The oddest thing about this slowdown and credit crunch is the delayed reaction – or the lack of reaction – of the UK housing market. Shares have slumped. Commercial property prices have fallen substantially. Retailers have complained about the squeeze on their customers. Yet house prices are still slightly up on a year ago, and the last few months have seen only small declines in the national figures.
When I last wrote about this I ventured that high Stamp duty. Home Information Packs and higher mortgage and transaction costs were encouraging people to sit tight and not move. The market was short of supply, just at the point when otherwise it might have gone down. Fortunately unemployment has not been shooting up, and people have been able to meet their mortgage payments even though their budgets are under more pressure. There has been an uneasy equilibrium created by inertia and the new impediments to selling and buying.
We may still, however, be in a for a slow but painful decline in house prices. There is plenty of evidence that new buyers are finding it more difficult to obtain a mortgage. Gone are the deals offering total borrowings in excess of the house price, and gone are the days when you could get by without a deposit. US interest rates may be plunging, but UK general rates are much stickier, and banks and building societies are keen to rebuild margins by charging more for a mortgage relative to the general level of interest rates.
There are those who say they do not think lower interest rates will make any difference to the Credit Crunch – indeed that seems to be the fashionable position. They link this with fears about inflation in the UK getting out of control if any action is taken to cut rates. This is a strange misunderstanding of the position.
Lowering the general level of interest rates could be crucial to avoiding the slowdown of the housing market becoming something worse – a price crash. As part of the Credit Crunch is the banks’ unwillingness to accept mortgages as good assets when lending to each other, anything that makes it more likely more of the outstanding mortgages can be serviced and repaid by their owners would be good news. Surely more people will be able to afford the mortgage if the mortgage rate comes down, than if it stays up or even goes higher? In the USA the authorities have grasped it. They are fighting the battle of the bulge of the sub prime. If too many sub prime mortgage holders give up on the mortgage, then the losses will multiply through the banking system and more credit will be destroyed. The UK may not have had such an extreme version of sub prime lending as the USA, but similar dynamics apply in our housing market.
If the UK house price slide gathers pace, then more people will be in negative equity. Once the house is worth less than the mortgage, more people are inclined to give up on it. If more people lose their jobs, more will struggle to pay the high mortgage bills they currently face.
Meanwhile, it is difficult to see how we can become alarmed by inflation against the current background. The public sector is at last taking a tougher line on public sector wages. There is no evidence of inflationary pressures building up on private sector pay, as the market for goods and services is still competitive enough to make passing on big cost increases difficult. Private sector bonuses, especially in the financial sector, will be well down, deflating total remuneration. We have a few more months of bad figures to live through from the impact of raw materials prices and energy. The authorities need to be fighting against too sharp a slowdown from the Credit Crunch, rather than fearing an inflation that seems unlikely to get out of control.
March 19, 2008
Welcome to the grass roots of Fenland!
Here house prices are tumbling. A house down the road where I live which, a year ago, was up for £500,000, is today on the market at half that price.
Usually in March, the village/suburb is festooned with "For Sale" signs. Now – not a one. I imagine that most people imagine they know the value of their house, based on the value it was a year or so ago. This would account for the specious stability of the market, maybe. Also, of course, there are the Council Tax Provisions to take account of – they must make for stability of prices.
But, around here, they aren't putting their houses on the market. Several people are extending their houses so they don't have to move. We had one family with a divorce problem and it took four agents half a year to sell their property.
Meanwhile, lots and lots of houses are being built in people's gardens (Sorry, brownfield sites) and they are selling too. They are filled with people as soon as they are finished. This area is a favourite for white flight from further south, so maybe that is why cheap houses go so fast.
IO suspect, therefore, that the apparent stability of the market price of houses could well be as suspect as the rate of inflation.
March 19, 2008
I think Mike is right. Potential sellers, knowing they won't get previous prices, are just sitting tight. Indeed people with 90% mortgages probably cannot afford to move even if they wished.
March 19, 2008
Make anything, including money, cheap and everybody can afford it.The British had a frenzied feeding on cheap money. I perferred paying a £15,000 mortgage at 15% interest rate when the Conservatives were in power to paying a £200,000 one at 6.25% now Labour are in power. The higher the borrowing cost the more you tend to think seriously about taking on such a debt
March 19, 2008
The stamp duty regime is killing many deals, consider the following:
A man lives in a £300K house and needs to move because of a growing family, to say, the next street and a £400K house. This might sound a lot, but in the South East, as you know, it's not.
So, if he accepts an offer of £300K for his house, the buyer is in fact prepared to pay £309K, so it's £300K for him and £9K for the government. He then buys the £400K house and pays £12K in stamp duty.
So he has not received £9K for the sale of his asset and has to pay £12K and is therefore £21K out of pocket on the deal. This is an awful lot of tax to pay for the right to buy your own house and make no demands on state housing.
Tax free day (as defined by the Adam Smith Institute) is in June for the average person. If he moves in that year, then this additional levy may mean that almost the whole year is taken up working to pay taxes ! He would make almost no net progress at all.
March 19, 2008
Your article raises a number of issue. I would like to help you out on one: the reason why the residential property is not fallings as quickly as shares or commercial property.
While most investment markets reflect the prices a willing buyer (bid) and a willing seller (offer) are willing to accept in market size, the residential property market is a last transaction market.
The Halifax House Price Index (and other indices) reflects actual transactions. In the absence of a substantial increase in forced sales (and with many factors leading to a fall in transactions) the HPI will remain surprisingly strong.
Mike Stallard (10:51) is correct to say "the apparent stability of the market price of houses could be as suspect as the rate of inflation".
March 19, 2008
I am not sure I agree with the idea that inflation is not an issue. With the price of commodities soaring, and the government using a measure of inflation that does not tell the whole story, there are potential problems ahead. Combined with the exchequer taking ever greater slices of income, the general public have a perception of inflation that is wildly different from official numbers (rightly or wrongly). Simply put, they feel poorer.
The worst case scenario would be if lower interest rates fail to heal the wounds, but stoke up inflation. Not likely I admit, but Labour has a track record of such successes.
Reply: YES OF COURSE INFLATION IS CURRENTLY HIGH AND PAINFUL AND HIGHER THAN THE OFFICIAL FIGURES. I AM LOOKING OUT 1-2 YEARS AS THE MPC NEEDS TO.
March 19, 2008
Despite being the son, brother and uncle of estate agents, I am extremely pessimistic about the housing market. I think it is heading towards a major fall outside some fashionable postzones in London and other major cities.
The non-dom tax mistakenly first advocated by George Osborne will have an effect on the higher end of the market in the aresa where the non-doms live.
Credit is certainly going to be tighter and more difficult to get as well as expensive.
Many people are already borrowed up to the hilt and will be unable to move up market.
Many people are emigrating and willing to sell for less than the expected last year.
Private sector and public sector earnings are not increasing at anything like the same rate as the true rate of inflation.
Labour's doubling of Council Taxes and the increases in other taxes are now affecting people's standard of living and making people pessimistic.
Many people will want to down-size in order to reduce borrowings and release capital for their children.
People who are feeling the pinch and finding credit difficult and expensive will bargain harder and look in cheaper areas.
If the housing market, on which so much wealth and credit depends, crashes by as much as 10% then the economy and many people will be in real trouble.
March 19, 2008
The lesson from previous slumps is that house owners are very reluctant to realise a loss. So the market stalls as potential sellers sit on thir hands.
The things to look atr carefully are the increasing discounts on new properties and the very substantial price drops when repossessed properties are sold at auction.
March 19, 2008
'Inflation out of control'….. and just how is the government, any government, going to control the price of foodstuff, oil and raw materials ?
Inflation is only 2.5% for those in a buying frenzy of electrical goods or in the fantasy world of MPs…. in the real world (where the majority of voters live), the rate of inflation is nearer 10%….. and rising.
reply;YES INFLATION IS TOO HIGH AND WILL STAY SO FOR A FEW MORE MONTHS BUT THAT REFLECTS PAST ERRORS. THE FUTURE IS ABOUR DEFLAITON NOT INFLATION
March 19, 2008
It seems to me that the Bank has been behind the curve for quite a while now, holding rates down too long, then putting them up too sharply when it lost control of inflation. I am worried that they are behind the curve again now as the economy bombs they seem to be fighting the inflation already in the system. Inflation does seem very high at the moment but I would prefer that to a Japan-style decade of depression.
March 19, 2008
I'm not impressed by the idea that central Government should act to prop up (overvalued) house prices at the expense of investors (and those wishing to buy). Even if it is true that inflation won't be a long-term problem there must be a severe spike due to the currency falling, and those on fixed incomes will be permanently deprived of their current purchasing power after this.
Why should the prudent suffer for the imprudent? Talk about moral hazard..
March 19, 2008
Business investment , the housing market & retail sales are under pressure . It is such a shame that the PSBR is too high to allow an active fiscal policy that could tackle these problems . Cutting stamp duty rates to one 1% rate & exempting the first £250,000 of all property transactions from that tax would be a tonic for the housing market by easing a regressive tax burden . Likewise ending stamp duty on shares would bolster the Square Mile at a time when we need them to do well to ward off recession . No Non- Dom tax hikes & a CGT flat rate of 10% would help as well . Why take money off of the working poor only to hand it back in meanstested payments that punish people who earn more ? Surely axing tax credits & providing a bigger personal allowance and higher Child Benefit would end the poverty trap ? Poorer taxpayers are most likely to spend money gained from tax cuts – hence the introduction of the lower rate band in 1992 when a recession was going on . Pledging a war on welfarism that encourages demeaning dependency and ending the QUANGO state would ensure that the tax cuts needed to address the UK’s problems could be funded .
March 19, 2008
Business investment , the housing market & retail sales are under pressure . It is such a shame that the PSBR is too high to allow an active fiscal policy that could tackle these problems . Cutting stamp duty rates to one 1% rate & exempting the first £250,000 of all property transactions from that tax would be a tonic for the housing market by easing a regressive tax burden . Likewise ending stamp duty on shares would bolster the Square Mile at a time when we need them to do well to ward off recession . No Non- Dom tax hikes & a CGT flat rate of 10% would help as well . Why take money off of the working poor only to hand it back in meanstested payments that punish people who earn more ? Surely axing tax credits & providing a bigger personal allowance and higher Child Benefit would end the poverty trap ? Poorer taxpayers are most likely to spend money gained from tax cuts – hence the introduction of the lower rate band in 1992 when a recession was going on . Pledging a war on welfarism that encourages demeaning dependency and ending the QUANGO state would ensure that the tax cuts needed to address the UK's problems could be funded .
March 20, 2008
Sadly, John you are wrong, we are in a stagflationary world. We should be worried about inflation and people need to rebuild their balance sheets having leveraged,consumed on the back of a unsustainable asset price boom. Consumption will fall at a time when people's disposible income is under presuure from real inflation and rising taxation (both indirect and direct), increased mortgage costs as banks rebuild capital and price credit more sensibly. So we have the perfect storm, government expenditure starting to slow, consumption falling and growth slowing leading to lower tax receipts. Logical conclusion, cut government expenditure. We have no room to borrow this time after years of plenty has been squandered. Here the opposition is yet again falling into the Heath/One Nation Tories failure of the'70s , failing to grasp the economic realities. The political establishment yet again deceiving the people by not facing up to reality and showing an avid lack of leadership. I appreciated Ambrose Evans-Pritchard's article in today's DT. He at least understands the seriousness of the situation and has been one of the few economic journalists to have consistently understood the seriousness of our situation. I disagree that reflation will get us out this time.There has been a big disconnect in the housing market, that of affordability on sensible borrowing levels – as a rough rule of thumb we need a correction of circa 20% over the next 2-3 yrs with wage inflation running at 2.5-3.0%. This will result in a reconnection of the whole market such that first time buyers et al will be able to buy on sensible multiples and with a sensible LTV. I personally took a view on the market over two years ago and wait for the inevitable correction. Sterling is one of the biggest shorts in the market(I have had this view for nearly a year) and that has inflationary effects as already mentioned in previous posts. I have worked in the city for 22 years and could not believe the stupidity and greed from people who should have know better, now fear will rule and the consequence will lower growth and higher unemployment. I am of the belief that yet again increasing the money supply will have a limited impact , I use the example of a serious drug addict who uses more and more but it has less and less effect, i.e. the law of diminishing returns. We have postponed reality for too long and this time we will not be able to reflate our way out of it, so tin hats on!
reply; YES WE ARE IN A MORE STAGFLATIONARY PHASE, BUT THE INFLATION WILL FALL OFF SHARPLY AS THE CRERDIT SQUEEZE TIGHTENS ITS GRIP.
March 20, 2008
Well I think we can draw a useful analogy to the dotcom boom and bust.
The tier one and tier two internet service providers (such as AOL and France Telecom) are still going strong. The unprofitable and unfeasible websites that traded for silly money on the NASDAQ are not. Many a speculator made and lost money.
Now the big banks are still reporting healthy profits. The dodgy debt is crashing, as is the cost of insuring it. Yes, banks have lots of debt on their books in all sorts of strange forms no one understands, the banks, hedge funds and speculators with the dodgy credit products will be introduced to reality in the same way that the dotcom speculators were.
The dotcom boom coincided with a mass innovation of new ideas, some of which supply and demand approved of, some of which it shunned. It will be the same with the credit derivatives, the CDO's, the SIV's and all the other rubbish flooding the financial markets.
Today the average consumer wonders how he ever did without the internet, and thinks nothing of dotcom shares. The market will support the good developments of the consumer credit boom, which will inevitably lead to more social mobility and freedom, as did the internet. The bad bits, like the dodgy dotcome shares, will be seen for what they are.
There will be no more 125% mortgages whilst the underlying asset goes up at 15% a year anymore, but this is not a bad thing. This is a reality check.
Years from now consumers and businesses will still need banks and payment systems, they will still need to make investmenst and borrow money.
The market will have learned not to get sucked into buying dodgy debts and another boom will replace the vacuum left ny the dotcom and consumer credit booms. What this will be is anyones guess, my bet is on GM and nanotechnologies.
March 20, 2008
There are no soft landings now. We now have a choice of casualty or intensive care. (SENTENCE LEFT OUT – ED)
I work in retail but do not favour interest cuts the BoE must stand firm. I think you grossly underestimate the threat of inflation over the medium to long-term. If rates go down, as I'm sure you're aware, sterling weakens. We stock 3000+ lines and they all come from abroad, predominantly China. With weaker sterling, even with a tandem decline in the $, significant inflation will have to flush through the system, beyond, already soaring, raw material costs. Any cost savings we're currently making on purchasing, via resourcing, are not being passed on to the consumer, but retained in enhanced margins to offset higher energy costs.
I don't think our export industries are sufficient to make any significant hay, from a weaker pound, unlike the US. Wage bills will be inevitably rising again later this year with the next round of minimum wage increases.
We have the choice of a short spell in casualty, big house price falls, big asset writedowns and a short period of recession. If attempts are made to wrench the M4 taps further open we'll be in intensive care.
reply; I DONT AGREE. RETAIL PRICES WILL BE UNDER DOWNWARDS PRESSURE AS THE ECONOMY SLOWS.
March 20, 2008
John, Where do you think this deflation is going to come from? It is unlikely that the populations of China and India are suddenly going to reconsider their consumption of stuff, so demand for the stuff that makes stuff – ie commodities – looks underpinned. Cheap Chinese exports? Hardly – raw materials, prices, wages and expectations are all rising there, and they are being able to pass on some of the impact of the falling dollar in their export prices. And that's before they revalue! Imports generally? Well, I doubt that sterling's got much more in the tank – what happens when it starts to sink? Food prices? Check out the possible impact of the UG99 new wheat rusk virus.
Deflation will happen only if, quite simply, there isn't enough money out there to support rising prices. But in the immediate future and the medium term, the US Fed, and soon the Bank of England, will be printing the stuff like there's no tomorrow. (Because if they don't, quite possibly there will be no tomorrow). The future, I hate to say, is inflationary, because a) it's possible and b) no-one in history except the Japanese has tried for long to deflate their way out of a debt mountain.
The real message from all this is that the bull market in bonds, which has formed the backdrop to our policital economy since the early 1980s, is over. This is why derivatives desks everywhere have blown up, and it's the unwinding of those massive derivatives positions (roughly 20x official bank credit in US, Eurozone and Japan put together) which is freezing money and capital markets right now.
So you might like to spend some time with your Conservative colleagues asking them to imagine what systemically rising govt bond yields will do to their fiscal plans. Just a thought.
REPLY; THE DISINFLATION WILLL COME FROM THE SLOWING WESTERN ECONOMIES AND THE SHARP CONTRACTION IN NEW CREDIT.
March 20, 2008
"Meanwhile, it is difficult to see how we can become alarmed by inflation against the current background." So you don't do the supermarket shopping then, John? And you expect your income to rise sharply to meet that and other increases such as council tax?
Reply: NO – PLEASE READ WHAT I SAID I AGREED CURRENT INFLATION IS HIGH AND ABOVE THE GOVERNMENTS FIGURES. I JUST DO NOT SEE HOW INFLATION CAN BE A PROBLEM A YEAR OUT GIVEN THE STATE OF THE MONEY MARKETS
March 20, 2008
Unfortunately property prices are likely to crash at some point as recent prices have been so far in excess of any kind of rational valuation model. _Gross_ rental yields are around half the cost of capital at current borrowing rates for a lot of residential property – landlords aren't going to subsidise tennants for ever.
Latest property auction in Cambridge: http://www.cheffins.co.uk/catalogue/propertyaucti…
3 sold, 8 unsold. Maybe things have already moved…
March 20, 2008
You can call it what you like but in 12 months time asking prices will be 20% lower and they still won't be selling. Building firms are going bust leaving their creditors to argue over the rusty wheel barrow and broken cement mixer. All the unsold city flats will be bought by Housing Associations and filled with "Not Rights" and the Banks and Building Societies won't bother repossessing as they don't want streets of empty houses. I've published this hundreds of times but a 10% deposit and three times ONE salary and we wouldn't have this boom bust cycle AND we would have real money to spend and create real jobs.
March 21, 2008
John , sadly looks as though you are in the minority here. Not that it means you are wrong, though I think you are! Sterling weakening, the government printing money and accepting weak collateral does not add up to deflation in my book. Staglation is here, as the late lamented Nils Taube, the UK's version of Warren Buffet was quoted as saying recently he saw our current situation as a cross between 1987 and th early 70's, when th emarket disintegrated. Great minds think alike!
March 21, 2008
Generally, the onset of property market crashes start with transaction volumes falling – people being unprepared to sell at what seems to them the 'wrong' price, and people being unprepared to buy at the 'wrong' price. This is almost always the pattern, even in traditionally highly liquid/speculative markets such as Hong Kong. Same thing here. For what it's worth, I sold a flat in York a couple of months ago, slashing the price hard when it became clear I'd just missed the top. Now I feel extremely smug about it (which, I suppose, is why I'm posting).
March 21, 2008
Socialists have acheived their final aim.
Is the House Price crash a redistribution of wealth?
A simple five step plan:
Sell Council houses at 60% of open market value i.e. a state handout of 40% of open market value.
Allow the occupants to borrow, borrow, borrow from Secondary Banks advertising on day time television. The 40% state equity handout to be used as security for these loans.
The occupants spend, spend, spend on plasma screens, new kitchens, weddings abroad, Elizabeth Duke Jewllery.
The occupants fail to make repayments, cannot obtain any more credit due to crunch and hand in the keys to be repossessed. Rehoused by the Local authority who sold them their original house.
Bank shares/stockmarket collapse along with pension fund values and property values. The Middle Class taxpayer has a devalued pension and a devalued house.
Their wealth reduced to pay for all those wonderful days of joy for those considered needy enough to qualify.
March 22, 2008
Chris lives in my part of the world. There has been a big spike in house prices, immigrants from abroad and the amount of work around in the last ten years. The locals have had a shock around here in many ways. More realistic house prices is the next
Take a look at this site for your own area.
http://propertysnake.co.uk/