Don

Anyone with a slightly longer perspective shouldn't really worry as the long term trend in house price inflation is (slowly) upwards.

Alternatively, if you buy and subsequently have to move in the short to medium term and swallow a loss in capital value, then odds are the next property you purchase will also be a lot cheaper than a few years ago.

OTOH, timing the property cycle right is a good way to make money and timing it wrong is a good way to lose money.

MikeStanton

The 40%? From robertd: The term crash is a very emotive term. Now, to most people - including myself - it means a rapid, very significant fall in average prices.

With more level-headed assessments - no, not building societies or estate agents - estimating a potential 15-20% drop over 5 years - that's hardly what I would call a crash

MikeStanton

At last, some rational analysis. Good one, Badge.

Quinkana

Not to worry - when their Omnipotencenesses want to kindle the next Mania and sell off the housing they bought at the bottom of the coming Panic, they'll just put episodes of "All Creatures Large and Small" on international TV to lure back the rats.

Don

The Economist called -25% over 4 years a crash and they're a pretty good authority.

Here's what the Economist says about the economics behind the crash:

1. "The p/e ratio. The price of any asset should reflect its
   future income stream. Just as the price of a share should
   equal the discounted present value of future dividends or
   profits, so the price of a house should reflect the future
   benefits of ownership - either the rental income earned by
   a landlord or the implicit rent saved by an owner-
   occupier.
2. "During the dotcom bubble, investors behaved as if profits
   no longer mattered. Likewise, people today are ignoring the
   link between house prices and rent.
   "The p/e ratio helps to expose the fallacy that house
   prices are rising because of growing populations and fixed
   supply, because these factors should affect the rental as
   well as the owner-occupier markets.
3. "The fact that prices are rising much faster than rents
   suggests that homes are being bought in the expectation of
   capital appreciation rather than underlying fundamentals.
   That is the definition of a bubble."

odaat

Warning of big fall in house prices

IMF tells home buyers to 'exercise caution' and says taxes may rise after election to plug budget deficit

Larry Elliott, economics editor
Thursday September 30, 2004
The Guardian

The International Monetary Fund last night issued a double warning on the UK economy, urging house buyers to beware a sharp fall in property prices and predicting that higher taxes may be needed to plug the hole in the government's budget deficit.
Just two days after Gordon Brown boasted of Labour's record on the economy at the party's conference in Brighton, the IMF provided a more sombre view in its half-yearly health check of global economic trends.

It told potential house-hunters to "exercise particular caution" and added to speculation that taxes may rise after the next election when it expressed doubts that Labour could finance its spending plans without putting its "golden rule" in jeopardy.

Mr Brown has shrugged off fears that the housing boom of the past few years will be followed by a fall in prices of up to 30% and insisted this week that he would not surrender his reputation for prudence.

The IMF said the expected improvement in the public finances as a result of the 3.4% growth in the economy this year would not be enough to restore the public finances to good health. "Following the large increase in the fiscal deficit in recent years, some consolidation is expected in 2004, mainly reflecting higher revenues. In 2005 and beyond, stronger fiscal consolidation than presently seems in prospect would be desirable, both from a cyclical perspective and to reduce the risk of a breach in the golden rule in the future."

Mr Brown's self-imposed golden rule states that over the course of an entire economic cycle - which may be several years in length - the government should only borrow in order to invest in long-term investment projects. While borrowing to fund the annual running costs of government is allowed in particularly tough years, this is supposed to be at least balanced by running surpluses in good years.

The IMF's warning comes after similar judgments from the UK's leading experts on tax and spending - the Institute for Fiscal Studies - and by a number of City firms. Oliver Letwin, the shadow chancellor, has said that the consequences of "big government" will be higher taxes if Labour wins a third term.

In its world economic outlook, the IMF reiterated its fear that the UK's strong economic performance could be tarnished by a steep fall in house prices and stressed that buyers should take special care.

"Despite higher oil prices, private consumption remains strong, underpinned by sustained income growth and rising housing wealth; private investment has turned up; and government expenditures have continued to support domestic demand."

The IMF expects UK growth of 3.4% this year and 2.5% next, both 0.1 points lower than it was forecasting in the spring. "The central risk remains an abrupt adjustment in the housing market, where - despite signs of cooling in recent months - prices still appear higher than can be explained by developments in fundamentals." It added: "With interest rates on a rising trend, and most house purchases fi nanced with adjustable rate mortgages, house buyers should exercise particular caution at the present juncture."

While some in the City believe that interest rates may have peaked at 4.75%, the IMF said that further tightening of monetary policy would be needed to keep inflation in check. "While inflation remains low, the economy is now running at close to capacity and cost pressures are increasing; the Bank of England has appropriately raised interest rates five times since November 2003 and a continued 'early but gradual' approach appears desirable."

MikeStanton

Indeed, the The Economist is a good authority.

You appear to be referring to their graph entitled "Waiting for the crash" and quoting a range of potential drops that average anywhere between a drop of ~3-10% each year. That is no crash. Invesment funds often lose more, and nobody refers to them as having crashed. What happened to the financial markets in 1987 was a crash.

Again no evidence has been provided to support a strong likelihood of a crash.

So far, all I've read are posts that are strong on hysteria and very, very weak on sound analysis.

Amen.

Don

Whatever definition is used of a crash, the only good evidence of a number of years of house price decline and/ or stagnation (or not) will be after the event.

But it's not possible to make a house buying or selling decision after the event.

Quinkana

Might be of mild interest to a few if you were to provide "evidence" to support a hypothesis that a crash was highly unlikely.

Real estate compared to a stock market is like a submarine compared to an aeroplane. A 20% drop over ~ 1 year in real estate is mercurial.

MikeStanton

Let's use the IMF's view (mid-Sept'04), not that of doom-mongering fantasists, shall we?


IMF: no sign of house price fall

There is no strong evidence that house prices will fall, the International Monetary Fund (IMF) has said. Higher interest rates might slow the growth of house prices, but the IMF does not see a fall in house prices, it said in its biannual report.

The IMF added that global financial markets are at their strongest since the stock market bubble burst in the late 1990s. However, it warned that high oil prices could slow growth and raise inflation.

Rising prices? Strong house price gains in several countries have prompted fears that prices may fall sharply, as current prices do not reflect real value.

Federal Reserve chairman Alan Greenspan lent support to this view when he said last month that house prices may be "out of alignment with fundamentals".

A recent survey by the Economist magazine found that home prices are now at record levels in relation to average incomes in the US, Australia, the UK, France, Ireland, Holland, New Zealand and Spain.

Homes both at home and abroad are more overvalued today than at previous market peaks, from which prices typically fall sharply in real terms, the magazine said.

The IMF's view is more optimistic.

"Even though prices in some countries like the UK, Australia, Spain and the US might be high, the risk of decline in the near term is not very real at the moment," Hung Tran, chairman of the IMF committee which oversaw the report, said late on Wednesday.

The key issue is the sensitivity of households to rate increases, Gerd Haeusler, director of the IMF's international capital markets department, said.

The level of household debt is rising, particularly in America and in the UK but many households, especially in the US, have locked into long-term low rates, making them immune to rising rates."


In other words, Economics 101

MikeStanton

Ah, do I detect signs of backtracking? Moving from 'crash' to something more restrained? The point is the doom-mongering scenarios are not well-founded. They are pure speculation.

It just makes good copy.

MikeStanton

You're a bean-counter : I am surprised you accept the crash scenario with such little evidence. But, then again...

Do please provide an example of a housing market that crashed in a similar economic environment, ie a healthy economy and low interest rates.

I can wait.




I'm still waiting...

Don

No backtracking. I said all along that my definition of a crash was about -25% over a couple of years. I don't care about the semantics and nor would anyone with a stake. It's the scale of the loss over time that matters.

The scenario of a decline in house prices over the next few years is not at all unfounded or speculative. It is based on proper analysis of what is happening in the mkt now and what happened in every single other house price bubble over the last 60 years:

The bubble burst and after a period of over-reaction, house prices in relation to average earnings went back to trend.

There will always be people who don't want to wake up and smell the coffee, who don't understand that the housing mkt is cyclical and that therefore the lessons of history are of value, (or are just a bit thick,) but I reckon you are just playing DA, Mike.

Unless you honestly believe that this is a new paradigm? Try and make me laugh, if so, with your rationale.

Don

You neglect to say that the IMF said there was a 40% chance of a house price crash in the UK.

Quinkana

Only beans I count are all mine.

I accept the possibility of a crash but I also accept that it is near meaningless to try to ascribe likelihood (aka probability) to it. A dirty bomb in London would cause an overnight crash of, say, 100% but what is the probability of that occurring?

There are so many factors which interplay, many non-linearly, in the setting of property prices, that a catastrophe (in the mathematical sense) - a crash - is a possibility. Catastrophes, by their non-linear nature, are unpredicted and unpredictable except in the most controlled of experiments.

We just some excessive inflation (eg commodity or wage price rises) and central banks to raise real interest rates from negative to positive. Or any of a number of other combination of events. Example - 1980's.