Monday, 28 January 2008

House prices - it is four in a row

The housing data is in for December, and prices are down for a fourth consecutive month. In many respects, the housing crash is a process of aclimatisation. Just as the bubble was marked by years of double digit growth, we must now learn to accept that prices will continue to fall for the foreseeable future.

So what happened in December? According to Hometrack, the average cost of a home in England and Wales fell by 0.3 percent. After 12 months of those kinds of monthly declines, prices would be down around 3.6 percent. Given that the RPI inflation rate is currently about 4.1 percent and rising, in real terms, we can, perhaps, expect house prices to fall somewhere between 7 to 8 percent this year.

This raises an interesting question; how long will the housing crash take? Suppose in rough terms, house prices are overvalued by 100 percent in terms of affordability and price to income ratios. Assuming that the combined nominal price fall and rate of inflation is around 8 percent, then it would take about 8 years for house prices to work off all that excess valuation.

So, homeowners, how do you feel about eight years of a "healthy price correction". Tough medicine, methinks.


Anonymous said...

UKHB: "how long will the housing crash take?"

It's like this, during the inflation of the bubble, buyers were incentivised to buy as quickly as possible, if they delayed the purchaser could simply wait a little longer and sell higher.

In a deflating price environment, buyers want to sell as quickly as possible, because they know that if they don't they will have to sell at a lower price in a month.

As the momentum of deflating house prices grows, people who have to sell, will sell at any price, people who don't will not.

The question is, how many people will find themselves in a position where they have to sell?

traderboy said...

oh how i laugh when i see all the £800k-£1.2mm properties in the estate agents windows (London). there are SO many of them, I just don't see how they get sold when the City is going through job losses and severely reduced bonuses, and 2008 shaping up to be even worse than last year!

ukhousingbubble said...

While agreeing with the sentiment, I read somewhere that city bonuses were only down around 7 percent.

Markbaldy said...

It will probably take a while longer for house prices to crash by
the proper amount - ie down to 50 or 60% of their current price... even then, most will STILL BE WAY ABOVE WHAT KEY WORKERS CAN AFFORD.
Having said that, bubbles burst a lot quicker than they are lets wait and see ?
Once a selling frenzy starts ("we must get the best price before the crash") then we will start to see BIG reductions. This will be the reverse of the "herd" mentallity that drove prices up. ("we had better buy before they go up any more")
I just hope Gordon Brown is still in power to rightly get the blame when his miracle economy collapses.