"House price crash predictions are premature"

mixu

Another day, another opinion... this time Nationwide.

“Some commentators are already suggesting that the market is poised for a fall with affordability so stretched, especially for first-time buyers. At a simplistic level, a move in the house price to earnings ratio back to its long term average would imply a fall in house prices of nearly 40%. However, the long term average house price to earnings ratio is not a good benchmark given that we would expect this ratio to trend upwards over time. Reasons for this include the decline in real and nominal interest rates since the 1980s and a change in people’s preferences towards housing as an investment, as a supplement or alternative to equity based pensions. In addition, as we have mentioned several times, the UK suffers from a slow response of housing supply to changes in demand, which supports house prices. Looking at mortgage payments as a proportion of take home pay, which takes lower interest rates into account, suggests that rates could increase by more than 2% before affordability (on this measure) became as stretched as in the late 1980s.

“A more important factor which would suggest that large price falls are unlikely in the current economic climate is the state of the general economy. Clearly there are risks to interest rates, but in the current circumstances it is not clear how big these are. Even the tone of Mervyn King’s letter to the Chancellor and his testimony to parliament seemed fairly sanguine. In both cases the Governor expressed the view that CPI inflation could fall back sharply over the next four to six months, which would suggest severe rate hikes are unlikely. Back in the 1980s the collapse in prices came about following a sharp rise in interest rates (from 7.4% in mid 1988 to around 15% two years later) and a 1.4m increase in unemployment at a time when the economy was slowing. Today the economy is continuing to grow; the labour market has been remarkably strong and interest rates have increased by only 0.75% in the last two years.”

https://www.nationwide.co.uk/hpi/historical/Apr_2007.pdf

http://news.bbc.co.uk/1/hi/business/6594449.stm

andyyorks

BBC reporting that BTLs are to double by 2010 (not quite when you read it but a good headline!)

http://news.bbc.co.uk/1/hi/business/6592663.stm

pricedout_1

andyyorks wrote: »

BBC reporting that BTLs are to double by 2010 (not quite when you read it but a good headline!)

http://news.bbc.co.uk/1/hi/business/6592663.stm

But how can they possibly predict that? Rental yields are low, mortgage costs are rising, interest rates are rising, there are a lot more tenants around with debt problems than there used to be (UK debt = £1.3 trillion :eek:) and BTL is a labour intensive investment option. Surely a lot of potential BTL's are going to look at these issues and think twice?

mystic_trev

Every month she keeps coming out with the same thing. HPI is slowing, please don't increase Interest rates! Well I'm sorry Fiona, they'll be going up again next month and probably a couple more times after that, not to takle House prices but CPI - Which is the BoE remit!

cells

the thing about a crash is, to try and sell within the top 10% and then buy back at the bottom 10%!

personally i believe we are near the peak

manhattan

Also nationwide have an interest in keeping the market afloat, so they need to come out with statements like the above.

They are a business at the end of the day that supplies mortgages!

jyonda

manhattan wrote: »

They are a business at the end of the day that supplies mortgages!

I believe that the mortgage lenders are the people who created this bubble and they will be the people to burst it. The sun will continue to shine and they will continue to make profits so no biggie if they tighten up on the loose credit.

Sisyphus

jyonda wrote: »

I believe that the mortgage lenders are the people who created this bubble and they will be the people to burst it. The sun will continue to shine and they will continue to make profits so no biggie if they tighten up on the loose credit.

If they had a part in creating the boom in the first place, competition and greed has allowed it to get out of hand. If they thought they had engineered a soft landing a couple of years ago they were mistaken.
The demand of high yield in financial markets has led to growing demand for mortgage backed securities, inflating the bubble to greater and greater limits.
The lenders believing they have hedged their risks have become greedier and greedier.
The absence of major incidents in the credit markets mean that yields no longer reflect the true risks inherent in the mortgage backed secs.
Get the idea? It's spiralling.
At some stage it will unwind and fast.

ReportInvestor

A factor that many commentators are ignoring that we are probably at the start of a process which could see our 70%+ homeownership fall to below 60% over the next decade.

Don't assume that property will fall back to "affordable" levels.

We are becoming an increasingly unequal society, but the "left wing" party, New Labour has maintained and even extended the incredible tax benefits available to buy-to-let investors because it has failed to offer alternatives to the housing shortages.

Sisyphus

ReportInvestor wrote: »

A factor that many commentators are ignoring that we are probably at the start of a process which could see our 70%+ homeownership fall to below 60% over the next decade.

Ergo don't assume that property will fall back to "affordable" levels.

could you elaborate?
sorry I'm a tad slow today

mystic_trev

Sisyphus wrote: »

could you elaborate?
sorry I'm a tad slow today

Both you and Ergo by the sounds of it!