Why house prices must fall by 28 per cent

Thrugelmir

Batchy wrote: »

House prices are lower, which I think we can all agree on... and mortgage rates are also very low, the only thing stopping first time buyers at the moment is insecurity. Until the press stop reporting all the negativity towards austerity cuts and 600k public sector workers going, then there will be no positivity and no one will spend... they will hoard their cash.

Savers have continued to save. Debt fuelled the boom. So there will be a cultural change in the years ahead. As the availability of credit is greatly constrained.

UK banks have £800 billion of funding to refinance in the wholesale markets in the next 30 months. The effects will be felt everywhere.

RenovationMan

I thought hoarding cash created the Japanese Deflation?

I'm happy to do my bit and spend, spend, spend on housing



(though I'll be overpaying, overpaying, overpaying for the next 10 years!)

carolt

tommy75 wrote: »

Coming thick and fast now.. Something in the air?

http://blogs.telegraph.co.uk/finance/ianmcowie/100006757/why-house-prices-must-fall-by-28-per-cent/



A trivial increase in house prices this month has prompted speculation that the market may be stalling but prices would have to fall by 28 per cent from their current level to become affordable for first-time buyers.
Nationwide, Britain’s biggest building society, calculates that average house prices edged up by 0.1 per cent in June to stand about 3 per cent higher than they did at the start of the year. While the headline figure attracts most attention, Nationwide also measures affordability by measuring house prices as a multiple of gross or pre-tax earnings.
On that basis, housing remains far more expensive than the long term average. For example, Nationwide’s first-time buyers’ price/earnings ratio increased from 4.4 in the first quarter of this year to 4.6 in the second quarter.
In other words, the average first-time buyer now needs 4.4 years’ income before tax to buy the average first-time buyer’s home. That’s a tall order. To see just how steep it is, compare that figure with Nationwide’s average price/earnings ratio over more than the last quarter of a century of just 3.3.
So, by this measure of housing affordability, prices would have to fall by 28 per cent from the their current level to reach the long term average since 1983 for first-time buyers. While homeowners may be dismayed at the prospect of a major asset losing more than a quarter of its value, younger people might more reasonably regard such a reversion to the mean as a chance for them to escape from rented accommodation – and a good reason not to rush to buy now.
Any or all of three main factors could precipitate such a large change in house prices. Higher interest rates – now regarded as a question of ‘when’, rather than ‘if’; higher unemployment – ditto; and reduced mortgage availability; already a fact.
With inflation running well above Bank of England targets, however it is measured, and the coalition government determined to cut spending to reduce deficits, the only real question is whether higher interest rates or rising unemployment will be first to burst the housing bubble.
Housing analyst John Wriglesworth of the Wriglesworth Consultancy said: “First-time buyers who decide to proceed at present face a double difficulty of having to find higher income multiples than have been regarded as reasonably affordable in the past and being required to produce higher deposits if they want to fulfill their housing aspirations.”
As pointed out in this space before, it might be wiser for prospective first-time buyers to wait before they buy and save a bigger deposit while prices fall.

What sage advice.

IveSeenTheLight

carolt wrote: »

What sage advice.

And from the same writer

http://blogs.telegraph.co.uk/finance/ianmcowie/100006262/why-irresponsible-lending-helped-me-and-millions-of-others/

Why 'irresponsible lending' helped me and millions of others



Chancellor George Osborne is expected to give new powers to the Bank of England to curb mortgage lending to no more than 75 per cent of property value. This may prove initially popular after the excesses of the credit boom that burst in 2008 but he should beware the law of unintended consequences.

Young people trapped in rented accommodation for many more years than their parents were forced to waste money on rent are unlikely to thank him for his caution.

......

As I pointed out when the FSA announced its new ‘get tough’ approach last year, there is a lot to be said for ‘irresponsible lending’.

So long as borrowers understand the risks they are taking with, say, 90pc mortgages, there is no reason why regulators should intervene to prevent people seeking the rewards these loans generated for many during recent decades.

Restricting access to credit, where willing lenders serviced demand from willing borrowers in a free market, means that young people who start the property game with nothing are condemned to end it with nothing.

........

Self-interest is the one motivation you can always rely on and my personal experience of the property ladder was shared by many others in my generation.

One of the best financial decisions I ever took was a 100pc mortgage – yes, that’s right 100pc - for about five times my salary 25 years ago. No such loans are available today.

Without such ‘irresponsible lending’, I might still be renting a bedsit in Kilburn rather than owning a home in Highgate.

That’s not intended to sound like bragging but to demonstrate why people who fail to understand the importance of credit – and, dare I say it, house price inflation – in the creation of wealth are either very naive or perhaps living under hedges on a diet of roots and berries. They have certainly missed one of the simplest ways to accumulate tax-free gains available in our lifetime – at least until now.
Will today’s bedsit tenants thank the regulators for freezing them out of home ownership and condemning them to years of throwing cash away on rent? I doubt it. The Chancellor should resist the temptation to meddle with markets, remember the importance of individual free choice and give young homebuyers a fighting chance.