Just over a year ago I commented on the fact that several bodies in the housing market refused to give their predictions

http://www.noelwatson.com/blog/CommentView,guid,87934429-905b-4f5e-8b88-8a876b6a3fbc.aspx

As it turns out, they were all wrong, with both Halifax and Nationwide showing gains YOY.

Whether this will continue when/if QE is withdrawn and interest rates rise remains to be seen.

http://www.lloydsbankinggroup.com/media1/research/qtrly_regional_comments.asp

Interesting to see that Greater London is already 25% off peak

Was ~320k (this figure has been adjusted)

http://www.noelwatson.com/blog/PermaLink,guid,f6aea8d2-ce5c-42d4-8d20-90fd4d636840.aspx

(rows 1285 on 2nd and 3rd tabs)

http://www.lloydsbankinggroup.com/media/excel/24_04_09historicdata.xls

Now £241,306

http://www.lloydsbankinggroup.com/media/pdfs/research/GreaterLondonQ12009.pdf

http://www.ft.com/cms/s/0/47931550-f874-11dd-aae8-000077b07658.html

Reading this article, I was wondering whether the two statements
"Even under what seem like extreme scenarios for UK and US house prices, many people agree that few mortgage bonds outside subprime definitely look expensive. "
"Also, for example, Fitch Ratings recently said that under its stress testing, which included the assumption of a 30 per cent fall in house prices, no mortgage bond rated triple A in the UK would see a downgrade."
are linked. In particular, is 30% fall in house prices considered to be an extreme scenario?  I belive the 30% reflects a peak to trough estimate

http://www.ft.com/cms/s/0/8305276e-ebdf-11dd-8838-0000779fd2ac.html

yet when the derivatives market are pricing in 46% peak to trough,

http://www.tfspropertyderivatives.com/pdf/RISK&MANAGE/2009/Feb-09.pdf

30% seems very optimistic.

http://www.ft.com/cms/s/0/53e54c1e-f0af-11dd-972c-0000779fd2ac.html

"Gordon Brown was on Sunday night accused of having “learnt nothing” from the economic crisis after he defended unorthodox mortgage loans worth 125 per cent of the value of a home.

After he was pressed on whether he should “shoulder the blame” for lax lending practices, Mr Brown insisted “high percentage mortgages” were fine as long as interest rates were low"

Astonishing that he believes this.

http://www.noelwatson.com/blog/PermaLink,guid,bc024a3b-6d2a-4ea1-bd0e-052811080655.aspx

Was having this discussion on a forum a few days ago, so thought I would have a look back at when the UK last had big inflation to see how this strategy would fare.

Scenario:

It is the end of 1973. The average house price is £9,767 and increasing at 24% per annum. You are worried about inflation and think that property is the best hedge over the next two years. You have a 20k deposit and buy a £100k place. You secure at 2% over base (which averages 11.4% over the period in question)

Property:

Property gains 13.5% over two year period, so you make 13.5k capital gain. The funding costs are around 21.5k, income from rent around 14k, and maintenance/voids/transaction costs around 4k, meaning that you make £10034

Cash:

Assuming you get 2% under base on your 20k savings, you make £3760

Shares:

The FTSE All share started the period at 149.8 and finished at 160.52. I estimate the yield to be 5% giving a return of £3335

Gold:

Gold (denominated in GBP) went from 45.95 to 69.31, giving a return of £6740

 

So, in this sample size of one, and for this time period, it would appear that property was the best investment. However, a lot of the returns are dependent on rental yield, and if you look at the chart below in the renting section, you will see that yields are massively lower than they were in the 1970s, and housing much more overvalued. So maybe now is not the best time to be looking at this, but in two years time, who knows.......

References:

House prices:

http://www.nationwide.co.uk/hpi/downloads/UK_house_price_since_1952.xls

 

Rental yield:

http://www.nationwide.co.uk/hpi/historical/Dec_2008.pdf

http://www.ntu.ac.uk/research/school_research/nbs/overview/working_papers/59876.pdf

Base Rate:

 

FTSE All Share:

http://www.thisislondon.co.uk/standard-business/article-23569535-details/It's+got+so+bad+that+even+the+bears+are+buying/article.do

" From its low point of 146 on 5 January, 1975, the FT 30 share index doubled in six weeks. Well, that was then. As Bolton should also know, that index had fallen by two-thirds from its 1972 peak, and the dividend yield on the All-share index was 10%."

 

Gold:

 

 

RPI:

UPDATE:

After feedback, have decided that ignoring the cost of renting is over simplification, so have added estimated yield from renting the property.

Calculations:

PropertyasInflationHedgeCalcs.xls (17.5 KB)

 

PropertyasInflationHedgeCalcs2.xls (18 KB)

Halifax in their latest press statement state

http://www.hbosplc.com/economy/includes/02_01_09HousePriceIndexDecember2008.doc

“The house price to earnings ratio – a key affordability measure - is at its lowest for five and a half years.  The house price to average earnings ratio has decreased to an estimated 4.44 in December 2008 from a peak of 5.84 in July 2007. The ratio is at its lowest level for over five and a half years (April 2003: 4.44). The long-term average is 4.0.”

There are two things that interest me here. Firstly, where does the average earnings number come from. Secondly, is the long term average 4.

From the report, the average (SA) house price is now £159,866, and the NSA price is 158,437 (AllMon(NSA))

http://www.hbosplc.com/economy/includes/02_01_2009HistoricData.xls

 The earnings comes from the ASHE

"3.  PRICE/EARNINGS RATIO
Ratio of the Halifax standardised average price to national average earnings for full-time male employees. Price Earnings ratios revised to reflect new data in the Annual Survey of Hours and Earnings (ASHE). "

So, £159,866/4.44 gives average earnings of £36,005, and £158,437/4.44 gives £35864

The AHSE data is here

http://www.statistics.gov.uk/downloads/theme_labour/ASHE_2008/tab7_7a.xls

and it can be seen that the mean salary for a male full time employee (tab "Male Full-Time") is between 35 and 36k

I believe the value they are using is the value for Great Britain, as a prior report

http://www.moneynews.co.uk/5793/halifax-average-salary-increases/

states that the mean salary is £31.5k, which corresponds to the 2008 survey for mean earnings for full time employees (Full-Time, cell F7)

http://www.statistics.gov.uk/downloads/theme_labour/ASHE_2008/tab7_7a.xls

so if we use the NSA number, and the value for the whole of GB, we get £158,437/£35,356. This gives a value of 4.48, so not quite 4.44, but not far off.

Comparing this with April 2003 numbers. The average NSA house price was £128,280

http://www.hbosplc.com/economy/includes/02_01_2009HistoricData.xls

and earnings £27,829

http://www.statistics.gov.uk/downloads/theme_labour/ASHE_2002/tab1_7a.xls

(I took 2002 as I don't think the 2003 numbers were out in time) giving a ratio of 4.61. So I'm not sure exactly why my numbers don't tie up.  However, the question I have is

• Why is the mean number being used rather than the median?
• Why are they using male only?
• Have they always used this criteria?

Nationwide appear to use different criteria

http://www.nationwide.co.uk/hpi/historical/Dec_2008.pdf

they are showing average PE still above 5.5

 

Next, looking at the long term average. Halifax claim that it is 4.0. The affordability data can be downloaded from here

http://www.hbosplc.com/economy/includes/23_10_08affordability.xls

here they appear to use the earnings for male and female, and the peak here was 5.98 (on a quarterly basis). The average is shown as 4.07. However, as with the Nationwide trend of 2.9%

http://www.noelwatson.com/blog/PermaLink,guid,31834980-ddd9-4df0-a2af-60d1ebfac038.aspx

I believe that this has been skewed by the bubble since the turn of the decade. Take this out and the average is 3.68. This compares with a value at the end of Q3 2008 of 5.02, and a minimum of 3.09, which occurred after the last bust. Will we see the ratio fall below 3?

 

I haven't seen such sulking since I lost at Monopoly when I was twelve years old (not that I ever lost). First we had the CML

http://www.timesonline.co.uk/tol/money/property_and_mortgages/article5308033.ece

now we have the Halifax and Nationwide refusing to give a prediction for house prices in 2009

http://www.timesonline.co.uk/tol/money/property_and_mortgages/article5372549.ece

There are a few predictions for total falls

Nationwide (prediction made in September)
House prices will fall 25 per cent between 2008 and 2010, according to Graham Beale, chief executive of the United Kingdom’s biggest building society

Barclays (December)
Fall of 15 per cent next year. John Varley, chief executive of Barclays, which owns the Woolwich mortgage brand, said that prices would fall by between 10 and 15 per cent before the end of the coming year

Lloyds TSB (December)
Fall of 10 per cent in 2009. Sir Victor Blank, the chairman of Lloyds TSB, which is taking over HBOS, said this week that house prices would fall by another 10 per cent in the next year

Halifax (December)
Fall of 20 per cent over 2008 and 2009. Martin Ellis, chief economist for Halifax, owned by HBOS, said at the start of this month that he thought house prices would fall about 20 per cent over 2008 and 2009

Capital Economics (October)
Fall of 35 per cent between 2007 and the end of 2009. The consultancy believes that prices will drop 35 per cent from the peak in 2007 and will not begin to show growth until 2011

Knight Frank, Savills (December)
Fall of 15 per cent in 2009. Both estate agents believe that prices are halfway through a fall of 30 per cent from peak to trough. Savills expects prices to begin to recover in 2010

Winkworth (December)
Fall of 10 per cent in 2009. Dominic Agace, of Winkworth, the estate agent, said that sales prices were down by 20 per cent this year and that prices would fall by a further 5 to 10 per cent in 2009

Rightmove (December)
Fall of 10 per cent in 2009. The property website has released a report predicting that house prices will decline by another 10 per cent next year

Kinleigh Folkard & Hayward (October)
Fall of 5 per cent in 2009. Lee Watts, the managing director of the estate agent, blamed irresponsible lending for a 20 per cent fall in prices this year and predicts that there will be a further 5 per cent decline next year

It seems that the consensus is that we are down around 15%, and are 10% from the bottom. I'm not sure why people pay any attention to vested interests. The market is off 19% already (>6% in the last two months alone)

http://www.hbosplc.com/economy/includes/04_12_08historicdata.xls   (AllMon(NSA))

and as I showed yesterday, it is still 25% over fair value.

http://www.noelwatson.com/blog/PermaLink,guid,a501304a-3b27-4712-a08a-c9e984ff9619.aspx

The betting exchanges are pricing in 22% falls next year - I reckon this is about right

http://www.noelwatson.com/blog/PermaLink,guid,87e050b0-fb3f-4e6d-b7ff-6b74ec0f2e0a.aspx

 

 

 

 

My original attempt

http://www.noelwatson.com/blog/PermaLink,guid,31834980-ddd9-4df0-a2af-60d1ebfac038.aspx

was flawed as Nationwide discounted the house prices backwards from the current price.  

I recently had a look at housing market, RPI and earnings,

http://www.noelwatson.com/blog/PermaLink,guid,69aef6ad-57ce-411c-96ca-df1d6cc283da.aspx

and came to the conclusion that while Shiller thought that in the U.S., house prices tend to increase in link with inflation,

http://www.noelwatson.com/blog/PermaLink,guid,78724d63-2cd1-4484-a8f7-5c5b4a22596a.aspx

in the UK I believe that house prices increase in line with earnings growth (which for the period I chose was around 1.5% above RPI, and tended to be closely correlated).

For my final attempt (famous last words), I will download Nationwide data from 1953, adjust for RPI, and add an RPI-earnings adjustment. Note that I am using RPI as I don't have earnings data back to 1952.

The Nationwide data can be downloaded from here

http://www.nationwide.co.uk/hpi/downloads/UK_house_price_since_1952.xls

Note: I am using All Houses (UK)

RPI (quarterly is from here)

http://www.statistics.gov.uk/StatBase/tsdownload.asp?vlnk=7173

For the RPI-earnings adjustment, I've got data back to 1964

Note that the mean is 1.9 compared with 1.5 when using 1975 as the start date

http://www.noelwatson.com/blog/content/binary/RPIEarningsCombinedFrom1975.gif

Note that I am performing a very small extrapolation (highlighted red) to guess the values for Q4 2008.

RPI: Was 3% in November - I will guess 2.8% for December

Actual house prices: Were 158,442 in November.

http://www.nationwide.co.uk/hpi/historical/Nov_2008.pdf

The expectation is for a 1.5% fall in December, so I will guess £156k for December.

CONCLUSION:

Using the above data/assumptions, it would appear that house prices on the Nationwide index are still ~25% over fair value. We then have to take into account the inevitable undershoot. Furthermore, we have no idea how inflation, and corresponding pay rises will erode the debt.

 

 

Nationwide1952.xls (62 KB)

I posted last month about U.S. housing vs. inflation, and in particular Robert Shiller's belief that housing, in the U.S. at least, does not outperform inflation, and the recent outperformance is the exception.

http://www.noelwatson.com/blog/PermaLink,guid,78724d63-2cd1-4484-a8f7-5c5b4a22596a.aspx

Russ made a couple of comments

"I think an argument could be made that the long term increase should be in line with earnings, which you would expect to exceed RPI by the long-run productivity increase in the economy (perhaps 2%, but who knows?)"

so I decided to have a look at some of the data. Note that I am looking at U.K data rather than U.S. as I am more comfortable with the various indices.

Firstly, the Nationwide trend of 2.8% p.a. was baselined from Q1 1975

http://www.noelwatson.com/blog/PermaLink,guid,31834980-ddd9-4df0-a2af-60d1ebfac038.aspx

Average earnings growth (inclusing bonusus) in that period is 7.89%

while average RPI is 6.38%

shown here in another format

note that the mean figure of 1.5 is the same as in shown in the inflation adjusted house price trend in 2000

http://www.noelwatson.com/blog/content/binary/NationwideApril2000.JPG

which makes me believe that we still at least 30% still to go.

The second point

"The reason I'd say house prices would inflate with earnings is that they are not a static good, there are improvements in quality and so the average house of 50 years ago (outside bog, no central heating etc) would not resemble the average house of today. Also rents have tended to rise with earnings, and rents represent the replacement yield of housing."

I'm not sure I agree with the first part - I don't think we should make hedonistic adjustments.

Discussion here

http://forum.objectivismonline.net/index.php?showtopic=11943&mode=threaded&pid=171334

Compare a Fiesta from 1998 with one made today. A 2008 1.25 Fiesta costs £9,040

http://www.parkers.co.uk/cars/new-prices/summary.aspx?model=1721

whereas one from 1998 costs £9,315

http://www.parkers.co.uk/cars/used-prices/Valuation.aspx?deriv=15025&plate=58

so even without adjusting for inflation, the new Fiesta is cheaper,despite being more advanced in almost every way. The same is true for computers and white goods. Why should housing be any different?

As for rental levels increasing in line with earnings, I don't have the data, but it would seem logical.

 

 

Latest TFS survey - bottom is even further away

http://www.tfspropertyderivatives.com/pdf/RISK&MANAGE/2008/Dec-08.pdf

 

compared with last month

http://www.noelwatson.com/blog/PermaLink,guid,5685fb5a-c3fa-45b0-8e0e-18312f9804d0.aspx

 

UPDATE: Bottom is predicted to be £109,108 in November 2011

http://www.contractjournal.com/blogs/brickonomics/2008/12/half-price-houses-by-2011-says.html

I guess they weren't doing enough business to make it worthwhile. At least we still have TFS and I need to go and make friends with the chaps on the property derivatives desk.

http://www.spreadfair.com/

"Dear Cantor Spreadfair Customer

Cantor Index Limited has taken the decision to close Spreadfair, its online betting exchange, to focus on its financial spread betting and CFD business.

Effective from 4 pm, 1st December 2008, Cantor Spreadfair will cease to accept new customers and will take no further opening wagers.

Any funds that you have on deposit with us remain totally secure and any funds not required to support open bets will be refunded to you immediately.

If you have any questions, please contact our customer services team on 08000 111 441."

The TFS numbers were released yesterday, and were pretty gloomy

http://www.tfspropertyderivatives.com/pdf/RISK&MANAGE/2008/Nov-08.pdf

The market is saying that house prices will be at £134,346 compared with £168,158 today, a fall of 20%. This may seem excessive, as the market only fell 15% in the last year, but when you look at the -3% NSA figure for October 2008, it becomes more believable. Furthermore, if the link between mortgage approvals and house prices holds true, falls of 20% next year seem optimistic

http://www.houseprices.uk.net/articles/house_price_predictor/

As the TFS article states

"Some residential derivative market spectators are increasingly
suggesting that the house price will not fall to £134,346 in a year or to
£117,011 in three years. They could be right. Here is the thing; if you
think the levels are too low, put your buying trousers on and come to
market. Unlike every other house price forecast, the derivative
“estimates” are tradable"

The market is predicted to hit the bottom in 2011, a fall of over 40% from peak

Spreadfair aren't nearly so bearish,

 

but I don't think it is possible to take advantage of the apparent mismatch because

• You have to post margin
• I believe TFS is for institutional investors only
• Notionals may be a magnitude different between the two
• Slight date mismatch (and Spreadfair use Halifax quarterly numbers)

my prediction was for between 45-55% from peak, so I am still pessimistic

http://www.noelwatson.com/blog/PermaLink,guid,31834980-ddd9-4df0-a2af-60d1ebfac038.aspx

The RICS report came out this morning

http://www.rics.org/NR/rdonlyres/ED3C83E0-6B1C-4BAB-BEC2-317A5379EDAD/0/hms_1008.pdf

with NSA price balance being the worst ever, again (http://www.noelwatson.com/blog/PermaLink,guid,e6ea914a-fc1f-4d40-80d9-99654d973a29.aspx)

 

So, with the depressing news out of the way, let's get onto some fantasy

First, from the RICS report

"and a general feeling that the worst of the price fall may be over"

Not sure what he is smoking, but if you consider that there are a lot more job losses to come (especially in the City - this EA is based in Chelsea), the recession is yet to make itself felt fully, and those that still have a job are unlikely to have a large bonus, I fail to see why prices won't keep falling. Look at the new car sales

http://news.bbc.co.uk/1/hi/business/7712376.stm

On to the Nationwide

http://www.ft.com/cms/s/0/1a67ae82-af91-11dd-a4bf-000077b07658.html

"Nationwide maintained a gloomy outlook on the housing market yesterday, saying prices will fall by a total of 25 per cent and there might be no bounce back until 2010."

So we have only another 10% to go? Why people listen to vested interests is beyond me.

 

I posted his graph here

http://www.noelwatson.com/blog/PermaLink,guid,bc024a3b-6d2a-4ea1-bd0e-052811080655.aspx

but he emphasises the point here (4:15)

http://finance.yahoo.com/tech-ticker/article/53094/U.S.-House-Price-Decline-Could-Be-Worse-than-Great-Depression

house prices, adjusted for inflation, went nowhere bwtween 1890-1990.

For the U.K. housing market, one could argue that it is different over here, because we have limited space (I don't buy this). If you look at my entry last month

http://www.noelwatson.com/blog/PermaLink,guid,31834980-ddd9-4df0-a2af-60d1ebfac038.aspx

the trend in 2000 was 1.5% above RPI. One could ask the question - why shouldn't the trend be RPI with no adjustment upwards?

 

I posted some housing advice by a U.S. realtor and promised to revisit the post a year later

http://www.noelwatson.com/blog/PermaLink,guid,70afcbb4-dfc0-49e5-8e5d-38e55fa3568c.aspx

Surprisingly, the U.S housing market has been decimated since. I came across some similar advice from a UK unbiased source (see below). Again, I will revist in a year and see how much of a good idea it turned out to be....

 

THE BANKING SYSTEM
The banking system is in chaos and any
bank deposit over £50,000 from today,
according to government statements,
is not guaranteed to be returned.

The government has stated that 98% of those
with bank accounts will be covered by this
guarantee but the government does not state
that the other 2% who own 50% of the deposits
will not so this money needs to be protected.

Have you seen with your own eyes, seen on
the television or read in the newspapers
the fact that English banks and building
societies are being inundated by investors
wanting their monies returned so that
they may place them in Irish banks as
the Irish government has guaranteed the
accounts to 100% of the sum deposited.

Are you aware that some people are so
desperate to protect their money that they are
transferring it from one account to another, they
are seeking to buy gold, which itself is subject
to fluctuation, they are investing in foreign
currencies, which is also subject to fluctuation
and probably some are storing their money
under the bed as being the least risky option.

The question is as to the best method of
protecting money in the current climate and
the simple answer is to invest in property.

Property prices are at their lowest
for a considerable time and there are
many good deals to be had. Mortgages
are available particularly for those
with a reasonable financial record.

Property has for the last 50 to 60 years shown
itself to be one of the best ways of protecting
money and the number of blips in the market
over these years have been very few and only
severe on those who were so imprudent as
to borrow at a level beyond their means.

For those who wish to protect their
money xxxx offers a wide range
of investment properties.
Yours faithfully
xxxxxx   xxxxxx
Director

 

I was originally going to write something about the Icelandic banks and how the CDS market had been pricing in pain for years, but recent events have overtake me. Instead I will look at what I believe will be property's LTCM. All the ingredients are there, leverage, not just being in the market, but being the market, and the rest of the market knowing what you are up to.

But first, LTCM. There have been several books written about LTCM, When Genius Failed" being a good example

http://www.amazon.co.uk/When-Genius-Failed-Capital-Management/dp/1841155047/ref=sr_1_1?ie=UTF8&s=books&qid=1223365713&sr=8-1

the Wikipedia article is also very good

http://en.wikipedia.org/wiki/Long-Term_Capital_Management

There are a couple of property investors that I elieve are going to suffer the same fate

http://www.guardian.co.uk/money/2008/oct/04/buyingtolet.property

 

• Leverage

"Fergus is cautious about precise figures, but reckons his properties are worth "around £250m" and that the typical loan-to-value is around 65%"

With house prices plummeting, how long with this equity cushion, and therefore funding last?

• They are the market

By concentrating on two and three bed houses in Ashford and Kent, they make up a large percentage of the market

• They have made their intentions known

I'm not sure why they did this (maybe they love the publicity), but by doing this they are letting everyone know that they are selling up, so people will be targetting them with low bids.

 

The greatest bubble in UK history is now bursting. To me, the fact that the market was a bubble was pretty obvious, but identifying when it was going to go pop, was nigh on impossible (as is the case with all bubbles). I have been blogging on both the UK and US housing market for a couple of years

http://www.noelwatson.com/blog/CategoryView,category,Housing%2Bmarket.aspx

and it is interesting to go back and see how accurate the betting exchanges such as Spreadfair have been - these were pricing in falls well before an incredulous general public realised what was about to happen.

http://www.noelwatson.com/blog/CategoryView,category,Housing%2Bmarket.aspx

The latest Nationwide numbers came out yesterday showing the (now expected) falls.

http://www.nationwide.co.uk/hpi/historical/Sep_2008.pdf

The thing that interested me was on page three - "Long Term Real House Price Trend". It shows that after the recent falls we have been having, we are almost back to the long term mean, so on first impression this would imply that we haven't got much further to fall. However, this ignores two key points. Firstly, house prices are cyclical, and secondly, I believe the long term trend of 2.9% over RPI has been dragged up by recent rises.

So, how much further have house prices to fall. Up until now I have been reluctant to give predictions, feeling that the betting exchanges (Spreadfair) and property derivative sites were the best way forward

http://www.tfspropertyderivatives.com/pdf/RISK&MANAGE/2008/Sep-08.pdf

but I thought that it would be fun to have a punt and see how it turns out in a couple of years

The most recent graph can be found here (doesn't include Q3, but we can fix this)

http://www.nationwide.co.uk/hpi/downloads/UK_house_prices_adjusted_for_inflation.xls

 

 

We can get our Q3 number from the latest report £165,188

http://www.nationwide.co.uk/hpi/historical/Q3_2008.pdf

next we need to decide what is a more accurate real rate of return. For this we can look at the Nationwide archive

http://www.nationwide.co.uk/hpi/archive.htm

and in particular April 2000, as the figure of 1.5% p.a. reflects (in my opinion) a more accurate reflection of growth, as it occurs soon after a big fall preceded by an equally big rise

http://www.nationwide.co.uk/hpi/historical/MPR0004.pdf

 

 

Comparing the two graphs, it is interesting to see the trend line for Q1 2000 is around £25k lower than for Q2 2008.

We can easily extend the current 2.9% trend into the future (each cell in column D is 1.007 larger than the one above - 2.84pa - this doesn't include the Q3 numbers to make it 2.9%, but it is close enough)

Next we add our own 1.5% trend. For this, we add multiply each cell in column E by 1.00375 multiplied by the cell above. Note that our starting figure for the 1975 Q1 1.5% trendline is not the same as that for the 2.9% trendline - we need to adjust for the fact that the data series started before 1975. Note how our modified trendline now crosses at around £75000 for Q1 2000, as it did with the April 2000 report

Next is the tricky part. We have to discount our house prices for inflation. The calculations are shown in the spreadsheet. I am assuming an inflation rate of 1.2% a quarter which gives 4.7% per year.

To attempt an accurare looking graph, I have included two variables, initial quarterly fall and decrease on the quarterly fall per quarter. I have estimated these at 10500 and 700 respectivelly.

So, what is the fall from peak to trough. The peak was round £185k, the low on my graph is £83k (2013 Q1) - so we are looking at falls of around 55% - so around 45% to go (from peak).

This may seem like an extreme few, and I may have made a fundamental error in my calculations. However, in the latest nationwide report, it states

“House prices now are over 60% higher in real terms than they were at the start of the decade, even taking into
account the falls since last October"

So if we are around 165k now, this would take us down to 100k. As I said earlier, these things tend to undershoot, so maybe 83k doesn't look so unrealistic.

Spreadsheet attached:

Nationwide2008Q2.xls (121.5 KB)

 

EDIT: There are still some areas of concern

1. Trend line start dates differ

2. Real house prices are discounted from the present time - therefore they are not comparable for different time periods

 

Attempt 2:

Changes

1. Trendline starts at same point

2. Monthly trend increased to 1.005 (2% pa)

3. Starting quarterly fall 10000

4. Quarterly decrease 800

 

We now have a bottom of £97588 in 2011 Q4

 

 

Note that this is effectively a hack of a hack, but it is best guess so far.

Spreadsheet attached:

Nationwide2008Q2v2.xls (141 KB)

Hot on the heels of the Halifax numbers

http://www.noelwatson.com/blog/PermaLink,guid,74974cbf-7143-4210-b369-ec27d06f36ac.aspx

comes the latest RICS survey, and it makes for grim reading, showing the balance of surveyors reporting a fall compared to a rise is the greatest ever, eclipsing the last downturn.

 

This is all a bit confusing as Halifax said that sound economic fundamentals are supporting house prices

http://www.hbosplc.com/economy/includes/08_04_08HousePriceIndexMar2008.doc

"Sound economic fundamentals are supporting house prices. A strong labour market, low interest rates and a shortage of new houses underpin housing valuations. Our research shows that the labour market is the key driver of the housing market. Employment is at a record high and unemployment continues to fall"

http://www.thisislondon.co.uk/standard/article-23478211-details/The+negative+equity+map/article.do

 

Very similar to the graph that showed the falls last time around

http://www.noelwatson.com/blog/PermaLink,guid,ae958e81-fc73-40ad-babf-26da711926a2.aspx

 

 

 

Halifax numbers were out today, and they made for grim reading. Down 2.5% on the month SA and 1.5% NSA. Annual appreciation is down to 1.1%

http://www.hbosplc.com/economy/includes/08_04_08HousePriceIndexMar2008.doc

Good job we have sound economic fundamentals to support the housing market, and it would be even better if sound economic fundamentals was a leading rather than a lagging indicator - see the U.S. one year ago.

This has really knocked the Spreadfair numbers - a couple of weeks ago the U.K. was priced at 181k by the end of this year

http://www.introducertoday.co.uk/News/Story/?storyid=763&title=Confidence_in_house_prices_on_the_rise&type=news_features

today's spread was 167/176 - down around 10k, or around 6%. The London market is 269/276.

http://www.zoopla.co.uk/

http://uk.techcrunch.com/2008/01/17/zoopla-launches-property-command-and-control-system/

• BOE mortgage approvals

50K NSA (averaged 79k last two Januarys)

http://www.bankofengland.co.uk/statistics/ms/2008/Feb/taba5.4.xls

• Nationwide -0.5%MOM (-0.6% NSA) - 2.7% YOY

• Hometrack -0.2% MOM

http://www.hometrack.co.uk/commentary_survey_250208.aspx

• Land Reg +0.9% MOM

http://www.landreg.gov.uk/assets/library/documents/181181.pdf

 

This latest news has seen the Spreadfair indices recover

 

from six weeks ago

http://www.noelwatson.com/blog/PermaLink,guid,f6aea8d2-ce5c-42d4-8d20-90fd4d636840.aspx

From the CME

http://housingrdc.cme.com/

Seems to be lacking liquidity, but this may be due to time of day.

The latest Case-Shiller numbers were out today

http://calculatedrisk.blogspot.com/2008/02/s-case-shiller-prices-fall-sharply-in.html

and OFHEO

http://calculatedrisk.blogspot.com/2008/02/ofheo-widspread-house-price-declines-in.html

are we 12-18 months behind the U.S. in the U.K?

• Prices falling for six month in a row

http://www.rics.org/NR/rdonlyres/06197498-AAD8-4789-B8BB-D7164C32971E/0/RICSHousingMarketSurveyJan2008WEB.pdf

• The Land Reg figures have been updated - Greater London was down 5.7% in the quarter

http://news.bbc.co.uk/1/shared/spl/hi/in_depth/uk_house_prices/counties/html/county37.stm

compared to Halifax's -6.3%

http://www.hbosplc.com/economy/includes/19_01_08greater-london.doc

• Can the MPC cut rates any further with inflation and pay settlement rising?

http://www.ft.com/cms/s/0/363de920-d90c-11dc-8b22-0000779fd2ac.html

http://business.timesonline.co.uk/tol/business/economics/article3359893.ece

http://news.bbc.co.uk/1/hi/business/7234389.stm

• Even thought subprime was never a problem in the UK (allegedly), it would seem that the repossessions have a higher percentage of people from this sector than expected

http://news.bbc.co.uk/1/hi/business/7242311.stm

Apparently only 6% of mortgages are subprime on this side of the pond......

• BOE inflation report

http://www.bankofengland.co.uk/publications/inflationreport/ir08febo.pdf

Since my last update,

http://www.noelwatson.com/blog/PermaLink,guid,0e3b33e1-7703-4307-ba05-1f8326b04221.aspx

Spreadfair is predicting further falls for London whereas the whole of UK is unchanged

 

Halifax showed London down over 6% in the last quarter, from 320,364k to £300,318

http://www.hbosplc.com/economy/includes/19_01_08greater-london.doc

http://www.hbosplc.com/economy/includes/19_01_08UK.doc

Slightly OT, an American tries to justify the amount he paid for his house

http://themessthatgreenspanmade.blogspot.com/2006/04/debunking-dismal-duo.html

Motley Fool analysis on last downturn

http://www.fool.co.uk/news/property-home/2008/01/25/how-bad-was-the-last-housing-crash.aspx

http://www.fool.co.uk/news/property-home/2008/01/25/the-last-housing-crash.aspx?source=eooyhoit14050001

 

A lot of people say that renting is like throwing money down the drain, conveniently ignoring the fact that an interest only mortgage is effectively renting from the bank. The argument for buying becomes less convincing with a falling market. An example is given below. 

House in Weybridge

Sale: Originally on at £619,950,

http://www.propertysnake.co.uk/site/detail/9182876

it is now listed at £595,000

http://www.johndwood.co.uk/www/site/_page.php?page=propertyDetails&type=b&id=WEY070272&theme=buying_country

Assuming a typical IO mortgage of 6%, this would mean you were paying £36000/year, or £3000/month.

Renting:

Listed for rent at £360/week which works out at £1560/month

http://www.johndwood.co.uk/www/site/_page.php?page=propertyDetails&type=r&id=jlwe_3186&theme=renting_country

Throw in the fact that house prices now appear to be falling (by around 1% month on average - Rightmove have the latest numbers - see link below), and this place will cost you at least £7k more a month to buy rather than rent. Maintenance costs would also be a lot less on a rented property

http://www.rightmove.co.uk/pdf/p/hpi/HousePriceIndex17thDecember2007.pdf

http://www.hbosplc.com/economy/includes/05_12_07HousePriceIndexNov2007.doc

Down 1.1%, and last month revised downwards from -0.5% to -0.7%. Fortunately for home owners, Martin Ellis states that

 "The UK economy is in sound shape. Strong market fundamentals, a structural housing supply shortage and pent-up demand from a large number of potential first-time buyers will support house prices, preventing a sustained and significant fall. I have put my own money on Spreadfair as I am so confident"

Actually, he didn't say the last bit, I made it up, but he really should be putting his money where his mouth is. As you can from my post a few weeks back, Spreadfair is predicting even greater falls

http://www.noelwatson.com/blog/PermaLink,guid,36bbf00c-9e24-42e8-b405-053aa7a525b4.aspx

 

Another vested interest states

"house prices have continued to grow at a healthy rate over the last two or three months"

http://www.ifaonline.co.uk/public/showPage.html?page=661317

We have seen Halifax's numbers, and Nationwide shows 0.7%, 1.1%, -0.8%, so that's an annual rate of below inflation and interest rates - hardly healthy!

 

Will the MPC cut rates in a futile attempt to stop the downturn. It is a very close call on Betfair

On a related issue, we are about to remortgage and found the following site useful

http://www.halifax-intermediaries.co.uk/tools/product-search/#results

A year ago I posted this

http://www.noelwatson.com/blog/PermaLink,guid,70afcbb4-dfc0-49e5-8e5d-38e55fa3568c.aspx

and surprisingly the U.S. housing market has been through a torrid time, with median house prices down 18% in the last six months alone

http://www.economagic.com/em-cgi/data.exe/cenc25/c25m01

Will the U.K go the same way

http://www.landlordexpert.co.uk/index.php?news=1397

I will revisit in a year's time - I'm guessing yes. Spreadfair punters certainly think so

http://www.spreadfair.com/

 

These people are also pricing in 7% down in a year

http://www.tfsbrokers.com/pdf/RISK&MANAGE/2007/Nov-07.pdf

 

http://business.timesonline.co.uk/tol/business/economics/article2737191.ece

I have been expecting this for a while

http://www.noelwatson.com/blog/CategoryView,category,Housing%2Bmarket.aspx

maybe the MPC will cut rates as they did in August 2005

http://213.225.136.206/mfsd/iadb/Repo.asp?Travel=NIxIRx

 

 

Observing the collapse of the U.S. housing market, I am continually informed that it is different in the U.K. for some reason.

The FSA have released a report related to U.K> subprime mortgages - areas of concern include self certification.

http://ftalphaville.ft.com/blog/2007/07/04/5657/subprime-the-nasty-uk-truth/?source=rss

Future interest rates are still rising

http://www.futuresource.com/charts/charts.jsp?s=LSSM08

It's going to get messy!

Six times salary mortgages are now being offered

http://www.telegraph.co.uk/global/main.jhtml?view=DETAILS&grid=&xml=/global/2007/04/11/nhomes11.xml

UPDATE: Nine times!

http://www.cambridge-news.co.uk/news/region_wide/2007/04/12/c35ac683-f9d5-459d-84f4-d7150f641794.lpf

UPDATE: Ten times!

http://business.timesonline.co.uk/tol/business/money/mortgages/article1654078.ece

the old 3.5 times salary rules is deemed old hat - good job the credit assessment is much more sophisticated. Until the banks start tightening their lending criteria and/or the MPC raise real interest rates (currently <1% with RPI inflation at 4.6%), the boom shows no sign of abating, although the bust is sure to come at some point. The long term interest rate mean is around 7%, and nothing says rates won't exceed the long term mean.

The chart above is using CPI -a measurement that even the BOE governor is unhappy with (unlike RPI, CPI excludes mortgage payments)

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2006/11/01/cnbank01.xml

Not sure if this is a wind up, but Harlow estate agent Alan Howick is fuming that interest rates have been going up recently

http://www.bishopsstortfordcitizen.co.uk/news/localnews/display.var.1167393.0.rate_rise_is_outrageous.php

I'm not sure if he appreciates that interest rates are still below their long term mean, and that real interest rates (interest rates - inflation (5.25- 4.4) are still very low. I'm not sure that raising equity from your residence is hard work - surely they have merely been the beneficiaries of historically low rates. I'm sure Mervyn and co. will pay lots of attention to Mr. Howick going forward.

Betfair are quoting 4.4 (3.4-1 in traditional odds), so it's looking like rates will be held this month (although punters could be wrong footed as they were last time)

although the market has priced in a couple more rises between now and June

http://www.thebusinessonline.com/Document.aspx?id=E161BD4B-1844-497D-9A04-207B84C577A0

As the article says, lax lending criteria/excess liquidity have keeped the bubble going

http://www.realtor.org/home_buyers_and_sellers/buy_now_ad.html

http://www.realtor.org/files/home_buyers___sellers/good_time_to_buy_ad.pdf

I will revisit this in one year's time from now. I'm guessing the market will still be heading down

http://graphics8.nytimes.com/images/2006/08/26/weekinreview/27leon_graph2.large.gif

Article on the B.B.C.

http://news.bbc.co.uk/1/hi/business/6088630.stm

This is the first housing downturn that I have been old enough to witness so it will be fascinating to see how it pans out. One thing to be expected is for vested interests (and reading the article it would appear that BBC is one - if the U.S. isn;'t experiencing a crash, I'd like to know what it is experiencing!), will be constantly talking up the market. The reasoning given by the realtors is that the market is not crashing because sales are picking up month on month. However, this is partly due to the sales of previous months being revised downwards

http://calculatedrisk.blogspot.com/2006/10/september-new-home-sales-1075-million.html

http://bigpicture.typepad.com/comments/2006/10/house_of_pain_t.html

It seems even Alan Greenspan is getting in on the act

"Most of the negatives in housing are probably behind us," Greenspan said. "The fourth quarter should be reasonably good, certainly better than the third quarter."

http://money.cnn.com/2006/10/26/news/economy/bc.economy.greenspan.reut/?postversion=2006102615

Maybe he feels guilty for causing this bubble and subsequent collapse in the housing market with his super accommodative monetary policy, but if I were someone looking to buy a house, and prices had fallen by 10% in a year, why wouldn't I wait for another year when, if the market follows the same trend, they will be 10% cheaper again?

The 10% number may be an underestimate, as vendors will be adding incentives to try and shift homes without reducing the headline asking price - free furnishings etc.

If this situation were to happen in the U.K, then a new home currently retailing for £550000

http://www.findaproperty.com/displayprop.aspx?edid=00&salerent=0&pid=398896&agentid=00360

would be retailing for £500000 in a years time (assuming the falls were uniform), so not only would you save £50k off the asking price, you would save £7000 on the stamp duty.

http://www.houseweb.co.uk/house/market/sdutycalc.html

and with interest rates soon to be 5%, the "cost" of the house will be 5% less in real terms. Including the incentives the developer would throw in, I would assume a saving of approx 80k in a year!

Of course, this won't happen in the U.K. as it is different here because.... (insert reason here - examples include low interest rates, high employment, stable economy, shortage of affordable housing)

There are lots of informative U.S. based blogs -

• Boston Bubble

http://www.bostonbubble.com/

• Interest rate round up

http://interestrateroundup.blogspot.com/

• Paper Money

http://paper-money.blogspot.com/

• Accrued interest

http://accruedint.blogspot.com/

• Calculated risk

http://calculatedrisk.blogspot.com/

• The Big Picture

http://bigpicture.typepad.com/

and our very own U.K. website

• House Price Crash (not the most neutral of site but never a dull moment!)

http://www.housepricecrash.co.uk/forum/

http://www.bloomberg.com/apps/news?pid=20601103&sid=adbsVAhN68TM&refer=us

Markit page here (can't work out how to find spread - different layout to CDS)

http://www.markit.com/magnoliaPublic/affiliations/abx

 

This was unexpected - you could get odds of 5-1 on Betfair at the weekend, and when the auction closed you could still get 3-1

 

The market is certainly spooked, especially estate agents

 

It will be interesting to see how the housing market is affected. of course, 0.25% is only a small change - when rates return to their long term average of 6-7%, this could be tricky.

They have come from a 1% Fed rate to 5%

http://bigpicture.typepad.com/comments/2006/05/real_estate_dat.html

although I don't believe the ARM has moved by as much (1 year Freddie Mac link below)

http://www.freddiemac.com/pmms/pmmsarm.htm

FED predictions can be found here

http://clevelandfed.org/research/policy/fedfunds/Index.cfm

I personally think the U.K would've continued to drop if we hadn't had the 0.25% cut last year

http://www.houseweb.co.uk/house/market/irfig.html

With at least one 0.25% interest rate rise currently predicted for the U.K. over the next year it will be interesting to see what effect this has on the U.K. market.

http://uk.houseprices.yahoo.net/

I found this picture the other day showing how London house prices have changed between 1988 and 1995.

These figures don't take into account inflation - the following links show inflation levels for those time periods. I'd estimate that taking inflation into account, the falls in some areas were around 55-60% - ouch!

http://www.statistics.gov.uk/articles/economic_trends/HICP_Historical_Estimates.pdf

http://www.safalra.com/other/ukinflation.html

http://eh.net/hmit/ukcompare/result.php?year_late=1988&use%5B%5D=CPI&use%5B%5D=DEFIND&use%5B%5D=WAGE&use%5B%5D=GDPCP&use%5B%5D=GDPC&typeamount=100&amount=100&year_source=1988&year_result=1995

Of course, it is different this time, but if I had a place on the right hand side of the map, I may be getting nervous.