Home—Blog—Why the government can't stop house prices falling
Jul 22, 2010, 02:16
Posted byMerryn Somerset Webb
Comments (47)
I spent this morning doing an interview for a property programme. We talked about all the usual things – how subprime happened, how securitisation changed the way the market worked, how the rules of the mortgage game changed after 2000, and so on.
But the real question the interviewer wanted answered was: "How come no one saw it coming?"
My answer was that a great many people did. It wouldn't be true to say that any of us knew exactly how the crisis would play out. We didn't. But there was plenty of evidence that a nasty credit bubble was building years before it popped.
The participants in the MoneyWeek roundtable had been banging on about it for years. I remember one roundtable in early 2007 where we explicitly discussed the subprime market: a hedge fund manager at the table told us exactly what he expected to happen and expressed his amazement at how so many people were still investing in subprime assets when they knew perfectly well they were set to blow.
But if so many people knew, asked my interviewer, then why did the government do nothing about it? The answer to this bit I think, is that once the bubble existed the authorities could see no way out of it. The obvious answers – bring interest rates up to normal levels or introduce regulations that would stop the issuance of mortgages to non-prime borrowers – would both have kicked off recessions, given the debt-laden nature of the public and private sectors. That just wasn't politically acceptable. So they did nothing.
I bring this up now because in the course of conversations about house prices these days, the main defence used by the bulls is still that the government in the UK "won't let" house prices fall. But how can they not? This isn't about the government. It is about the credit cycle.
We had the boom – which it seems the government was unable to control. And now we have the bust, a period in which the supply of credit is very tight, and the price of what credit is available is relatively high. And hence one in which mortgage lending is going to stay low.
If we should have learnt anything over the last ten years it is surely that the price of a house is not defined by how many people would fancy living in it, but by how many people can raise the finance to buy it. I simply don't see how the government can change that basic dynamic.
Published in Blog More articles by Merryn Somerset Webb
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(22 July 2010, 05:33PM) Complain about this comment
There are some other measures governments can take (1) to prevent asset price bubbles occurring, including housing bubbles and (2) to cool them once they have started. The money supply M3 in the years prior to the 2007 bubble was running at 10-14 % per annum and was a somewhat overlooked factor encouraging credit and asset inflation at that time. Requiring banks to reduce their lending gearing to a safer level, with larger compulsory deposits held at the BoE, would have cooled things a little. BoE could set different interest rates for mortgage lending than for commerce and industry. The government could have a variable stamp duty rate on house and commercial property purchase, raising it to say 10% during booms and 0% or even negative, say -5% (subsidy), during busts, equalizing over the cycle. By this last measure they could effectively control house prices. Horror!
(23 July 2010, 12:30AM) Complain about this comment
Merryn,You're too kind to those politicians. Of course they didn't want to see it coming! Make hay while the sun shines... buy second homes... do them up on politicians expenses... sell them tax free. And for heavens sake make sure that rates are low so that you'll get a 'fair' price when you come to sell.Those monkeys knew exactly what they were doing.
(23 July 2010, 11:26AM) Complain about this comment
Easy.New life can be blown into the bubble by extending the length of a typical mortgage term. Say hello to inter-generational mortgages. The sheeple can then take on more debt and it will still be managable relative to their incomes because extending the terms will reduce the monthly servicing costs.Simples.Also don't underestimate the stupidity of the average Brit. They're still obsessed with propwerdee
(23 July 2010, 12:39PM) Complain about this comment
Why should house price capital gains be tax free?Germany taxes gains if you have not lived in a house for enough years and as a result people don't speculate on house prices. In the UK during housing boom, a tradesman could either work for someone else and pay income tax or do up his own house.Any work on his primary residence would have improved the house price far ahead of the "fair" market rate for his skilled work, but he would have paid no income tax or capital gains. Even better, if he could access materials free of VAT.The only downside is that you have to move primary residence every 6 months - so live in your girlfriend's house, and remember not to marry her so that HMRC are happy...If you don't tax something you get more of it.
(23 July 2010, 09:34PM) Complain about this comment
They could always operate a deliberate policy of stoking up inflation, that should help support house prices for a while, certainly long enough until wages are driven up enough to re-establish the 3 x average earnings + 5% deposit mortgage scenario deemed to offer fair value. Actually they might already be doing that, needs to be achieved within the life of this parliament for the Coals to benefit from GB and Co's original plan for continued re-election in 2010 and 2015. Pity the Labs never asked for Lord Peter's whimsical advice during the election, he would have put them right on their odds of winning, maybe then they wouldn't have fought so hard against the Cons and we would have avoided having to suffer the insufferable St Vincent and his pious condescensions from on high.
(23 July 2010, 09:36PM) Complain about this comment
The answer to the question "will the government let house prices fall" is no, if they can prevent it by any available means short of war.After the housing bubble in Europe, and with a further slide in house values (as expected) the European banks could go over like ninepins- and even those not directly effected would be severely damaged.The banks in the UK and Spain who have cruelly and voraciously re-possessed houses, find that it would have been better to let the families live in them. To late now, I am afraid! Like sand through the Banks fingers, the value of houses ebbs away, as does their ability to continue to trade. The Euro could be destroyed.The calculations of the people who think the government will prevent this further house price collapse are wrong. Governments acting alone cannot prevent a collapse. The whole world must act in concert.
(24 July 2010, 02:10AM) Complain about this comment
When though Merry, oh great sage of house prices. Oh and while you are on how is your track record on predicting houses rises and falls over the last 10 years.
(24 July 2010, 10:37AM) Complain about this comment
It would have been hard to predict the continued and unjustified availability of large amounts of credit to just about anyone and their dog over most of the last decade, hence pretty difficult to accurately predict a very long overdue 'correction' in house prices.
(24 July 2010, 10:46AM) Complain about this comment
I sold up in Sept '07 on the suspicion of a bubble burst and am still in rented accomodation. Was tempted into buying back in last year but decided against it as I think greater price falls are in the offing in '11/'12. I agree that government/BOE will eventually prove powerless to prevent a drop off in prices but will continue keep rates low. This is a pity as many savers who have seen their incomes savaged would happily start spending again if they could see a decent return on their investments and surely this would be a healthier way of economic improvement rather than supporting excessive borrowing by short term gain seekers.
(24 July 2010, 10:57AM) Complain about this comment
It appears that no one has mentioned one of the most significant moments in the UK housing cycle. House prices appeared to be stalling in the summer of 2005 the BOE reduced interest rates by .25% and effectively gave the message that they would do all they could to maintain the house price inflation. This then triggered house price spikes in many areas of the country of more than 25% within 2 years!
(24 July 2010, 11:38AM) Complain about this comment
The british PM invested a large fortune in property in the past five years and buying vorviously at the top of the market, if my normally reliable source is to be believed.Will he now throw it all away in the interest of our children's futures?A 20% drop in property paper values would probably send enough banks into a tailspin to bring down the whole house of cards. This is a global problem and any nutty professor at the wheel could bring the entire global system down. The only game in town is to try and stay in the saddle until the horse rights himself and can stand on all four again.Keeping your little Properdee worth more than you paid for it until your pound cant get you a pee in the train station will keep banks solvent and voters happy.Hopefully will then get a new PM to reform the whole pile of horsemanure. It's been festering the seventies
(24 July 2010, 11:40AM) Complain about this comment
Well said Mike, I too am very tired hearing predictions from this site and many others, predictions of this this big housing crash. Living in London I've seen house prices in some areas go up by 30% after maybe a 5% fall during that so called crash we just had, or didn't have! I understand Merryn you have bought a property over the last 12 months, if this is true surly you are going agent everything you have advised over the last few years or so!? I would very much like to see one of these economists put their heads on the block and man/women up enough to say it straight, when they expect to see a real housing and buy how much prices will fall. Until this time I see you all as a big part of this problem
(24 July 2010, 11:41AM) Complain about this comment
The reality is houses in many parts of the UK are ridiculously overpriced. In London were I was hoping to buy, only because this is where myself and my wife work. Prices are so far out of the reach of the many, first time buyers are in their mid-30’s to 40’s before they can take that first step. On a personal level, I earn above average wage and my wife about average. Have saved very penny for 4 years to achieve a 6 figure deposit, we’ll like not to burden ourselves with more than a 1k a month mortgage over 25 years. Trying to be realistic you understand and not borrow more then we can afford to pay back. The only houses we seem to be offered are small damp and rundown properties in area you would fear to walk the streets at night. On top of this the government will bill me 10k plus stamp duty for this pleasure.
(24 July 2010, 11:42AM) Complain about this comment
I refuse to over pay greedy homeowners and agents for these so called homes; I am happy rent from a greedy landlord until I believe prices are acceptable once again. I believe if more people just said no to these over inflated greed driven unbelievably unrealistic house prices the happier we would all be. I believe stamp duty is a shameful tax on money we have already paid tax on, why we accept this blatant abuse of government power I’ll never understand. Feel a little bit better now, but still far away from owning my own home sadly.
(24 July 2010, 12:24PM) Complain about this comment
In March 2004 Kate Barker published her "Review of Housing Supply". Prior to that, in June 2003 I sent her a submission which you can read at http://webarchive.nationalarchives.gov.uk/+/http://www.hm-treasury.gov.uk/d/barkresp_PhilipBowcock_0903_16.3kb.pdf.pdf.Should I say "I| told you so" to anyone?
(24 July 2010, 12:54PM) Complain about this comment
Merryn is right. The price of a house is very much about Availability of Finance but perhaps more importantly the Availability of New Finance. I asked a couple of old FRICS’s who saw the early 1980’s and 1989-1995 and said surely the lovely rectory or farmhouse won’t fall and the clear answer was that in the end in the 1990’s they all fell by 40%, “there was just no money about”.
(24 July 2010, 01:56PM) Complain about this comment
Merryn, the crash of which you speak will not happen. Market logic does not apply to houses, and never has, because there is an inherent belief that the property that you own will never go down in value. It never has in the past, so in the long term, they believe it won't either. That's peoples' perception and they will do almost anything to make this come true. Add to that the fact that people have to live somewhere and can’t trade houses like other commoditiesYou will find that as people need to move for jobs, they will rent out their house if it won't sell at the price they want, and lease something near their new location. In the early 90's there were huge chains of rentals, much like chains of house-buyers in the good times. (You look from your photo as if you're too young to have remembered that).Further, the amount of housing that is needed is still well below that available, and on the simple laws of supply and demand, will tend to keep house prices up.
(24 July 2010, 04:13PM) Complain about this comment
As long as the government intends to keep printing money and to keep interest rates at their ridiculous 0.5% pa level then it is virtually impossible for prices to crash. It seems that the Condems clear intention is to try to avoid hyperinflation but to allow the REAL value of houses (and all other assets) to keep dropping until the long term "house price to wage" ratio is restored (a similar tactic to the seventies). It is a very dangerous game but it might work and this time the (minority/coalition) government has not only political and economic constraints but major financial incentives (due to its ownership of two major banks) which are encouraging it to pursue this course.
(24 July 2010, 06:17PM) Complain about this comment
The truth is that rising house prices were very popular with property owners and investors, but less so with first time buyers. It would have been electoral suicide for any government to interfere, although it should have forced the banks to tighten up on their lending criteria to avoid the subprime. Basically the banks had a free hand to do whatever they liked under light touch regulation. The lesson is that the banks cannot be trusted to conduct business without endangering the global economy, and therefore the government needs to step in and impose strong regulation.
(24 July 2010, 08:33PM) Complain about this comment
There is a structural problem with the UK housing market. This is manifested as the ratio of earnings to house prices. It is completely out of kilter. A correction would probably have taken place by now however the growth in the buy to let sector has stifled the first time buyer market the health of which is a pre-requisite for movement through the price bands. A homeowner recieves no tax relief on mortgage interest wheras a landlord is allowed to deduct mortgae interest as a business expense. Assuming the landlord is making profits then effectively this is tax relief. While this inequity exists the housing market will continue to be dysfunctional.
(25 July 2010, 07:22AM) Complain about this comment
Hi all - a diversion from my usual forex comments....have the goverment start buying every house available on the market at an agreed fomula price - say outside of key london postcodes to keep the capital requiremets downSell the house to the next people registered in that area / road (people can only register for maximum of x properties in an area in a certain price range and if they refuse say 3 properties they go to the back of the queue)the goverment sets a price formula based on a very low digit % growth per annum and allows addition of improvements to the price formula but only up to a set level or where the property needs fundamental restoration improvements - thats it .......no gazumping, no idiots walking away after 10 weeks in the chain and ready to exchange (like me recently fume fume), no tourists trawlng their property because hips has gone with no intention of selling.........oh yeah ....and no estate agents !communist state or good idea ?NVP
(25 July 2010, 12:53PM) Complain about this comment
Re 22. NVP (25 July 2010, 07:22AM)Completely barmy - Stick to forex.
(25 July 2010, 02:37PM) Complain about this comment
I almost bought my first house in 2003, but held off because prices looked ridiculous even then. Seven years on, and I'm still waiting for the correction. I remain convinced it will come - the signs of changing sentiment are already evident. There isn't any upward pressure on property prices at all. I actually believe the correction will over-shoot too - as sentiment goes to the other extreme. I expect to see this start happening from about now, with the prices falling to lower than 2003 levels (in real terms) in 2013. There's a forecast for you. If I'm wrong, I'm leaving the UK.
(25 July 2010, 04:39PM) Complain about this comment
Houes prices are still 4.5 - 5 times the average wage. Wages aren't rising and cuts are likely. (I'm in the Police and we are making plans for 25% cuts)Unemployment is going to rise, followed by repossessions.First time buyers are looking for a 20% deposit, credit is tight.The banks are rebuilding their balances, and they are due to pay back the huge amount of money they borrowed from us.What exactly is going to fuel house price rises? (apart from the typical British wishful thinking)It is going to come down the same as it has done over the last 2 cycles. I am waiting with my cash (losing real value in the building socety due to inflation and low interest rates) for when it happens. I will then buy what I can afford. I won't be extending myself beyond my limits and then suffer from high interest rates. I did that in the 90's, it wasn't very nice.Can't predict a time, but I follow moneyweek, and usually they are right.
(26 July 2010, 09:29AM) Complain about this comment
Your article on low interest rates and inflation eating into your savings is precisely the reason you should own property.By buying for the same cost as it takes to build you should be protected.Will labour costs drop ,will the price of brick,cement and other materials fall ,I think highly unlikely and housing prices should keep track with inflation.The people most at risk are those who over pay and building costs is a great indicator of value.
(26 July 2010, 10:30AM) Complain about this comment
the problem is that house prices continue to rise. I see no slump in house prices at all. especially in london. I see no shortage of mortgages on offer either. I ran John charcol who said that I could have any mortgage I wantedprovided I fulfilled the stringent lending criteria . And then there always the chinese who have limitless pockets who are now lending in the Uk . And we have not mentioned the foreign buyers who are flooding the top end of the market.If you put the accelerator to the floor (zero interest rates and QE) dont be surprised if prices race ahead.
(26 July 2010, 11:49AM) Complain about this comment
Francis might get a mortgage but 10million others can't. Property prices are determined by the supply of finance and that won't improve enough for min 5 years. We came out from recession in the 90's fairly quickly because banks had enough capital to write down their loan books. This time they don't because of no Glass Steigal. Their many times more leveraged. Therefore with the current market being propped upon in order to preserve banks reserves, they've absolutely no incentive to lend. Actually, a senior manager at one of the big banks told me that if it was their choice, they wouldn't lend at all.
(26 July 2010, 12:08PM) Complain about this comment
I was quite shocked, when I moved to London five years ago, to see how much of their disposable income Londoners have to spend on rent or mortgages. For most people in the UK property is the only asset class they will ever be able to invest and have to solely rely on being their nest egg when they retire (that must be a risky bet in anyones book). No wonder that the majority of politicians, mainstream media, colleagues and friends can never confess that the emperor is naked. One can only hope that one is high enough in the pyramid scheme to be still paid out and that the supply of new participants will not cease anytime soon. The consequences are that you will have to welcome immigration not cap it, create further tax incentives for foreigners not limit them and if you could then improve infrastructure and weather, we might stay and keep your scheme alive for some more years to come.
(26 July 2010, 02:14PM) Complain about this comment
The Government, and parliament had a vested interest in rampant house prices inflation thanks to them receiving subsidised mortgages. Its incredible to think they were allowed to keep the capital gains from their gambles in the property market.If UK was serious about house prices remaining stable we'd follow many of the rules that Germany has adoped, and we'd have a suitable strong rental sector that enabled people to make home. At present if you live in a rental property aka "private rental accommodation" its thought of as little better than renting a room in a B & B. Tenants have a very raw deal in the UK in comparison with Europe so buying is the only viable option if you want to make a home, paint, put in a new kitchen or put pictures up. The Tory housing minister has made no mention of changing the status-quo for tenants. Things will only get worse.
(26 July 2010, 02:48PM) Complain about this comment
The Govt. didnt do anything about the bubble because mortgage equity withdrawl was one of the main drivers of economic growth. Wages and household incomes have been eroded in real terms for 30 years or more to the point that the economy can no longer grow in the traditional way. So a credit binge was the only way of keeping the party going. Now we have the hangover!
(26 July 2010, 07:28PM) Complain about this comment
I sold my flat in Chiswick just before the crash and got 465000 for it an identical flat on the same side of the street was sold in 2009 for 338000 it previously sold in 2005 for 345000. Fact house prices have fallen. This is the only property to have sold on my street since the crash so it is very hard to believe the figures that are coming out in the press. Just check the land registry for the truth about house prices, and compare like with like.
(26 July 2010, 08:18PM) Complain about this comment
Elevated land prices are a sign of a bubble in house prices, also property trading well above replacement cost. If they bough tin fixed earnings multiples when giving mortgages for instance 3 times income. and excluding second income. this would bring housing to affordable levels for everyone. Land registry figures for houses exclude properties sold at auctions and those deemed to have been sold below market value, distressed sales seem to be excluded.
(26 July 2010, 08:21PM) Complain about this comment
32 and 25 are right. The maths is simple. Avarage wage is £25k, average property price £150k plus, giving a multiple of over 6. As the best sensible mortgage is about 4 times salary, the average deposit needed is £50k, Where does the first timer, who kickstarts the market, get that from ? Bomad I guess ( Bank of Mum and Dad ) , at a time when the old folks want to learn to Ski ( Spend the Kids Inheritance). Result : prices logically have to come down further, but will British emotion and dogma about property get in the way !
(26 July 2010, 10:58PM) Complain about this comment
realistically - is there any other answer to all this mess other rhan inflating the money supply?we need a utility banking system. with strict limits on what the banks can extract from the economy for their "services".right now the bankers extract far too much - and for what? "intelligently allocating capital" ? they don't know how to do it!Bring back Captain Mannering - a good solid old banker.
(27 July 2010, 12:22AM) Complain about this comment
Inflation is increasing in China, India and Brazil as their economies slowly start to over heat then their governments start raise their interest rates, the capital which has been flowing here from there goes which direction again? China, Europe, the UK and the USA all have aging populations who will soon wish to retire (Baby boomers). Where is the capital going to come from to continue to inflate this housing Bubble?Add to that that young couples cannot afford housing and no housing usually precedes no children so...You are all free to draw your own conclusions, I have already drawn mine and it doesn't include investing in a buy to lose property empire.
(27 July 2010, 04:19AM) Complain about this comment
Amazed at how so many who advocate a free market suddenly stand on their heads when the issue of house prices is placed on the debating table. So many protectionists in these comments that I thought that thinking had died 120 years ago! Surely any call which says protect house prices at all costs is actually a call to sustain a phantom economy. In other words as deceitful as the politicians were when they turned their back on the credit bubble.
(27 July 2010, 11:25AM) Complain about this comment
A government that wanted to dampen a house price bubble (and hence the credit bubble) doesn't need to persuade its central bank to increase interest rates (because there is lots of collateral damage from that).The government could try liberalising planning laws, but that doesn't always work.The one sure-fire thing it can do is introduce a tax on land values (and if it does something sensible with the revenues, then so much the better).
(27 July 2010, 12:49PM) Complain about this comment
In Answer to Mike (#8), Merryn has an excellent record of predicting house prices; she had long been warning of a fall, and sold her flat close to its peak value. She has bought another property since the crash, prematurely in the opinion of some, but we shall have to wait and see. The trouble with renting is that you can't alter the building to suit yourself.
(27 July 2010, 04:20PM) Complain about this comment
Merryn, your concluding remark referring to house price valuation being correlated to credit availability is correct. However, there are other correlations which you choose to ignore. The credit situation means it has been possible to take low risk highly leveraged bets on housing. What you don't mention is that the gains are tax free. In a rising market those gains compound very quickly. start with 10k, get 100k mortgage, HPI is 10% per year, but compound on the principle is 100%pa.It is the combination of the freely available credit and the tax free gains that made the bull market.Tax the gains on housing speculation and implement sensible LTI/LTV ratios and the problem is largely solved.
(29 July 2010, 03:08PM) Complain about this comment
Did anyone manage to get Philip Bowcock (above's) link http://webarchive.nationalarchives.gov.uk/+/http://www.hm-treasury.gov.uk/d/barkresp_PhilipBowcock_0903_16.3kb.pdf.pdf. to work? I can't
(29 July 2010, 03:11PM) Complain about this comment
apologies, scrap my last post. Just put philip bowcock into google.
(30 July 2010, 02:05PM) Complain about this comment
Jack (37) is spot-on!It's funny, the 'they should do something' brigade usually accompany it by a sob story; you rarely get property millionaire commenting like that, even if they've had a tough time of it recently.And there's the usual failure to connect the foregoing as being those who often provide the rental accommodation that everyone seems to think we are short of.The other 'howler' is the fixed income multiple obsessives (usually those who use the idiotic term 'liar loan'). It's funny how the poor sods may get approval to pay £750 pcm to rent a flat, yet they'd get turned down for finance with a lower monthly mortgage repayment as not earning enough! The market doesn't work at the moment, partly because it's not a truly free market. Too many busybodies involved already.
(31 July 2010, 01:01AM) Complain about this comment
if one looks at the valuation of property against say stocks property doesn't look particularly attractive.there are a lot of very Posh properties on the market at the moment which would indicate the top end is sagging. The valuations are high here in the UK . We have also seen a substantial collapse in prices in parts of the US market (not to mention S. Spain) and what happens in the US often has an eerie habit of making its way here.OMG - LIKE YOU KNOW! Yes we end up with all their crappy expressions as well! Its usually just a matter of time.....
(31 July 2010, 03:46PM) Complain about this comment
House prices depend on the gullibility of younger people. If they take the bait that HPI is good and buy at artificially inflated prices then prices will not be affordableCan't young people doing shared ownership, see that they are pricing themselves out of the market? Did their parents buy part of a house?There are only 3 groups of people favoured by high prices:1) BTL investorsTheir portofolios are being subsidised with taxpayer's cash via housing benefit. Low interest rates mean that people with savings are being robbed of interest income to pay their mortgages.2) Banks. Large bonuses are from people paying more interest for a now larger mortgage. ....
(31 July 2010, 03:47PM) Complain about this comment
....3) People downsizing. These older people are stealing from the young. Younger people now need 2 incomes to pay mortgages, where older people only needed 1 Anyone outside those 3 groups are better off, if house prices fall. FTB's & those looking to buy a larger house should ignore the high finance driven vested interests. They want them to be banker's bonus paying debt slaves, instead of having cheaper mortgages and disposable income
(04 August 2010, 09:38AM) Complain about this comment
Interesting artical but how do you account for the fact that house prices have risen again today by 0.6%. I don't think you have any idea what you're talking about.
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