Friday, 14 November 2008

Housing pessimists have got it all wrong

A 40 percent fall in house prices? No way, says Yolande Barnes of the Times:

"To predict that the UK housing market will fall by 40 per cent and remain at these new, corrected levels is to ignore the role of finite supply and the use of equity.

The most frequently used indicator of property market overheating is the house price to income ratio. In the 1970s and 1980s loans averaged around three to four times earnings, causing the pessimists to argue that the recent levels of six or seven times are unsustainable.

What the pessimists ignore is the increased use of equity in the housing market. Mortgage lending in the 1960s and 1970s facilitated a huge transfer of property ownership from landlords to owner-occupiers. Those home-buying pioneers have been paying off their mortgages and house-price inflation has increased their purchasing power in competition with new entrants.

So it has always been inevitable that, in the face of finite land and property supply, the relationship between incomes and value (the basis of having a mortgage) would become disconnected as owners became less mortgage-reliant."


The problem with this story is that it works the other way too. As house prices fall, equity shrinks, meaning that existing home owners have less purchasing power to buy high priced homes. The housing market can enter into a death spiral with evaporating equity pushing prices down further.

10 comments:

Mark Wadsworth said...

That's a very polite fisking, I must say. Did it take you long to delete all the swearwords you wanted to use?

Anonymous said...

Mmm, obviously she just ignores the kind of graph that appears at the top of this blog, which makes it obvious enough what happens next, even without regard for the obvious effect of the credit crunch etc.

But she is also dangerous: this kind of silly journalism threatens to drag the unwary into a bull trap in the Spring. Of course, newspapers sell advertising to all sorts of businesses who would like people to think there will be a recovery in the Spring.

So this kind of writing serves the commercial interests of the newspaper, like most of the investment analysis one read (in the end stock markets, housing markets, whatever, only go up etc. etc. etc.

Caveat emptor!

B. in C.

blooKat said...

The (many!) comments are worth a read...

Anonymous said...

Oh the newspeak. Increased "purchasing power" due to increasing house prices = owners became "less mortgage reliant"!!! They have the extra purchasing power when and only when they ramp UP the mortgage!!! Heh, unless they sold up completely, but she's not talking about that...

Anonymous said...

This commment was in the Times version of the story:

Is this the same Yolande Barnes who this time last year forecast a 6% fall to the end of 2009?
http://www.savills.co.uk/news.aspx?category=residential&id=9551&page=0

So now 6% has become 25%. I wonder what she'll be saying in November next year.

Anonymous said...

What can one expect from an industry shill? Saville's deals in high-end property, and it was the last bastion of the bubble. Now the Russians are getting margin calls on their debt and are running home; the City will be shucking thousands of bankers; and even the new non-dom tax levy will add to the misery. So send in Yolande to rally the troops. As they say in NY, fuhgeddaboutit.

Anonymous said...

I don't think that there is a risk of hyper-inflation in the UK, I'd go so far as to say it's a given. Property prices in the UK are going all the way to the moon, (if and when) the British economy recovers.

The UK residential social housing market has short fall of over 5 million homes due to the increased demand caused by immigration (over 9 million immigrants in the last decade).

In some part of London immigrants are sleeping four or five to room and there are even people living in garden sheds. Whilst immigration to the UK far from slowing down if anything is accelerating.

electro-kevin said...

Houses derive their value from the land on which they are built.

And what's the value of sterling of late ?

Anonymous said...

The original propaganda article is this morning doing the rounds of regional newspapers(in the property sections)thinly disguised as authoritative journalism.

Anonymous said...

The article is the same hype that helped create the bubble.

It may help a few dishonest people offload some bad assets come the Spring.

Bolande Yarns.