The YR2K bug that destroyed the affordable housing ladder

As a Housebuilder Our current focus is on the Downsizer and retirement end of the market and we are actively pursuing two smaller schemes from 5-50  homes respectively both in England. Phasing has become a large factor especially with respect to absorption rates and we have been exploring deferred land payment deal structures with other Land owners.
#Home@tix #DigitalSales #Housebuilders #RealEstate #PropertyDevelopment

Home@ix BUMPER STICKER, summer 2022.[31]
“occasionally something outside the Box(SILO) comes along and seems obvious but no one saw it previously. We think Home@ix is like that!”
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The stylem@ix brand has been put on ice with a watching brief, as the latest Financial crisis has again caused a credit crunch and associated havoc at all stages of the Housing Value Chain both Financial and Social, on both the Supply and Demand sides of the equation. Our preference in the meantime has been to develop our offering through a Dashboard for Down-sizers and Last Time Buyers via the Silverm@ix brand.

The Crashers v the back to normal by christmas protaganists remind me of the Early Swervers v The Work to Ruler... https://t.co/HTFOVbbf5F

— Real-Estate Land Development Limited (@RealEstateLand3) May 25, 2023

I have avoided using the word “crash” in my own description of what I’m expecting (‘collapse’ in house prices remains my unchanged expectation) and I’ve often repeated that I think it will take 2-3 years for that to happen (2025 being when I expect the bottom.

I worry some…

— Moving Home with Charlie (@moving_charlie) May 25, 2023

Definition of terms is everything, then context.
1992 and 2008 are the most widespread extensive market corrections. Both are either side of Y2K. A pivotal year.the other being 1979. 1/2https://t.co/SdV84k2CZW

— Real-Estate Land Development Limited (@RealEstateLand3) May 25, 2023

PDF of the Slides of the Land Registry Data 1995-2022https://t.co/6IavZ91CyX

— Real-Estate Land Development Limited (@RealEstateLand3) May 25, 2023

I Had a Long Running Discussion on the Motley Fool back in 2009 about the Last Crash. 

​Why House Prices Will Fall this year 2009.

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Back to 2009, And this Motely fool in another country and another life?
​Formatted Comments May be read at this blog.

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  RogerGLewis
  27 June 2012
  A year later a year older and perhape a little wiser. http://www.positivemoney.org.uk is a good place to start in seeing why the banks are the parties who have the lions share of responsibility for the mess we are all in and how bizarrely they have benefited the most at the expense of the rest of us. Are any other parties to this discussion in a similar position of a rather different viewpoint.
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  RogerGLewis
  30 May 2011
  Just re visited this after a very long couple of years and placed this observation in a blog I am writing. Just re read this whole debate from January 2009 on House prices. It’s strange even though I now believe the Banking System has to be reformed root and branch and the intervening 2 years or so has brought to light a hell of a lot of stuff about liquidity ratios at Banks going berserk I wonder How positions on this discussion would now change? My philosophical outlook has changed markedly and my world view is certainly one that, yes, as an earlier poster in this discussion pointed out , “perhaps my own timing and decisions were more due to luck than Judgement”. I would have to agree with those sentiments absolutely , perhaps for different reasons than the comment might have been implying, but I see the observation as very wise non the less. It also reminds me of where I first came across the Elephant tale. I would be interested to know if anyone did buy after reading this article and how it worked out. I currently writing an a pamphlet suggesting reform to the valuation of property by Mortgagees in possession to take account of Economic replacement costs as I believe the potential for a devastating Crash is a very real and present danger There is a very strong undercurrent in the geo political/economic out look that requires a paradigm shift in thought and deed. Anyway hello to anyone who contributed to this discussion would be great to have a re unioun discussion so to speak and reflect on what we were thinking back then and what we think now , that would be a very useful thing I think. http://en.gravatar.com/rogerglewis
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  11 February 2009
  Here we go again. Statistics Speculation Percentages Multiples Inflation Cuts 100% 5% 10% deals no deals Why not say how longs a peice of string cos its all spin !
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  RogerGLewis
  08 February 2009
  John Godfrey Saxe’s ( 1816-1887) version of the famous Indian legend, It was six men of Indostan To learning much inclined, Who went to see the Elephant (Though all of them were blind), That each by observation Might satisfy his mind. The First approach’d the Elephant, And happening to fall Against his broad and sturdy side, At once began to bawl: “God bless me! but the Elephant Is very like a wall!” The Second, feeling of the tusk, Cried, -“Ho! what have we here So very round and smooth and sharp? To me ’tis mighty clear This wonder of an Elephant Is very like a spear!” The Third approached the animal, And happening to take The squirming trunk within his hands, Thus boldly up and spake: “I see,” quoth he, “the Elephant Is very like a snake!” The Fourth reached out his eager hand, And felt about the knee. “What most this wondrous beast is like Is mighty plain,” quoth he, “‘Tis clear enough the Elephant Is very like a tree!” The Fifth, who chanced to touch the ear, Said: “E’en the blindest man Can tell what this resembles most; Deny the fact who can, This marvel of an Elephant Is very like a fan!” The Sixth no sooner had begun About the beast to grope, Then, seizing on the swinging tail That fell within his scope, “I see,” quoth he, “the Elephant Is very like a rope!” And so these men of Indostan Disputed loud and long, Each in his own opinion Exceeding stiff and strong, Though each was partly in the right, And all were in the wrong! MORAL. So oft in theologic wars, The disputants, I ween, Rail on in utter ignorance Of what each other mean, And prate about an Elephant Not one of them has seen!
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  RogerGLewis
  08 February 2009
  Stevie Smith – Not Waving But Drowning Nobody heard him, the dead man, But still he lay moaning: I was much further out than you thought And not waving but drowning. Poor chap, he always loved larking And now he’s dead It must have been too cold for him his heart gave way, They said. Oh, no no no, it was too cold always (Still the dead one lay moaning) I was much too far out all my life And not waving but drowning.
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  RogerGLewis
  08 February 2009
  Hi Old but hopeful, Do you remember this one, it’s never far from my thoughts these days. Also Stevie Smiths not waving but drowning tells us alot about perceptions. Max Ehrmann Desiderata Go placidly amid the noise and haste, and remember what peace there may be in silence. As far as possible without surrender be on good terms with all persons. Speak your truth quietly and clearly; and listen to others, even the dull and the ignorant; they too have their story. Avoid loud and aggressive persons, they are vexations to the spirit. If you compare yourself with others, you may become vain and bitter; for always there will be greater and lesser persons than yourself. Enjoy your achievements as well as your plans. Keep interested in your own career, however humble; it is a real possession in the changing fortunes of time. Exercise caution in your business affairs; for the world is full of trickery. But let this not blind you to what virtue there is; many persons strive for high ideals; and everywhere life is full of heroism. Be yourself. Especially, do not feign affection. Neither be cynical about love; for in the face of all aridity and disenchantment it is as perennial as the grass. Take kindly the counsel of the years, gracefully surrendering the things of youth. Nurture strength of spirit to shield you in sudden misfortune. But do not distress yourself with dark imaginings. Many fears are born of fatigue and loneliness. Beyond a wholesome discipline, be gentle with yourself. You are a child of the universe, no less than the trees and the stars; you have a right to be here. And whether or not it is clear to you, no doubt the universe is unfolding as it should. Therefore be at peace with God, whatever you conceive Him to be, and whatever your labors and aspirations, in the noisy confusion of life keep peace with your soul. With all its sham, drudgery, and broken dreams, it is still a beautiful world. Be cheerful. Strive to be happy. Max Ehrmann, Desiderata, Copyright 1952.
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  06 February 2009
  Hi everyone thanks for a most interesting debate. Special thanks for all the links to statistics, that’s great for me. I hope no-one will take offence if I say that it all reminds me of a poem from my schooldays “The Blind Men and The Elephant” 5 blind men decide to feel an elephant, because they can’t see it, to get an idea of what it looks like. One feels the leg, and says an elephant is like a tree, one feels the tail, and says, no, it’s like a snake, one feels the trunk, I forget what he said, and so on. They debate about which of them is right and the poet concludes “and all of them were partly right and all of them were wrong!” This is a crazy, crazy market, which means that whatever happens will be crazy, and speaking of carziness how about this? MSN’s property news headlines 2 days ago, gave some reputable survey, I’ve forgotten which one, that said prices had fallen 1% in January. In today’s headlines, Halifax says prices have risen 1.9%. Howzaat! And what’s reaaally interesting to me, is that in this debate, despite the many intelligent, informed, and perceptive points made, no-one considered that “spin” even worth mentioning…
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  RogerGLewis
  23 January 2009
  Two years of a Flat market (Stagnant) is probably about right DAQ80. I don’t think that should put Drayal off buying at this stage personally, in fact it’s a good time to buy as there should be less cowboys about and their unpleasant practices. Clearly the first trick is to source a sensible mortgage deal, easier said than done right now, but that will change.
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  23 January 2009
  Hello Roger, I meant before the end of 2010. 2 more years of stagnant or falling house prices sounds fairly reasonable – predicting much beyond there is fairly pointless because we don’t have any idea about what might happen to trade flows, potential revolutions in productivity, migration and the attitude and regulation of markets.
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  RogerGLewis
  22 January 2009
  Hi Daq80, by this decade do you mean 2010-20 or 2009-10, Prices may not explode any time between 2010 and 2020 but even at 5% compound growth they will be 70% higher in 2020 than in 2010, that isn’t a forecast but an observation, a what if proposition if you like. The ability of the world to produce real things in real economies is a potential that will be utilised, in due course and probably sooner rather than later. Because some borrowing and lending has been done imprudently does not mean that all borrowing and lending is imprudent for ever more. It is also true that all borrowing and lending that took place when the sillyness was happening was not exclusively on an imprudent basis. Once the correction sorts the Wheat from the Chaff there will still be plenty of wheat left, the economic potential of all markets is arguably still the same now as it was before the crash. I can’t be bothered to do the maths but I’m sure that if someone can be bothered to add it all up they will find that there is as much matter after the explosion as before, and the economy will be a little easier to put back together, than a bunch of sub atomic particles.
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  22 January 2009
  Drayal, there isn’t going to be an explosion in house prices any time this decade. The £500bn is actually also not a real figures – the government isn’t going to borrow that amount, it’s merely said that it will stand behind that amount of debts which have already been created to secure the financial system. In reality the government will only have to stump up a tiny fraction of that amount as there is a £500bn of assets in theory matches up to those debts. The government has guaranteed the shortfall between the assets and debts in effect, and only once the difference exceeds what banks and other lenders already have in capital. However, what will happen and is already happening is that the companies which created those debts in the first place through commercial lending, personal loans, trade credit and finally and most importantly mortgage lending are doing their utmost to deleverage – in other words to cancel and reduce as much of that huge amount as quickly as they reasonably can. This huge sucking of money out of the system is causing a scarcity of credit that the government is not going to be able to fill – and nor is anyone else.
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  RogerGLewis
  22 January 2009
  I’m with Last Chip all the way on that. Houses are for the long term and with a long term view if I were you I would find the best house you can afford at the best price you can negotiate now Draval. Make sure you can afford the payments when interest rates go back up again, in a few years time with a good margin for error, and you should be alright. DIfferent areas have different levels of price fall but do remember not to believe that the prices in Estate Agents windows or in property listing are what is being paid. On Primelocation.com there is a feature showing what prices have actually sold for as they have to be registered at the Land Registry for Payment of Stamp duty, zoopla has a similar feature. Don’t be in a hurry or be pressured into making a higher bid if someone else is interested there is always another property even in the periods of boom. Stick to your guns and pay the price you feel is fair for that property. Don’t stand for any nonsense from the Agents, insist on seeing what you want to see have a list of questions for the things that are important to you and satisfy yourself that all your own boxes are ticked.Before you start looking see what Mortgage is best suited to you and get an offer in principal, you have an even stronger position in doing that.’ WE are all cash buyers if we have the finance arranged’. As a buyer now you have a strong bargaining position and your experience of buying a property now should mean that you get a higher degree of service and have less hassle with the professionals not doing their job properly for you. Remember you’re the Boss in a buyers market, be fair but firm and enjoy knowing that you will have a wider and better selection over a longer period of time in which to make the right decision without all the Hype going on. Good Luck
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  LastChip
  22 January 2009
  For what it’s worth (not a lot!), I don’t think there is [i]any[/i] possibility of a hose price explosion. The real debate is whether prices will fall some more (and if so, by how much), or whether we’re likely to see a fairly flat market in the near future. As I stated above, my own personal view, is it will trend down a little more this year and then remain flat for about another 18-24 months, but it [i]is[/i] only my opinion. My crystal ball is no better than anyone else’s!
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  22 January 2009
  And Draval add to the fact they are thinking of printing money “quantive easing” does this devalue the cash in the bank ? I don’t know. Uncharted waters, but as i have been saying for some time which Cliff D’arcy ignores becaue he wants prices to fall (as he’s renting since 2003 or 05 and has admitted he wants to buy), this is why he publishes these articles all in the same vein). Personally over time a house is a house, it’s tangible and is desirable as an investment and as somewhere to live. It;s the most important asset anywhere(except perhaps gold). I am needing to sell this year(if i can) and i do worry that the bounce will create a bigger property boom than the previous for all the reasons you outline.
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  22 January 2009
  I am so confused and wondered what EVERYONE’S thoughts are since the announcement of the new 500Billion bail out and the raising of billions of bonds to release capital into the mortgage markets. I cannot believe that this is happening, isn’t it because of mortgage bonds that we are all in this dire predicament? I was reading an article by the head of the new bank of england (I think), written today I believe, and he said that long term we need desperately to get away from borrowing and start saving. House prices were just beginning to show some signs of falling , I thought we had all begun to realise that perhaps borrowing vast sums of money that we can’t afford was not such a good idea, I keep reading that 70000 people will lose their houses this year, yet the government are raising IOU bonds to kick start the housing market so house prices go up and people will attempt to buy on low interest rates but what then? What happens when interest rates go up ? I am just a simple housewife, I was forced to move last year lost money on my home but still have capital I want to buy again and thought house prices were falling and I would just wait until what I would prefer to live in became affordable. If the government had not announced that it was now going to raise bonds and kick start the housing market because people spend lots of money when they move and they need us to spend money, I would have held out until the summer knowing that when I started to look there might be something I could afford. Now I am worried that house prices are going to start going up as we are already being told that interest at Estate Agents increased in January and in my area house prices really have not come down, certainly not 15+ % So in the light of the new government bail out does this article still ring true or are we about to witness an EXPLOSION in house prices as everyone rushes out to buy believing that house prices will go up . Any advice would be GREAT, I feel so overwhelmed by all of this
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  RogerGLewis
  21 January 2009
  Hi Pond, Yes I think that The New labour experiment has had it’s shortcomings they haven’t the monopoly on economic incompetence by any stretch. Although the independence of the Bank of England from the treasury was in my view Gordon Browns Master Stroke as we say in Bristol Fair Play. It is fair to say that they have been caught napping on their watch as has been Mervyn King and Eddie George before. I am optimistic in that I do not believe that our economy, represented by the wealth of talent that there is in British Industry including banking, has ever had more potential to emerge from all of this stronger. We are a more entrepreneurial culture now since the economic revolution of Margaret Thatcher and Geoffrey Howe in the early eighties, the first and second Thatcher terms. Home ownership of course blossomed from there and has a large impetus in motivating people to wealth creation. The seventies was a whole lot bleaker than now, in the states too. I am not in denial but can see that there are solutions to a lot of these problems I don’t think anyone should be throwing themselves off any tall buildings just yet, quite the opposite they should be building them In 3-4 years time when they’re built the demand will be there. Roger
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  21 January 2009
  Pond, I think a better way of looking at your view is not to say supply and demand are irrelevant, but to think of supply and demand in their economic meaning – not simply whether people want a house or not. In economic terms, demand is not a constant, but expresses willingness to buy at different supply (or price) levels. In the case of housing, demand was only high at the stratospheric price levels we saw 12-18 months ago because of the easy and cheap availability of credit with no or minimal collateral. This is why countries such as Spain which have seen a construction boom have also seen rapidly rising prices in line with the UK. In actual fact this explanation – debt finance – is roughly what you point out, but the explanation for the sudden drop in prices and the likely continuation of that trend is in fact entirely to do with supply and demand in all their guises.
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  Pond321
  20 January 2009
  Roger, I agree and it is healthy to debate these topics. I think the one thing that that we all see eye to eye about is that the current government are a bunch of muppets who have destroyed our once sound economy and banking system!! ?
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  RogerGLewis
  20 January 2009
  Hi Pond, I really don’t agree with you but still want to be your friend it would never be a boring night out with you and would be fun to paint in the gaps between the dots of each others points of view. I’m with Matchmade whole heartedly on this one I don’t think either of us approves of a lot of what has passed as the current governments housing policy. Hips, brownfield development, inertia to tackling an outmoded and frankly broken planning system, stealth taxes aplenty. The basic premise of investment in anything is you gotta be in it to win it, the minefield is there to be negotiated , to be honest this is much more fun than shooting fish in a barrel. WIth best Wishes Roger
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  Pond321
  20 January 2009
  Matchmade. Not sure you are getting the bigger picture here. Let me try to explain……. The price of houses are purely and simply based on the amount of money that is chasing them. Supply and demand, in the context of the UK market are irrelevant. That is evidenced by: • Countries with a huge oversupply of house (US, Spain etc) still seeing massive house price inflation • Countries that had a huge increase in property prices not seeing a corresponding spike in rental prices (UK, Ireland etc etc). If there was REALLY competition for places to live, rental prices would be chased up (see Australia as an example). Much of the money in the UK/World financial system has been created in the last few years. It has been ‘created’ as debt. That is how banks ‘make’ new money. That money will only exist in reality once it has been paid back to the banks by the people who borrowed it. However, the problem is, the money cannot be paid back. The people who borrowed it cannot afford it. Be they subprime borrowers defaulting on their mortgages, or LyondellBassell owning Oligarchs owing £2.5BN, the effect is the same. The banks have to write off this ‘money’ they created. This means, that in effect, you could almost argue that there are two types of money floating around the economy. 1) Real money, backed by real assets that can be claimed in the event of default 2) Funny money, that was magically created by banks, that was secured against dodgy assets or dodgy insurance, and which will disappear as fast as it was created. So, say a house was worth £100K in 1999 and £300K in 2007. That is a rise of £200K. The problem is, probably £150K of the ‘rise’ was driven by the availability of loose credit (i.e the funny money detailed above). When this loose credit is written off by the banks, and removed from the economy the price of the house will revert to a level that is sustainable with the amount of money that remains in the economy. Now, bear in mind that the UK banks borrowed £6 Billion from overseas banks in 2000 to fund this lending binge. In 2007, they borrowed £737 Billion. This should give you an idea of the amount of money that needs to be ‘removed’ from the UK economy. This will have a devastating impact on all asset prices – stocks, bonds, commodities etc. Unfortunately, a disproportionately large amount of cash is tied up in property. So property will be hurt worse than most. Commercial property prices have dropped by approaching 30% and are not stopping. Most commentators are expecting drops of 50%+. The same will happen to house prices. However, it will be a slower, more drawn out process as Estate Agents need to persuade each and every seller that the ‘Equity’ in the house does not really exist and was actually and illusionary figure based on huge amounts of ‘funny money’ that never existed in the first place……
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  matchmade
  20 January 2009
  Pond321 – the reason there is a shortage of affordable housing is that: a) prices have been pushed up by an easy supply of credit, a lack of new supply, and a tax system that encourges people to put most of their money into housing rather than other forms of investment. b) the cost of building a new house is, frankly, enormous compared to most people’s salaries, especially when developers have to give away 1/3 of their houses as “affordable homes” which are rented out or sold as bribes to the Government’s favoured constituencies. Until the Government starts subsidising housebuilding as they did in the 1950s, we will never get cheap new housing at substantial volumes. All this talk about houses “inevitably” falling to some arbitrary multiple of average salaries is just ridiculous. It ignores supply and demand, the cost of building a new home at a largely fixed quality level on a limited supply of land, increasing wealth in the economy which is inherited and used to top up young people’s deposits, and a tax system which says that all capital gains on one’s principal home is tax-free, which makes it a no-brainer to put most of one’s money into housing. House prices are falling rapidly as we are in a recession and everyone’s terrified of losing money and it’s very hard to get a mortgage. Trading volumes are very thin, so prices inevitably fall as many of the few properties on the market are poor quality distress sales, and the majority of sellers and buyers are sitting tight. I agree that houses prices will probably stabilise around the end of 2009 and then do nothing for 3-5 years. The new house market will remain bombed out, with almost no houses being built, because the cost to build a home has simply become more than people are prepared to pay. For this I blame greedy landowners, who expect ridiculous prices for their land, and the Government, for imposing a ludicrously complicated planning system, incredibly expensive taxes (Section 106, affordable homes, as well as VAT, corporation tax and so on) and unachievable and expensive zero-carbon rules on new homes, even though the vast proportion of energy is lost by inefficient existing homes. Developers and builders are as usual stuck in the middle dealing with everyone else’s agendas.
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  RogerGLewis
  19 January 2009
  Hi Pond, I appreciate that you have a genuine concern that things have got really bad and will continue to get worse. I also appreciate that your own calculations seem to be that you are better of renting. It may well be that you have a good system for investing/saving with a portfolio spread across a range of asset classes, pension provision and all the stuff we all know are good to do. The current Bust has not been with us for a matter of Months it has been fomenting for at least 18-months. The madness of crowds examples given above in the thread apply both ways to booms and to busts. What we are likely to see now is a period of a few years with everything bumping along the bottom, life does go on and there is a level of economic activity that will always take place . The broken Banking system will get fixed, essentially oil will be put back in the engine and the NItrous oxide conversion/turbo charger will be removed, and yes should never have been fitted in the first place. You will make your own decisions I am sure but do have a look at housing demand/supply in more detail if it isn’t addressed then the bubbles in the property market will come and go and be more dramatic in future. My Grandfather would never take out a mortgage and was very against any of his seven children taking out mortgages to buy property, his strong dislike of Mortgages were founded in his experiences as a coal miner in South Wales in the 1930’s. None of his seven children all of who are now retired themselves followed his advice and none of them has ever been re-possessed, or regrets having bought their homes My own parents sold a house in 1972 to move abroad with work and found it very difficult to buy in 1977 when we all returned to the Uk, the next time we were abroad for dads work they rented their house out.In 1977 they bought and found it a very tight squeeze. They have no mortgage now and have the ability to do equity release should they need some extra cash, they would not be as secure had they not made that decision in 1977, my parents are pensioners on an indexed link pension and of course not havig rent to pay is a very great saving at their time of life. We could trade stories all day of winners and losers in the housing market but I would bet you a pound to a penny all day long that a higher percentage of buyers of property this year will be in the winners column at their retirement than in the losers column. A point on renting as opposed to buying and surviving 3 months without a job, landlords are more likely to evict a tenant with greater ease than a Mortgagee for non payment of rent/mortgage payments.IF you are investing over the longer term say you are 30 and plan to retire at 55 you need to make your comparison over a 25 year period If there is a period with a starting point and a finish period with an intervening 25 years where renters would have ended up better off than Buyers I would be interested to see it . The good thing though about being a long term home owner is that your rent is added to your savings effectively. If you are investing the equivalent amount you will be working a lot harder than if you seek out and buy the best property each time you move, of course staying put is more efficient from a taxation point of view ( the dreaded Stamp Duty) There’s no desperate rush so I wouldn’t be worrying particularly if I were you my main concern would be that I would be giving money to a land lord that I could effectively be giving to my self, home ownership is a great form of saving especially if as most of us do and we trade down on our retirement, this is an often overlooked benefit.
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  Pond321
  18 January 2009
  Roger, I can certainly relate to some of the points you have made. As a potential First Time Buyer myself, I am one of the people that need to be ‘persuaded’ to buy. This is how my thinking goes: – When to buy. In simplistic terms, for every £1 I borrow via a mortgage, I will have to pay two back. At the moment, I can get a house that was valued at £300K the peak of the market for about £260K. I am fairly confident that that I will, at some point in the not too distant future, get that same house for about £200K. Thus, I will ‘save’ £60K upfront, which relates to £120K over the duration of the mortgage. I would be mad to commit to spending £120K extra to buy a house now as opposed to, say, 18 months time. – Renting vs buying. For the last 5 years, I have rented a flat. The monthly rent on the flat is LESS that the monthly payments would be on an interest only mortgage for the same flat. The landlord also pays my service charge and water rates. I have no responsibility for fixing anything in the flat when it goes wrong, or any of the wear and tear, or payments towards things such as replacing the communal widows or fixing the lift when it malfunctions. The people who bought my flat paid about £135K for it in 2003. They then spent several thousand gutting it and doing it up. The value of flats in this block rose to about £180K in 2007. The last one sold a few of months ago and was put on the market at £162K. It sold after a couple of months, but it would surprise me if it went for the full asking price. It would seem, in a few months, that the value of the flat that I rent will be less than my landlord paid in 2003. So if my rent is cheaper than a mortgage, and I get no capital appreciation, what is the point in buying? – Debt. I am lucky enough to work for one of the most successful companies in the world. The company I work for is sitting on a cash pile of well over $20 billion and has no debt. Even so, a round of redundancies is widely rumoured to be announced this week. This is expected to be between 10% and 20% of the workforce. Most of the people I work with are in their mid twenties to mid thirties. They all earn well above the average salary, they are probably in to the top 5% to 10% for their peer group. They all have nice cars and nice houses. And they all, without exception, could not survive three months without pay. They are mortgaged to the hilt. They have credit card debt. They have car loans. They have student loans. I do not think you understand the sheer scale of debt that exists within this country. The moment anyone of these people lose their job, or their partner loses their job, they become another repossession statistic. This is what will drive house prices down for years to come. People like my friends, losing the fight to keep their house. – Lack of housing availability. The government says that we will need 3 million new houses by 2010. This figure is oft quoted by estate agents and the like. The problem is, I do not believe this figure. There has never been a shortage of houses for sale or rent. In fact, rental prices have DECLINED over the last few years. There was a shortage of houses that people could AFFORD. But this is very different to an actual shortage of houses to live in (as in Australia for example). – Finally, house prices rose for over ten years in a row. They rose over 300%. They have been dropping back for about 1 year and have dropped 20%. I would be interested to hear about any house prices crashes that have occurred historically where the bubble lasted 10+ years and the bust lasted a matter of months.
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  RogerGLewis
  18 January 2009
  For some reason my last post has posted itself twice I apologise for the cock up unfortunately I don’t know how to fix it. Thank you for the recommended reading Cunning Cliff, I will look out those titles on my next trip to Borders. Are you saying that basically the world economy is so broken it will never be fixed? at least not any time soon. I admit to being an optomist but was certain of a crash from 2005 onwards it has been worse than I ever imagined and whilst there is a degree of wishful thinking in being optomisitc for the future I do feel the british economy is in better shape than 1982 and 1992 and that as a more enterprising culture if Government sticks to the social stuff and deals with the crooks then the end of the world is not what we are experiencing. The Japanese experiences in the ‘lost decade’ have a lot to do with the very large cultural differences which are reflected in the government of Japan. What happened there is not automatically going to happen here for many reasons. I know you have a difficult job and that your Job is not to please your readers but to inform them of how you see it, and call it how you see it. I am interested to hear why you feel that the supply side of the property equation in the UK is so insignificant as not to merit a mention in your article?
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  Cliff D’Arcy
  18 January 2009
  Thanks to everyone who commented on my article. As always, the topic of property prices polarises my audience into two diametrically opposed camps! ;0) To those who doubt my belief that house prices still have a fair way to fall, I recommend reading these five books: 1) “A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation” by Dr Richard Bookstaber http://www.amazon.co.uk/Demon-Our-Own-Design-Innovation/dp/0471227277 * After reading a pre-publication copy of “Demon”, I sold the vast majority of my shares in banks and insurers in the spring of 2007. I owe Dr Bookstaber a large drink for correctly predicting the credit crunch and the ensuing financial and asset-price collapse! 2) “Devil Take the Hindmost: A History of Financial Speculation” by Edward Chancellor http://www.amazon.co.uk/Devil-Take-Hindmost-Financial-Speculation/dp/0452281806 * “Hindmost” is perhaps the best book ever written on asset bubbles and busts. Indeed, it correctly predicted the post-dotcom collapse. 3) “Against the Gods: The Remarkable Story of Risk” by Peter L Bernstein http://www.amazon.co.uk/Against-Gods-Remarkable-Story-Risk/dp/0471295639 * A superb guide to a greater understanding of risk and reward. 4) “Fantasy Island” by Larry Elliott and Dan Atkinson http://www.amazon.co.uk/Fantasy-Island-Larry-Elliott/dp/1845296052 * Some home truths about the awful state that the UK is in today. I reviewed this book here: http://www.fool.co.uk/news/your-money/2007/12/21/were-all-living-on-fantasy-island.aspx 5) “The Gods That Failed: How Blind Faith in Markets Has Cost Us Our Future” by Larry Elliott and Dan Atkinson http://www.amazon.co.uk/Gods-That-Failed-Markets-Future/dp/1847920306 * More analysis of the mess we’re in from the authors of 4). Enjoy! :0) Cliff (Fool freelancer and shareholder)
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  RogerGLewis
  18 January 2009
  Pond321. Of course I understand all of the points you make and I do not disagree with you, where I think we disagree is whether or not all of this carnage should discourage a first time buyer from Buying their own property now. It is true that First Time buyers are very important to the efficient functioning of the Housing market, and I hope that increasing numbers of them will start to come up for air and see that the future still exists and is a good place to be headed. Housing is a human necessity whether we rent a room from our parents or a local authority apartment or choose to be a homeowner is a decision we all face. Renting is expensive in relation to Buying at present if you can finance a property purchase in this very poor lending market my question is why wouldn’t you? Those that disagree with this proposition base their view on a notion that they could pay less for the same thing in another 6 months , year or some other timescale.or perhaps have an objection to private property from a philosophical/political viewpoint. Supertyke26 sums up the situation in saying that the desirable properties which are available are still sought out by long term investors/homeowners , these homes are just not coming on the market any more, the vast majority of homeowners do have a choice as to whether or not to sell their property most will sit tight and ride out the storm. The housing market consists of many tiers the sub prime problem in the US is very different to the UK market there is simply more property over there and whole neighborhoods are being destroyed by foreclosures on Properties which are Sub-prime, not just the financial status of the potential borrowers are sub prime the properties themselves are perhaps worthless.( is there such a thing as a worthless property in the UK? ) some derelict properties have a cost of re-furbishment that is more than the final value when restored, such properties are essentially worthless in the sense that their residual value would be a negative number)This is not common in the UK on homes that have been mortgaged even recently. Even in the states where the self destruct button appears to have been pressed it is not to late to have calmer heads prevail. I think there is an element of talking at crossed purposes on this one, not all sub-prime properties are worthless is probably more true that all sub-prime mortgages are secured on worthless properties. My view is that First time buyers should not be deterred to committing to home ownership to satisfy their future housing needs, you have to live somewhere anyway , renting is relatively expensive and the market has had a correction, its probably safer now than it was in 2006 ( hindsight is a wonderful thing). In the current climate where even desirable properties are difficult to sell in some cases I would advise any first time buyer to get on and buy such a property. Investors who are looking at property from another perspective and weighing it against other opportunities have a different set of things to consider, I think it would be foolish if an investor holds property at the moment in addition to their own home to sell all of that property including their own home to take flight from their depreciating asset. Where a market develops that the price of property falls below the cost of replacement even excluding land value, a point made by Matchmade, you pretty soon start expecting invites to the mad hatters tea party. In a market that needs 3 million new homes to be built by 2020, to meet housing demand, where there is a fundamental shortage of supply over the short term, property is a good store of value, hedge against inflation, a good means of saving. It’s easy to lose your shirt in property, I am not encouraging anyone to go silly I have watched with incredulity the craziness in the so called property hots spots in London and the south east and the north West of the Uk and in South Wales, of course these bubbles are unsustainable of course some people have been incredibly stupid but the end of the world still isn’t nigh. It is a sensible choice although a serious comitment to take on ownership of your own home. If prices were to fall over 25% in 2009 following the 30% falls in 2008 buying now would have got you off to a pretty shaky start, there are however Bounces in markets following over corrections brought about from market excesses. Of course things have been really bad, a lot of the so called new bad news is all just obvious fall out from the bad news we already know about, in the run up to Northern Rocks nationalisation and the collapse of Lehmans there was a kind of Phony war when nothing happened because no one knew who was the elephant in the room all of these things are important and serious of course they are. My view is that most ( the Majority of the bad stuff ) is already priced into the markets and write downs rarely turn into total losses. Calmer heads usually prevail, the bears enjoy their glory at the inevitable slump at the end of each cycle not many multiple choice exams have (a) as the only correct answer for all the questions although if you answer (a) to all questions to a multiple choice exam you’ll probably get at least one if not a few more answers correct. I am sticking to my guns any first time buyer that asks me if they should buy now I would say yes its a great time to buy if you can get your finance if you are careful to pay the right price for you and if you are happy to take a long term view. In the long run we are indeed all dead but by the time your time is up if say your 25 now and plan on retiring at 65 in the 40 intervening years you will see between 5 and 8 cycles in the property market but by the time the next peak comes around buying at todays prices its my bet you’ll be ahead of the game, its only a guess there are no guarantees, it may be that you could wait 12 months and be better off to the tune of 25% although I very much doubt it, Turkeys after all don’t vote for christmas. The turkeys being the banks in this particular case will eventually realise that they have to consider the longer term too and act accordingly, this realisation will occur sometime this year meanwhile a lot of people will be eyeing the markets with increasing relish.
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  18 January 2009
  My friend who is an Estate Agent says that the market is much worse than thats being reported. She says that there is demand but its people chancing their arm by making stupid offers or time wasters just nosey. The agents are told to try to hype up the market or lose their jobs. Their clients will not drop their house prices even though the price is out of date by months. No Estate Agent believes that the market will pick up until next year at least.
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  Pond321
  18 January 2009
  RogerGLewis A few points. Firstly, I find your ‘everyone thought the world was flat’ analogy amusing. To me, it seems like you are arguing the world is flat (i.e things will revert to how they have always been and there is no need to consider any change from historical precedent).. Your point around the banks failing twice since the seventies reflects this. The UK banks have been bankrupt a couple of times since the seventies. This is very different to the global banking system failing, which is the current risk. Secondly, you do not seem to understand that the impact that Mortgage/Credit Backed Securities have had on the market. They have allowed trillions of dollars of money to be created out of thin air. These trillions of dollars will be destroyed as banks write down the value of the securities. The prices of assets (like houses) will drop substantially as there is no longer this wall of ‘loose’ credit chasing them. Property, as you correctly state, is illiquid. It will take years and years for these falls to complete. Thirdly, look at Japan. Property prices have been trending down for 15 years there. The same could easily happen here – and our banks ar certainly in more of a mess as we do not have the savings that the Japanese had when their financial system went belly up……
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  RogerGLewis
  18 January 2009
  Mr Buffets sayings are many, his biography, Snowball is what I am currently reading. It is disappointing that it seems personal attacks on this forum are equated by some with somehow addressing and countering the opinions posted by others.I think you’ll find stain tune rider that the cautious thing is a Buffetism borrowed from his mentor Mr Graham, an investment guru that spurned a group of investors referred to extensively as the Grahamites. In that biography on which Warren Buffet himself cooperated, the sentiments as repeated by me, not as a direct quote were accurate, I won’t find a page reference but do recommend it to all as a good read, I see from googling the term (Warren Buffet, when the greedy get cautious.)that Mr Buffet has used this term in several forms and probably many times over the years, including again recently it seems, I sourced it from the biography. Remaining in the subject, sure I agree that if you already have your own property and are seeking other investments some with very low risk, or even shorter term higher risk higher return investments, will be more attractive to you. If you want to put your money under a mattress good luck to you I’m not going to tell you not to. My final word on this subject is this. It’s a free county do what you want to do,but remember in the 15th century some people thought the world was flat and maps had areas marked ”Here there be monsters’. I felt MR Darcy’s article was very one sided in fact I still do, these days I’ll stick to my Satellite Navigation I’m not into getting my info from outdated maps, least of all those touting monsters. Be careful out there, but don’t be cowed by the sooth sayers and merchants of doom.
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  18 January 2009
  Staintunerider: yours must be a lonely place, wherever it may be! You seem to be the only person who knows his ass from his elbow; you’re presumably the only person living on the planet wherever you live; and you can’t quote accurately either. A reputable Wall Street site claims that Mr Buffet’s remark was: “Be fearful when others are greedy and greedy only when others are fearful.” Would you do us all a favour and give us a break from your ill-considered and ignorant views, and from your unnecessarily impertinent remarks on other posters’ views? Disagree with the rest of us by all means but “please keep your comments polite and on topic”, even at 1:54AM.
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  18 January 2009
  RogerGLewis, it goes to show what you know ! Buffet said when others are scared get greedy and when they are greedy get scared. The fact you got this simple fact wrong means you don;t know your butt from your elbow. Anything else you add is redundant !
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  17 January 2009
  DAQ80: thanks for your support. A point about banks: you imply that they have some discretion over their capital accounts. Not really: the Basel II accords [are supposed to ;)] regulate them. No point in addressing them here, but for banks to command decent agency ratings (FWTW), they’re better off if they comply with the accords. Staintunerider: your point about UK income distribution and the housing market is well taken. Rock solid data for 2006/2007 is available here: http://www.statistics.gov.uk/cci/nugget.asp?id=334. In short, average UK household “final income” — that is, after tax and benefits — was about £28K (graph accuracy). For the top one fifth of households, the figure is about £52K; for the bottom one-fifth about £15K. In future, if final household income is earned by two or more members, banks and BS will only base mortgages on a percentage of the total — 80%? The risk that one or more members lose their jobs, even temporarily, is too great. The scary thing is that, even for the average household earning a final income of £52K, the maximum average mortgage will be about £185,000. At 6% over 25 years, monthly repayments are £1,190. I happily leave you to work out what the average house price is likely to be for this segment of the household population. My guesstimate? About £300,000. As for the first quintile, maximum mortgage about £50,000: average house price about £65,000!
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  17 January 2009
  RogerGLewis, This might not have much to do with the thread, but I’d your comments much easier to read if you followed the conventions of the language you’re writing in and didn’t randomly capitalise words. It’s so annoying it deflects from your intended message completely. Back to the thread – Cliff called the market a little early, but his judgement about what was imminent has been absolutely spot on. I’m not about to soliloquise here – life’s too short, but to knock the bloke because he’s a ‘renter’ is downright bizarre. Perhaps a more reasonable target would be to knock those who seek to invoke envy in others by displaying things they can’t afford with no reasonable likelihood of paying for them. Where’s the dividing line between reckless (or feckless) debt and theft?
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  17 January 2009
  The reason that property prices are falling besides the banks lending restrictions (as they try to repair their balance sheets and restrict their credit to avoid further write off by asking for higher deposits) is that many people particularly the first time buyer and the investment buyer like myself are staying out of the market. All the properties I have bought for investment since the early 90’s have been with cash as I have no need of a mortgage.I got out of investment property by may 2007 as I saw th market overcooking in the same way as it has done in the past.The ratios were all far too high and the lending terms outrageous(125% mortgages) Most of my cash is now locked nicely away for a couple of years or longer ( up to 2013) at a rate averaging 6.5% so why would I want to risk buying say a property at the moment say for £200k which might be at least 15-20% lower at the end of 2009. I would then have lost about 40k offset maybe by rental of 10k before tax making a loss on capital this year of 30k and reducing my 200k to 170k. On the other hand my £200k has moved up to 213k before tax without any of the hassle of the rental market. Until the market looks tempting enough many investors like me will stay out, further aggravating the situation as will first time buyers who if they have any sense will sit it out and rent and save a bigger deposit while they rent thus securing a better mortgage deal when the market looks tempting again probably in late 2010 at the earliest. regards malc
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  RogerGLewis
  17 January 2009
  The long term trend for house prices in the UK particularly even on a 50 year mean curve is actually not so bad after all for most of us our houses are firstly a place to live in. of course I recognize the incredible times in which we are currently living and have experienced for the past 18 months. IF one falls of a cliff then the ground will sooner or later be reached, I think that impact has happened, multiple discounting of basically the same disastrous decisions banks have made in the past 5 years is not the way forward, double counting of anything has always been poor maths to my way of thinking. I remember Nigel Lawson de-crying the teenaged scribblers, a lot of said scribbling has proliferated of late. On house prices there are bargains to be had wise investment advice is that if you can buy within 10% of the bottom of a market and sell within 10% of the top you are doing pretty well. Frankly we are a long way from the next top and it is a fair bet that we are not 10% either way from the Bottom, property should always be a long term Buy due to its illiquidity, on a 25 year view I can’t see why anyone would not want to buy now, If I were a first time buyer I would be buying, get the best bargain on the best there is out there that you can afford. Buying as several people have pointed out is now substantially cheaper than renting at the level of rates prevalent today. As for the whole armageddon stuff sure there is some extraordinarily strange stuff happening but the banks have been bust at least twice since the seventies. I don’t think that the ability of our economy is less now to recover from this I think it is actually better. Last year Oil prices and inflation were the great worries, this year we are to believe we should be preparing for deflation of a wiemarian scale. We live in a Land of opportunity in an age of great potential. Personally I am starting a number of new business ventures this year precisely to capitalize upon the stodgy thinking that will be slowing down potential competitors who are adjusting to the new realities in the market. Yes there were ridiculous excesses from 2005-2008, yes there have been some lamentable cock ups and even frauds but the world keeps spinning , the sun rising and setting and the world essentially is still here or was last time i looked. There are always opportunities at times like these, I am arguing that Property is one of them.
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  Pond321
  17 January 2009
  RogerGLewis “I shorted Canary Wharf in 2003 as well in a very lucky trade that doubled the 7 figure sum that I foolishly trusted to my legendary Luck. Maybe I’ll get lucky again this time.” Perhaps, but it does not sound very likely. Do you not understand that we are experiencing a financial whirlwind the likes of which we have never seen before? This week: – Thousands of UK Job losses were announced every day . Some days topped 10,000. – Anglo Irish Bank was nationalised – Citigroup has announced it will need to split in two to survive – Bank of America needed another $20Billion + Gov’t bailout to survive. – Yet more British retailers entered administration – The Telegraph announces that the UK is to set up a £200 BILLION bad bank All of the above happened in the last 5 days. I know the most dangerous words in economics are ‘it is different this time’. However, there are not normal times. The world financial system is on its knee’s. Wealth is being destroyed a rate never experienced before. And it is only just beginning. The effect of millions of people becoming unemployed and hundreds of thousands of house being reposed have not impacted on the UK financial system yet. All of our woes to date have been caused by speculation on US debt. When losses from UK loans hit the system – the question will not be ‘is it a good to buy?’, the question will be ‘will the UK financial system survive?’. I hope for deflation, but fear financial collapse. So now is not a good time to be buying a house…..
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  17 January 2009
  I think I’d have to be on guy’s side on this argument. Banks are actively restricting credit because they’re overexposed. It is absolutely imperative that they reduce the size of their balance sheet in everything from consumer loans, mortgages and commercial debt. As was mentioned, people are talking about maintaining 15% capital ratios, which is a significant margin above what has recently been held and means banks won’t be able to risk increasing their exposure to housing in particular. The next year is going to see further falls I reckon, plus a big shake up on the high street. Not pretty but very likely. It’s going to be a case of save hard for the worst and hope that by the end of this year there are some signs of the economy picking up.
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  17 January 2009
  RogerGLewis: we can agree on a lot. I doubt if “worst” is a helpful adjective for recessions. What is different about this one, in my own living memory, is the virtual collapse of the banking system in the UK and USA, among several other countries. For about 20 years the banks have based their lending policies on a similar set of “Extraordinary Popular Delusions and the Madness of Crowds” to that of house buyers. To pursue those risky policies the banks borrowed long from the wholesale market and loaned to customers who had no hope of repaying the loans on property that didn’t have the intrinsic value of the price they paid for it. Property prices, especially in the commercial property sector — in many UK high streets half the properties may be vacant in a year’s time! — are collapsing, so the long lenders want to be repaid, destroying the banks’ capital base. In addition, it is estimated that £70 billion of corporate debt must be refinanced in 2009, some of which is highly speculative owing to the much increased risk of business failure. I don’t know whether all this is doom and gloom, or even a recession. Frankly, I don’t really care what we call it. What I’m fairly sure of is this: as Mr Greenspan famously remarked, in living memory, in a century, no one has been even close to the situation we now face. No one really knows how to address the issues. And no one can know how they will finally play out. But: the combination of a tulip-style property market and reckless banking policies will not be repeated for a very long time. Real house prices will revert to the long-term (50 years or more) mean and increase, as you imply, in line with real earnings. For some idea of the trajectory of real house prices, please try this: http://www.nationwide.co.uk/hpi/historical.htm
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  RogerGLewis
  17 January 2009
  I am glad you got out in 2003. However, given your comments around supply and demand, that sounds like luck rather than judgement. I shorted Canary Wharf in 2003 as well in a very lucky trade that doubled the 7 figure sum that I foolishly trusted to my legendary Luck. Maybe I’ll get lucky again this time.
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  RogerGLewis
  17 January 2009
  This is article is spot on. I disagree with the comment above, which says that you will not get a better chance in 25 years. If you go back to 1984( 25years ago) the house price to wage ratio was 3.36 it is now around 5.8 that means that anybody who expects to get the same returns in 25 years time will need the ratio to be nearly 10 in 2034. The peak of 2007 ,which the ratio was around 7, broke the banks. What would a ratio of 10 do? . House prices will drop a lot more and its the people who are buying today, and in the last 5 years who will pay the price sadly for life. I was pleased to see such a wide range of opinions on My Darcy’s article flourish. I am happy to have stuck my neck out so to speak. I fully understand the degree of pessimism and disappointment which one sided analysis plays on. I too am a very strong critic of the TV property is a one way bet culture. I prefer to examine the facts and not to spin. The wage House price ratio is only one measure of House price affordability indeed back in the early 90’s it was a great signpost to the great value offered in places such as London Docklands, we have been in a period of over 9 years of relatively stable and historically low rates. You will remember interest rates in high double figures in the early 90’s as well as I do I am sure. WIth Base rates at 1.5% the wage House price ratio needs to be looked at in a different light to compare early 1990’s to today the amount of disposable income spent on Housing costs is less today than it was then, this is only one factor the analysis on one ratio alone should not inform anyones decision to invest look at the cost in comparison to your income and do a sensitivity analysis to see how affordable the mortgage would be at a higher rate one could realistically expect to see, I would personally be very surprised that if over the next cycle Rates peak at over 8%, and will probably peak at much less than that. I disagree that we are entering the worst Recession in living memory. I think we have been in recession since the second half of 2007, if you want to just take the 2 quarters of negative growth definition fine but it really does not do justice to the complex way in which Markets and economies really work. Warren Buffet has it right when he says ‘ when the greedy get greedy get cautious and when the greedy get cautious get greedy’ that time is now. I am not spinning I don’t have any particular axe to grind I just prefer to see both sides of any particular argument and this article I think missed a big chunk of analysis which should if considered dilute the conclusions from Armageddon to mere doom and gloom. Personally I am happier investing into this much chastened market and I am secure in the knowledge that the fundamentals will return to equilibrium as the natural cause of things and indeed already are.
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  17 January 2009
  If you have to buy now, cos you need somewhere to live its good for a few reasons. Prices are already low, further room for lowering offers (i.e. a valuation just done on a property we offered for in Nov has come in lower still hence a further 18K saving negotiated), cash is safer in property (yes we did have savings in Icelands bank which we ‘lost’ for a while). Property bought now may go down 11% this year but my cash would probably buy less in a year if I saved it at current rubbish rates. There may be reduced production and higher prices in a years time. Property will go up again eventually, more than my cash will.
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  16 January 2009
  Guykguard, to repeat if this happens the banks will get clobbered worse than subprime. If property goes where you suggest, up to a third of Uk property will be mortgaged for double their worth. The banks are dumb enough to create this situation in which they would actually end up the losers, because it would be better to go bankrupt and then be scott free in 5 years than try and deal with it. I don;t think you understand how many people earn well over 50k these days and they are still bottom feeders. If property went where you suggest a 50k earner could easily buy a 2 bed terraced house in the South East priced at 90k in 1999. For those who mention the average wage at 25k, well even 2 of these in a household can do it. No I don’t want prices to rise to 2007 levels although one day they will but that’ll be inflation and other economic factors. Fairvalue is where they should be and we don’t agree on what that is, Personally i think it’s here or 15percent down at most as a range. You simply can’t compare tulips and the gold rush as having all the same fundamentals as the property market, they are not the same, just because greed was a factor doesn’t make many other factors the same for all. You cannot c
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  16 January 2009
  Below is the solution to all our debt problems ? http://eyesonthelies.com/2008/12/16/1930s-inflation-propaganda/
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  16 January 2009
  Staintunerider: whooah, take it easy! I don’t intend to ruffle your feathers. On the other hand, no amount of personal remarks or wondering who I may be will make any difference to the bald facts or to the lessons of economic history and economic theory. Forty years may seem a long time to you and me, but in economic history it’s not time. In terms of economic theory, the reversion to the mean plays an important part. To see both history and theory played out in the realm of real UK property prices, please go here: http://www.nationwide.co.uk/hpi/historical.htm It is your fervent hope that prices will revert to their levels in 2006/2007. I’m on your side in this but history is against you: in the next 10-20 years real prices are far more likely, owing to the inescapable tendency of the reversion to the mean, to fall below the trend line, much as they did from about 1990 to 2002, when the rate of inflation was falling and relatively low. It’s easy to see that they’ve been heading south for two years, much as they did in 1979-1981 and 1989-1990, when there were no banking crises to arrest the flow of mortgage finance. One obvious impetus for the expected reversion to the mean is the banking crisis. Today, Barclays shares tanked 24% in 20 minutes; Anglo-Irish was nationalised; Citigroup and BOA are on the ropes. Why? Because the discounted future market value of the assets, including some dodgy derivatives that keep on surfacing, that still back their loan books are not worth anything like what the lenders and the borrowers thought they were worth. Much economic theory plays out at the margin: an analogy of the margin rule is the droplet that breaks the surface tension of the full glass of water, pouring water all over the place. Hence how the banking crisis was so sudden and so drastic: and the “glass” that overflowed so suddenly is still overflowing. And there’s no quick way of putting it back! Banks don’t “have to” do anything: like the rest of us, they can choose, happily. For the foreseeable future they will choose creditworthy customers over NINJNAs; depositors who prefer security for their savings over fancy returns; and rebuilding their obligatory Tier 1 and Tier 2 capital bases over dodgy derivatives, mainly by some massive cost cutting. (Those branch networks are doomed: what a crazily expensive way of raking in modest deposits, cashing cheques and dealing with other trivia!) I quite understand that the D’Arcy/guykguard motion, that house prices will continue falling for the foreseaable future, is dead scary! It can never be popular with property owners, which gives me personally no pleasure. But, the future will show that the behaviour of UK real house prices over the next ten years was no different from the prices of Dutch tulips; the gold rushes; the dot.com bubble; oil prices in 2008; and every other irrational aberration of the elementary rules of economic theory. The motion can be carried without even a show of hands!
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  LastChip
  16 January 2009
  Actually, I don’t think Mr.Lewis is a million miles away from reality. There is not only the supply issue to consider, but one which everyone ignores, the demographic issue. The vast majority of people that are coping with their mortgages will stay put. Perhaps a couple of years ago, they may have considered [i]trading up[/i], but now they’ll simply stay where they are. This takes a huge chunk of real estate out of the equation. Further, there is a massive section of property owned outright by the baby boomer generation, who are content to stay where they are and have never had any intention of moving. The headline decreases seen in the media, will simply relate to distressed sales, from those unfortunate enough to get thrown on the scrapheap, but in reality, only represent a very small proportion of overall property stocks. Where I would quibble with Mr. Lewis’s analysis is, I think (but don’t know for sure), that property will trend down a little more this year, (maybe another 10-12%), but not as much as most commentators suggest and I suspect the market will remain substantially flat for another 18-24 months thereafter. So perhaps a three year freeze on prices. By then, given a gradually recovering economy (albeit up to the hilt in public debt), will balance the flat prices seen over the period. In other words, the economy will catch up with prices, rather than, prices reducing to match the economy. Therefore, I don’t believe there is any reason to rush out and buy a property right now. Equally, I do not believe (for the reasons stated), there will be huge further falls. There will [i]appear[/i] to be, but it’s almost an illusion on a very limited amount of housing stock and statistical analysis is based on actual sales. To take that to its extreme, if only one property were sold this year and it sold for 40% less than last year, the media would state a 40% drop in house prices, but that hardly represents reality! Finally, for those of us not intending to buy or sell, it is completely irrelevant anyway, other than making the individual [i]feel[/i] richer or poorer. In fact, it could actually benefit a few, who were right on the edge of inheritance tax.