Deconstructing Moneyweek: Why British House Prices Won't Fall

HAMISH_MCTAVISH

An email comes from a reader. She has read an unusually rude criticism of MoneyWeek's bearish stance on house prices and wants us to answer a few questions.

:rotfl:

An "unusually rude criticism", eh?

Perhaps it was from one of your readers that listened to your advice this time last year, Merryn......

You know, when you were loudly proclaiming that the summer of 2009 would be investors last chance to lose money at the end of a bull market.

But had they followed your advice, they'd have lost the best part of £20,000 as a result. PLUS the money they wasted in rent in the meantime.

Ouch.....

No wonder they were rude.:eek:

First, she asks why traditional income ratios matter when interest rates are so low. After all, if she can get a mortgage at 2.39%, as she says she can, what difference does it make if she borrows four times her income?

She has a point - but not a lasting one. Why? Because interest rates won't stay low forever. If you borrow money today, you need to be sure that you can meet your monthly payments, not just at 2.39%, but at 5%, at 7% and perhaps at 10%.

It doesn't make a difference.

As you well know, the 3.5 times income average was established primarily during the three decades of the highest interest rates in the BoE's nearly 400 year history. Where actual mortgage rates were usually above 10%, and sometimes above 15%.

This period of high interest rates was a blip..... The long term average remains around 5%, but as both Morgan Stanley and the BoE themsleves have pointed out, the base rate in the future is likely to remain well below this level.

In fact, they have both gone so far as to state the new "neutrality point" for interest rates is around 2.5% to 3.5%. Anything above this level will create sufficient demand destruction to eliminate inflationary pressures.

We have in fact seen a progressive lowering of base rates over the last few decades. The average last decade was around 5%, the decade before was more like 10%.

But the decade to come will be, in all probablility, more like 2.5%.

We don't see rates going up immediately, partly because we expect the global deflationary scare to run a bit longer, and partly because Mervyn King has made it very clear that he will support the new government as much as he can by keeping rates low as they slash spending. But the Bank of England can't ignore its targets for ever. That means rates will have to go up in the end – and then our reader's monthly mortgage payments will, too.

So many fallacies, such little time......

Never mind.

1. It's not just you..... No credible commentator sees rates increasing immediately, or increasing significantly in the next 3-5 years. Some (like your fellow bear Bootle) see rates below 1% for 5 years.

2. It's not just King..... Osborne and Cameron have both pledged to keep rates as low as possible for as long as possible, because only in this way can the wider economy achieve the growth needed to reduce the deficit. Cuts alone won't do it..... So without low base rate fuelled growth, the entire economy is screwed, the deficit widens, and recession awaits.

Even Blanchflower has predicted a good few years of above target inflation to inflate away much of the debt, whilst rates stay low.

Funnily enough, thats exactly what is happening. Now you can love or hate old Danny boy..... But he was a member of the MPC, and so has a significantly better grasp of the decision making process than the Crash Ramper Editor in Chief at Moneyweek.....

But it doesn't have to be interest rate rises that force the next fall in prices.

Well that's handy..... Because they won't.

So what else could it be?

Low interest rates have allowed the financially stressed to hang on to their homes. But the cuts in public spending, along with the trauma in most of our export markets, suggest that unemployment might soon see another rise. Can the over-leveraged hang on to their homes even when unemployed? We'll see.

Ahhhh, that old chestnut......

Unemployment has risen significantly over the last 12 months.

As have house prices.;)

And rising unemployment isn't the only thing likely to push up supply in the market.

Phew.....

Good thing you've got another reason, as I'm starting to enjoy this....

Consider the rise in capital gains tax (CGT) to the same levels as incomes. That means whopping great bills for second-home owners. A house bought for £100,000 in 1985 would now be worth £490,617, says the Nationwide. Sell it today and you'll pay CGT of £68,500. Sell it when the rate goes up to 40% and, assuming no allowances are made for inflation, you'll pay £152,200. That suggests that you should get out now. Indeed, if you own a second home it also gives you a huge incentive to sell at below what would have been the market price. Sell the £490,617 house now for £450,000 and you'll still pay less tax than if you waited and sold after the tax rise.

Second home owners, eh?

Interesting.

There are only 300,000 of them in total, mostly the very rich, and the very stupid. Most of whom won't sell..... Due to being very rich or very stupid, funnily enough.

So whilst I could almost see a "Delightful Cornish Cottage now owned by city spiv" price crash, it's hardly enough to crash the wider market.

But the tax rise also makes a big difference to the buy-to-let industry. Much of the benefit to being in buy-to-let has come not from net yields (which have all too often been negative) but from capital gains. Paying 40% on those capital gains, such as they might be, can only make the business less attractive. That will push up short-term supply in the market and push down long-term demand.

And most of the buy to let industry are relatively recent buyers, with sub-100K gains, who bought into the model when CGT rates were at 40%. If it worked for them then, why would it not work for them now?

On the demand side, I'd also point to the fact that mortgages are still not that easy to come by. Mortgage approvals for house purchases came in at 48,901 in March. The long-run average is well over 90,000.

And yet house prices have risen anyway......

I wonder why?



Oh yes, that's why......

At the same time, mortgage lenders are already warning about a looming £400bn funding gap as the Bank of England withdraws special support schemes introduced at the peak of the financial crisis.

Hmmmmm.......

If you think any government that wants to get re-elected will withdraw the SLS and cause another crash, just 3 years before the next election, without enough time to trigger a consequent recovery, then you are deluded.

The SLS will be withdrawn if the markets can support funding levels. If not, the SLS will be replaced with something else.;)

Our reader also makes the point that inflation should be great for those with whopping great mortgages. It means that the price of your house goes up and the real value of your debt goes down. I addressed this last week so I'll just let you read here why this isn't necessarily so.

Your argument revolves around the fact that inflation does nothing for debtors, unless wage inflation follows. (which it inevitably does, eventually)

However that same argument also shows that "real terms" price decreases do nothing for potential buyers, unless wages also increase.

Given that so many housing bears are now resigned to the likely outcome being nominal gains but "real terms" falls, I'm not sure I'd be celebrating that, if I were you.....

Finally she suggests that the housing market won't fall because the government just won't let it. The Bank of England won't raise rates enough to crash the housing market because "that would be madness." And anyway a crash would mean another recession which would mean falling tax revenues and make our national debt even harder to service. "So the UK has to have rising house prices to keep paying the country's debts – and the government will make sure it happens."

And she would be correct. For all the wrong reasons, but remarkably still right.

This is touching stuff.

If by "touching" you mean niave but surprisingly still right? Then yes.....

So far, if there has been one big lesson from the financial crisis it has been this: no government can make sure of anything. The US couldn't stop the subprime crisis; Gordon Brown couldn't stop boom and bust; the Monetary Policy Committee can't stop inflation consistently rising above target; Greece can't make its people accept austerity; the Irish government couldn't stop house prices falling by 40% plus; Spain can't stop unemployment rising above 20%; and Germany can't stop the market slaying the euro.

Nice rant.

Almost "Hamish-esque" in it's power to bamboozle and distract....:D

But of course all of those things are completely irrelevant to the UK's house prices......

Ireland's house prices fell 40% because they have a housing vacancy rate of 17%.

America's house prices fell by 35% plus because they have a vacancy rate of around 16%.

Ours is more like 3%..... Which fully explains why the UK, along with Australia (with a similarly low vacancy rate) were the first to recover.

So why on earth would anyone think that the UK government – even the new one – would be able to stop house prices falling?

See above.....

None of this suggests our reader shouldn't buy her dream house if she finds it and can easily afford it (even with rates at say 10%). Just that if she does, she should be prepared to find that doing so doesn't exactly make her fortune.

Indeed......

But buying now is likely to have a far better result than STR-ing in 2006 with an average price in the area of 450K, (versus more like 650K for the same area today) paying rent for a few years whilst savings yielded next to nothing, and then buying back in at just a few percent less than peak.;)

Not that you'd know anything about that....... Or would you?:rotfl:

Now readers, pop along to moneyweek and comment/email away about the big nasty Hamish deconstructing Merryn.....

http://www.moneyweek.com/blog/why-british-house-prices-will-fall-00187.aspx

headcone

Thank you for another insightfull post Hamish.

I was however a little upset about your Cameron House price rise thread.

It is one of my favourite hotels, however no matter how expensive it gets I will just have to live with it,you get what you pay for I suppose.

nembot

I'd be billing you for disk space if I managed capacity here, never before have ones and zero's been used to post so much drivel.

It's not just that you just talk carp, that's excusable - it's the nastiness behind it.

IveSeenTheLight

nembot wrote: »

I'd be billing you for disk space if I managed capacity here, never before have ones and zero's been used to post so much drivel.

It's not just that you just talk carp, that's excusable - it's the nastiness behind it.

nembot, use your time to question any points Hamish raises.
Your post above is pointless.

If you have a different opinion, state why or even better show why it is different

DaddyBear

Hamish, you really should think about counselling. So much anger, so much wasted time. Not a bad post but it's regurgitating a lot of your usual bile, and to be truthful, not many people are listening, and certainly not the person it's aimed at. Let it go, I'm sure you can find a more productive way to spend your time in the early hours if the morning.

IveSeenTheLight

DaddyBear wrote: »

Hamish, you really should think about counselling. So much anger, so much wasted time. Not a bad post but it's regurgitating a lot of your usual bile, and to be truthful, not many people are listening, and certainly not the person it's aimed at. Let it go, I'm sure you can find a more productive way to spend your time in the early hours if the morning.

I'm sure you yourself could find a more productive way to spend your time instead of the above post.
It adds nothing to the topic or discussion.

If you have nothing on topic to post about, let it be and the thread will either remain by those wishing to entere into a mature discussion / debate or the thread will die down the pages.

Hamish has raised some very interesting points and I've yet to see any of them being called.
Is that an indicator that you have nothing to disagree with on Hamish's points?

P.S. on a seperate point, I noticed you updated one part of your signature but not the other
How about updating your Aberdeen signature as well?
Mar 09 = £151,491
Mar 10 = £169,607

Source Registers of Scotland Executive Agency

http://www.ros.gov.uk/professional/e...lpd_stats.html

http://www.ros.gov.uk/pdfs/local%20a...mar%202010.pdf

http://www.ros.gov.uk/pdfs/la_mar_09.pdf

11.95% ~ YOY increase in average Aberdeen
Source: Register of Scotland

System

Good post, shame MoronScummerWebb can't see it here.

I wonder if we'll see a single structured counter argument today?

doire_2

But had they followed your advice, they'd have lost the best part of £20,000 as a result. PLUS the money they wasted in rent in the meantime.

Bit of a sweeping generalization there

HAMISH_MCTAVISH

Joeskeppi wrote: »

Good post, shame MoronScummerWebb can't see it here.

Sadly they limit their comments section......

And I doubt Merryn would be interested in engaging in a proper debate anyway.

The prominent crash rampers never are, because under scrutiny their case simply does not hold water.

I wonder if we'll see a single structured counter argument today?

Doubt it.....

HAMISH_MCTAVISH

doire wrote: »

Bit of a sweeping generalization there

Sorry doire, should I have done one of these.......

"But had they followed your advice, they'd have lost the best part of £20,000 as a result.* PLUS the money they wasted in rent in the meantime.**"


























* Except in Northern Ireland
**More like £100,000 in the nicer bits of London

Jonbvn

IveSeenTheLight wrote: »

I'm sure you yourself could find a more productive way to spend your time instead of the above post.
It adds nothing to the topic or discussion.

Agreed. Why are the perma-bears resorting to ad-hominem attacks, instead of trying to refute the arguments presented by Hamish?

Personally, I'm not as bullish as Hamish. However, given that the average Brit has OCD wrt property, I don't think a huge crash is possible.