Wednesday, 10 October 2007

House Prices Under Stress

A clear winner in the Stress Test poll (see sidebar) – almost a third of you interested to explore a rapid collapse in UK house prices (we characterised this as 50% in 12months). Well, lots of us have houses !

Some interest also in thinking through the impact of 5 more years of Broon – perhaps a little less likely now, a week being a very long time etc etc – and 10% inflation during a severe downturn.

An interesting view was posted on the house-price scenario: “it would also be almost physically impossible for this to happen”, said Anon, in a long comment which made several good points.

I’d respond to this in two ways. Firstly, one of the purposes of stress-testing is to confront the possibility of something close to a discontinuity: such things do happen from time to time.

Secondly, though, I’d question just how infeasible a 50% drop is. As Idle commented on the estimable Electro-Kev’s blog:

when prices have been going up at 15% a year, just losing the last two years' worth of (overshoot) price growth will mean a 32% correction. Three years' growth lost = 52%

Now 50% in a single year would be steep, for sure: but many a commodity market has melted down more dramatically than that.

Finally, let’s watch very closely for the details of the forthcoming CGT changes. If the 10% rate for assets owned more than 2 years is indeed to be replaced by an 18% rate on a known date early in 2008, this – as Dearime suggested - could do a ‘reverse Lawson’ on house prices irrespective of the looming downtrend. Government intervention is a frequent trigger for market discontinuities – unintentional, as often as not !

ND

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Poll result:

Which scenario is most useful for stress testing ?

> Food prices treble – 11%
> Cybercrime: no refunds – 7 %
> House prices collapse – 32%
> 10% inflation + downturn – 18%
> Successful terror attack – 11%
> 5 more years of Brown – 21%

34 comments:

Jeremy Jacobs said...

Don't buy this at all. I have connections with the property-search/HIPS market. Busier than ever at the moment. Demand far outstrips supply.

Sackerson said...

You have to eat food; you don't often have to sell your house. So depending on what is affected, price changes might be theoretical rather than practical.

Wasn't it Keynes who said that wages are sticky downward? Ditto house prices, as far as the owner-occupant is concerned.

Anonymous said...

Jeremy, are you in London/SE England, or elsewhere? I shouldn't be surprised if we have (at least) two quite different housing mrkets.

Anonymous said...

Who cares? I bought my house at the bottom of the market, 17k, and it is now way up there... :-)

Housing always bounces back and historially prices double every seven years regardless of the market price.

Then again....

CityUnslicker said...

Most economists have been saying for a while that we are in for a correction.

The key to me is not whether it has an impact on whether I have to sell my house or not; but on whether I lose my job as the economy sinks.

Reality may kick in. A lot of consumer spending has been equity withdrawal.

There is still panic in the market about lack of supply. This will soon go away when people fall out of love with owning their own property as it becomes a financial millstone.

Mark Wadsworth said...

Dearime beat me to it on the 'reverse Lawson' point.

This is the Goblin King's fourth desperate throw of the dice in shoring up property prices:
- the idea that your pension fund can have buy-to-let properties (strangled at birth).
- introducing REITs to funnel money into commercial property. Didn't work, REITs shares are down by about 20% since introduction earlier this year.
- restricting supply by introducing HIPs.
- now, encouraging buy-to-letters to hang on until next April.

One more thing he might like to try is reducing council tax, which all things being equal, will boost house prices.

But it won't work. Look at Ireland, look at commercial property market in the UK.

Old BE said...

Prices swing wildly in the short term, we are in an upward bubble right now and soon there will be a downward one. But long term as long as there is general price inflation then the "value" of property will increase over time. As long as one doesn't get trapped in negative equity when one wants to move it doesn't really matter what the absolute price of one's home is.

For example: if my flat halves in value I don't care. As long as rates don't spike, I can afford to keep up the payments. It only matters when I have to pay the cash back to the bank when I sell, so I just wait until inflation has eroded the real value of the debt.

Anonymous said...

House prices CAN correct 50% downward in 12 months - but what I am saying is that for this to happen you would need a substantial proportion of the housing to come onto the market in desperate circumstances. So what I am saying is that such a thing would be a SYMPTOM of some other large-scale problem, perhaps due to one of the other issues you have raised. A terrorist detonating a nuclear bomb in the Square Mile would do it!

Nick Drew said...

Jeremy, Dearime - yes, there must be a strong regional aspect: this from today's Grauniad

... large price falls were recorded [last month] in East Anglia, Wales, and the Midlands. The south-east, north-west, south-west and Yorkshire and Humberside also saw small decreases in price. London showed a small rise in prices


http://business.guardian.co.uk/story/0,,2188261,00.html

Nick Drew said...

Ed - people in your circumstances can certainly view absolute prices with some equanimity: (indeed if you have in mind a trading-up move, lower absolute prices are a boon).

But what about

(a) those who have (re)mortgaged to finance other expenditures ?

(b) the rather large new buy-to-let sector ?

I know the East Midlands a bit (e.g.), and the substantial rental market in several towns there is as soft as, well, a very soft place.

Old BE said...

I'm afraid I have no sympathy for those who have invested in property as an asset, gambling on ever rising prices. It's not a one-way bet any more than the stock market is. They will have to sit it out or take the hit I suppose. Those who take the hit will hopefully sell to first-time buyers, levelling the playing field a bit.

ps I have nothing against buy-to-let in principle.

Anonymous said...

I think a lot of buy-to-letters have bought into this market as a way of generating retirment income in a manner that is difficult for Brown the pensions-snatcher to get his hands on. Given the circumstances this market could remain pretty strong regardless as when the economy takes a tumble there won't be anywhere else worthwhile to put it. People will always need a roof over their heads - for which you can charge.

Anonymous said...

I think for us, the answer is rising fuel prices as my husband has such a long commute every day.

Nick Drew said...

Ellee - following up on your point and reference above to a growing regional divergence in house prices, presumably many more people will be inclined to commute ever greater distances ... not sure what sort of 'joined-up government' this represents

CityUnslicker said...

Anon has a point. But as yeilds fall then they 100% buy-to-letters will be forced to sell.

This already happened in Central London a couple of years ago which is why that market went sideways in 2004/5 when the rest of the country had strong house price growth.

Jeremy Jacobs said...

London, of course.

Steven_L said...

Half of these so called 'property developers' are middle class mugs that don't know the first thing about houses or dealing with tradespeople who have been helped along by hyperinflation.

The over-leveraged amongst them will be the first casualties.

This also applied to young homeowners that have used their houses as cash machines.

One of my best mates is a kitchen salesman and he's starting to fell the double pinch of less people wanting kitchens and rising interest rates. He's used his nice £250k flat as a cash point. He started in 2001 with a £35 2 up 2 down. I thought he had a load of equity.

Apparently not he confessed the other night. A few £100 T shirts etc yes. 6 years of expensive holidays yes. Equity? No.

Nick Drew said...

Steven, that unfortunate story of your friend's position is a fantastic Real Life perspective on the whole game, which is too often being viewed from an ivory-tower perspective. Real Life is messy.

And as in any walk of life, the professionals cream the amateurs every time.

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