Monday, 18 August 2008

Why UK house prices must fall

I get a queasy feeling looking at this chart. It is a feeling something akin to vertigo. Did house prices as a ratio of earnings really go that high?

According to the Bank of England, the answer is yes. Since 2003, the ratio was exploring uncharted territory, reaching levels that would have seemed impossible in previous housing bubbles.

The ratio is now quickly returning to planet earth. As it hurtles towards its long run average, it is going to leave an army of recent homebuyers holding permanently depreciated assets. Losses, defaults, and repossessions, this is what the future holds for the UK housing market.


Anonymous said...

Do you read that chart as meaning peak to trough declines of 50% assuming NO RECESSION and NO OVERSHOOT?


Anonymous said...

According to a FT-adviser report approx 118bn was invested in BTL mortgages over 10 years and this has no doubt caused higher house prices.

I would like to know how much the investors influenced the house price increases (as a function of earnings ratio) shown in the chart? With that information I could get a better feeling for how far and how long they will fall. One thing is clear is that not all investors will be on average earnings and so this skews the chart if you try to read the information from a FTB perspective.

The total mortgage assets in the building society sector is worth 250bn (bsa stat's for end of April) and so crudely based on that 118bn is a large chunk.

The chunk is even higher when you consider that not every investor would have got a BTL mortgage. Many investors would have improved properties and sold them on at a later date to make money.

One thing is clear that it is a lethal combination when you consider that:

a) BTL sector will shrink because any newcomers can not make money within a reasonable timeframe and existing investors will want to sell off at the property peak.
b) Many FTB's have gone because they can't enter the market.
c) Most property improvers have gone because improving a property in a falling market makes no sense.
d) It appears a large proportion of existing borrowers exaggerated their earnings.


Thai said...

Do you know what the long term ratios look like for homes in countries which are not so prone to bubbles; say Germany and Switzerland?