You aint seen nothing yet: Why house prices could fall another 20%

Graham_Devon

http://blogs.telegraph.co.uk/finance/ianmcowie/100008832/you-aint-seen-nothing-yet-why-house-prices-could-fall-by-another-20-per-cent/

House prices would have to fall by more than a fifth from their current level to revert to their long-term average affordability of four years’ average earnings. Even after the modest reductions announced by Nationwide Building Society today, the typical house price equals more than five years’ earnings.

So would-be first time buyers frozen out of home ownership by the credit crunch and most lenders’ demands for at least 20 per cent deposits may draw comfort from the prospect of affordability reverting to its long term average – as measured by Nationwide since 1974. This data shows that property was most expensive in 2007 when the average house price equalled more than 6.3 years’ earnings.

To put that in context, the ratio briefly exceeded 4.9 at the top of the 1980s housing boom but fell to little more than 2.8 at the bottom of the subsequent slump in 1996. So those who hope that house prices will fall can point to historical precedent to suggest recent reductions are just the beginning of a trend.

But Nationwide economist Martin Gahbauer said there are significant differences between the current situation and the past: “Although the house price to earnings ratio is currently above its long-run average, it is possible that the equilibrium level of the house price to earnings ratio is higher than the long-run average level would suggest.

Please keep arguing to a minimum...

"Dissavowed" posted an interesting comment.

andykn

Graham_Devon wrote: »

http://blogs.telegraph.co.uk/finance/ianmcowie/100008832/you-aint-seen-nothing-yet-why-house-prices-could-fall-by-another-20-per-cent/

Please keep arguing to a minimum...

"Dissavowed" posted an interesting comment.

They've got to fall by 20% first before they can fall by another 20%.

The long term average multiple isn't a valid measurement in this case as it's been rising over the long term, it's like calculating the average cost of a pint of beer over the same time.

Graham_Devon

andykn wrote: »

They've got to fall by 20% first before they can fall by another 20%.

Why? If something falls by 5%, it can fall by another 20%.

The long term average multiple isn't a valid measurement in this case as it's been rising over the long term, it's like calculating the average cost of a pint of beer over the same time.

You think?

Interesting way of looking at it.

The long term average is just that. Long term average.

You are stating this long term average is no longer valid, because recently it's increased? Even though the recent increases will be included in the average?

As I say, interesting way of looking at it. Makes a mockery of averages.

Really2

A bit more.

“Factors that could argue in favour of a higher equilibrium level are a much lower level of real interest rates than in the past, and a higher proportion of households with more than one earner. If one assumes that the long-run average is the equilibrium and that the ratio will eventually revert to its mean, this would imply house prices rising by less than average earnings over a period of time. It does not mean that house prices need to fall abruptly.”
Melanie Bien, a director of independent mortgage broker Private Finance, added: “Historically low interest rates are proving to be a real blessing for homeowners. Many are enjoying extremely cheap mortgage rates which mean that higher living costs and the reduction in income faced by some homeowners are not as disastrous as they would otherwise be.
“Most forecasters agree that interest rates will not rise until next summer at the earliest, and then at a slow rate. However, borrowers should not be complacent but consider how they will afford their mortgage once rates start to rise. Taking out a fixed rate now for five years, rather than sitting on your lender’s standard variable rate, might be a sensible option if you are worried about losing your job or budgeting.
“House prices may have fallen again in November but this seems to be more of a gradual slowdown than a crash. There is still plenty of pent-up demand from buyers keen to purchase a home but who can’t get a mortgage. They are being forced to rent for longer so while first-time buyers may be struggling to get on the housing ladder, landlords who can access the finance will find there are plenty of opportunities for them, with the prospect of rising rents and yields.
David Hollingworth, of London & Country Mortgages, agreed: “There are clearly some tough times to come with further redundancies likely to have an impact in consumer confidence.
“Overall, the market looks set to remain flat at best until consumer confidence begins to return. Low interest rates remain a positive for potential buyers although much will be dependent on the level of deposit that they can put down.
“Current expectations on interest rate rises would suggest that we will not see any movement until well into next year or even beyond that. Clearly an increase before that would knock buyer confidence in a fragile housing market.”

Glad to see every one agrees with him.:)

andykn

Graham_Devon wrote: »

Why? If something falls by 5%, it can fall by another 20%.

You think?

Interesting way of looking at it.

The long term average is just that. Long term average.

You are stating this long term average is no longer valid, because recently it's increased? Even though the recent increases will be included in the average?

As I say, interesting way of looking at it. Makes a mockery of averages.

No, I'm saying it's not valid because it's been increasing for a long time, not because it's increased recently. That's why I said " it's been rising over the long term", clue's in the words.

In fact I didn't say "recently" at all, just you said that.

But, yes, to try and average out something that's been rising long term could be described as making "a mockery of averages". So don't do it.

JonnyBravo

Graham_Devon wrote: »

As I say, interesting way of looking at it. Makes a mockery of averages.

Lessons from Graham on averages???

<-- sits down for the show

System

This is one of the worst ones yet, there's no substance, it mentions a prospect of returning to long term average *smirk* but gives no reasons why that would happen except for "that's what happened last time".

Really2

I presume it is talking about in real terms (I guess that from the quotes from others he uses).

The majority of the last "crash" was in real terms and I expect that this time.
The problem see falls of 20% and expect it to be all nominal.

Graham_Devon

Really2 wrote: »

I presume it is talking about in real terms (I guess that from the quotes from others he uses).

The majority of the last "crash" was in real terms and I expect that this time.
The problem see falls of 20% and expect it to be all nominal.

Considering the whole basis is wage multiples, I'm 99% sure he's talking nominal.

Really2

Graham_Devon wrote: »

Considering the whole basis is wage multiples, I'm 99% sure he's talking nominal.

Wages go up, house prices stay stagnant = Real term.

Either that or he likes people disagreeing with him to back up his argument?

this would imply house prices rising by less than average earnings over a period of time. It does not mean that house prices need to fall abruptly.”

Good job you saved 1%, the last crash as refered to in the article (and many times on here) the nominal falls happened in the first 18-24 months. From 1992-1996 they hardly moved nominally, if you look on the nationwide real term graph you will see half of the fall happened.

ukcarper

Now mortgages are based on joint incomes where in the past they weren’t isn’t it reasonable to expect that they won’t drop to long term average.