Thursday 2 September 2010

No time to buy a house?

More news out today on House Prices; in the UK the price of houses I think is used as a barometer of economic wealth like no other. It is the one measure that people can readily grasp. Ask someone in the street to even tell you what GDP stands for and I doubt you would get much of an answer. Ask them what house prices have been doing for the last year and you might well get a lengthy diatribe.

So the great recession has been seen as a housing recessions, sub-prime in the US, Northern Wreck and the 125% mortgages over here. This is really not the whole truth, but it seems to do for public consumption.

So now in the UK we find that once again the price of houses are dropping. This is only to be expected as the provision of mortgages has dropped right off. Banks are being ultra cautious with their rates and whacking customers with margins of over 2% which is huge (think £100k mortgage, £2k per year interest  for 25 years, a 50% gross return for the bank).

In these conditions prices are not going to rise for properties that are not attractive to overseas buyers. Thus central London, home of flats that are there purely to store art and antiques for their Chinese owners, are somewhat exempt.

Elsewhere we will see a further slow decline, perhaps as much as 10% over the coming year or two. One big prop that will stop the rot is the collapse of construction and housebuilding netted together with the rapid immigration. The UK is not the USA, which has lax planning and unlimited space for its wooden housing.

I wonder how long it would take to change the mindset of the UK population away from seeing houses as the sole asset class for storage and increase of wealth though - longer than the trough will turn out to be is my guess.


Anonymous said...

"a 50% gross return for the bank".! With fractional lending the return for the bank is much more.

Hairy Arsed Bloke said...

This delusion (aka the perceived wealth effect) on the part of the British public was very well understood by the New Labour regime. It was at the heart of their ability to remain in power for so long. While they instructed the BoE to target CPI and imported massive numbers of workers to cause wage deflation, they also allowed asset price inflation to accelerate. People though they were well off because their house prices were going up and they could afford domestic staff.

The LibCons will resort to asset price inflation as soon as their honeymoon period ends.

Mark Wadsworth said...

It was all making sense until your last bit:

One big prop that will stop the rot (1) is the collapse of construction and housebuilding (2) netted together with the rapid immigration (3). The UK is not the USA, which has lax planning (4) and unlimited space for its wooden housing.

1) Why do you refer to falling land prices as 'rot'? Land price bubble make us poorerl, not richer. Banks have two ways of upping profits - charge higher margins or simply push up the price of land so that they can lend ever larger amounts on the same old houses.

2) It's not so much a collapse as that the Tory government is the most NIMBY government ever and have shut everything down. And I don't know why free marketeers cheer at this. Imagine the Tory government issued quotas on how many cars can be built or how many haircuts a hairdresser is allowed to do.

3) Ho hum. Blame the foreigners. Increasing lifespans has a bigger impact then immigrants in numbers terms.

4) Again, not true. At the height of the boom in 2006, a million new houses were built in the USA. Pro rata to population that's the same as 200,000 in the UK (which is indeed what we were building).

Old BE said...

I agree, I think it is extremely unhealthy that most people view housing as their favourite investment. If only we threw as much of our personal cash at innovative businesses!

There is no single "housing market" though. Even non-smart bits of inner London have fared much better than elsewhere. My own not-very-glamorous abode has slipped far less in value than nicer flats further out. A few months ago I was told by a local agent that I could expect to get what I paid for it in March 2007.

I overpaid during the bubble. I have learned my lesson. I wonder how many have?

Electro-Kevin said...

House prices will never be cheap here comparable to local wages or retail prices.

But that doesn't mean that our country is rich. It's just that they get away with convincing people who live in smaller and smaller pads that they ARE rich.

So we all become 'middle class' That way we get taxed more whilst feeling superior.

Anonymous said...

is there really a shortage of housing or merely a shortage of housing to buy? I ask as I live near ever-expanding Bicester (Tesco Town) which has ample housing to purchase, only no-one buys it as its not in the prime buy-to-let land of Oxford.

I suspect a lot of the demand for housing (in certain areas) is because of competition between buy-to-let landlords and first time buyers. I offer Ashford, Kent as an example, where the market appears cornered by small speculators leveraging existing properties to corner the market

Charlie said...

BE "I think it is extremely unhealthy that most people view housing as their favourite investment"

Some view it as the safest investment. After having lost two occupational pensions and a savings plan, bricks and mortar was the only one I was going to risk with rebuilding my nest egg.

Regardless of how the market behaved, at least I would either have a roof over my head or a revenue stream in my old age.

Marchamont said...

Crowded island, scarce land.

That's what they all said about Japan before their economy stagnated and house prices halved.

Could never happen here though - could it?

Demetrius said...

Its a mess and getting worse. Part of the problem is housing benefits and where the drugs money is going.

CityUnslicker said...

Great comments, will answer more late.

marchamont, Tokyo was valued at more than the whole of the USA - even coming down by half was not enough. People were borrowing on 50year mortgages at 7x income; makes Wreck's 125% loans look like bargains.

asquith said...

Am I the only one (I don't think I am...) who gets enraged by the media assuming that prices should be high & low prices are a bad thing?

I've actually read some of these journos saying "Prices get better", "prices get worse" when they mean higher & lower. As someone who rents & would vaguely like to buy at some point I happen to think the exact opposite if it's all the same to them.

Saying that, we have prices far lower than the rest of the country, even in areas that aren't so rough.

Anonymous said...

I live in Olympicland (E3,E15) and flats are going up everywhere. Many are being snapped up by foreigners and estate agents here have more stamps in their passports than cocaine smugglers (assuming they are not the same people...)

Africans, Asians and South Americans like buying London Property because they see it as safe. So it is not just Knightsbridge and Mayfair being bid up by foreign money.

Steven_L said...

Well, I'm moving to the south east soon (new job) and I can't see myself ever buying anything there unless I marry someone rich.

But I honestly don't care. I'll keeping renting all bills and council tax included, never have to spend any money on carpets and dodgy plumbers, and have a whale of a time with all my spare cash.

CityUnslicker said...

Hiary arsed - great comment.

MW - A fall in house prices is a bad thing though if it happens fast. It wrecks consumer confidence and creates negative equity. What we need is a period of no or very slow price rises of declines (with luck we may get this). Then inflation can do its work. This way in a few years we end up with cheaper housing without the cost of another recession.

Our economy, like it or not, is built on property and finance. Screw them both and we are in big trouble again.

re your point 2 - the Tories have hardly been in. Housebuilders re not building houses because there is not the demand and the banks won;t finance them to sepc so much, it is not all planning.

re point 4 - I just don't agree in the US if an area gets shit then everyone leaves, witness Detroit and New Oreleans, we have this on a much smaller scale. In the US building new is much easier and cheaper due to materials, economics of scale etc.

Charlie said...

Agreed. The high vs low, good vs bad argument depends on perspective. I think the real issue is rapid movements up or down.

Drops while seemingly making them more affordable would also result in banks requiring larger deposits to avoid -ve equity which is a bigger problem for 1st time buyers, but it's these that allow the others further up the ladder to move up.

Large scale new build projects aren't helped by the requirement for 'affordable' one bed properties that no-one really wants but have to be built as a pre-condition for the other more desirable 2+ properties.

Small scale developments suffer the problem of finding appropriate locations and securing funding, but without extra capacity coming into the market to provide a buffer, the prices are going to be volatile making the market difficult for both buyers and sellers.