talking about day-to-day essentials you'd buy from the supermarkets).

2. Property taxes, and a taxpayers' revolt. Those of us who didn't live excessive lifestyles and get heavily into debt seem like they're still going to have to contribute financially to try and get us out of this mess. Basically, we could be forced to pay towards our country's debts. But what if increased taxes (e.g. property taxes) push the individual over the edge and into debt themselves? Is it legal for a government to force an individual into debt, if they've been prudent all their life to stay out of debt? It's the country that is in debt, not me... so why should that situation be potentially reversed? How do we revolt? (And I don't want any answers to go the way of the "Taxpayer Revolt" thread, hence why I'm not going to post the question there).

3. Would it be more likely that the government would go for the currency devaluation and eventual erosion of debt through inflation option. That way, it wouldn't appear that they are specifically targetting individuals to bail the country out, even though the end result would be the same (i.e. costing individuals more money).

These may seem like selfish questions, however those of us with smaller aspirations, who aren't looking to uproot and leave the country for a better place, are likely going to have to bunker down through a depression if it happens. So looking out for Number One is going to be of prime concern.

I think my questions are basically relating to the social aspect of this crisis, rather than from the financial and investment perspective.

Or micro-economics instead of macro-economics.

Not everyone is going to be in a position to "be prepared and hedged" in the same way. For some, this could come from stocking up on daily essentials now in case of inflationary price increases in the future. For others, it could be taking up new interests and activities that don't cost thousands of pounds and require travelling round the world to get their enjoyment.

I really like the last paragraph of the article:

An interesting argument.
But most buyers of UK properties are spending their Pounds, not dollars.

International people will be chased away as Britain is forced to "raise taxes on the wealthy".

The main thing that has propped up overvalued UK property is ultra-low rates.
Change those, and UK property will crash.

RISE IN BOND YIELDS, over 4%
was triggered b the bad figures and the breakdown below $1.55

I have taken the time to dive into Iceland's economic stats, but I have anecdotal evidence from reading Blogs by people living there. Life is tough now, with few jobs. People have been forced to sell house, cars, and other items to make ends meet. And they are eating a different diet. Many are existing on porridge now, I have read. I am considering a visit this year, since it may be a "glimpse into the future."


How it works : your taxes go up, and you have to spend less on other items, like housing, cars, and food, in order to make ends meet on an after tax basis. If you try to maintain your present lifestyle, then you may have to increase debts to do that. You "revolt" by leaving the country, voting "the bastards out of office" (though its a bit late for that), or taking to the streets (as they are doing in Greece.) Ultimately, you find you are less wealthy, and have to economise even more, to stay out of debt. I have been warning about this for Years, I think you may know.


Indeed. But here's the thing: Britain is now an oil importer, so trying to "inflate away the debt", puts oil prices up, and probably pushes interest rates up too - to protect the currency. So it is still a very painful option. As I have argued with all my calculations on this thread, the UK has pained itself into a very awkward corner, and there is no easy way out. All roads lead to a house price crash IMHO, because only ultra-low rates can sustain current prices, and I dont see how current rates can be sustained, despite what EA's and media pundits may be saying.


Hunkering down, and reducing your expenditures is a smart way to go. And also avoiding a home purchase while prices are so very excessive.


I wanted to finish a grim message on a positive note.
And I am a reasonably positive-thinking person, even if my economic view sounds pessimistic

*U.K. JAN. MORTGAGE APPROVALS FALL TO 35,083 FROM 45,650

Survey 43,000



You cant read much into one piece of info, but ouch!

To be fair with you it wasn't an argument just a different perspective of value.


Regards

ML

DrBubb

On my monthly blog update for UK Property (latest here http://retirementinvestingtoday.blogspot.c...10-update.html) I use the dataset LNMM as my proxy for earnings courtesy of the Office for National Statisitics. LNMM is the average earnings index for the whole UK economy (not seasonally adjusted). The dataset goes back to 1990. Not sure if thats of any use to you?

Here's Dresdner Kleinwort sounding very much like my own comments on UK housing

thanks, GK

I think you are absolutely spot on. People have been hanging on to la la land prices, banks have been moving Repos to holding companies I am told.

The stuff has to hit the fan soon. The timing will be when interest rates go up, or a fresh wave of job losses.

I remember late 80's early 90's people refused a first to accept property prices were falling, and held on for a couple of years, then as more and more "bargains" appeared people capitulated and cut prices hard to enable themselves to move on.

The problem today is without the big cuts at the top, (due to people hanging on with low rate tracker mortgages) this isn't rippling down the chain, enabling a fresh wave of first time buyers to move into the market and start the whole cycle starting again.

The other side of low interest rates is the negatve impact it has on the psychology of savers, as interest rates drop, then due the nature of being prudent or a saver they withdraw even more from spending into the economy, becoming even more frugal.

Somebody in power needs to accept there has to be lots of pain before there will be gain.

Nobody bucks market forces even if you blow 200billion!!!!!

Regards


ML.

We are in the UK sold our house in 2007 and haven’t bought another yet. I have been bearish on property but now I’m having doubts.

Below is a list of the things that worry me. Feel free to shoot them down and try lift my gloom:

Financial Regulation.
When Brown created the FSA he abolished it. Despite the banks nearly failing nothing has changed, we still don’t have any. There are no limits on LTVs or salary multiples. The banks are too big to fail and left to self-regulate but all they care about are bonuses. I suspect that all this deferring bonuses is rubbish and later it will come out that staff are being given the cash behind the scenes. The banks are being forced to lend and each week mortgage availability seems to be improving. Santander 90% for FTBs today.

QE
When it started the housing market picked up as people became worried about inflation and could see the value of their cash being eroded. I had hoped that QE was going to give badly indebted people a final chance to sell before prices fell. Higher mortgage deposits were required which seemed to be trying to tempt the cash rich into taking the hit as they can afford it. However now if the housing market starts stalling they will just keep extending QE. This is what Mervyn King was really saying this week. The UK doesn’t have an economy outside house price rises.

Equity
The UK has a lot higher proportion of house owners than other countries such as say Germany. If house prices have gone up 150% in a decade that means that someone buying a £100k house now has £150k+ in equity. They can afford a large deposit on a larger house and secure a cheaper mortgage, probably much cheaper than they have ever paid. Taken another way someone downsizing could be a cash buyer. Are low mortgage approvals now not as useful a guide as before due to the equity realised on previous purchases? Parents are sharing their equity with children and helping them buy by paying deposits and on it goes.

Wage inflation
I think we have had massive wage inflation outside of your average family in the private sector. Just look at bankers, executive pay, BBC, NHS. I recently read about a council electrician earning £124k last year. There are lots of people who can afford houses no matter how overpriced they appear to me. Talk of freezing public sector pay is shutting the stable door after the horse has already bolted.

Brainwashing
The newspapers and TV are not impartial when it comes to house prices. Such as the BBC try to put a HPI positive on everything they report – it’s BUY BUY BUY all the time.

Second incomes
When we bought in 1998 we were told 3 times main income, plus 1 times second income. Now it is 4 or 5 times joint income. The strange thing is that families are happy to do it. They will do anything to get on the property ladder. The rise of second income mortgages means that house prices will never return to the old affordability stats which were largely based on main income only.


Government
The expenses scandal has proved that lots of our MPs are corrupt and only have their own interests at heart. They don’t care that lots of people cannot afford to buy a house. Lots of them have property portfolios partially funded by taxpayers via flipping houses. I expect that the next phase of trying to keep house prices inflated will be grants/tax breaks for landlords. Using the public’s council tax and income tax to prop up prices for landlords will be portrayed as if they are doing people a favour instead of pricing them out of the market and using their money to do it. The government may even give the house hungry people what they want - 50 year mortgages and retirement at 80.

Sterling
This is my big mistake as it is all I have. I had my chance but blew it. Now I cannot see how anyone holding sterling can win regarding house prices. I now see one of two outcomes:

1 Sterling continues as now with low interest rates for a long time. I cannot see how interest rates can rise while people/businesses in the UK have so much debt to service. This devalues my cash and gives people with mortgages longer to pay them down. House prices do not fall

2 Sterling collapses, interest rates rise a bit but that won’t be enough to protect the value of my cash against inflation. House prices won’t fall in desirable areas because those who exited sterling earlier on or foreigners will buy them. In less desirable areas house prices will fall a lot and there will be social unrest – but that won’t help me because I wouldn’t want to live there.

Of course I could try exit sterling now. I could gamble what I have on something I know little about, I have never been a financial investor. From my limited knowledge everything looks to be in a bubble in markets that are government rigged. My feeling is to try find a house to buy so at least I have something tangible.

that word 'unexpected' again

http://www.bloomberg.com/apps/news?pid=206...N73jM&pos=5

No big mistake, MS: we're British, why should we have thought to speculate against our own country, or mistrust our own politicians so much, by holding some other country's money instead?

Buy gold! If sterling crashes, house prices won't come down (they might even go up), but gold will go up (in sterling terms)! It's the poor(ish) man's safety net. I buy a sovereign or two each month, and I reckon I'm £10,000 up over the last eighteen months or so.

Housing market 'still has 10pc to fall'
Goldman Sachs has tempered expectations of an imminent recovery in the UK housing market by forecasting a further 10pc fall in prices.

By Graham Ruddick / 22 May 2009

In a comprehensive note on the housebuilding sector, the investment bank said it would be year before house prices found the bottom of the market in the second quarter of 2010.

Shares in house builders have rallied so far in 2009 as the likes of as Taylor Wimpey and Persimmon completed key refinancing packages and reported improved visitor levels and sales volumes compared to the depths of the financial crisis last Autumn. (?? March 2009 ??)

However, Goldman analysts warned that, although sales volumes could rise by 12pc next year, prices will remain under pressure because of rising unemployment and the fact that property values are still well above the historical average of affordability of 3.8 times salary.

"Improving volumes may support house prices in the short term, but the negative outlook for unemployment into 1H10 [first half of 2010] and an above-average affordability ratio will limit the potential for a sustained improvement in our view," analysts said.

Goldman's forecast mean a peak-to-trough fall in house prices of roughly 30pc from summer 2007 to 2010.

The housing market has suffered dramatically since the onset of the credit crisis through a dramatic fall in mortgage availability. It is now also under pressure as business struggle in the recession and lay-off staff.

Yolanda Barnes, head of residential research at Savills, said it was too early to talk about "green shoots". She added: "The seeds have been planted but haven't been watered yet."

Ms Barnes' forecasts are broadly in line with Goldman's, explaining that a recovery is likely to be hook-shaped as unemployment and low mortgage availability also hinder a sharp upturn.

"We think we will have a year of banging along the bottom," she said.

Goldman warned there is a chance that distressed sales caused by the macro economic environment could drive prices beyond 3.8 times affordability to the record relative lows of 1995.

The bank upgraded its rating on Tony Pideley's Berkeley to hold, citing the company's cash-rich balance sheet and potential to snap up deeply-discounted patches of land.

However, there was a downgrade for Redrow.

Steve Morgan, the founder, has returned to lead the business, sparking a rally in the share price, but Goldman issued a caution over its high-leveraging and limited asset writedowns.

"We believe a further decline in house prices over the next six-12 months will limit upside potential in the price and likely highlight the difference in implied inventory write-downs compared to its peers," its analysts said.

Barratt, which many observers believe will launch a rights issue in the medium-term to pay down debt, had its target price significantly raised from 155p to 195p in light of increasing sales volumes.

Overall, however, Goldman said the outlook was "limited" for housebuilders.

/see: http://www.telegraph.co.uk/finance/5370047...pc-to-fall.html

I doubt that.

Prices have rallied, but not because Sterling came down. You have got cause and effect in the right direction.
They rallied because the BofE moved from Base rates near 5% to new Base Rates at 0.50% - that's a drop of 90%!

That pushed Sterling down while propping up House prices.

Of rates rise, as Sterling falls, and especially if the rise dramatically, then UK house prices will fall.

One of the things that concern me is the timescale of the crash. I want to purchase in 2012 and hope that prices have come down by atleast another 20% (circa £134,000 Halifax index). If prices are in freefall throughout 2011 and also 2012 then I will defer my purchase until 2013 but not any later.

Any comments on the timescale of the 30-40% drop DrBubb? When do you think this will all play out?

I took a shoot at this on DrB's Diary:

I will answer some individually:



I have been telling people to get out of Sterling for some months. I think this is the real achilles heal of all your arguments.

When the bottom is in, most people will be too scared to buy.

And I may be one of those arguing against buying in 2012-13, because there may be little prospect then of making any real return from the big slug of equity : 40-50%) that you may need to buy a house then.

You will be surroiunded by people who have seen huge amounts equity wiped out by owning property, and it will take real courage to buy, or maybe it will be foolhardy to even try. Is it courageous or foolhardy, that is the dilemma you will be faced with, and most people (and maybe DrBubb too), wil be telling you it is foolhardy.

Does that help?

Sentiment is beginning to turn, as reality settles in...

House prices to suffer 'significant correction' in 2010

... as figures show recent rises are beginning to lose momentum.

By Myra Butterworth, Personal Finance Correspondent / 26 Feb 2010


Economists suggested the drop marked a change in fortunes for the housing market which has seen prices rise by 9.2 per cent during the past year Photo: GETTY Values dropped 1 per cent in February, the first decline in 10 months, bringing the average price of a home in Britain to £161,320, according to Britain’s biggest building society Nationwide.

Economists suggested the drop marked a change in fortunes for the housing market which has seen prices rise by 9.2 per cent during the past year.

Martin Gahbauer, Nationwide’s chief economist, said: “The market may have lost momentum in early 2010 as the stamp duty holiday ended and house-hunters were obstructed by the icy weather.

“Even without the impact of stamp duty changes and the snowy weather, it would have been surprising to see house prices maintain the very strong upward momentum seen for most of 2009.

“In light of low growth in household incomes and elevated levels of unemployment, house prices were beginning to move ahead of the recovery in general economic conditions.”

Howard Archer, an economist at Global Insight, said: “House prices will suffer a significant correction in 2010 and will probably be no better than flat over the year. The price rises that have been seen since early-2009 are out of kilter with the overall economic fundamentals.”

And David Smith, a partner at estate agents Carter Jonas, warned: “There is every chance prices will fall back in the second half of the year, particularly if interest rates rise and, as many still think, the economic recovery continues to drag.”

/see: http://www.telegraph.co.uk/finance/economi...on-in-2010.html

LTV percentages are still too high

Mortgages: How the cash-poor are stranded in a maze
Homebuyers who can't cobble together a sizeable deposit will find lenders imposing a high interest rate.

Patrick Collinson reports

Here's the good news: it's easier to get a 90% mortgage today than at any time since the credit crunch began. And here's the bad news: interest rates (from 4.49%) on 90% loans are steep, and if it's a 95% loan you want, the rate can spiral to 7%, equal to 14 times the Bank of England base rate.

First Direct, already the cheapest lender for people with big deposits, this week introduced the best-value mortgage for anyone with just 15% to put down. It is offering a lifetime tracker at 3.49% over base rate, currently 0.5%, giving an initial rate of 3.99%, plus a fee of £499.

Analysis by Moneyexpert.com this week found 147 fixed-rate mortgages available for those wishing to borrow at least 90% of a property's value, an 88% increase on this time last year, and said there is a "growing inclination" among lenders to offer higher loan-to-values.

But don't cheer too much. A year ago, the average loan-to-value (LTV) on a fixed-rate mortgage was 75.7%, but today it is 76.8%. In other words, if you want to buy the average-priced UK property at £163,481 (Nationwide index, January 2010), you'll need a deposit of £39,927 to access the best mortgage deals.

Such a sum will remain out of reach for most, which may explain why the first-time buyer market remains moribund. In January, mortgage lending hit an eight-year low of £8.1bn, from £18bn in January 2007. The end of stamp duty relief at the start of the year plus the bad weather evidently deterred buyers. But the English Housing Survey, an in-depth government survey of attitudes and behaviour, suggests other forces are at work.

The survey, published on Tuesday, found owner-occupation is declining year in, year out. It peaked in 2003 at 70.1% and has since fallen to 67.9% of Britain's housing stock. Instead, younger adults priced out of the market are now more likely to rent from buy-to-let landlords. The survey found 3.1 million people in England rented privately during 2008-09, a 50% increase on the 2.1 million in 2001

/more: http://www.guardian.co.uk/money/2010/feb/2...irsttime-buyers

== ==

Mortgages: Homebuyers who can't cobble together a sizeable deposit will find lenders imposing a high interest rate

What, praytell, is wrong with that?
If there is a big slide coming, perhaps they should not be lending more than 70% at all,
since the risk is simply too big for banks to take on

I was pretty astounded last week to notice the results at a nearby property auction.

A small builder's yard went for double the Guide. A set of 3 garages went for the same price as the original 4 garages were advertised for retail (non-auction) some months ago.

Res property prices held up also, far too high for my comfort.

There were only 14 lots and the buyers seemed insatiable judging by the prices.

Obviously, I bid on nothing at all.

My Property Bee list suggests price drops on some of the South East region detached houses that I'm watching. That said, they are then selling, although I would like to think for some significant amounts further reduced from the lowered asking price. I won't know until the LR figures are published.

In my areas, there is nowhere near the number of properties up for sale to make a healthy market, IMHO.

TLB

Dr Bubb,

Thanks for the detailed reply.

Sterling is certainly my achilles and I've made the biggest mistake of my life not diversifying in 2007.

However you seem to be saying low sterling is negative for house prices but I'm not convinced. It's only bad if interest rates go up in check with sterling depreciating. That hasn't happened and the Bank of England seem happy about that. Doesn't lower sterling mean inflated building costs so pushing up prices?

I think the drivers behind house purchases now are the low return on savings and the fear of inflation. I think when Mervyn King talks about more QE being necessary he is meaning if house prices go down not if economic output drops - because house prices are the economy. If we get more QE people with cash will be even more stuffed so even more likely to buy a house.

George Osborne was on the Andrew Marr show this morning and again came out with his usual "Under the Conservatives interest rates will be lower for longer so your mortgage payments will be lower". There is no political will to increase interest rates. People in secure jobs with a mortgage now are having a great time paying down mortgage debt and probably getting ready for the next move to a bigger house.

3.5% inflation, 0.5% interest rates and all this debt? Where are these market men who are supposed to keep the government in check and demand higher rates?

Anecdotally I contacted a friend last night who is now a mortgage advisor. He told me this week he sold a mortgage to a single mum with 2 children who earned £7,600 but also made £14,400 in benefits, so total income of £22k. She would have to have a £30k job in the real world to earn that much. This sounds like sub prime to me. Her benefits will be based on the children who won't be children for the length of a mortgage - if she loses benefits as they grow up and cannot replace the benefits income with a better job how can she repay the mortgage? This is one of the fundamental problems - our financial regulation is useless.

Hi Mugged,

I feel exactly the same as you, however it is never to late to do something about it.

My feeling is gbp is going to get beaten up badly down to the 105 area against the Dollar,

I have two choices here get out of sterling into other currencies or gold, I am going to go more heavily into gold.

Looking back the other day I see if we had taken GF, CGN advice we would be 60% up.

Read your bottom parragraph has anything changed in the system ? No? Do you want to be in £ when the reality of the UK'S

financial situation is finally faced up to. I think they will defend the pound but only at the 105 area?

You are not alone, the highly intelligent minority on here are just that, some see it before others, me and you are a little slower,

but not to act when you have finally grasped the situation would be criminal.Remember there are alot more to see the situation like we see it

who havn't even started looking yet.

"THERE IS A BULL MARKET IN GOLD YOU KNOW"

Regards

ML.

This is my big problem. When I look at how much I have thrown away already not doing something earlier I feel as though it is too late.
I am finding it hard to buy gold in sterling now, when the price has rocketed so much from when I wouldn't do it before.

For someone who only has sterling and who intends to stay in the UK - what percentage would you put in gold now?

Fifty-Sixty percent buy 10% now wait till price goes up above purchase price and buy another 10% and carry on.

Very few people have the sense to do what cgn, and gf do which is get in stay in and enjoy the ride.

Put it another way if you where in gold 100% now how much would you sell to put into sterling ?

You can only play at your own comfort level, best of luck.

Regards

ML.

A third option is to buy US dollars. Gold is now at all time highs in the pound and Euro, yet in the dollar it has corrected. There is also a real chance it will continue to correct in the next few months. The Dollar may be the only currency [besides Yen] by which you would be in a postion to take advantage of a dip.

Of course, if you were that concerned about Sterling, and owned no gold at all, then it would also make sense to buy some gold outright with Sterling also.

Once again a diverse approach can be taken, and one that you are most comforatble with.

Back in UK looking at houses last week. Will probably buy at some point: fully in knowledge that price will go down for a few years - but setting this against having to move between rented houses if landlords muck us about in rented accommodation (we've been moving around world for 12 years and so would welcome stability!). Hopefully prices won't fall by more than what I've made since STRing (too early) and investing in PMs/gold stocks etc (they'd have to fall a LONG way for this to happen).

Impressions of the market were that it was thin (stockwise) but quite busy. A few of the houses we've had our eye on had been 'aggressively priced' but seen quite good reductions over the last month or so. Nevertheless, Estate Agents still looked 'shocked' at our low offers - pointing out that only a month ago the house was for sale for current asking price plus 5/10%, so how could we expect a 'further' reduction. (To which we reply 'well it didn't sell' at that higher price: I could market my jalopy for £50,000 quid, doesn't mean it is worth it).

That said, the same Estate Agents also seem keen for us to make low offers (up until the moment we do - when the reaction described above kicks in), stressing our 'good position' etc. I suspect they are actually quite keen for a few 'less realistic' vendors to take a reality check and lower their asking prices.

Other impressions are that there remains quite a bit of stock that has been on the market for over a year, still not reduced. Why oh why? If I was an Estate Agent I'd refuse to continue marketing the house (and paying for space on rightmove etc) if people didn't start reducing their house prices after 3 months on the market....

Given the current disconnect between mortgage SVRs and BoE base rates, some of the cheapest trackers look quite interesting right now - especially if you squirrelled the 'saved' cash away ready to throw it at the repayments should rates rise dramatically. I can get a Tracker for base-rate plus 1.89% with First Direct - ie pay only 2.39% until the BoE have courage to raise rates. Alternately, I have agreement from Kent Reliance for a 25 year fix at 5.98%. I'm torn between the two.... (or a Coop 10 year fix).

Also wondering whether, instead of buying for 95% cash, I should buy with less cash and then get a mortgage for 3 times salary so I have money left over to keep invested in Gold etc.

BTW, interesting comment on a related thread on here that, if measured by 'affordability' someone on £60K would only be able to borrow 1xincome. Doing some budget work, I've come to a similar conclusion myself!

Wanderer

I'd buy with a 50% deposit. If the mortage becomes burdensome, for whatever reason, you can pay the mortgage in full as it suits.

That is not something he should be proud of.
Chances are: he is robbing her, and the rest of us for some lousy fee he is making.

Why do we hear so much about the greed of bankers, and so little about the greed of mortgage brokers,
and real estate people?

Start with your savings, subtract a few months for a cushion, and the rest can go "elsewhere" outside Sterling.
And gold can be the core of that non-sterling savings