COMMENT: House market has key role in our recovery (From Worcester News)

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COMMENT: House market has key role in our recovery

7:30am Thursday 15th July 2010 in Local

COMMENT: Encouraging movement in house sales

AS THE nation attempts to pull itself further away from recession, the housing market is at last showing signs of long-term recovery.

Property prices fell away alarmingly after reaching a peak in late 2007 and the ensuing credit crunch and economic crisis has done little to help either sellers or buyers.

There is little doubt the house price boom was a bubble waiting to be burst and the market was artificially inflated by the time of the crash.

Thankfully there are now encouraging signs the market has corrected itself.

There have been 16 months of rising house prices although only half of the value lost in the preceding 16 months has been recovered. The recovery has been less pronounced here in the Midlands, with prices rising by just over five per cent, than in areas like London and the South East which have seen increases of around 20 per cent.

Many economists are predicting a flat property market for the rest of this year while others warn more price falls could be on the way.

The housing market remains important to the national economy because so many of us are home owners and, for most people, property remains their single biggest investment and asset.

The potential for mass job losses in the public sector could lead to another big increase in repossessions and this could play a part in determining the housing market’s direction.

The market will find its level – probably below its 2007 peak – but it may be some time before we are clear what that is.

Comments(18)

economist says...
7:51am Thu 15 Jul 10

I'm sorry but I have rarely read so much ill-informed rubbish - has this been written by an Estate Agent or someone involved in BTL? There has been an avalanche of reports (research about the property market & in the media) showing that the UK property market is set for 30%-40% price falls over the next few years and that it will be 10 years or more before the peak prices seen in 2007 are revisited again. The Halifax House Price Index has reported falling prices for the last 3 months and in 4 out of the last 5 months. The Land Registry Index also has been reporting falling prices and the Nationwide Index has a falling trend that is about to go negative. Asking prices are falling in just about all places except London according to research by Rightmove which is confirmed by data from Home dot UK.
It is widely recognised that it was the house price boom fuelled by the credit boom (ie the Banks creating more & more credit that didn't exist to feed the asking prices for property that were continually pushed up by irresponsible Estate Agents) that led to so much debt that the Banks went bust and indeed the whole economy leading to millions losing their jobs, wage deflation (average income down from £28000 to £25500 in just the last 6 months alone!!!), income erosion via tax rises, rising cost of bills, etc., etc. and also necessitating massive cuts in public services. That is what boom time house prices (and current prices are near the top of the boom) have cost us! Current levels of house prices have made the age of austerity a necessity!!

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economist says...
8:05am Thu 15 Jul 10

On what basis is the above Comment claiming that "Thankfully there are now encouraging signs the market has corrected itself" - complete and utter nonsense.

Economic research into asset (including property) price bubbles consistently shows that ALL asset (incl property) price bubbles ALWAYS burst with prices ALWAYS falling back to their long term trend levels - this was confirmed, again, by recent research reported in the FT which pointed out that the only 2 asset price bubbles that have not burst with prices returning to their long term trend levels are the UK and Australian house price bubbles but that is simply because they are in the process of reaching the full-on bust stage (which has now restarted in the UK - see above comment). For the UK this means that house prices need to fall 30%-40% to return to their long term trend level.

Why was the house price crash in the UK interuppted last year? UK prices fell by 20% between Autumn 2007 to Spring 2009. Then, Gordon Brown injected £300bn into the mortgage market via the SLS and CGS schemes. Along with a Base Rate at a 316 yr low this caused house prices to stop falling and to rise over the following 12 months - by just over 10% on average (taking them to 30%-40% above their long term trend levels). This £300bn has just about run out and the Govenor of the Bank of England has said there is zero chance of the £300bn being replenished or replaced. Indeed the Banks have to repay the BofE the £300bn (and indeed pay off another £500bn of debts that they owe) by 2012/14 - this means the Banks have to hand over £800bn between now and 2014. This is why the Banks and the Bank of England are saying that even fewer mortgage loans are going to be available (unless prices fall to sensible, healthy, non-economy wrecking levels).
The money to support current levels of boom time house prices simply does not exist - there is only one way house prices are going and that is a long, long way down.

On what basis is the above Comment claiming that "Thankfully there are now encouraging signs the market has corrected itself" - complete and utter nonsense. Economic research into asset (including property) price bubbles consistently shows that ALL asset (incl property) price bubbles ALWAYS burst with prices ALWAYS falling back to their long term trend levels - this was confirmed, again, by recent research reported in the FT which pointed out that the only 2 asset price bubbles that have not burst with prices returning to their long term trend levels are the UK and Australian house price bubbles but that is simply because they are in the process of reaching the full-on bust stage (which has now restarted in the UK - see above comment). For the UK this means that house prices need to fall 30%-40% to return to their long term trend level. Why was the house price crash in the UK interuppted last year? UK prices fell by 20% between Autumn 2007 to Spring 2009. Then, Gordon Brown injected £300bn into the mortgage market via the SLS and CGS schemes. Along with a Base Rate at a 316 yr low this caused house prices to stop falling and to rise over the following 12 months - by just over 10% on average (taking them to 30%-40% above their long term trend levels). This £300bn has just about run out and the Govenor of the Bank of England has said there is zero chance of the £300bn being replenished or replaced. Indeed the Banks have to repay the BofE the £300bn (and indeed pay off another £500bn of debts that they owe) by 2012/14 - this means the Banks have to hand over £800bn between now and 2014. This is why the Banks and the Bank of England are saying that even fewer mortgage loans are going to be available (unless prices fall to sensible, healthy, non-economy wrecking levels). The money to support current levels of boom time house prices simply does not exist - there is only one way house prices are going and that is a long, long way down. economist

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Malvern says...
8:15am Thu 15 Jul 10

Estate agents said yesterday that house prices will fall this year and will take approx 5 years, at least, to reach 2007 prices. Economist might have said that but I couldn't be bothered reading that Tome.

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economist says...
8:26am Thu 15 Jul 10

And how is the propertry market doing in Worcester? Estate Agents keep trying to talk up the market, have been saying that property is selling well, that the time to buy is now, etc., etc. - i.e. all their usual 'second hand car' salesmen talk. (Note that research consistently finds that over 95% of the public don't trust Estate Agents - and with good reason. Indeed the Office for Fair Trading reported that they found that many Estate Agents tell their clients lies.)
The Land Registry data for completed property sales shows the number of properties sold in Worcester each year as follows:

2002 - 2966 properties sold
2003 - 2522
2004 - 2375
2005 - 2137
2006 - 2690
2007 - 2179
2008 - 1180
2009 - 973
But, Estate Agents were saying that the property market was recovering in 2009 and that the number of sales were recovering and going great guns. And yet the evidence shows that this was not true. In 2009 the number of properties sold had collapsed by 64% compared to the number sold in 2006.
Then Estate Agents claimed that the collapse in sales bottomed out in the 1st Quarter of 2009 and that sales have been recovering ever since. Again - not true.
Using Land Registry data lets look at the number of completed property sales in Worcester for the 1st Quarter of each year:
2006 - 560 properties sold
2007 - 517 sold
2008 - 297
2009 - 200
2010 - 205
So, this year has seen the first Quarter with a number of completed property sales at more or less the same level as the historically low levels seen in the 1st Quarter of 2009.
Why such low sales numbers - simply because prices are way too high and unaffordable to the vast majority of people whether they want to become a 1st time buyer or are mortgage holders and want to move up the property ladder.
The asking prices set by Estate Agents are ridiculous and have broken the property market.

The Banks, the Government, the media and the public have all woken up to the fact that the boom times are over and that we are now in the age of austerity. It is high time that Estate Agents, including Worster EA's, woke up to the new economic reality and set asking prices accordingly. The WN Comment is correct in saying that the property market is a key factor for the economic recovery - after all it was the poison of boom time house prices that played a key role in breaking the whole economy that we are ALL paying for so dearly. If house prices remain at current levels it will only ensure that economic recovery will not be achieved and many more will lose their jobs, see more wage cuts, income erosion, loss of health and education services, etc. For true, sustainable economic recovery property prices must fall back, 30%-40%, to their long term trend levels that are healthy for the economy and are affordable (through hard work and saving) for 1st time buyers and people who want to move up the property ladder.

Time for Estate Agents to stop being so greedy and irresponsible and to stop, what is in effect, vandalising the economy.

By the way, the stats I provide above, and a raft of other measures show that the property market has not corrected itself - it is broken and a bubble that is bursting.

And how is the propertry market doing in Worcester? Estate Agents keep trying to talk up the market, have been saying that property is selling well, that the time to buy is now, etc., etc. - i.e. all their usual 'second hand car' salesmen talk. (Note that research consistently finds that over 95% of the public don't trust Estate Agents - and with good reason. Indeed the Office for Fair Trading reported that they found that many Estate Agents tell their clients lies.) The Land Registry data for completed property sales shows the number of properties sold in Worcester each year as follows: 2002 - 2966 properties sold 2003 - 2522 2004 - 2375 2005 - 2137 2006 - 2690 2007 - 2179 2008 - 1180 2009 - 973 But, Estate Agents were saying that the property market was recovering in 2009 and that the number of sales were recovering and going great guns. And yet the evidence shows that this was not true. In 2009 the number of properties sold had collapsed by 64% compared to the number sold in 2006. Then Estate Agents claimed that the collapse in sales bottomed out in the 1st Quarter of 2009 and that sales have been recovering ever since. Again - not true. Using Land Registry data lets look at the number of completed property sales in Worcester for the 1st Quarter of each year: 2006 - 560 properties sold 2007 - 517 sold 2008 - 297 2009 - 200 2010 - 205 So, this year has seen the first Quarter with a number of completed property sales at more or less the same level as the historically low levels seen in the 1st Quarter of 2009. Why such low sales numbers - simply because prices are way too high and unaffordable to the vast majority of people whether they want to become a 1st time buyer or are mortgage holders and want to move up the property ladder. The asking prices set by Estate Agents are ridiculous and have broken the property market. The Banks, the Government, the media and the public have all woken up to the fact that the boom times are over and that we are now in the age of austerity. It is high time that Estate Agents, including Worster EA's, woke up to the new economic reality and set asking prices accordingly. The WN Comment is correct in saying that the property market is a key factor for the economic recovery - after all it was the poison of boom time house prices that played a key role in breaking the whole economy that we are ALL paying for so dearly. If house prices remain at current levels it will only ensure that economic recovery will not be achieved and many more will lose their jobs, see more wage cuts, income erosion, loss of health and education services, etc. For true, sustainable economic recovery property prices must fall back, 30%-40%, to their long term trend levels that are healthy for the economy and are affordable (through hard work and saving) for 1st time buyers and people who want to move up the property ladder. Time for Estate Agents to stop being so greedy and irresponsible and to stop, what is in effect, vandalising the economy. By the way, the stats I provide above, and a raft of other measures show that the property market has not corrected itself - it is broken and a bubble that is bursting. economist

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crowquill says...
9:54am Thu 15 Jul 10

I totally agree with economist, this is completely out of touch with all the major reports on the subject. Recent figures point to a month on month fail. Just about everyone including the ever optimistic council of mortgage lenders is now predicting a fall. The hedge funds and banks still think that house prices are 20-25% over priced.
Why is this written as though higher house prices are a good thing. Do we really want our children to be in debt for the rest of their lives just to live in a rabbit hutch?
So that begs the question who wrote this article and why?
Come WN come clean this has vested interest written all over it!

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PeterNielsen says...
10:29am Thu 15 Jul 10

House prices will level out at an affordable level when supply and demand are more or less equal. What that level will become will not emerge until supply meets demand. By demand, I don't only mean a limited number of people having the money to buy a limited number of houses. I also mean that demand that cannot be satisfied because prices are too high. Call it need. The housing market has been affected by such trends as low levels of house building for sale, and even lower levels of social housing. An additional factor is the bursting of the buy-to-let bubble. Buy-to-let was based on the idea that you could recover the cost of borrowing to buy a property by setting a rent above the mortgage repayments. The cost of these rents are now carried in part by the government through a subsidy to landlords, namely, housing benefit. People living in rented property subsidised by housing benefit are not in the housing market as potential buyers even though they may want to be.
Most continental countries have a supply/demand equilibrium mix of ownership, privately rented and social housing. That did not prevent house prices from rising there at the same time as here but the housing disaster started by Thatcher and continued by lair and Brown has not materialised in Europe.
On the whole, I agree with Economist Warndon that prices will fall though not necessarily within the timescales or values given. Nor will it be influenced entirely by buyers and sellers. There is not a major house building policy in sight. Labour's has been binned by the Tories. That leaves a "housing market" in which a comparatively small number of people will be buying and selling to each other and those in need of housing will have to stay below the radar and suffer. This would tend to keep prices from falling.
Personally, I hate the term "housing market". The idea that someones security of tenure should rest on capitalist exploitation is repugnant.

House prices will level out at an affordable level when supply and demand are more or less equal. What that level will become will not emerge until supply meets demand. By demand, I don't only mean a limited number of people having the money to buy a limited number of houses. I also mean that demand that cannot be satisfied because prices are too high. Call it need. The housing market has been affected by such trends as low levels of house building for sale, and even lower levels of social housing. An additional factor is the bursting of the buy-to-let bubble. Buy-to-let was based on the idea that you could recover the cost of borrowing to buy a property by setting a rent above the mortgage repayments. The cost of these rents are now carried in part by the government through a subsidy to landlords, namely, housing benefit. People living in rented property subsidised by housing benefit are not in the housing market as potential buyers even though they may want to be. Most continental countries have a supply/demand equilibrium mix of ownership, privately rented and social housing. That did not prevent house prices from rising there at the same time as here but the housing disaster started by Thatcher and continued by lair and Brown has not materialised in Europe. On the whole, I agree with Economist Warndon that prices will fall though not necessarily within the timescales or values given. Nor will it be influenced entirely by buyers and sellers. There is not a major house building policy in sight. Labour's has been binned by the Tories. That leaves a "housing market" in which a comparatively small number of people will be buying and selling to each other and those in need of housing will have to stay below the radar and suffer. This would tend to keep prices from falling. Personally, I hate the term "housing market". The idea that someones security of tenure should rest on capitalist exploitation is repugnant. PeterNielsen

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economist says...
11:08am Thu 15 Jul 10

I agree that house prices will not simply be determined by buyers and sellers and the supply demand dynamics that they create. Of more significance is the supply/demand of credit available for mortgage loans - and there we have a collapse of supply. The Banks need to repay £800bn of debt in a timeframe of 2012/14 - as I said above this is a key reason why the Banks have said that compared to last year they are coming up against having £400bn less available for mortgage loans. In addition to the mortgage funding issue there is the wider problem of Banks being, in effect, insolvant and the extent of their financial difficulties is such that most economists are estimating that it will take a decade or longer for Banks to rebalance their books - in the meantime they will remain risk averse and will only loan out to low risk customers (e.g. the demand for high levels of deposit, etc.). The Government can't afgford to bail out the Banks a 2nd time round so caution and restraint is the order of the day. The BofE Govenor has already publicly warned that obtaining mortgage loans is going to get much more difficult - this will only improve as house prices fall.
I don't agree that the UK has a shortage of properties, or that this will do anything to prevent house prices falling 30%-40% back to their long teerm trend levels. We only need to look at Japan to see a country/island with a much higher population density and less building land than the UK for evidence of this - house prices have been falling in Japan since the beginning of the 1990s. In the UK also, there are over a million empty properties. Also, if there was a significant shortage of properties then we wouldn't have the very large number of empty, unsold flats in every town and city across the country that have been built over the last 10 years. Research shows that the house building boom of the 1930s-50s, and to some extent 1960s/70s produced a very large surplus of properties.
History shows that house price bubbles always burst and prices always end up returning to their long term trend levels - often they dip below the long term trend level for a period of time (e.g. in the 1990s UK average house prices fell to 2.8 times the average income). And always there are those that argue that house prices may fall but will never fall back to their long term trend levels, but they always do one or another.

I agree that house prices will not simply be determined by buyers and sellers and the supply demand dynamics that they create. Of more significance is the supply/demand of credit available for mortgage loans - and there we have a collapse of supply. The Banks need to repay £800bn of debt in a timeframe of 2012/14 - as I said above this is a key reason why the Banks have said that compared to last year they are coming up against having £400bn less available for mortgage loans. In addition to the mortgage funding issue there is the wider problem of Banks being, in effect, insolvant and the extent of their financial difficulties is such that most economists are estimating that it will take a decade or longer for Banks to rebalance their books - in the meantime they will remain risk averse and will only loan out to low risk customers (e.g. the demand for high levels of deposit, etc.). The Government can't afgford to bail out the Banks a 2nd time round so caution and restraint is the order of the day. The BofE Govenor has already publicly warned that obtaining mortgage loans is going to get much more difficult - this will only improve as house prices fall. I don't agree that the UK has a shortage of properties, or that this will do anything to prevent house prices falling 30%-40% back to their long teerm trend levels. We only need to look at Japan to see a country/island with a much higher population density and less building land than the UK for evidence of this - house prices have been falling in Japan since the beginning of the 1990s. In the UK also, there are over a million empty properties. Also, if there was a significant shortage of properties then we wouldn't have the very large number of empty, unsold flats in every town and city across the country that have been built over the last 10 years. Research shows that the house building boom of the 1930s-50s, and to some extent 1960s/70s produced a very large surplus of properties. History shows that house price bubbles always burst and prices always end up returning to their long term trend levels - often they dip below the long term trend level for a period of time (e.g. in the 1990s UK average house prices fell to 2.8 times the average income). And always there are those that argue that house prices may fall but will never fall back to their long term trend levels, but they always do one or another. economist

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economist says...
11:16am Thu 15 Jul 10

Another factor weighing heavily down on UK house prices is the demise of BTL as an investment - BTL has become Buy To Lose your money.
A report out this week revealed that 43% of BTL'ers would not be able to cover their mortgage payments when interest rates go up by just 2% - and this is when the Base Rate is at a 316 year low!!
Then we have the Capital Gains Tax rise to 28% (with further rises to come? - the LibDems think so) meaning that BTL'ers will have to pay 52% more CGT than they did previously.
Then, worst of all for large swathes of BTL'ers are the cuts in housing benefit - the cap on Housing Benefit and the cut in LHA from the 50th to the 30th percentile. This cut in the LHA will mean that many BTL Landlords will have to cut their rents by 40% or lose their tenants. And all this in the context of 43% of them being on the bring of disaster when the Base Rate is at a 316 year low and house prices are falling!
If house prices are falling whilst the Base Rate is at a 316 year low just imagine what will happen to house prices as the Base Rate climbs back up to its long term trend level of 6%! And the Base Rate will inevitably return to that 6% (and go even higher at some point) at some point.

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Malvern says...
1:00pm Thu 15 Jul 10

If house prices fall the banks will increase interest rates on mortgages to compensate for their loss of profits.

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economist says...
1:47pm Thu 15 Jul 10

House prices are already falling - see the Halifax and Land Registry House Prices Indexes + asking prices are already falling (except for London) see Rightmove and Home.co.uk. Supply to the property market has increased by 70% compared to last year whilst demand has continued collapsing. Demand is set to collapse further as the £300bn made available for mortgage lending by the New Labour Gov has run out and needs to be repaid by the Banks to the BofE by 2012/14 - which is why the mortgage lenders are saying they are heading towards having £400bn less than last year for mortgage lending - even the Govenor of the BofE is warning that mortgage lending is going to collapse further going forward from here. In addition Moodys are reporting today that the open markets are dry in terms of UK mortgage lenders trying to raise credit for loans from that source.
If Estate Agents don't respond to this reality by cutting asking prices drastically they will find that they will be selling far fewer properties than even the historical lows achieved in 2008 and 2009. Time for Estate Agents to wake up to reality and throw off the delusion that the boom times are continuing. Where on earth do Estate Agents think people will get the money from to pay their silly, fantasy, boom time asking prices? The answer is that people won't and can't get the money.

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economist says...
2:23pm Thu 15 Jul 10

I should also point out that if people could get the mortgage loans in the numbers of normal levels of activity (ie sales numbers completed) to support current levels of house price then the UK economy would be effected in exactly the same way as it was before when normal levels of sales were being completed and house prices were at this level (ie in 2007) - the Banks would go bust, millions more would lose their jobs, wage deflation would be even worse, etc., etc. .... we would, however, this time fall into economic depression rather than just severe recession.
The Government really needs to introduce tight and effective regulation of Estate Agents to stop their vandalism of the economy that we ALL pay so dearly for. Its not just the Bankers that need contolling, its the Estate Agents as well.

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drbeat says...
5:39pm Thu 15 Jul 10

Crikey...if your wealth is in US Dollars prices have in fact fallen by approx 35% since 2007! All these cheers from the VIs about price increases mean nowt as food, fuel etc has stormed up in price too! The neccesities of life cancel out any gains made from this Ponzi scheme! The WN person needs to understand that the correction has been delayed...delayed by low Interest Rates (that killed our currency hence why those with stronger currencies see a huge fall since 2007), by QE that was only done to prop up asset prices, by mortgage bailout schemes that Brown brought in, the bank bailouts, and also by the banks simple refusal to press ahead and sell the repo'd homes on their books! This intervention simply delayed the correction! And because of that intervention the eventual correction is going to be a hell of a lot more painful and I fear will affect everyone and not just the feckless few!

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sir james says...
7:47pm Thu 15 Jul 10

Dare I ask whether we ordinary mortals would be disadvantaged if house prices fell by half?

Surely our younger people could afford to buy houses without shackling themselves to global money lenders?

Surely the financial crash had at its core a system of usury which is now costing us all dear without any benefit to the average British person.

Why is our government not suing the financial regulators (plus Clinton and Blair?) in the USA with the same vigour Obama is screwing BP?

It is well known that Clinton and his New Labour fan club were talked into relaxing financial regulation here and in the USA,and that these regulations had protected us from fraud since the last disaster in 1929.

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New Kid on the Block says...
10:00pm Thu 15 Jul 10

Why is it that as soon as I saw the headline I thought to myself that Economist would soon be adding some of the longest comments ever seen on this website?

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economist says...
9:36am Fri 16 Jul 10

And yet another major factor that will drive UK house prices down is the fact that the FSA is now making moves to ban Self Certified Mortgages - ie the mortgages whereby large numbers of people made up the figures about their incomes in order to get a larger mortgage than they would otherwise have got if they had declared their true income. And mortgage lenders for many years have not been checking or asking for evidence of people's incomes (yes, absolute madness!!). You might assume that self certificate mortgages were a niche, small part of the mortgage lending market - but no. During the boom years, and even in the last 12 months Self Certified mortgages have made up 40% (forty percent) of all mortgage lending. It is not difficult to see how these mortgages have acted to push up UK house prices (and used by large swathes of BTL'ers) and it is not difficult to see how the ban on these types of mortgages will cause a large drop in property prices.
So add this to the avalanche of other factors creating downward pressure on house prices and it is not difficult to see that the UK will follow the same path already trodden by other countries since 2007 such as the US, Ireland, Spain, etc., etc. all of which have seen house prices fall by 40% or more already (and prices are still falling in those countries).

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sir james says...
2:46pm Fri 16 Jul 10

Good! Of course as our pound loses value any old foreigner with a bit of cash can buy our houses as an investment and ensure that British folk own neither British industry nor even the houses they occupy, and there will be much joy in the "markets" as Britain falls further under their control.

What a mystery it must be to many folk when British governments completely ignore public opinion save for a few weeks at election time.

I suppose it never occurs to them when we sold off our assets we sold off our democracy at the same time!

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economist says...
3:25pm Fri 16 Jul 10

I should also add that the FSA is looking to introduce mortgage lending restrictions in terms of interest only mortgages (IO mortgages). Again, IO mortgages, are another significant factor that pushed house prices up to boom time levels that we currently witness - mortgage lenders were allowing people to take out IO mortgages without having a financial saving product in place that would pay off the capital sum at the end of the mortgage term. Now the FSA wants restrictions in place that ensure that if mortgage lenders are to allow someone to take out an IO mortgage the applicant must prove that they have income to cover the costs of a full repayment mortgage rather than just sufficient income to cover the cost of the IO mortgage. This alone would cause house prices to fall - combined with all the other factors coming into play the downward pressure on UK house prices is immense.
To buy property now or in the near to mid future will be financial suicide.

Estate Agents, if you don't want to see a further collapse in property sales transactions you will have to cut asking prices drastically, and repeatedly until you achieve a sale. No point giving boom time, unrealistic, fantasy valuations to get a property on your books if it ain't going to sell - and that is what is happening in the vast majority of cases of properties you are putting on the market - sales is down to a pathetic trickle (as evidenced by the Land Registry data, and indeed other sources of data about the property market).

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mrsi says...
10:50am Mon 19 Jul 10

I hope the market crashes.

Simple as.

Negative Equity? I have the answer for you... "live in it". No problems.

COMMENT: House market has key role in our recovery (From Worcester News)

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