Here’s a bit of historical context: in the last major house price slump, prices peaked in the third quarter of 1989*, hit bottom in the first quarter of 1993 when they were 20% lower and did not rise back above the pre-slump peak again until the first quarter of 1998.
What would similar timescales mean for us this time round? Prices peaked in the third quarter of 2007, so that would mean them not hitting bottom until the first quarter of 2011 and not getting back to their pre-slump levels until the first quarter of 2016. In other words, not only would house prices still be falling at the time of the next general election, they would also be relatively weak all through the next Parliament. Prices are currently 15% down on the peak (compared with that 20% fall last time).
As to whether the length and depth of the last slump is any guide to the next one, who knows? Though so far those who were saying, ‘ignore the past, we’ve rewritten all the rules about slumps’ don’t seem to have come out of the forecasting business terribly well.
* All figures in this post based on the Nationwide house price index.
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5 Comments
Fred Harrison
http://www.renegadeeconomist.com/
got this house price crash bang on, as he did the last one. OK, like a lot of the extreme LVT people he comes across as a bit of a loon, but looking at what he wrote when so many idiots were making business plans based on house price rises going on indefinitely, I have to say … respect.
I myself was firmly enough convinced of the Harrison cycle to make sure I’d sold my flat by the beginning of 2006 and put the proceeds into a high interest rate account with a building society that had kept strictly to old school business lines.
Interesting assumption there. How long does Mark Pack think the next Parliament is likely to last? Until 2016?
Not sure I follow the question? The general election after next will have to be by 2015 (which is the date if both this and the next Parliament go their full term).
If property prices don’t return to their previous levels until 2016 that means they’ll be “relatively weak” all through that Parliament, and all the more so of course if one or other or both general elections is sooner.
Upward pressure on prices comes from lack of new new homes being built, inward migration, families splitting up and living apart, and of course until recently easy credit.
Downward pressure is currently because of the credit crunch and increasing unemployment.
Looking ahead it depends on how the pieces of the jigsaw move – and maybe there are some pieces I have missed?
The situation had come to be that housing was treated as like some sort of crop – you could just keep harvesting it as it produced wealth through price increases and we could all live off that. Incredibly, it seems there were actually large companies led by people paid very highly for the supposed power of their minds whose business model was essentially based on this.
House prices are set by what people are able and willing to pay for them. A big factor which needs to be taken into account is money recycled through inheritance. A house is sold because its owner has died, the money is passed on to the heirs, and they use it to bid for more housing. I think this probably plays a big factor in why house prices do seem to be able to maintain a level above what you’d think most people could even uncomfortably afford, there is a feedback process here.
So long as housing is not in abundance and people are reasonably confident about their own future income and house prices remaining at least steady, people will work on the basis of what they can afford to pay monthly, then backwards from that as to what mortgage amount would lead to that monthly payment, and bid that amount for whatever is the best housing left after those who can bid more have taken the better. So if interest rates fall, the mortgage amount which leads to a particular monthly payment goes up, and people can and will bid more, so house prices go up. That is why blanket subsidies such as mortgage tax relief don’t “help house buyers”, they simply enable them to bid more. As I said above, we must also factor in many house buyers having a lump sum derived from inheritance to add to the bid.
Memories of the years of high inflation have probably led to people being willing to bid higher than is sensible. When inflation was high, you simply had to sit it out uncomfortably for a year or two, and inflation would soon reduce your loan to a more comfortable level. It takes a while for the social assumptions based on the past to end. Young buyers recently may never have experienced high inflation, but they will have the attitudes past onto them by older people and society in general which remembers the 1970s. I suspect this will dwindle as a factor now we have gone quite a while with long term loan payments remaining much as they were when first taken rather than dwindling in real terms as prices and wages risse rapidly.
Currently the reduction in easily obtained mortgages and people’s fear for the future of their jobs means there’s a reluctance to put in high bids. Also no-one now is thinking “I’d better borrow an uncomfortable high amount for fear that if I didn’t, I’d be priced out altogether next year”.
Countering this is sellers being reluctant to accept that house prices had reached silly levels, so unwilling to cut to what might lead to a sale. If your house was valued at £300,000 a year ago, you’re going to be very reluctant to sell it at £200,000, even though that’s probably realistically what you’re going to have to do if you really want a sale, and even though if you bought it even not that long ago, that would still be more than you paid for it. Hence there’s a standoff, buyers won’t buy, sellers won’t sell – and a big difference in the ticket prices in the estate agents and the real price when a house HAS to be sold (death, repossession etc).
My feeling is there’s a long way to go still because if you look at the ticket price now, you’re still left thinking “how on earth can the sort of ordinary peopple I know afford the price asked for that ordinary house?”.
I find the price of houses in the ward where I was a councillor a good guide. It’s ex-council stock, the local schools are poor, the environment quite rough, the postcode unfashionable – in short, it’s about the cheapest house-and-garden you can get in London, what you’d buy if you really want a house-and-garden but have to look at the cheapest option for that. In 1994 when I was first elected, the houses were going at about £60,000. When I stood down in 2006 they were about £220,000, I see now the ticket price has dropped below the £200,000 line. The realistic price for these has to be what a young couple on average wages for one, part-time looking after the kids wages for the other, can afford. I’d say they’ve still a long way to go down to reach that level. Call bottom of the market £120,000.