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The Great 2003-2005 Crash in Britain’s Housing Market
tommy75
Posts: 583 Forumite
[FONT=Arial,Italic][FONT=Arial,Italic]
http://www2.warwick.ac.uk/fac/soc/economics/staff/faculty/oswald/housingaccountancynov2002.pdf
November 24, 2002
[/FONT][/FONT]
Andrew Oswald, Professor of Economics, Warwick University
[FONT=Arial,Bold][FONT=Arial,Bold]
The Great 2003-2005 Crash in Britain’s
Housing Market
[/FONT][/FONT]
Housing Market
At the end of 1988, I had a chat with my wife. I told her we must sell our
house. Look at these graphs, I said. House prices are going to fall.
Perhaps not surprisingly, as nobody at that point could remember a time
when British house prices had dropped, and she (correctly) was dubious of
economists’ forecasts, she found my logic unimpressive. So she declined to
sell. By the autumn of 1989, our house had lost about 20% of its value, and
there was to be worse to come. Fortunately, we had sold, at that stage,
because I had taken a job with a United States university. This episode,
however, made an impression on family and acquaintances, because my
forecast had seemed to them so implausible.
I think we are about to go through the great housing crash of 2003-2005.
This crash will feel worse, in my opinion, than the one at the end of the
1980s.
I advise you to sell your house, and move into rented accommodation. After
that, put as much money as you dare into the stock market. If that high level
of shares keeps you awake at night, then sell shares down to sleeping point,
and keep the rest in cash.
I am serious. However, in real life it is of course not so easy, and one could
take the view, as with a pension portfolio, that housing will go up and go
down, and that one should just stay fully invested. For some people, that is a
defensible position.
The best indicator of what will happen in the housing market is the ratio of
prices to incomes. In Great Britain, the long-run ratio of the average price of
a home to the average person’s earnings is about 4. In other words, if the
typical Briton gets a wage of approximately 25,000 pounds, then the
sustainable typical house price in this country is around 100,000 pounds.
That sustainable ratio is a bit higher in London and the South East, and a bit
lower elsewhere, but this is the broad-brush number.
Unfortunately, we are now considerably above that. British house prices have
currently reached a ratio of 5 times the average level of earnings.
I believe that house prices will continue to rise about 5% or a little more until
next summer, 2003. Then I expect British house prices to fall by around
30%.
One way to understand this is simply to look at the numbers and to study
history. Another is to use pure logic. Both, however, point to the same
conclusion. Sell now.
As in most markets, when things get over-valued, the decline in prices does
not merely return to long run par value. It overshoots downwards. When
people start selling, they get carried away, and go too far down. The same
happens in the upwards direction, of course. To use jargon, ‘bubbles’
happen on the way up and the way down.
It is useful to look at the stock market, and to compare that with the housing
market. The value of shares is dictated, at bottom, by people’s confidence in
the future. More precisely, the price that traders are willing to pay for a share
like Rolls Royce or LastMinute.Com is fixed by their deep-down views about
the degree of prosperity to come in the British economy. The price of shares
tells us about confidence in the future.
The same has to be true in the housing market. Both shares and homes are
assets. They are valuable because they will be worth something in the
future.
This takes us to an inescapable fact that seems not to have been made in
public debate. It does not make sense for the stock market to be valued
below its long-run trend while housing is valued above its long-run trend.
Because both are assets, that cannot be sustained. It is not an equilibrium,
one might say. Either people are confident about the future, in which case
both houses and shares should be worth a lot, or they are not confident, in
which case the prices of both shares and houses should be low.
The current over-valuation of house prices in our nation is being driven by
low interest rates and a lack of logic by purchasers. Buyers have mistaken
low interest rates as a sign that houses are, in some sense, cheap. But that
is a very serious illusion. Just because my repayments today are lower than
under high inflation and high interest rates does not mean, in a true sense,
that my home is now less expensive. A 40,000 pound BMW is not cheaper in
a world where interest rates are low, nor dearer in a world where interest
rates are high. The price is the price. And it is the same with houses.
Britain’s housing crash will probably come about something like this. In late
Spring of 2003, it will begin to be recognised that house prices have stopped
rising. People will cease being such enthusiastic purchasers. Those who
rushed into buy-to-let properties will begin to sell them. House prices will
crumble, just a little. Then by late summer of 2003, confidence in housing
will go. Prices will crumble more. At that point, newspapers will take up the
cause. Headlines will appear: house prices fell 8% last year.
Panic will then set in.house. Look at these graphs, I said. House prices are going to fall.
Perhaps not surprisingly, as nobody at that point could remember a time
when British house prices had dropped, and she (correctly) was dubious of
economists’ forecasts, she found my logic unimpressive. So she declined to
sell. By the autumn of 1989, our house had lost about 20% of its value, and
there was to be worse to come. Fortunately, we had sold, at that stage,
because I had taken a job with a United States university. This episode,
however, made an impression on family and acquaintances, because my
forecast had seemed to them so implausible.
I think we are about to go through the great housing crash of 2003-2005.
This crash will feel worse, in my opinion, than the one at the end of the
1980s.
I advise you to sell your house, and move into rented accommodation. After
that, put as much money as you dare into the stock market. If that high level
of shares keeps you awake at night, then sell shares down to sleeping point,
and keep the rest in cash.
I am serious. However, in real life it is of course not so easy, and one could
take the view, as with a pension portfolio, that housing will go up and go
down, and that one should just stay fully invested. For some people, that is a
defensible position.
The best indicator of what will happen in the housing market is the ratio of
prices to incomes. In Great Britain, the long-run ratio of the average price of
a home to the average person’s earnings is about 4. In other words, if the
typical Briton gets a wage of approximately 25,000 pounds, then the
sustainable typical house price in this country is around 100,000 pounds.
That sustainable ratio is a bit higher in London and the South East, and a bit
lower elsewhere, but this is the broad-brush number.
Unfortunately, we are now considerably above that. British house prices have
currently reached a ratio of 5 times the average level of earnings.
I believe that house prices will continue to rise about 5% or a little more until
next summer, 2003. Then I expect British house prices to fall by around
30%.
One way to understand this is simply to look at the numbers and to study
history. Another is to use pure logic. Both, however, point to the same
conclusion. Sell now.
As in most markets, when things get over-valued, the decline in prices does
not merely return to long run par value. It overshoots downwards. When
people start selling, they get carried away, and go too far down. The same
happens in the upwards direction, of course. To use jargon, ‘bubbles’
happen on the way up and the way down.
It is useful to look at the stock market, and to compare that with the housing
market. The value of shares is dictated, at bottom, by people’s confidence in
the future. More precisely, the price that traders are willing to pay for a share
like Rolls Royce or LastMinute.Com is fixed by their deep-down views about
the degree of prosperity to come in the British economy. The price of shares
tells us about confidence in the future.
The same has to be true in the housing market. Both shares and homes are
assets. They are valuable because they will be worth something in the
future.
This takes us to an inescapable fact that seems not to have been made in
public debate. It does not make sense for the stock market to be valued
below its long-run trend while housing is valued above its long-run trend.
Because both are assets, that cannot be sustained. It is not an equilibrium,
one might say. Either people are confident about the future, in which case
both houses and shares should be worth a lot, or they are not confident, in
which case the prices of both shares and houses should be low.
The current over-valuation of house prices in our nation is being driven by
low interest rates and a lack of logic by purchasers. Buyers have mistaken
low interest rates as a sign that houses are, in some sense, cheap. But that
is a very serious illusion. Just because my repayments today are lower than
under high inflation and high interest rates does not mean, in a true sense,
that my home is now less expensive. A 40,000 pound BMW is not cheaper in
a world where interest rates are low, nor dearer in a world where interest
rates are high. The price is the price. And it is the same with houses.
Britain’s housing crash will probably come about something like this. In late
Spring of 2003, it will begin to be recognised that house prices have stopped
rising. People will cease being such enthusiastic purchasers. Those who
rushed into buy-to-let properties will begin to sell them. House prices will
crumble, just a little. Then by late summer of 2003, confidence in housing
will go. Prices will crumble more. At that point, newspapers will take up the
cause. Headlines will appear: house prices fell 8% last year.
http://www2.warwick.ac.uk/fac/soc/economics/staff/faculty/oswald/housingaccountancynov2002.pdf
0
Comments
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He was a few years out........but not wrong !!!'In nature, there are neither rewards nor punishments - there are Consequences.'0
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He hadn't factored in liar loans, BTL frenzy, property investment seminars and their "15% deposit paid" deals on off plan property.
But he was right without those.0 -
he did not factor in the interest rate cuts in 2005 to try and keep the party going a few more years.. this crash should of started in 2005 but the government fought tooth and nail to postpone it and made it ten times worse.It is nice to see the value of your house going up'' Why ?
Unless you are planning to sell up and not live anywhere, I can;t see the advantage.
If you are planning to upsize the new house will cost more.
If you are planning to downsize your new house will cost more than it should
If you are trying to buy your first house its almost impossible.0 -
Follow his advice and you'd have lost out big time.0
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>This takes us to an inescapable fact that seems not to have been made in public debate. It does not make sense for the stock market to be valued below its long-run trend while housing is valued above its long-run trend.<
An economist always expects markets to be rational. He's forgotten Keynes' observations that markets can remain irrational longer than you can stay solvent.
And that some politicians think they can buck the market, selling gold, gerrymandering the economic data, that sort of thing...0 -
I'm often confused but didn't the crash that this guy was talking about come as a result of the bursting of the DotCom bubble and prices noway fell to the historic norm of price:income level?0
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The bottom line, he was wrong :rolleyes:'Just think for a moment what a prospect that is. A single market without barriers visible or invisible giving you direct and unhindered access to the purchasing power of over 300 million of the worlds wealthiest and most prosperous people' Margaret Thatcher0
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Graham_Devon wrote: »....on the date.
Sorry, just trying to help you finish your sentence, I'm feeling charitable, and you obviously had problems finishing it yourself.
It is not proven that he was right apart from the date. We have yet to see. Structural changes in the market, change in the norm level of debt, a contribution from inflation and a delay in things taking effect could confound his predictions.0
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