House prices: Too good to be true?

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Significantly over-valued? That has to be the understatement of the millenium. House prices are probably double if not three times what they should be if had "natural inflation" been applied.

And lets not forget please who it was that enable if not encouraged this situation by refusing to allow the BoE to take house price inflation into account when setting interest rates. Yes - it was the same bloke that brought us a record trade gap and record household debt our Prime Minister the great Gordon.....

I've been trying to buy a house in Hampshire for about 18 months. Very little good property coming on to the market, and over the last 6 months there has been significant competition from cash buyers for those that do appear. The best properties have been going for near the asking price.

However, I suspect that there are only so many people with a stash of cash and if more properties start to come on the market (as appears to be the case since the start of September) I strongly suspect the slide will restart...

One phrase you didn't use Steph - supply and demand. There is probably huge pent-up demand for people to move home, a demand that has been thwarted by the lack of mortgage finance for the last 18 months as banks have starved the economy of credit. House prices have been falling because of this lack of finance, not because of lack of demand. Sooner or later the financial institutions will have to relax their over-cautious current approach and we will resume our national obsession with rising house prices. Caledonian Comment

Stephanie wrote:

"Capital Economics have a similar analysis (see graph below). They reckon prices would need to fall by at least another 20% to reach fair value"

"Fair value" is a curious concept in a market that is in chronic under-supply, isn't it?

"Affordability" is often cited as to why prices should rise (and can rise) - however affordability if a direct function of the price of money. Further the price of money changes over time for reasons un-related to the supply of property.

If interest rates rise as they are widely expected to do (and in my view should have been for the whole of the last decade - Mervyn King's catastrophic error) to savings at 5 to 6 percent then mortgages will be a few percent higher. So affordability will (inevitably) crash from present levels.

I like to consider 'Fair Value' as that price which can be afforded (for a family home) by a single male average income of an area. I like this definition as it encompasses the need for heads of families to be able to afford to house the whole family and look after its basic needs. (I choose this level as it permits an economically stable family life to be re-established.) On this basis house prices are not 20 percent overvalued but between about 30 percent and 60 percent (in the, mainly rural, low wage areas). (My grandfather paid 12 percent of his income for housing - not the huge percentage which is common now, and society had a stable structure and families could be housed, fed and clothed and couples remained together.)

However the banks like 'Affordability' with huge multiples of income because of the (stupidly) low interest rate regime pursued by the Bank of England/Government. I don't like this definition.

(I corresponded with both the Bank and the Treasury, on several occasions during the last fifteen years pointing out the inherent problems, both economic and social, with excessive income multiples being allowed for mortgages, but they did not agree with me! I also proposed practical solutions which they ignored - such as putting the entire onus on the lender to ensure that the borrower could afford the loan and, if not, the lender could not pursue the borrower for repayment in the event of default. )

Thanks for this calm and sane contribution Stephanie. Another factor is the people who saved big deposits during the boom in anticipation of a fall in prices. How many of those people have bought over the last few months? How many are left? This could be the classic trap which often occurs in all kinds of financial markets.

"From an economic standpoint, the rise in house prices since the early 1990s has been a massive transfer of wealth from young wannabe home-owners to the older generations who bought when the going was good. It's worked like a tax on young people -and a windfall to large numbers of the middle-aged and old."

Unless the housing market is stagnant then there will always be a transfer of wealth from one generation to another. This transfer cost rubbish has become a mantra.

The real problem is that we are focusing one one element of economic activity. If you regard housing as an element of the cost of bringing up the family then you would pobably find that the middle-aged and old householders were actually indeficit. The inflated house prices have been maintained by an enormous growth in the re- mortgage market and where was the major part of that money spent?

We aslo get caught-up with numbers. Is it really any harder for young wanabees to buy now than it was say 20 or 30 years ago?

We're seeing a textbook 'Bull Trap'.

I feel sorry for those that will fall for it and shackle themselves to years of painful negative equity, while the smart money (those who have engineered this short-lived bounce) are busy off-loading their investments.

So much analysis and so little common sense. There is a huge shortage of family homes in the South East and little new build whilst there is a surplus of small town centre appartments. Far morte important than 5 year trend analysis by the IMF. Economists should pay more attention to supply and demand and less to graphs. Just another example of BBC's fear of reporting good news in case they are wrong. Just compare the coverage of the fall in prices and equities with the coverage of the last six months?

as someone who sold in 2008 and has rented since trying to get back on the property ladder and unable to do so - a mixed bag of redundancies and vendors pricing unrealistically and lenders reluctance, I think that it is too soon to be celebrating the reurn of the house price increase.
Base rate is at an all time low and cannot be sustained - when as it will have to go up the rates raise and homeowners who have enjoyed the lower svr start to struggle to pay the higher payment and then can't fix due to a combination of those redundancies and lender reluctance to lend I feel that we will see a glut of properties come onto the market as well as more repossessions.
Also a point to bare in mind as more houses are sold as repo's the avearge house price will naturally be lower.....

So if the stats on the graph are in any way true that means that in at least five other economies prices have risen to beyond sustainable levels to a greater degree than in the UK. Given that France especially is held up as a paragon of prudence which has shunned the excesses of the Anglo-American way is it possible a) the stats are rubbish or b) our basket case status has been over-stated a trifle? Probably a bit of both I reckon.

Stephanie, you're right to conclude this:
"From an economic standpoint, the rise in house prices since the early 1990s has been a massive transfer of wealth from young wannabe home-owners to the older generations who bought when the going was good. It's worked like a tax on young people -and a windfall to large numbers of the middle-aged and old".
But you may have missed the significant route by which we oldies rob the young: our local 'planning' cartels.
British planning law has a large and unintended consequence already analysed and discussed by Meulbauer and by Barker: UK planning law creates local cartels that co-ordinate their own rationing of housing supply. Across the UK, the restrictions imposed everywhere by these local cartels force up prices way beyond the rate of appreciation that less restricted markets achieve. And all in the name of "protecting our local community". It's rather like having our own OPEC for our housing supplies.
Most analysts and comparitors overlook these fierce cartels/planning committees and assume that the demand side (household incomes) is the key influence of house prices - which it plainly isn't. It's the supply restrictions that hold prices and values so high in the UK.

Home-owners are occupying an artificially scarce commodity that they know appreciates in value because of artificial planning restrictions. So-called affordability has little to do with house prices when supply is so tightly rationed. That's how the mostly older residents rob the young! Lovely!

Just wait until April / June 2010 the collapse in the economic recovery will be stupendous.
Can't wait to see this "shower in power" get lynched by their own hand.
We will end up financially and morally broken with crime the only winner.
The MP's will flee the country just like Blair has.
Just shows how corrupt the EU is when they appoint Blair as President when the UK's financial collapse was engineered by this evil man.
Oh he will be Ok the same as all the MP's with properties bought by the MP's at less than half their value and by the tax paying public.
Mrs Blair in Bristol bought properties for £250k when the real value at the time of purchase was £1.5million.
Never have found out what favours were bestowed on the sellar by Blairs lot.
Nothing has changed after the expenses exposure.

Sorry but there are a number of glib fallacies in this article.

It is true that the market is shifting about half the number of houses than it did in the boom but that is still a lot of houses. Much more importantly it is more than enough to ensure that the average price is not affected by a few sales at exceptional pricing.

With there being so little mortgage finance available it is virtually impossible to tell what the real current demand is.

What we do know is that over the next few years and certainly over next 10 years supply is likely to fall a long way short of demand. We have a predicted rising population, we have forecasts showing the family break up and other factors also driving up demand for property but as a country we are not building anything like enough houses to keep up with this demand (last year shortfall was probably of the order of 90% compared to govt own estimates).

In other words there are long term trends that are likely to drive up prices. In the short term however, the rise in unemployment is likely to be a negative influence on prices

Based on that, whilst I am surprised that overall in the last 12 months prices have been flat, I would have expected a fall of up to 10% before prices slowly climbed back, it is perhaps not that surprising given that unemployment has not reached crisis levels (yet)

During a classic recession house prices are a lagging indicator i.e. house prices drop as a result of the recession, normally for several years after the recrovery has begun simply because of the time it takes the housing market to turn around, the effect of rising unemployment, affordability issues etc.

The current recession was caused by a housing market bubble.
The drops we saw in the housing market over the last 18 months are the primary crash as an overheated housing market led to the crash. The drops we've seen are not as a result of the recession but rather the cause of it.

I dont believe we've even started to see the lagging indicator effects on the housing market of the current recession.

We're printing money so inflation will rise and with it interest rates wil rise. I believe when we see that we'll also start to see the lagging effects of the recession on the housing market.

It is peculiar and frankly depressing that the pervading mentality in this country is that high and higher house prices is a good thing. Why??? Almost everyone needs to get into huge debt to "buy" a house, so why would needing yet more debt be better? Cheaper everything else is welcomed.

I fear for my children, and I am resigned to living in a small house for at least a few more years, despite a family income which apparently puts us in the top 10-15%. It's madness.

Yet my head tells me that a market with such a low level of transactions, low level of mortgage lending and crucially low level of first-time buyers, cannot be sustained, especially if interest rates rise. Anyone buying now is brave or foolish.

These sophisticated economic model confirm what should be obvious from a few simple ratios. The Nationwide itself provides a ratio of (first time buyer) house prices to incomes. It shows that prices are higher, relative to incomes, than at the peak of the 80s boom.
This chart needs updating, but it makes the point.
https://equology.blogspot.com/2009/08/all-fall-down.html

Thanks for writing this article Stephanie - unusually intelligent and well thought out for a BBC reporter, regarding house prices that is. I would say some of the estimates for further falls are a little on the conservative side though.

However, it is an absolute myth that there is a shortage of supply at the moment. This can easily be verified by looking at the time on the market (try looking at mouseprice) which is typically double the pre-crunch levels. Houses aren't selling very quickly - even now. What there is a shortage of is vendors prepared to sell at reduced price (that is the level at which normal volumes can be supported). This is partly due to the relatively low numbers of forced sellers presently (because of base rate slashing and repayment windows for those in trouble).

@CaledonianComment
"There is probably huge pent-up demand for people to move home, a demand that has been thwarted by the lack of mortgage finance for the last 18 months as banks have starved the economy of credit. House prices have been falling because of this lack of finance, not because of lack of demand."

I only have a GCSE in economics but even I know that the finance IS DEMAND. There may well be a huge pent up desire to buy property - that's what happends in bubbles. The demand will not return as lending is now back to proper levels - i.e pre-bubble. Even if lending was at the same level then demand would still be lower because of rising unemployment and supply of distressed sellers would be up for the same reason. There is a huge wave of repossessions due to hit the housing market in the coming months as Gordon's repayment windows (he forced the courts to take on) run out. House price have a long way to fall - and I say that as a homeowner.

And then there's public sector cuts...

Not a happy outlook for property rampers.

Oh dear, oh dear. Another ridiculous prediction from our dear friends at the Nationwide. Then again, would we really expect anything different from an organisation that stands to go bankrupt as and when the market collapses?

The fact of the matter is that we are currently in a temporal stasis and the figures being banded about are based, as you rightly say, on a tiny amount of exchanges, since the vast majority of those wishing to buy are unable to get mortgages and won't be able to since the banks are effectively broke and need every penny they can get as they face more and more toxic debt fallout.

Indeed, what people seem incapable of understanding is that housing is 50-70% over inflated. Whereas in times long past lenders called the shots and lent no more than 2 or 3 times salaries, ensuring that prices would never go out of sync with the cost of living, for over a decade they broke all the rules, and in their wisdom decided to reverse the equation and instead perversely allowed sellers to create the prices, thus ensuring that the only way people could actually afford to pay their bills was on ever more elaborate credit mechanisms, e.g. interest only mortgages, multiple credit cards, equity release etc.

What utter folly!

However, without this asset bubble we would never have had the businesses, jobs and lifestyles we have become accustomed to.

Shame it was all an illusion.

What we are now seeing is a desperate attempt by all those in power to keep the illusion running for as long as possible, i.e. artificially low interest rates, quantative easing etc. Unfortunately, whether we see deflation or inflation, we will see the housing market inevitably collapse. In the former scenario, businesses will contract, jobs will be lost and people will be unable to maintain their mortgages, hence lose their homes. In the latter scenario, people will be unable to maintain their mortgage payments which will hike up above their capacity to pay, hence they will lose their homes.

The problem is that unlike the 1980s, where the amount of those affected was relatively contained, the amount of people affected this time will be in the millions and could thus lead to widescale social unrest.

Property and land will always be worth more than bits of paper. A house is always worth a house, but everybody's savings have been devalued by 30%, and there is worse to come.

There is a great opportunity for the government to regulate the growth in demand for house through controls on mortgage credit and through the provision of social housing through both local authorities and housing associations. The latter if ambitious enough would make no small contribution to getting people back to work. House prices in the medium term refelect the lack of adequate supply and the availability of credit. There appears to be a chronic denial that substantial number of our citizens cannot, or at best marginally, afford to purchase their own home.

FALSE EQUALITIES IN MODELS

"The IMF folk compare that historical picture with what's happened in individual markets so far. They then go back and run more complex models with measures of affordability and other data. The conclusions are broadly the same: prices in the UK, Spain and Denmark all probably have quite a long way further to fall - in the UK's case, maybe another 12-13% in real terms. Whereas the US and Germany are probably close to the bottom. Remember this is about house prices in real terms, after inflation. You could get that 12% real decline if prices stayed flat for a while - but if inflation stays this low, you're talking quite a few years."

Bear in mind how the IMF/World Bank was created in 1944 along with some of its recent history. For example, why do they not factor in the demographic changes which are slowly but surely sweeping through the USA and Europe at considerable cost to infrastructure, demand for welfare, healh, housing, and educatin (which amount to the bulk of public expenditure), not to mention deteriorating credit worthiness given low, almost child-like, levels of numeracy and literacy in the swelling underclass brought about by destructive, ill-informed, anarchistic, policies from all Liberal-Democratic parties?

There is one fatal flaw with these Nationwide and similar lenders statistics, which state they are based on an AVERAGE of prices of dwellings that have actually changed ownership with the help of a mortgage from that lender. That flaw will also affect even the Land Registry data on completed transactions registered, with a slight delay.

What is conveniently overlooked in lenders' vested interests in showing the housing market to have already bottomed and begun to recover, is that the substantial deposits now required by the vast majority of lenders are tilting the samples of completed transactions away from first time and low end buyers, many of whom typically have insufficient cash or equity in an existing property to meet the 10% to 25% minimum deposits so many lenders now stipulate.

Whereas those buyers among those with middle priced and higher priced homes are far more likely to have either built up equity in their homes, enabling them to upsize or downsize in the mid to high price market segment using a mortgage, or are wholly cash purchasers or sellers exiting the housing market.

In turn that mid to upper segment now forms a higher than usual proportion of the houses traded and relative to the housing stock.

So, when comparing the average prices of the houses they recently financed with those in the past, Nationwide's current average price figures are distorted upwards, and will not reflect the reality of the wider market including the lower end when or if lower priced dwellings can begin selling in numbers proportionate to the housing stock once again.

No 13 "Never have found out what favours were bestowed on the sellar by Blairs lot."

At least a knighthood, surely; a baronetcy, even !!

Unless house prices adjust to a sustainable level in relation to the rest of the economy we shal have another crisis. The average house price must not be more than three times the average income. More than that and borrowing goes up, savings go down, debt becomes a burden and more and more is required of public services and state support.
We have to rebalance our economy to make more of what we consume and if we only succeed if unit labour costs are competitive. Excessive housing costs drive those up.
At the moment government stimulus and quantitive easing have plasterd over the weaknesses. Remaining are asset inflation, hidden losses from the crash, instabilty of the banking system and public debt so vast that when the spending cuts bite recovery will be choked off. If cuts are delayed the crisis will be deferred but become bigger.
It is mathematically impossible to have low inflation in the economy and constant inflation in housing asset values. The outcome is a reduction in the value of our money and an increase in the cost of our debt. Further QE in such circumstances is to set out on the road to Zimbabwe.

Hmm. I was a young "wannabe" home owner in the mid 90s, and whilst I've made a massive paper profit, it's meaningless for the purposes of trading up unless I'm also prepared to take on a similarly massive new loan. And I'm not - hopefully - one of the "older generation". There's no clear distinction between the early 90s and now. The erosion of the wealth of the nation - epitomised by the fact that houses cost more to buy in real terms - has been progressing since WW2. Simply now the gearing has reached such ludicrous proportions that only very highly paid young professionals can afford the entry-level prices. And then only mostly by clubbing together or settling down early.

The recent house price rise makes no sense whatsoever. As pointed out by numerous media articles, unemployment remains high whilst housing stocks are low. Interest rates have to climb as soon as the UK starts to emerge from recession (I expect at least 3% by the end of 2010), whilst it's a given that whoever wins the next general election will have to shed a considerable amount of public sector workers - mainly junior and middle level managers. A large quantity of public sector workers being made redundant will add to the unemployment statistics and drive house prices further down. Finally, average house prices remain well above 3.5 x average salaries which mainly experts point to as a long term sustainable average.

Where I live (Erdington, W Mids), we have the fourth highest unemployment rate in the country. Yet the average house price (according to the BBC) is £113,000). The average salary (according to the BBC back in 2008 - the latest stats I can find) is £24,000.

Therefore (as a rough indicator) the ratio is currently somewhere around 4.7. Prices are still too high and I still won't buy (even though I'm lucky enough to be able to).

No 14 "Based on that, whilst I am surprised that overall in the last 12 months prices have been flat, I would have expected a fall of up to 10% before prices slowly climbed back, it is perhaps not that surprising given that unemployment has not reached crisis levels (yet)"

This is probably due to the fact that a lot of Eu and non-EU "temporary sojourners" have departed for more lucrative shores. This masks the unemployment problem by leaving jobs open that can be taken up by locals. It will also have an effect on the rental markets that will take time to filter through. In 6-8 months time, when more and more rental properties stay vacant and the twin pressures, of zero income and ever more strident demands for mortgage repayments, are felt, the property owners will be forced back into the market and that will, in turn, push prices down again !!

2010 will be "interesting times" as defined by the (alleged) Chinese curse !!

House prices are dependant on ... land value, labour, building material, and planning costs, most of which continue to increase... not decrease.
A good property with potential in a good location will always be a good investment in this tiny overpopulated island.
Now we have sane sustainable lending policies from banks, and when utterly useless Hips get dumped after the election... my money is on Britain's housing market reverting to pre boom growth normality.... unless ! swine flu reduces the population or millions of Brits become unemployed or interest rates increase.

No 20 "Property and land will always be worth more than bits of paper. A house is always worth a house, but everybody's savings have been devalued by 30%, and there is worse to come."

I'm not complaining. I just received a repayment of a debt I was owed by someone from abroad, paid in his currency. I got a lot more quids for that amount !! :-)

I could have kept that money abroad but I had an urgent need for it here !!

No 23 "So, when comparing the average prices of the houses they recently financed with those in the past, Nationwide's current average price figures are distorted upwards, and will not reflect the reality of the wider market including the lower end when or if lower priced dwellings can begin selling in numbers proportionate to the housing stock once again."

Why let a few inconvenient facts spoil a good spin ??

What bizarre reactions. When the banks are lending to people who can't afford it they are reckless and profligate. Now they've returned to lending only to people who might be afford to repay they are mean and withholding money from the economy.

Also we see the old mantra "it's not really harder now for young people to buy than it was 30 years, they just need to lower their sights a little and tighten their belts".

The answer to both points is in the article, if not stated explicity: The average house price (£160k) is still 6 and a half times the average salary (£24k).

Banks are being very sensible not lending people 6 times their salary and the multiple 30 years ago was between 2 and 3. Again, as the article points out, the inevitable conclusion is that house prices are too high.

No 25 "The outcome is a reduction in the value of our money and an increase in the cost of our debt. Further QE in such circumstances is to set out on the road to Zimbabwe."

It could also result in someone winning an Ig Nobel Prize !! -
https://news.bbc.co.uk/1/hi/sci/tech/8285380.stm

"Mathematics: Gideon Gono, governor of Zimbabwe's Reserve Bank, for giving people a simple, everyday way to cope with a wide range of numbers by having his bank print notes with denominations ranging from one cent to one hundred trillion dollars."

When will we see our first one hundred trillion quid note ??

The headline of the main article says, "UK house prices have now recovered to the same level as a year ago". This is telling as there is a mindset that current house prices are depressed and an increase in prices is a Recovery. The truth is that house prices are still inflated, therefore a "recovery" would be if prices were to decrease to the point they equal the norm. I consider an increase in house prices at this time to not be a recovery. Quite the opposite; it is simply a re-inflation and until headlines say "UK house prices have now re-inflated to the same level as a year ago", we are always going to have a precarious housing market, upon which too much reliance of the economy is bestowed.

Housing is grossly overpriced ,new builds' prices are not based on cost, but on what the builder thinks the market will pay. The cost of land is also inflated by speculators making easy money. Until government takes the bull by the horns and fixes the price at which land can be sold for building the price will continue to rise.If the supply of land then diminishes there are mechanisms for compulsory purchase which must be used. If the price of "affordable " housing was set, then every connected commodity would have to fall into line or the traders in such commodities would go out of business.

XCAnderson (#19) "Shame it was all an illusion"

The illusion is based on the exploitation of something crucial to human adaptability, 'learning'. Animals hoard now in order to protect against the poorly predictable future. This is conditional avoidance behaviour. Most of the time, we eat to stave off, not assuage, hunger. Exploitation of diversity in this uncertainty management is what went wrong - or, very right for those who profited from it for a while. Now they will try to re establish the status quo, as that is all they care about and it's the defining principle of Liberal-Democracy. To them, other people are mere consumers, a means to their economic/resorce ends. They are just assets to be exploited. This prevails in all their relationships business and personal. It is the behaviour of criminals. It is how criminogenic risk is assessed...

That is true.

Can I please make a plea for a wider perspective that looks at the following issues:

1 What is the sensible relationship between income and asset values (mainly housing) taking account of long term interest rates. How else can you have a view house prices?

2 How many of those who are likely to be unemployed for a long time are likely to be home owners? Unemployment among those who are renters will not affect the sale market.

3 We all know that demand outstrips supply for housing. What is this lkely to mean for real changes in house prices over time? Is there any model or prvious experience that can help us assess this?

Another day another loony being given media space.

So house prices are rising and this is good news.

Consider this: In Spain house prices have only fallen by 10% from peak values - so surely this is good news? Brilliant news for so long as you forget that there are 1.6 million empty properties, and that long term demand for property runs at about 260,000 units per year.

In the US the Standard Poors/Case-Shiller index provides an analogous function to the Nationwide. This index shows house prices in the US are rising. However look at the methodology for computing the numbers and an answer is revealed. More and more expensive or up market homes are being foreclosed and these have a higher value than the first wave sub prime garbage hence overall average prices rise.

Anyone that does not want to get wiped out completely should stay from buying houses.

37. At 11:51am on 02 Oct 2009, Hawkespeter wrote:

2 How many of those who are likely to be unemployed for a long time are likely to be home owners? Unemployment among those who are renters will not affect the sale market.

------------------------------------------------------

Not sure I agree wholly with this. As renters default on their rental obligation property becomes less attractive as an investment opportunity and this in itself should bring down prices as demand will suffer.

While house prices are excessive, the tone of financing companies' published reports and ads still aim to rekindle housebuying hysteria, pushing properties still at bubble prices. But it's simple, first time buyers cannot easily afford a place. (I HATE the term housing ladder - it implies a climb to succumb to the illusion of bettering oneself. Nope, neither you nor I will ever own Buck House.) A few first-timers probably have the money but are under no illusion about the current interest rates. They will rise and put the mortgagors under pressure yet again.

The whole system of house ownership is daft anyway - not just the procedure for selling and buying, set up a couple of centuries ago when "moving" was probably a once-in-a-lifetime event - but the fianacial side in the free markets. How on earth can a system work where home-buyers take out 25 year loans, hocking their property, meanwhile they can't guarantee a job from one week to the next, to pay off that loan? So they live most of 25 years never knowing when they'll end up on the street. Totally demoralising as well as dangerous. Well....barmy. Would YOU invent a system like that?

I think it'll be interesting when house prices really do start to kick on and those people who accidentally ended up becoming land-lords because they didn't want to give their house away realise that they can now sell and make a nice profit. The home owner sells the house for more than it was worth in 2008 and the tenants end up kicked out and hopefully realise that it's time to buy their own house and the cycle continues. The glory days are coming back.

For me the answer in stabilising house prices to a natural level is easy if not radical. You pass a law saying that no person can own more that two houses that are no there primary residence. If a company wants to own more than two houses for rent then they have to use the personal allowance of their directors and staff the privalidge for which they would have to pay. This would release many thousands of houses for sale. reduce the price of houses and benifit everyone. Houses should be homes not tools to squeeze money out of the poor for the benifit of the rich.

I get really annoyed by the way that Nationwide and others keep on making press releases that are biased. One week the Land Registry says one thing, the next week Nationwide says another.

For a market to function efficiently, the people involved in it need to have accurate information. Otherwise it will fail.

Yet estate agents and organisations like Nationwide are effectively constantly trying to fix the market.

Ordinary folk are left in a situation where they are all forced to be gamblers - on the one hand worried about getting on the ladder, on the other hand worried about negative equity and spiralling interest rates.

I want my kids teachers, my doctor, and my plumber to concentrate on doing a good job and not on what the housing market is going to do.

All of this housing turbulence is man made. There's no need for it. We are competing against ourselves and wasting energy and effort on things that shouldn't matter.

And noone ever talks about the statistic that really matters - how many unused properties there are in the country.

No 40: "a system work where home-buyers take out 25 year loans, hocking their property, meanwhile they can't guarantee a job from one week to the next, to pay off that loan? So they live most of 25 years never knowing when they'll end up on the street. Totally demoralising as well as dangerous. Well....barmy. Would YOU invent a system like that?"

So what's the alternative? Renting? Doesnt' that have the same risk? Lose your job, can't pay the rent, get kicked out? Or does that carry the wonderful safety net that Uncle Gordon will bail you out with rental payments? Funny how buying a house means 25 years of having to pay to live somewhere whereas not buying a house means that you have the freedom to never pay for accomodation. I must have missed that.

Why are we listening to these "experts" arriving at figures that have little or no value. The banks will gradually relax their lending criteria for their own benefit. What is appalling is their ever growing margins between the interbank rate and what they are charging businesses and individuals. There is no accountability from them, this needs to change.

Why do people bother commenting when they clearly have not even read the article?

Rising prices? Back to where they were a year ago? In the current economic climate that shows just how stupdly disfunctional the market has become.

Rising prices benefit nobody except the recently dead who then have something to leave their offspring. Some of the important things in life are warmth, shelter and security. A house helps provide these. Anyone who viewed their house as a source of equity during times of rising prices needs their head examined. Withdrawing equity from your home is turning warmth and shelter into debt. Therefore we should not be celebrating the return of house price inflation (unless of course you are planning to die soon).

On another note, how come RPI continues to maintain a negative rate when house prices are back up? Could these figures just perhaps be wangled in just a teensy weensy way? Oh no, stupid me, we all have TRACKER mortgages. Every one, all of us. I believe those statistics.

Supply and demand is also affected by the fact that people are living longer. Depending on birth rates and the effects of immigration this might be a medium term blip.

Nevertheless, at this time, when these elderly home owners die, there is a re-distribution of their 'wealth' - to their descendants and sometimes the state. Some choose to re-distribute before their death by downsizing and making gifts. Some choose to draw down the value to meet living costs. Whatever, however, the net sale value of these homes to future generations doesn't stay locked up, forever.

Whether the 'cash' released is used to purchase another home in the UK is another matter.

BTW my local estate agent says business is very brisk - both lettings and sales and there just isn't enough local supply of either to meet demand.

The experts have overlooked such a fundamental problem in relation to housing. Granted, they are looking at relatively short term trends. However, we have a growing population, with current estimates saying that by 2050 there will be at last 80 million people living in the UK. Even a 10-15% increase on the current population level will cause problems if nothing is done to increase the supply of housing - Relying on private sector house builders in the current economic climate is a non-starter. Incredible as it sounds, credit controls need to be relaxed to some extent if we want to avoid a housing crisis. The government must step in and make some reasoned decisions. Simply throwing our money at the banks is not the solution.

A further factor which has contributed to the secular growth in house prices is the increasing participation of women in the workforce. With additional income in each household, there is more money potentially chasing each house, driving house prices up, and amplified by banks & building societies basing lending multiples on combined incomes.
So there is a heavy irony in financially stretched couples paying for nursey care so that both parents can earn to afford a home, while at the same time contributing to the financial burden under which they are labouring.
This conjures up the image of Lewis Carroll's Red Queen running ever faster just to stand still

"BTW my local estate agent says business is very brisk - both lettings and sales and there just isn't enough local supply of either to meet demand."

Sorry, but you believed an estate agent?

The number of mortgage approvals dropped by 17% last month. Sales volumes are still around half the pre-crunch levels - although admittedly slightly higher than a few monthss ago. If there was a shortage of supply, then houses would be being snapped up in no time whatsoever. Look on the mouseprice website and type in some postcodes to see the average time on te market and compare it with pre-vrunch levels. There is no shortage of supply - it's a myth being put out by the mortgage lenders and estate agents to try and justify the irrational upturn in prices at the moment. There is, however, a shortage of supply of sellers willing to drop their price - that will soon be rectified though.

It's a mistake to only focus on demand-side, i.e. affordability, salaries, mortages etc. Take a look at the supply-side, if production of a commodity is rationed prices rise regardless. How many houses are being build right now? - not many. How many houses are not being built due to planning restrictions? Supply-side is important too.

Housing myth Number 738 busted:

I lived in Newcastle for a decade during which time the population actually got slightly smaller (I'm taking the word of my ex-flat-mate here who is a city councillor). The number of houses and flats incrreased during the same time period. So did prices go down because of supply? Nope - they went up 200% - why? Something to do with a bank on the road I lived on that suddenly started taking on a large number of employees and started lending huge salary multiples. Easy credit caused the house price bubble and it definitely became a bubbles around 2001 (which is when the remortgage credit started keeping GDP above water) and that's how far prices will retrace. And then the rest - the overshoot on the downside.

Nothing to do with supply.

I concur with the comment that the supply/demand argument is flawed. First and foremost as house is a place to live are therefore if there was enormous pressure for housing (i.e. the supply can demand argument based on a growing population) we should also see a reciprocal increase in rents which we are not, rental returns are in 3-4% of asset value average vs. a long term average of 7-8%. If there was so little property in this country rents would follow house prices.

The only thing that makes assets increase in value is an increase in desire to own it (often in a herd mentality) coupled with the availability of money to pay for it, house ownership is very desirable and money was up until two years freely available. It will be many years before lending criteria are relaxed even to 90’s levels and the natural flow of money out of housing assets (deaths, unemployment, population movement) will erode prices over a 5-6 year period, remember 7-10% of the value is sucked out of the house in transaction fees alone. Only when money is made more available again will house price start a sustained growth which is my view will be 2015 based on the last HPC.

What amazes me is how people fail to realise the extent of the catastrophe we are in.

This is just the beginning and we should hope that in ten years time we haven't killed or eaten each other.

No 26 " And then only mostly by clubbing together or settling down early."

On the third hand, there's the Bank of Mum and Dad !! Perhaps even an outright gift !!

StevieYorkshire

Yep. It ain't house price, it's mortgage price. It's not bricks and mortar they're selling, it's loans and wage slavery to Mr Banker

#22. JadedJean - Jumped-up Jean - implicit racism AGAIN!!!!

The talk of a shortage of housing stock is a red herring. The real shortage has been of houses *available for owner occupation*, largely because of a massive speculative hoarding of property for letting and capital gains purposes.

As with any bubble, it feeds itself, price inflation fuelling expectations, driving speculative demand, further fuelling inflation. And all the time this creates its own rental demand, as more and more individuals are priced out of the ownership market.

The current situation is merely evidence that this sentiment is slow to die. "Accidental landlords" are nothing of the sort, of course, they take a bet that it is safe to trade up now and hang on to the old property "until prices recover", which is simply another form of speculation.

While existing owners are increasing their gearing and absorbing more property, high unemployment and lack of rosy illusions at the entry end of the market means they could be stuck with these properties for a while, until they are more realistically priced. The banks know this, which is why they demand higher security for first time buyers.

Perhaps it would be useful to indicate how much of the current turnover in the property market and recent price rises is actually due to new entrants? I suspect not much.

Who says house price increases are Good news?

For a large proportion of the population who are seeking to buy a house
the reverse is true?

Articles on house prices always seemed to be biased to existing owners rather than would be owners

I look forward to seeing a headline

"Falling Houseprices, Good news at last"

varcenum (#49) "The experts have overlooked such a fundamental problem in relation to housing. Granted, they are looking at relatively short term trends. However, we have a growing population, with current estimates saying that by 2050 there will be at last 80 million people living in the UK."

Most will be in the BME groups (99% of London's growth in te next 30- years is projected to be) as the indigenous population has below replacemet level frtility like the rest of Europeans. So, here's the problem. In the period that Britian's population grew just 10 million (largely through immigration note), the population of Bangladesh grew from under 50 million to 150 million, as did Pakistan! The growth in Britain's population in recent times has been largely down to BME groups and their progeny. So, given the S. Asian and African ex-Commenwealth countries are still growing, i.e have much higher than replacement level fertility, but have much lower mean skill levels, and as Britain a) effectively still has open borders and b) has a quasi welfare state under extreme financial duress, what is logically going to happen?.

Hissy fits (narcissistic rage) from the likes of John_from_Hendon won't change the devastating realities I am explicating here. Sensible readers will note that he never has anything rational to say about the logic of this problem. The reason why Bangladesh, Pakistan and Africa does not have the infrastructure which Britain does is because they can't afford, sustain it.

Alternative explanations and empirical facts are welcome. Invective and other forms of nefarious rhoetic/abuse is not.

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#55 FrankSz - Yeah it amazes me too. We are going all the way to oblivion. The ruling elites intend stepping up their war mongering so as to ensure we all go out with a big bang.

The only hope is if people rise up, but they wont because they still think that their house will rise in price and that this will somehow protect them.

If you wont wake up and smell the coffee then the last thing you smell will be the napalm. Meltdown is coming both literally and figuratively.

No 43 "I get really annoyed by the way that Nationwide and others keep on making press releases that are biased. One week the Land Registry says one thing, the next week Nationwide says another."

And just exactly what business is the Nationwide in ?? Commercial propaganda is no less insidious than political propaganda !! It is in their interest to "talk up" the house prices and any who believe them deserve all they get !!

Just take anything they say with an industrial-sized bag of salt !!

No 47 "Rising prices benefit nobody except the recently dead who then have something to leave their offspring."

Not even that !! Death duties will clobber anything over a certain minimum allowance and rising prices may push the price over that limit, thus ensuring maximum rate of tax !! Crash Gordon strikes again !!

No 48 "BTW my local estate agent says business is very brisk - both lettings and sales and there just isn't enough local supply of either to meet demand."

Local anomalies will always occur !! Especially if you live in a "des. res." location !!

No 55 "This is just the beginning and we should hope that in ten years time we haven't killed or eaten each other."

How fat are you ?? Do you taste good ?? I do have a very large barbecue that I think will do the job !! :-)

No 63 "If you wont wake up and smell the coffee then the last thing you smell will be the napalm."

Napalm ?? You've got to be kidding ?? Have you seen the price of oil recently ?? Much better uses for napalm than just frying houses !! :-)

Estate Agents will convince you your house is valued at 'whatever' and if you like you can put it on the market at any price you choose.
But never forget that the 'value' of any commodity (House, Car, Painting etc) is only what someone is prepared to pay for it.
If there are no buyers at any price, it has no value, whatever anybody says.

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I have to agree with Peter Beau and a few others. There is nothing strange about the bounce. It's a function of affordability when interest rates are taken into account. Also a function of shortage of decent housing stock, which will only have got worse with the recent hiatus in new build activity. Sorry John_From_Hendon but interest rates are going nowhere fast. The Capital Economics model is useless as it only uses two variables and excludes interest rates. Deerrrrrhhh. The IMF are wrong year after year and just because their model suggests overvaluation does not mean that will reverse. (Again other factors are at play - interest rates, supply and demand, cultural attachment to home ownership). Maybe some stagnation or a modest fallback, but a further crash? I don't personally think so.

Looking at a link from our village website the other day I saw that house prices had risen by 2.3% in the last quarter. The problem is in that time only a couple of houses have been sold. So this statistic has little relevance.

What seems to be going on is that a degree of mortgage lending has returned during the summer at a time when fewer, if any, houses were actually coming onto the market. Given the shortage of choice this is not a good time to be buying. This is if anything a speculators' market in which the better properties are cherry-picked by the cash-rich leaving the over-priced still on the market. This does not allow those in negative equity to escape from their situation. Until such can there will be no substantive return to price growth.

I am dystopian in my expectations given that the current `recovery' is only the consequence of the many measures taken by governments to minimise the effects of the recession. There is technical growth but it is not self-sustaining. In all areas other than government there continues to be a paying down of debt. In due course the government is going to have to address the issue of its own debt and this is where the story will really start.

I have had another person on the blower today talking about the recovery. I pricked his bubble when I told him this is an illusion. I am pleased there are these optimists about but there is a second long and nasty leg to this recession just hiding round the corner. Why else did Brown ask all the countries of the world at the G20 to keep on with their deficit financing? He has maxxed the credit card so even when everyone else has eventually staggered back in business we are going to be shovelling sewage.

As others have said here we are only at the start of a long process and it will become a lot worse before it gets better.

On a brighter note, given that economic growth did not recover in the UK after the Great Depression until 1941 then we need only to get someone to invade Poland pronto. Over to you JadedJean.....

Oh. And if you want a good laugh at Capital Economics expense, try
www.marketoracle.co.uk/Article7183.html

The whole notion of 'price' is suspect.


House prices where I live haven't budged a bit (well, just dropped somewhat in the low quality end of the property spectrum), but volume of transactions has gone down dramatically.

Price. Supply curves. Demand curves. Nonsense.

In any case, as I said earlier, people see houses not as dwellings but as a position on a 'property ladder': a speculative position. People borrow as a leveraged speculation.

Demand in the housing market in the UK must be high. Lots of Russians are suddenly flush with oil money they made a year ago. Whether they are running from the KGB....or are the KGB, Britain seems to be their home away from home of choice. And by Russian standards....Britain....is a tropical getaway the way the Caribbean is for the rest of us.

#71 / 72 John_from_Hendon

Just wanted to say I agree with you 100%. I enjoy reading Stephanie's blogs, but this constant aggression with blatantly racist overtones is very draining and rather depressing. It's almost at the point that I can't stomach visiting this blog. JJ's opinions about black IQ and Jewish 'problems' have now been woven into several unrelated threads despite being totally off-topic; it appears to be a personal hobby horse. One can only speculate about the motivation. Unfortunately, it is highly unlikely that JJ will stop to consider why her/his comments are so offensive - but I think for the benefit of other readers, it is important to expose these 'opinions' for what they really are - and importantly, where they ultimately lead. Thinly veiled comments about Trotskyites and anarchists can be better understood by looking at JJ's earlier links; these euphemisms fool no-one. Views such as these are not new and of course there is a history. Nazi propaganda was full of this sort of stuff.

What is particularly galling is when I try to summarise why this is wrong, my post is removed (see earlier blog 'bad day')

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#77 MuckTubrelius11,

If they have got cash, it is interesting that they don't want to take anywhere near the USA!!

Not so silly these Russian guys :-)

#78

Offense is taken, not given. If you don't like something, don't read it.

This is not a simple defense of JJ's posts, but a reaction against the current paradigm of political correctness. It emphasises the weak. If you do not like something, you must deal with it. It is not up to the world to tiptoe around on eggshells around the neurotic and ultrasensitive.

There is nothing to celebrate about the return of the house inflation bubble. Too many people have relied on price growth over time to reduce the value of huge mortgages.
Too bring stability back to the market, and steer house prices to their correct level, I would legislate to stop "interest only" loans. This would prevent people taking the high risk strategy of this type of mortgage. If that forces prices down the so be it. It would merely indicate they are presently overpriced.

# 81 FrakSz

"Offense is taken, not given. If you don't like something, don't read it"

What an extraordinary view!

This has absolutely nothing to do with 'political correctness'. You say "If you do not like something, you must deal with it". Well, my way of dealing with it is to post a response. But according to you, anyone who disagrees with what has been said is being "neurotic and ultrasensitive"

Regarding this blog about House Prices, not sure of the relevance of your link at #79 to a video of Iranian President Ahmadinejad. He is on record as being a holocaust denier and also for wanting to wipe Israel off the map. Interesting.... (or am I being neurotic?)

No 77 "Britain seems to be their home away from home of choice. And by Russian standards....Britain....is a tropical getaway the way the Caribbean is for the rest of us."

Well, they used to go to Cyprus until the Cypriots got a bit upset. And when these Mediterranean types get upset, they usually get upset with shotguns in hand. So, Britain is next on the list. At least the locals only use knives !!

Furthermore, there are plenty of grand places for sale after their former owners have departed for pastures friendlier, especially tax-wise !! And with Harrods and Aspinals so handy, London seemed to be the city of choice !!

No 80 "If they have got cash, it is interesting that they don't want to take anywhere near the USA!!"

They're trying to get rid of their petrodollars, not acquire more USD debts !! :-)

can anyone explain why capital gains tax should not be charged on a primary residence ? all other assets are albeit with annual reliefs
if it was {not retrospectivaly that woulsd be unfair }than perhaps it
would cool down the speculative aspect of residential home sales ??

In 1980 a two bedroom West London flat cost less than £20,000. Today it will market at £165k, ya. That is the problem attempting to correct itself but not being allowed to because the entire commercial financial industry of banks through to au pairs have nailed their colours and profits to that mast. Let's not forget the unbelievable markups which occur to new build property as it comes to market. No-one cares, it's a 25 year year rip-off on the buyer.
If spending does not resume, and it wont, down go prices for a long, long time to come yet. Optomism is a wonderful thing. It comes very expensive and long term in housing these days. 6-7 years for a property to double in value. We all knew, while it was happening that it was too good to last.

A property is worth what it costs to rebuild. Its Insurance rebuild cost. That's it, that simple, that straight forward, that unequivical, that uncomplicated.
Tell that to an Estate Agent. If, however housing continues it's value crash, rebuild cost is the bottom line. Below that and the economy tanked and is finished. Surprisingly, most property is valued at or around it's Insurance Rebuild cost now. Lack of earnings and finance is the problem preventing some bad habits returning.

# 86 humphreydeadmna

"can anyone explain why capital gains tax should not be charged on a primary residence ?"

In most cases, when someone sells their primary residence it is because they are moving, so will need to purchase somewhere else to live. As prices tend to rise over time (with occasional blips), the value of the property goes up, but so does the corresponding cost of the next property purchased.

If one is taxed on the increase of value of the primary residence, it would mean that one could not afford to buy a comparable property but would have to 'downsize'.

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Well I am about to buy a flat after a year of renting. The prices seem about the same as in 2008. Prices are artificially high due to a lack of properties on the market. Still with savings rates so low it is pointless having cash in a savings account and paying out rent. I also agree that prices do need to come down substantially.

#78
" I enjoy reading Stephanie's blogs, but this constant aggression with blatantly racist overtones is very draining and rather depressing. It's almost at the point that I can't stomach visiting this blog. "

Read: neurotic and ultrasensitive.

There is thought, consideration and rampant despotism greeting the 'bounce'.It is descibed in great detail here
https://www.google.co.uk/search?client=opera&rls=en&q=finance+%22cat+bounce%22&sourceid=opera&ie=utf-8&oe=utf-8

Meeowwww!

89. At 8:24pm on 02 Oct 2009, DistantTraveller wrote:


"
If one is taxed on the increase of value of the primary residence, it would mean that one could not afford to buy a comparable property but would have to 'downsize'. "

LOL! If capital gains tax encourages downsizing, then all that would happen is that house prices would drop to compensate for the tax. Speculative demand would be subdued somewhat. For crying out loud, think before engaging keyboard.

Further to #9. This is a unique variation of the trading pattern. The dead fat-cat bounce.

CGT on all property sales would go a long, long way to hepling sort out tax deficits. It's all funny money at the end of the day. These London MP's with first residences anywhere but London for expenses purposes, obviously didn't brush up properly on property tax.

Brown has brilliantly given the Tories a poison pill of the UK not taking any pain on his watch.

When the Tories have to put taxes and interest rates up:

Watch house prices plummet.

Watch the Tory poll rating plummet as Labour claims the Tories have destroyed the value of your house.

By Jan 2011 I predict a Labour poll lead of 5%.

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# FrankSz

"As for Ahmedinejad being on record denying the holocaust - can you provide links that show he sincerely believes this? "


Honestly Frank!!!!! Stop playing games. There's absolutely no way that he CAN provide a link that would show what Ahmedinejad SINCERELY BELIEVES!

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