According to the Halifax HPI, UK house prices are down 16.3 percent from their August 2007 peak.When I look at this chart today, I can't help remembering countless conversations about house prices that I had before August 2007. The details of each conversation changed, but the basic format always went something like this:
Alice: "House prices are unsustainable in terms of fundamentals. House price to earnings ratios are at unprecedented levels, households have accumulated a mountain of debt that will be difficult to repay and one day soon the whole rotten structure will collapse.
It will all come down; not one stone will stand upon another".
Home owning friend: "Well, you would say that Alice, you are a bitter renter who missed out on the greatest wealth creating opportunity that ever fell into the laps of ordinary people.
But lets put your bitterness to one side and talk fundamentals. Housing demand outstrips supply and with increasing incomes, rising population, changing lifestyles, the increasing number of single middle aged people, and ever more migration. Planning restrictions will nicely prevent house builders from increasing supply. With a housing market driven by these fundamentals, house prices can only keep rising."
Alice: "True, demand is high, but that is because banks have lent out huge amounts of credit to desperate home buyers and reckless buy-to-let speculators. Once that credit bubble bursts, demand will evaporate."
Home owning friend: "Banks employ very clever people who understand risk. Don't worry Alice, they know what they are doing.
Mortgage lending is a low risk business. After all, the loans are collateralized on a rapidly appreciating asset. Besides, homeowners have already accumulated huge amounts of home equity. Even if prices fell, homeowners could absorb the shock.
No, Alice, you haven't convinced me. In fact, I am thinking of dabbling in buy-to-let, not least because my occupational pension is worthless, and I need a low risk long term investment to give me a comfortable retirement"
Alice: "Ah, buy-to-let, well, good luck with that."
It is not that I want to say "I told you so". I haven't taken any pleasure in seeing my heavily indebted home owning friends suffer as they find it increasingly difficult to make ends meet.
No, the question for me is why did so many people buy into the lie that house prices would only keep rising. Why couldn't people see that it was all just one big UK bubble.
14 comments:
I had a similar conversation with an Estate agent friend who at the time had about 5 properties on BTL and thought he was going to be rich for life.
I mentioned the "eggs in one basket" theme too but to no avail.
He tried to get me in on this sure thing but I refused and look what happened.
Alice, I sympathise with all those who are struggling, alas my son brought at the top of the market. Even a decent deposit will not help him as he heads towards negative equity. Perhaps the interest rate cut will help, but things are going to be tight.
Could I have advised against, well perhaps, but its difficult prevailing against those who want their own place, a natural enough desire I think.
Keep up the good work.
People didn't see it coming because they didn't WANT to see it coming.
They were blinded by this new found wealth, hairdressers could live a Posh and Becks lifestyle on their 125% self cert. mortgages... whilst earning peanuts.
If it did go bad, New Labour then allowed people to write-off their debts... I never understood what the heck that was about - I mean if you borrow money, then it is accepted by any sane person that you pay it back !
Maybe Gordon Brown is hoping that the IMF will write-off the UK's debt... mmmm yes that must be it !
It was some kind of middle-class cargo cult. A couple of years ago I attended a financial seminar: question posed was -
if you came into a decent-sized inheritance, not enough to chuck it all in, but a goodly wedge, what would you invest it in ?
Of those present I was the only one who didn't say 'property'. The majority even said 'property abroad'.
When group-think gets going like that, there's no stopping it
I loved the comment from your friend about demand and supply. With urban newbuilds, people have seen the end lurking for years.
I've had those kinds of conversations.
From a sound banking viewpoint, the act of lending ought to be independent of the collateral offered. But this is not so in the housing market, where lending determines value. So we get bubble and bust.
B. in C.
Where did occupational pensions go?
Once, almost everyone could expect one, now, they have virtually disappeared.
Did brown have anything to do with it?
Alice are you considering buying a property ever or do you like paying your landlords mortgage on the property ?
With lower interest rates he'll be making a profit out of you.
"I haven't taken any pleasure in seeing my heavily indebted home owning friends suffer…". You big fibber, Alice! You've taken great, and scarcely disguised delight in it. And quite right too! You should take every opportunity to express anguished concern for your friends' plight. How about "Don't worry. House prices will only fall another 25%, then stabilise. If you hold on for ten years you might get out of negative equity."
Eighteen months ago I was advising my colleagues to sell their houses and move into rented accommodation. They told me I was mad. Then, when I sold my small portfolio of rental properties in February 2007 (held since 1998), they told me I was missing out on rising property values.
Now guess what? All my colleagues tell me they foresaw the crash coming. Hindsight is a wonderful thing.
Young Mark
I personally did tell people so, and in the grander scheme of things am taking great pleasure in all of this.
@ LEA, if you want a quick primer on the rise and fall of final salary pensions, see John Band's fine post.
Old Mark.
This drop in prices is great news. It certainly shows that paying rent rather than buying whilst house prices are plummeting has huge cost benefits. I am now dreaming of a reasonable house for 100K with near 0% mortgage rate!
The housing slump is at the center of the meltdown in financial markets as declining demand pushes down property values and causes foreclosures to mount.The S&P/Case-Shiller home-price index dropped 16.3 percent from a year earlier, more than forecast, after a 15.9 percent decline in June. The gauge has fallen every month since January 2007, and year-over-year records began in 2001.Prices dropped in 13 cities month-over-month, compared with 11 in June. Las Vegas saw values fall 2.8 percent in July, the largest decline.
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Gillberk
WHITE HAT
How low can they go? We are at 16 percent right now? We will be at 20 percent by January? Where do we go then? 30 percent? Is it too much to ask for 40 percent?
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