What would really happen if house prices fell substantially?

HAMISH_MCTAVISH

des_cartes wrote: »

ok so mortgage debt = 1.4 trn. Now by no means are all those mortgages 100% ltv and some have been going for a good few years with substantial capital being repaid on them. I would estimate (without any evidence) that the value of mortgaged properties is around 2 trn (making the average outstanding mortgage debt 70% ltv). In this scenario, a 30% fall in prices would result in total mortgage debt = total value of mortgaged properties. Hardly a disaster for lenders who have after all had 18 months of virtually free money to give themselves a pretty good level of cash.

It doesn't work like that.

Ask generali for details if you don't believe me.

As for thinking that a) the government can prevent a crash and b) that they would want to, what makes you think the UK government could hold back the tide of house price corrections that has affected almost every other economy since 2007/8? The Americans failed, the Japanese failed and as for litle old Ireland, I'm sure you know what has happened to their house prices. No, the UK government are powerless to stop market forces. Maggie knew that 30 years ago and nothing has changed.

Clearly not.

House prices have risen by £20,000 since the trough of the market, because the underlying supply/demand imbalance in the UK is so huge that the ONLY thing which makes house prices fall here is a dysfunctional mortgage market.

And there is plenty more that can be done to resolve that particular problem.

Mustbeananswer??

greenbubble wrote: »

how did this help all those small independent garages ?

law of unintended consequences im afraid.

so who actually benifited from this ?

green

I get the feeling that the car market is just poor now.....a year ago it was desperate!!!

des_cartes

HAMISH_MCTAVISH wrote: »

It doesn't work like that.

Ask generali for details if you don't believe me.



Clearly not.

House prices have risen by £20,000 since the trough of the market, because the underlying supply/demand imbalance in the UK is so huge that the ONLY thing which makes house prices fall here is a dysfunctional mortgage market.

And there is plenty more that can be done to resolve that particular problem.

If Brown were still pm it would have happened already. The fact it hasn't should tell you something about the different view this government have of the housing market.

Kronkston_2

Graham_Devon wrote: »

It's the investment in property that would cause the problems.

If prices fell substatially, those invested, be it large companies, banks, or a one man BTL, would suffer.

We have a situation now where so many are invested, with such large amounts invested, the severity in the outcome of falls is higher than ever before.

Mainly paper money then, the property is still worth one prooperty.

Kronkston_2

Silverbull wrote: »

Well Japan house price crash was 80%.

I dont think we will be that much.

No more than 50% at worse, maybe 60%

des_cartes

Kronkston wrote: »

No more than 50% at worse, maybe 60%

Prices will not fall 50 or 60 %. 30% will return house prices to a sustainable level compatable with earnings and availability of finance that existed before things were allowed to get out of control.

greenbubble

Mustbeananswer?? wrote: »

I get the feeling that the car market is just poor now.....a year ago it was desperate!!!

i seem to have a knack at drifting threads away from the OP's original question.

the figures for cars sold that i saw recently (sorry i cant immediately find a link) showed roughly that new car sales had falllen back to roughly a long term average (or just below), i guess we just need to be careful in thinking that the last decades sales figures were the norm when in reality they were just inflated through easy credit. so what do we do , try to stimulate sales in an market thats already at excess capacity ?

my damascus moment on this was when top gear stated that a bmw 3 series was now out selling a ford mondeo.

as to the scrappage scheme , instead of using small independant garages to fix old cars and keep the money local , they were removed and cash given to large multi-national comapanies , so why should one benefit and not the other ?

all it did was draw sales forward (short term gain).

this is without even discussing the environmental impact of new car production vs. servicing existing vehicles.

green

Mr_Mumble

Hamish is pretty close with his numbers but here are the figures (in £bn) from the 2010 Blue Book. First the value of residential housing:

National balance sheet Asset totals
4,048.3 -- Residential buildings (CGLK)

of which:

Households & non-profit institutions serving households
3,826.5 -- Residential buildings (CGRI)

Non-financial corporations
211.1 -- Residential buildings (CGUT)
100.4 -- of which Local Authority housing (CGWM)

General government
5.9 -- Residential buildings (CGVQ)

Financial corporations
4.8 -- Residential buildings (CGUD)

and for mortgages:

Households and non-profit institutions serving households
1,191.6 -- Loans secured on dwellings by UK MFIs (NNRP)

MFI = Monetary Financial Institutions (aka banks and building societies).

Total loans secured on dwellings is slightly higher at 1,235.0 (NYZM & NYZL).

Kronkston_2

Graham_Devon wrote: »

It's the investment in property that would cause the problems.

If prices fell substatially, those invested, be it large companies, banks, or a one man BTL, would suffer.

We have a situation now where so many are invested, with such large amounts invested, the severity in the outcome of falls is higher than ever before.

Well if I back the wrong horse on the 2:30 ay Haydock is it reasonable for the government to refund me my stake?

I do no think so.

shupufski_2

HAMISH_MCTAVISH wrote: »

I think you're entirely missing the point.

But first, to answer your questions..... (from memory, stats may be slightly different now)

There are roughly 22 million privately owned houses.

There are roughly 11.5 million mortgages.

In the recent crash, around 1 million went into negative equity, and around 3 million dropped close enough to negative equity that they can't remortage to move at a cost effective rate.

The total value of UK mortgage debt is around 1.4 trillion pounds.

The total value of the UK housing market is around 4 trillion pounds.

So......

It doesn't take a big fall in prices for bank balance sheets to be seriously hurt, which impacts not just on mortgage borrowing but also lending to business.

The banks almost went under with falls of 23%, now fair enough they've been able to rebuild balance sheets since then, but what do you think would happen with falls of 40%?

When lending for business is decimated as a result of banking difficulties following house price falls, what do you think happens to business investment, job creation, unemployment, etc?

Big house price falls also hammer consumer confidence, resulting in big reductions in consumer spending. When less money is spent in the economy, fewer jobs are sustained, unemployment increases, businesses fail, etc.

The result of 4 million houses being blocked from moving due to negative equity, or close enough to it, is that supply reduces dramatically.

And of course, many mroe people take houses off the market as they simply won't sell for less than they consider it to be worth. Particularly downsizers, investment property owners, second home owners, etc, and IMO this section of property owners is bigger than the ones in or close to negative equity.

As a result, and as we saw last time, property supply falls rapidly by about 50%.

And of course, even less properties are built, whcih stores up price booms for the future as well.

In short, little good can come of a crash, and the idea that ANY government will just let one happen without acting to prevent it is incredibly naive.

With respect, you are missing the point.

Banks did not nearly go under due to house price falls – banks nearly went under because of the removal of liquidity from the money markets. The fall in house prices was accelerated by the situation but not caused by it.

A reduction if prices will not affect every home and not put every borrower into negative equity. Although you have provided some figures that do not support your assertion that a fall in prices will automatically cause a negative equity death spiral.

What counts is the value of mortgages vs. the value of properties under mortgage and there is definitely a sense that there is a significant buffer of value over debt there.

Finally, the ability to continue paying mortgages is significant and as long as that continues then a drop in value does not matter.

There is no inevitability about the chain of events that you describe.