Umm, isn’t this what is wanted?

House prices are teetering on the brink of a crash that could be as bad as the bust of the early 1990s, a leading expert has warned.
There are already warning signs that prices are heading towards a near 40 per cent plunge, warns Paul Cheshire, Professor of Economic Geography at the London School of Economics.
It raises the alarming spectre of the return of ‘negative equity’ – when a house falls so far in value it is worth less than the mortgage – which hit one million people at the worst point in the 1990s.

42 comments on “Umm, isn’t this what is wanted?

  1. The problem for the government is that high property prices screw over young people – and the Tories want their votes.

    But falling property prices means electoral disaster for the government. If Middle Class Middle Britain lost 40% of the value of their homes, the Blue Lib-Dem Party might be out of office for a generation.

    I am not sure there is a solution to this problem. At least no one has found it. So they will try to keep prices high and kick the can down the street for some future government.

  2. Their graph shows “house prices fall for three months in a row” but the Y axis is labelled “House price growth”.

    Either another miserable journalist fail in distinguishing growth from rate of growth or the Mail really does believe that if prices grow less quickly that’s the same as them falling.

  3. The problem for the government is that high property prices screw over young people – and the Tories want their votes.

    Though the youngsters don’t seem to realise that would also be a fall in their inheritance.

    Still, they’ll never vote Tory anyway so why bother going after them?

  4. “…. prices are heading towards a near 40 per cent plunge, warns Paul Cheshire”
    did anyone ever work out how to go short on property prices?

  5. Rob,
    In his book, The Greatest Ever Trade, John Paulson describes how they figured out the crash would be caused by house prices failing to rise. He made $20Bn on that bet.

  6. The middle class have one home which they own and live in. If you had a house and 40,000 pounds in the bank, and then the prices of houses were slashed in half, you still have a house and 40,000 pounds in the bank.

    It’s people who own multiple houses as investment that lose when the price of houses goes down.

  7. As Rob, the only evidence presented is a reduced rate of increase. Not the same thing at all.
    After all, nothing has changed. There hasn’t been a massive boost in supply. There hasn’t been a mass exodus of people. Mortgage rates haven’t changed ( which would make house prices lower without helping first time buyers)
    I’ll have to dream on, it would have been nice to see my grandchildren in their own homes.

  8. Mortgage repossessions are at an all time low. Just one indicator of how few opportunities there are for buyers to come in at a discounted price.
    But net insertions into the VOA database appear to have just edged above household formation, and inflation arising from the currency changes after the referendum result is 1 year old, so won’t be in the RPI in a year’s time.
    I predict a negative RPI number in August 2018 – what’s the best way to profit from this, I wonder.

  9. synp

    The other demographic that would lose would be people in the middle class who need to change homes – upsizing for example or moving for work. If your house price has fallen 40% and you need to sell, that could easily be a significant loss.

  10. @Chernny_Drakon
    Sure, negative equity is a thing, but if you’ve been paying off a mortgage for a while already (and that includes equity brought forwards from previous moves) it’s less likely you’ll be caught. At that point, a 40% fall in selling price means you’re also buying something that’s at 40% the price it used to be as well, with all the reductions in the percentage-of-price transaction costs that brings.

    It’s that latter effect that has mean that massive house price rises have always made me feel poorer.

  11. synp,
    If you own a home and owe 80% of its value to the bank, then both you and the bank have a material interest in not seeing prices fall. Additionally, when it comes to remortgaging, you may find that your LTV ratio has gone up, pushing you into a higher repayment band. At worst you’ll be in negative equity, no bank will refinance you, and you’ll be stuck on your lender’s extortionate SVR. Eventually your home will be repossessed and you’ll still owe the bank thousands.

    I find it hard to understand how that can be considered a good thing.

  12. Chernny drakon:

    Mathematic example:

    Pre-crash a family needs to move to twice as large and twice as expensive home. Say home 1 has a value of 400k and home 2 of 800k. Net cost of move = 400k.

    Now say house prices crash by 50%. So house 1 is worth 200k and house 2 is worth 400k. Net cost of move is therefore now 200k.

    In an all cash/equity world it therefore doesn’t seem as if our family is worse off. On the contrary I’d say they’re better off.

    When debt is involved all of this of course changes

  13. Pat,

    BiND’s point is valid. A varying amount of the price of a house is about how much of a good investment it is. When people realise they aren’t rising, they’ve peaked, the investment value is gone. Prices eventually fall to the point where they’re so cheap, you might as well buy because it’s about as cheap as rent.

    Not sure about 40%, but I personally had a 30% adjustment from late 80s to mid-90s.

    I think London may get it really bad.

  14. I suspect the whole “London may get it really bad” is unlikely: there’s just too much demand and not enough supply. Speaking as someone who’s family was involved in retail a bit, it was noticeable how everywhere else mostly crashed, but London always seemed to be making money. Time will tell of course…if retail crashes in London too, there’s a lot of residential space that’s liable to come available.

  15. I don’t have anyone I need to leave my house to when I pop my clogs so am planning on an equity release draw-down as a pension top up. At current values I should be able to release c£250k so an extra £10k or so a year tax free for long as I will probably need it.

    So a house price drop could be an issue. But if I have to re-jig things so it’s £5k a year, so be it. Isn’t that what people used to do? Work out how much money they had and then work out what they could do with it?.

    Seems the modern trend is to work out what you want then demand the government give it to you.

  16. If you’re planning to sell up and retire to a villa in Portugal, a decline in both house prices and Sterling is most unwelcome.

  17. Hallowed Be said:
    “did anyone ever work out how to go short on property prices?”

    Aren’t there Exchange Traded Funds that track the property indexes? Presumably it’s possible to short those?

  18. Rupert Fiennes,

    What I know about London is rates for software people. It’s not much better than what the rates are out in Berkshire (except for back office city stuff). But rents/mortgages are considerably higher. There’s a growing amount of software work I get offered that is “work from home”, so location and high rents are irrelevant.

    And I can say this about the “new media” company I know. They have almost no-one in London now. The “creatives” designing campaigns for high-value brands are out in Berkshire. They have a small number of people in London for “client contact” but that’s all.

    If those people don’t need London, who does that is going to keep rents high? City quant guys and derivatives traders? Well, OK, but that’s not a large part of the population. And how many of them need to be in London, or how much could the support system of people working for them be improved?

    For rents to remain, rates will have to rise, but they won’t. Or government will have to pump more money into more wank jobs in London and more HB, but that’s not going to happen either.

  19. If house prices decline by 40% (whether there’s a crash or whether prices “fail to rise”) then is there not going to be another bank liquidity crisis as banks make provision for bad and doubtful debt and the reduction in the value of the security they hold? It’s only a few months since RBoS and others barely scraped by the stress testing that was done.

    Since property prices have gone up mostly because of low interest rates, and because people believe they can make a killing from the “eternal” rise in property values, perhaps it’s time to look again at taxing capital gains on residential property, to damp down some of the more extreme manifestations of high-risk indebtedness.

  20. Richard,

    The UK property indices are based on commercial property, not resi, and those are what the ETFs track.

    I once had to take a look at the various residential indices available; they all had serious flaws. I doubt if it’s changed much.

    You could attempt something using the listed builders, but good luck with that.

    I think it was Schiller who had written about the lack of house price hedging instruments somewhere between 1998 and 2002.

  21. Despite the short term pain, a reduction in house prices, and an end their being seen as an investment, would redirect future investment monies to something actually productive, as well as allowing more people to afford a home and maybe have a bit of spending money. All told it would be a great thing for the country.
    Just on this I think some government measures to ease the pain would be necessary- perhaps an offer to buy any house for what the owner paid for it ( and then sell it for the best price available).

  22. Rob – “Though the youngsters don’t seem to realise that would also be a fall in their inheritance.”

    Telling a 28 year old who wants to get married and start a family that having housing way out of their reach is fine because in another 30 years they may get a share of their parents’ house is unlikely to work.

    “Still, they’ll never vote Tory anyway so why bother going after them?”

    Steven Sailor has pointed out that voting Republican is most closely associated with family formation. Where it is cheap to buy a home, people vote Republican. Where they cannot start a family because homes are expensive, they do not.

    I would think the same is true for the UK.

  23. synp – “The middle class have one home which they own and live in. If you had a house and 40,000 pounds in the bank, and then the prices of houses were slashed in half, you still have a house and 40,000 pounds in the bank.”

    It depends where you are in your life cycle. Someone who has paid off their home may not care. Someone who has just borrowed 800,000 for a house that is now worth half that may well care a lot. It is not so simple. A collapse of house prices will punish the young who have recently acquired a house – probably the early middle aged these days. And those that are older won’t suffer.

    However it is also a matter of mentality. Someone who thinks they have a million quid in their house may have made other financial choices they would regret if their home was worth only half that. A lot of people do not save because they rely on their home.

    A collapse in housing prices is a lot like inflation – it is an arbitrary and unfair form of wealth distribution from one generation to another and between borrowers and lenders.

  24. > would redirect future investment monies to something actually productive

    High prices direct investment into building more houses. Housing seems quite productive to me: all those new flats going up along the Thames provide accommodation for workers on six-figure salaries.

    Hedging instruments: who would take the other (rising) side of the bet? What investor wants the price appreciation of housing, but without either the rental yield or the ability to leverage at rock-bottom interest rates?

  25. And this guy is an expert how? I would dare to suggest that the fall in house prices in the late 1980s and early 1990s was down to a number of policy measures making them less affordable, including scrapping miras, but particularly down to the aggressive tightening of monetary policy. Between May 1988 and November 1989 based rates doubled to 15%. This was a funding crisis, people could not find the mortgage payments from cash flow and so had to sell. It was Brutal. If the good professor suggest that we are going to aggressively hike interest rates then I would agree, but some drivel about Brexit causing a recession is just that. Drivel. Pulling out of the ERM was actually the catalyst to the great UK housing bull market as it happens.
    The problem now is thanks to their stupid housing policies – no doubt advised by professors at LSE, the government has managed to kill volumes in the housing market. It is now so expensive to move at the ‘top end’ (middle in London) that a new market is emerging. People are renting out their properties and renting from other people where they would otherwise be moving to. If we can get rid of the nonsense of ‘the housing ladder’ which actually means ‘an illiquid asset bought with leverage and no CGT’ then we might all be better off. Parents putting their spare cash into kids startups rather than starter homes.

  26. Pat – “Despite the short term pain, a reduction in house prices, and an end their being seen as an investment, would redirect future investment monies to something actually productive”

    A lot, maybe most, small businesses are started or funded by people borrowing against the value of their home. If the value of homes collapses, so does the ability of people to borrow and start new enterprises.

    It is a cliche that investing in housing is a bad form of investment but I am not sure it is true. Value is value. That value flows around the economy in a variety of ways and in the end I would think it is not bad for the economy. Although it is very tough on young people.

  27. If house price rises exceed wage growth, then it’s just zero sum: one side of the equation is just bunging money to the other side with no genuine value being created.

  28. I know a youngster whose place of work is described as “virtual”. He could live anywhere in Europe for all his firm cares. It’s his wife’s job that keeps them in London. She speaks three other languages, so if she changes job they might easily be off to somewhere sunnier.

  29. it was noticeable how everywhere else mostly crashed, but London always seemed to be making money.

    It’s the ever-increasing maw of the State that would keep London from crashing. By the same token, the Washington DC area is one of the few fast-growing areas of the country economically. And an increasing number of the richest counties in the country are those around DC.

  30. @Mark

    Pulling out of the ERM may have been a necessary condition for housing market recovery but the time lag of around three years before prices even began to keep pace with earnings makes calling it a catalyst a bit of a stretch. I think that the release of capital from building society demutualisations and maturing of first generation TESSAs in 1995/1996 was at least as significant a trigger for the restoration of boom conditions.

  31. Ted,

    > It’s the ever-increasing maw of the State that would keep London from crashing.

    You’re right about Washington DC. But the DC metro area is at most 3% of the USA’s population; whereas London alone is 13%, or 20% if you include the commuter belt. Government spending simply isn’t big enough to support London’s housing market.

    Alan / Mark,

    The introduction of Assured Shorthold Tenancy agreements (much more favourable to landlords) in the Housing Act 1996 marked the start of the long boom. Prior to ASTs, landlords were at considerable risk from bad tenants: as a result, banks were unwilling to lend to landlords. The AST made buy-to-let a safe investment, and the market hasn’t looked back since.

  32. @Andrew M, July 2, 2017 at 6:14 pm

    …The AST made buy-to-let a safe investment, and the market hasn’t looked back since.

    It has since last May/June when idiot Osborne’s stamp duty increase & interest costs laws kicked in.

    Result: fewer sales/purchases and Less Tax raised plus slowdown in growth which also results in Less Tax raised – typical left/socialist “punishment” tax biting back.

  33. My view of the 80s/90s crash:
    Inflation fell from the very high rates of the 70s but it takes time for people to adjust, so borrowing to finance a house seemed on past experience a good thing. But interest rates rose to shadow the ERM, mortgage payments became unaffordable, repossessions followed, Which might have dented this faith in the housing ladder… except that builders still had houses to sell, and the repossessed needed a place to live, which is where AST and buy to let came in. Buy-to-let often by people early-retired/redundant with a fat payoff and no better home for their money as interest rates were falling in the mid-90s. Buy-to-let pulled the market up again.

  34. DuckyMcDuckface said:
    “The UK property indices are based on commercial property, not resi, and those are what the ETFs track.”

    Three or four years ago there was an ETF called Housa that tracked the Halifax residential house price index. It seems to have disappeared though.

    Think there were a few set up around the same time to track different property indexes. Don’t know what became of them.

  35. @Andrew M
    “Government spending simply isn’t big enough to support London’s housing market.”
    I disagree I know lots of people who don’t work in London but they get paid to live here by the Government, stop doing that would solve a lot of problems with lack of supply.

  36. Hi Richard;

    Neither of those funds appear to be ETFs – they’re not listed, So no shorting or CFDs. Both of the funds (Housa and Heathstone) appear to be lending the funds raised to private landlords, to finance larger units; it’s not clear to me how differently this sector might behave if house prices generally were to fall. There are much larger institutional funds that buy and let larger units, acting as landlords themselves. Either way, they’re effectively long-only instruments.

    The Halifax index : One of the problems we found years ago was that it tracks mortgage approvals only; this means that an approval may not result in a completed transaction, and that a transaction might actually have more than one approval before it does complete. Also, it’s not clear from the current methodology document whether it’s the mortgage amount or the actual transaction amount that enters the index; again, when I looked at it last time, it was apparent that it was the mortgage amount in the index, not the transaction price. Given that the document does mention that the approval may not result in a completed transaction, I reckon that this is still the case.

    These were problems for us; they might not be for you.

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