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UK housing market - rumours of its death greatly exaggerated?

UK housing market - rumours of its death greatly exaggerated?

Old Oct 15th 2004, 3:16 pm
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Arrow UK housing market - rumours of its death greatly exaggerated?

Hi everyone.

Sorry about what is going to be a lengthy post, but I do feel that the opposite view has to be put into the forum about the UK housing market. I don’t post much and certainly don’t want to come across as a ‘smartarse’, however I would also wish to avoid the title ‘panic-mongerer’ as well.

First I would like to state that I do not have a crystal ball, but neither does anyone else. Please feel free to accept or ignore my advice as you choose. By the way, as a pre-july 136er I will hopefully soon be putting my money where my mouth is.

As Don has correctly stated, at the moment there is ample anecdotal evidence from this discussion forum, that people are struggling to sell their houses (although, anecdotally, the number of viewers seems to be rising slightly). This has been presented as evidence of an imminent house price crash in the UK, with falls in house values of circa 30%. My question is why?

This figure, I believe, was originally quoted by the OECD in a November 2002 report as their estimation of the amount by which UK homes were overpriced http://www.findaproperty.co.uk/cgi-b...l?storyid=4040.

It is interesting to note that the OECD themselves had changed their forecast to ‘house prices to slow, not crash’ as of May 2004 http://money.guardian.co.uk/print/0%...0330%2C00.html.

But why should we be expecting a ‘crash’?

The most common argument I have come across is that traditional ‘income multiples’ are being far exceeded. Traditionally, an income multiple of around 3-3.25 was seen as a fair long-term average. Income multiples are now as much 5 in some areas as is shown in the attached BBC article http://news.bbc.co.uk/1/hi/business/3717338.stm.

However, if you examine the affordability of these loans in terms of the percentage of income actually spent maintaining the loan, you see a different story (not much more than the long-term average). This is compared well in the following government report which although 8 months old, illustrates the point very well (page 6). http://www.odpm.gov.uk/stellent/grou...pdf_027576.pdf
The reason for this is that, despite the increase in house prices, interest rates are at historically very low levels and are relatively stable (even after the recent rises) and there is now serious talk that rates have now peaked and may be reduced next year (BBC article today) http://news.bbc.co.uk/1/hi/business/3735782.stm. As if they're not reduced and underlying (CPI) inflation falls more than 0.1% from its current 1.1%, the Bank of England will be put in the embarrassing position of having to write an open letter to the Chancellor explaining why it has missed its inflation target by undershooting it.

The last time the UK market ‘crashed’ was in the late 1980’s/early 1990’s. A comparison of data is illuminating (Sept 2004 (latest data) vs Sept 1990).
Code:
				2004			1990
Unemployment                    1.39m                   2.84m
Interest rates			4.75%			13.75%
RPI inflation			3.1%			10.9%
Another factor to bear in mind is that in 1990 we were heading into a global slowdown, not coming out of one. Further, interest rates are now out of the control of short-termist politicians who are more tempted to play the economy for political gain rather than for the long-term benefit of the country. In short, when the Bank of England raises interest rates, people listen.

Therefore, I would have to agree with the OECD and state that I think a ‘crash’ of 20-30% is unlikely.

So why is the market so slow? To be fair, most buyers in the market will remember the dark days of the early 1990’s or know someone who does. So once interest rates start to rise and the media is full of ‘house price meltdown’ stories, buyers are going to be put off. As it becomes obvious that rates aren’t going to rise (and perhaps decline) and the media switches to whatever other story occupies it then (maybe Jordan will split from Peter Andre), I expect the buyers will return, but prices will remain relatively stable.

You also have to remember that a lot of the stress you read about here isn’t caused by the housing market per se, but by the crazy way we go about selling houses in the UK and the stunts this allows buyers to pull.

The ones who suffer in a market like this are the poor sods who have to sell up for some reason (such as moving to the other side of the world!). But take heart. Its not actually a disaster if you look at it from another angle.

House prices are falling in Australia too (possibly faster than in many places in the UK). So imagine the following scenario (this is probably my plan). Sell your house at a 5% (ish) discount for a relatively quick sale, put the proceeds in a bank for 12 months at 5% (I know there are tax issues, but I’ll ignore them for simplicity’s sake) and rent in Aus. In 12 months you’ll have proceeds based on your full asking price while the market around you has dropped. Much better in the long term than moving when both housing markets are booming and you have to buy as quickly as possible to avoid losing out.

By the way, I know its very easy to pull statistics to prove an argument (as I’m sure someone will, to prove me wrong), but as Churchill said ‘There are lies, damn lies and statistics’, I am merely suggesting that there is more than one possibility for the UK housing market.

Right, I’ve said my bit.

Best of luck to all those trying to sell your houses.

Dave
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Old Oct 15th 2004, 3:27 pm
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Default Re: UK housing market - rumours of its death greatly exaggerated?

Good points. You could be right.

Couple of things to think about.

1. Real interest rates are what matter, (not headline rates), ie bank rate minus inflation. Currently real interest rates are not particularly low compared to previous crashes.

2. Unemployment rate matters but are we getting the true picture from the headline figure? How many hidden unemployed are there? How many more on disability benefit and the like compared to last crash?

3. Why should this time be different in terms of the housing cycle? EVERY other time the bubble of average house prices in ratio to average incomes has deflated and come back to trend.
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Old Oct 15th 2004, 3:47 pm
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Default Re: UK housing market - rumours of its death greatly exaggerated?

Originally Posted by Don
Good points. You could be right.

Couple of things to think about.

1. Real interest rates are what matter, (not headline rates), ie bank rate minus inflation. Currently real interest rates are not particularly low compared to previous crashes.

2. Unemployment rate matters but are we getting the true picture from the headline figure? How many hidden unemployed are there? How many more on disability benefit and the like compared to last crash?

3. Why should this time be different in terms of the housing cycle? EVERY other time the bubble of average house prices in ratio to average incomes has deflated and come back to trend.
No problem Don.

In answer to your questions.

1) headline interest rates quoted as its these your actual mortgage repayments are based on.

2) Agreed. No idea where to get the info though.

3) The major difference I can see is the lack of political interference in setting interest rates. 1990 saw (if I remember) rates rising later than they should have and then very quickly to very high levels.

Agreed in my scenario, house prices stay at these kind of levels and the country hopes like hell that we never see double-digit interest rates again, because then we really would be in trouble.

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Old Oct 15th 2004, 4:00 pm
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Default Re: UK housing market - rumours of its death greatly exaggerated?

Originally Posted by dutch
Hi everyone.

Sorry about what is going to be a lengthy post, but I do feel that the opposite view has to be put into the forum about the UK housing market. I don’t post much and certainly don’t want to come across as a ‘smartarse’, however I would also wish to avoid the title ‘panic-mongerer’ as well.

...By the way, I know its very easy to pull statistics to prove an argument (as I’m sure someone will, to prove me wrong), but as Churchill said ‘There are lies, damn lies and statistics’, I am merely suggesting that there is more than one possibility for the UK housing market.

Right, I’ve said my bit.

Best of luck to all those trying to sell your houses.

Dave
At long last, sensible comments about likely house price movements - except for the quote : it was Disraeli, not Churchill

Last edited by MikeStanton; Oct 15th 2004 at 4:02 pm.
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Old Oct 15th 2004, 4:00 pm
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Default Re: UK housing market - rumours of its death greatly exaggerated?

Originally Posted by dutch
2) Agreed. No idea where to get the info though.
Here's a start.

1. Unemployment fell again in the last quarter by 51,000 to 1.39m, with the number of benefit claimants dropping by 200 to 834,000. The number has fallen for 16 consecutive months.
The rate of unemployment was 2.7pc, its lowest level since April 1975, but Mr Willetts said the number of economically inactive people - jobless but not claiming benefits - was at its highest level for 20 years at 7.9m.

The number of economically inactive people takes into account new mothers who have dropped out of jobs to take care of their children, those who do not want jobs and the 2.7m people on incapacity and other types of disability benefits. The DWP said that as a proportion of the population, removing the number of students, 19.5pc were economically inactive compared with 20pc when Labour came to power. http://www.telegraph.co.uk/money/mai...equestid=98243

2.
Our fanatically fit prime minister has noticed, and last month he admitted that incapacity benefits disguise the true numbers out of work; the unemployed total would almost treble if the 2.7m claimants were included. Even Dr Stephen Duckworth, who has been paralysed from the neck down for the last 23 years and runs the Disability Matters consultancy, says that people get too comfortable lying in the well-padded ditch of disability support, and rarely return to work.

Now the TUC, perhaps imagining blackened workers whose lives are little better than the pit ponies they tend, has barged into the debate. Don't even think about cutting benefits to encourage people back to work, says its research, the disabled get little enough as it is.

This is difficult ground, since "disabled" covers a huge territory, and if anyone challenges the TUC, it can find as many harrowing cases as the proponents of a cut can bear. Some disabilities are obvious and ghastly. Others are a cheat's charter. There is no way of measuring things like back pain or, worse still, the catch-all of "stress", outside the head of the claimant. Ticking that box adds £30 a week to unemployment benefit, now disguised as the Jobseeker's Allowance, which may be why almost a million people now find themselves with mental problems.

The TUC's central challenge is to the 2.7m figure. Only 1.5m people, it says, actually receive Incapacity Benefits. This is true, and a fine example of how to fiddle statistics. Incapacity Benefit is only available to those who pay National Insurance. Those who have never worked cannot claim it. Instead, they are offered income support worth roughly the same amount, as are those who don't qualify under the Incapacity Benefits points system, which assesses the level of disability. http://www.telegraph.co.uk/money/mai.../07/ccom07.xml
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Old Oct 15th 2004, 4:09 pm
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Default Re: UK housing market - rumours of its death greatly exaggerated?

Originally Posted by Don
Good points. You could be right.

.

2. Unemployment rate matters but are we getting the true picture from the headline figure? How many hidden unemployed are there? How many more on disability benefit and the like compared to last crash?
.
The "claimant count" unemployment data (834,000 in Sept) has been disregarded for ages. The ILO definition - which is well respected - shows UK unemployment at 1.39M . This figure is 4.7% of the workforce giving the UK the lowest unemployment rate of all G7 countries.

And there are 660,000 unfilled job vacancies !
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Old Oct 15th 2004, 4:38 pm
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Arrow Re: UK housing market - rumours of its death greatly exaggerated?

Originally Posted by Jimbo9
The "claimant count" unemployment data (834,000 in Sept) has been disregarded for ages. The ILO definition - which is well respected - shows UK unemployment at 1.39M . This figure is 4.7% of the workforce giving the UK the lowest unemployment rate of all G7 countries.

And there are 660,000 unfilled job vacancies !
You're missing the point. See:

Speculation that benefits based on some sort of medical exception are becoming a dumping ground for the unemployed was encouraged further yesterday by figures showing that the number of people claiming disability benefit has risen to 2.5 million, from 1.4 million in 1994. http://www.telegraph.co.uk/news/main...28/nbene28.xml

Add 1.4 million 'official' unemployment plus an extra 1.1 million on disability benefit since 1994 and you get a real unemployment figure of 2.5 million, not very far from the previous crash (2.8 million in 1990).
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Old Oct 15th 2004, 5:49 pm
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Default Re: UK housing market - rumours of its death greatly exaggerated?

Well I'm still awake. Have read all the above and still don't know if my house will sell when I want it to and for the amount I want it to. Hey ho
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Old Oct 15th 2004, 6:02 pm
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Default Re: UK housing market - rumours of its death greatly exaggerated?

Originally Posted by MikeStanton
At long last, sensible comments about likely house price movements
Funny how you like analysis that supports a firm housing mkt but disregard analysis that points to a worsening housing mkt.
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Old Oct 15th 2004, 6:27 pm
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Default Re: UK housing market - rumours of its death greatly exaggerated?

Personally having just sold my place after a 1 year of torture and having to buy the house at the bottom of the chain to do it, I think that the OECD, Halifax and BOE data can be largely put to one side.

What makes a market are the buyers, buyers read badly written articles and watch breakfast TV, when they get told the market is rising it will, when they get told it's falling it will. Ultimately they decide.

Figures are for economists.... what is/will happen to the market will be the result of the crash/boom/stagnate, nobody can predict it accurately.

Ask anyone on here trying to sell what the market is like, they'll tell you more that the statistics will.
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Old Oct 15th 2004, 6:33 pm
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Default Re: UK housing market - rumours of its death greatly exaggerated?

As far as I can tell prices are still holding up but sales are slowing a little. And only a little. England is still way over-populated and restrictions on new build continue so demand is still greater than supply so don't worry about a crash. Prices rise are slowing similarly in Aus too so there is no net effect. Okay, so we may have to drop £5k to make a sale but this whole process is going to cost £20,000 by the time you include estate agents fees, buying stuff to settle in etc etc so lets not panic. What is £5k compared to a superior lifestyle we are all heading for?
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Old Oct 15th 2004, 9:06 pm
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Default Re: UK housing market - rumours of its death greatly exaggerated?

2 other factors to think about. The impact of interest rates varies with the level of debt and the current oil price will have a similiar impact by taking money out of the economy and down the petrol pump. We are already seeing airfares rise and it won't be too long before other sectors of the economy are impacted by the high price of crude. How mortgaged up as a nation is Britain compared to the late 80s and early 90s?
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Old Oct 15th 2004, 9:27 pm
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Default Re: UK housing market - rumours of its death greatly exaggerated?

Originally Posted by Don
Funny how you like analysis that supports a firm housing mkt but disregard analysis that points to a worsening housing mkt.
I spend my working life driving trucks through poor, incomplete or illogical analysis - especially in financial markets. If you could provide me with an example of similar market conditions that resulted in a crash, I'm happy to listen. But, I've requested this info before and I'm still waiting....waiting.

Oh, and let's make it clear, nobody's talking about a new (sic) 'paradigm' - the simple fact is the conditions aren't the same as that for many previous crashes, so don't expect the outcome to be a crash.
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Old Oct 15th 2004, 9:44 pm
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Default Re: UK housing market - rumours of its death greatly exaggerated?

Originally Posted by MikeStanton
I spend my working life driving trucks through poor, incomplete or illogical analysis - especially in financial markets. If you could provide me with an example of similar market conditions that resulted in a crash, I'm happy to listen. But, I've requested this info before and I'm still waiting....waiting.

Oh, and let's make it clear, nobody's talking about a new (sic) 'paradigm' - the simple fact is the conditions aren't the same as that for many previous crashes, so don't expect the outcome to be a crash.
Easy.

Similarly high real unemployment. Similarly high real interest rates. High borrowing, low saving. High ratio of average house prices to average earnings. External shocks (eg oil).

The conditions will never be exactly the same as for previous crashes.

They never were duplications of anterior crashes, previously, but the crashes still happened.

It's the preponderance of deleterious conditions that matters, and boy do we have a huge preponderance of poor conditions right now.
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Old Oct 15th 2004, 9:46 pm
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Default Re: UK housing market - rumours of its death greatly exaggerated?

Originally Posted by Don
You're missing the point. See:

Speculation that benefits based on some sort of medical exception are becoming a dumping ground for the unemployed was encouraged further yesterday by figures showing that the number of people claiming disability benefit has risen to 2.5 million, from 1.4 million in 1994. http://www.telegraph.co.uk/news/main...28/nbene28.xml

Add 1.4 million 'official' unemployment plus an extra 1.1 million on disability benefit since 1994 and you get a real unemployment figure of 2.5 million, not very far from the previous crash (2.8 million in 1990).
There's also the huge number of people who became unemployed after the City/Banking/IT went into meltdown post 9/11. I know of dozens of people who were laid off then, and who are still not employed, or have only got bits & pieces of temp. work, a couple of years later. These people don't show up in the unemployment figures, because they were relatively well off (after many years of being very well paid), had invesments etc to live off, and were unlikely to 'sign on' to the dole for reasons of pride. However, as they are actively looking for work and WANT to work, they should be counted in the unemployment figures.

I bet if someone got all their stats together, it would be a significant number, even though the City job market is said to be improving....

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