The housing market is heading for a fall

By Bengt Saelensminde Feb 23, 2011

Bengt Saelensminde

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On Monday, Rightmove delivered news of its latest health check on the UK housing market. And boy was it ugly.

Rightmove spelled out the news in three grim statistics:

• 1.3m properties were put on market last year
• 884,000 properties were sold (HMRC data)
• 530,000 mortgages were granted

Those three facts all point to one thing: the UK housing market could soon be falling in a big way.

Let's break that down to see why.

The half a million property overhang

Rightmove represents 90% of the housing market in the UK. So its statistics are meaningful and shouldn't be ignored.

The story this time is a very worrying one for homeowners.

If 1.3m homes came to the market and 884,000 sold, that left a new overhang of just under half a million properties. But had it not been for rich cash-buyers, ferreting away investment property (no mortgage), this would have been much worse.

The other issue is credit. If buyers can't get mortgages, then there is very little chance that that massive overhang of property is going to get cleared anytime soon.

Mortgages granted to homebuyers were a paltry 530k and most of those were to equity-rich buyers. The banks have already indicated that they aren't going to be increasing lending this year. In fact lending could even go down from here. As John Stepek points out (see: Borrowing costs will go up – even if the Bank keeps rates at 0.5%) the banks will have a hell of a lot of debt to pay back to the Bank of England and Treasury by the time this year is out.

Where does all of this leave the average housebuyer? It leaves him locked out of a market in deep paralysis, according to Rightmove's Miles Shipside. Demand for housing is down. And what about supply?

Well we know that there was an almighty overhang left over from last year. And we know that property coming onto the market in January was up around 35% on last year. And according to Rightmove, that's only going to get worse as ‘forced sellers' start to appear. Many people just won't be able to afford to keep up mortgage repayments as stagflation bites.

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The housing snarl up

Rightmove rightly identifies the second half of this year as the time when the chickens come home to roost.

Interest rates are set to go up - and that's even if the bank rate doesn't move. We're already seeing evidence of rising market interest rates (where the mortgage lenders borrow the cash) and it's pushing up mortgage rates.

With the overhang of property from last year still on agents' books, and coupled with an increased supply this year, a very unhealthy dynamic is emerging.

Ultimately, the underlying imbalance in demand and supply of houses has been repressed by low rates. Existing homeowners have hung on in there and cash rich buyers have chased any old yield - together, they've kept the market in check.

As the imbalance continues to grow and rates start to let rip, things are about to change.

Anyone thinking that this year's trough is going to provide a nice little springboard for a bounce should look to the vital statistics. Have a look at MoneyWeek's vital economic indictors to keep track of this story. We've been tracking several indicators that we reckon are the best early warning signs for the house markets - including mortgage approvals, consumer confidence and the share price of Carpetright, Europe's leading floor covering retailer.

They reckon that each measure points to at least an extra 5% price fall from here. And that could be just the start. You can see all these charts - and find out what they mean - here.

I will also keep you up to date on this story as it progresses - with housing set to fall by the end of the year, it may even be worth shorting the housing market. I'll explain how in a forthcoming issue.

• This article was first published in the free investment email The Right side. Sign up to The Right Side here.

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  • 1. Chris

    (23 February 2011, 02:09PM)  Complain about this comment

    Anyone else getting a couple of IG Index ad's obscuring the text...?

  • 2. Russell

    (23 February 2011, 02:23PM)  Complain about this comment

    It also means that all those people who bought 'for investment' are fools, they've thrown their cash into the pit.

    Just because a property is cheaper than it once was, doesn't mean it's cheap. It is only cheap if you have a reasonable chance of selling for a profit; with UK property, no chance.

    Don't be confused by central London prices, it's another country.

  • 3. Bob

    (23 February 2011, 02:44PM)  Complain about this comment

    The 'overhang' is only of frustrated movers who are still living in their properties. We have an overall shortage of accommodation with the population increasing at over half a million per annum, households at 200,00 p.a. and houses being built at the rate of 100,000 p. a..
    Averages cover up so much. Properties at the top end are hanging about while those at the bottom are being snapped up. Rents are increasing markedly at the bottom end - try getting a 2-bed flat in the centre of Birmingham for less than £625 pcm with Leeds, Exeter and Basingstoke showing similar trends.
    It is difficult to see much of a correction in a market so short of overall accommodation with more and more sharing in order to afford the rent or mortgage.

  • 4. NoBull

    (23 February 2011, 03:05PM)  Complain about this comment

    Bob @ 3 - the last sentence of your post destroys the rest of your argument:

    'It is difficult to see much of a correction in a market so short of overall accommodation with more and more sharing in order to afford the rent or mortgage.'

    If more and me people are sharing that reduces the demand for property. Of course these people sharing may WANT their own property, but if they can't get a mortgage they are unable to DEMAND a property - and it is DEMAND, not woolly-headed desire or 'social need' that determines prices.

  • 5. Bob

    (23 February 2011, 03:38PM)  Complain about this comment

    Response to NoBull.

    Involuntary sharing is a measure of unsatisfied demand as many local authorities with huge waiting lists will tell you. Many young people are living with parents because they cannot move out and young people share flats to spread the costs.

    Half a million increase in population does not easily go into 100,000 new dwellings without a considerable increase in involutary sharing. My argument is intact.

  • 6. A NE Agent

    (23 February 2011, 03:57PM)  Complain about this comment

    Massive under-supply will keep prices up. Prices in desirable locations up and down the country have been steadily rising since the fear of a real crash dissipated at the end of 2009.

    The compound affect of ultra low rates, moratorium on repossession and a policy of very low construction will ensure this remains the situation until the banks start lending again...not matter how long that takes.

  • 7. jammy

    (23 February 2011, 05:00PM)  Complain about this comment

    Bob,

    you mention an increasing population, however I believe such an assumption is outdated.

    There are 3 factors at the moment contributing to a stagnent if not decreasing population. The economy is not producing spare jobs that in the past encouraged a massive influx of Eastern Europeans. Indeed many are returning home. Likewise ex-pat Brits are putting of returning to the grim scene being played out here. Lastly with the massive crack down on student and work visa's, the numbers arriving from outside the EU will fall.

    Given that it is only immigration, not the birthrate, that has driven a population increase in this country, there is no reason to asume that the poplution will increase while the economy is going no where.

    Jammy

  • 8. Chris

    (23 February 2011, 05:10PM)  Complain about this comment

    All the indications are that property in the UK will fall 50% in value. Of course, it might not. But don't bet your house on it!

  • 9. Samadd

    (23 February 2011, 05:21PM)  Complain about this comment

    Averages do indeed conceal much. I don't feel that £60k 2 bed terraces will drop by £9k in a hurry. They are too near to being affordable by first timers. buy to let on these will still bring in about 7%. - better than a savings account!

  • 10. onstrike

    (23 February 2011, 05:23PM)  Complain about this comment

    @ 6

    Why do every Agent spout the same old line of no supply and banks are not lending ?

    As for when the banks start lending again I think you will have a long wait as they will probably never lend at a rate that will support the price of house`s today ,

    You need to look at the MBS /CDO market as this is what drove the lending as the banks could sell on the risk and skim a profit ,but as they are virtually non existent know
    could you enlighten us all to where the money is going to come from to support price`s at the current level

    And with the new LHA rate being calculated from the 30th percentile what effect is that going to have on rent`s hhhhhhhhhhhhm I wonder? my guess is that only the old btl brigade [bought prior 2003]or those`s with very little leverage are going to survive .In my neck off the woods the smart BTLer`s are already looking for the door

  • 11. nellie

    (23 February 2011, 05:39PM)  Complain about this comment

    Bengt... avid reader of your "missives" and over the past three years, since discovering MoneyWeek etc, have moved savings into gold/silver... keep telling friends but no one seems to be listening. Today exchanged contracts and contents into storage i.e. homeless in 10 days time. Wife not speaking to me! If you, colleagues and CarpetRight etc data are correct, 2011 could be an interesting year. Wish me luck eventually finding a new home later this year (maybe 2012) despite the chronic "housing shortage". May have this smile wiped off my face... time will tell.

  • 12. PV70

    (23 February 2011, 08:05PM)  Complain about this comment

    Bob, I for one don't believe in a shortage of property. Had it ever been true, rents would have increased in line with house prices.

    In my area (North London) there are quite a few properties that are now both for sale and to let. You only need to look at some locations - even as close to London as Hitchin) to realise that there are lots of flats that are no-one seems to want to live in. Even some new flat around Paddington remain empty.

  • 13. A NE Agent

    (23 February 2011, 08:27PM)  Complain about this comment

    @10

    Check out:
    http://www.voa.gov.uk/lhadirect/documents/lha_percentile_rates_august10.htm#table

    You will see the the 30th% reductions are very modest in most areas. Add to this the fact that it only affects new tenancies this year you will understand why none of my landlord clients are getting too worried about this.

  • 14. Neil

    (24 February 2011, 08:06AM)  Complain about this comment

    I've given up trying to read the property market. Yes it will probably fall in real terms, but where I want to live, Zone 1 in central London, the chances of being able to afford anywhere have completely vanished. I only earn 150k a year which is nowhere near the kind of money you need for a 2 bed flat even. Until wages rise to keep up with property in London the only people able to afford it are rich foreigners and bankers. All of West London, South west, and most of NW London are now off the richter scale too. The situation is totally impossible for anyone with a household income of less than 250k to buy a family house in a reasonable area even in zone 3.

  • 15. Mike Wilson

    (24 February 2011, 09:02AM)  Complain about this comment

    The market, everywhere in the country, is supported by high rents and low interest rates.

    Will interest rates go up? Not much. If they do the whole economy is going down the pan - and the banking system with it. The government have already taken action to make sure that this type of systemic failure will not be allowed. More QE as and when necessary. I think would be house buyers can factor relatively low interest rates into their buying decision equation for at least 10 years. Economies are cyclical and we, and the government, have an debts to repay.

    High rents mean that low interest rates attract investors with cash into the housing market. There seems to be a lot of people about with the cash to sustain current prices.

  • 16. Mike Wilson

    (24 February 2011, 09:03AM)  Complain about this comment

    Forced sellers are few and far between - banks are in no hurry to repossess as repossessed properties selling at low prices will mean banks have to revalue the assets against which their loans are secured. None of them want to do this - as bankrupty is the only outcome.

    So, we have a housing market historically overvalued against salary levels, with low transaction levels and a dearth of mortgage finance. But, still, prices are not going down significantly.

    At least, and this is the important bit, they are not going down anywhere you actually want to live. Nice houses in nice roads in nice areas are still fetching top money.

    And this idea of a supply overhang - number of properties listed by Rightmove versus number sold - is pure nonsense. Does it account for houses listed twice by different agents? Does it account for houses staying on the market longer? What does it mean? Well, actually, absolutely nothing.

  • 17. Mike Wilson

    (24 February 2011, 09:04AM)  Complain about this comment

    Big house builders like Barratts are talking about renting unsold stock and, more importantly, BUILDING NEW HOUSES TO RENT! This will completely change the dynamic of the market. The costs to build will be recouped in 15 years and, after that, the properties will be cash cows.

    So, sure a grotty terrace in a back street of a town no-one wants to live in - that went by by a factor of 6 between 1997 and 2007 may well halve in price.

    But a nice 3 bed semi in a commuter town in the South East - don't hold your breath waiting for price falls. 10% - 20% will be the most these fall.

    Why are comments limited to 1000 chars? Is the character count counting correctly? Seems very short.

  • 18. Confused

    (24 February 2011, 09:23AM)  Complain about this comment

    Did someone just say that they _only_ earn £150k per year?

  • 19. Debt Destroyer

    (24 February 2011, 09:51AM)  Complain about this comment

    Affordability plus the availability of mortgages/loans is the problem. If both these factors were more available then the market would be at least ticking- over. Wages are not rising, unemployment, food and energy costs are all rising.The perfect storm is about to hit the housing market,prices will fall by about 50% and the downturn will last at least 10 years(lost decade).
    I sold up in 1989 came back into the housing market in 1995 sold up again in 2007. Either I have been very clever or stupid only time will tell.

  • 20. Luke

    (24 February 2011, 02:05PM)  Complain about this comment

    Don't forget inflation my friends. Even if house prices stay where they are, you are losing 5% at best.

  • 21. Roberto Birquet

    (24 February 2011, 04:34PM)  Complain about this comment

    Some people do not read the story.
    re: The 'overhang' is only of frustrated movers who are still living in their properties. We have an overall shortage of accommodation.
    That argument cannot continue indefinitely. There are plenty of houses. Despite not so many people having families, people are far more often living in shared flats. That decreases the requirement for actual houses. But the word demand continues to fool people.

    Demand is not the same as volumes. Demand is a map of volumes to prices. Demand is dependent on availability of money. The reason prices went so high until 2007 was the availability of money via the banks, which were getting funds throught he wholesale markets. I cannot see the wholesale markets (the reason for the economi crisis) coming back.
    Frustrated movers are those living in denial that 2006-7 prices were real.

  • 22. Critic Al Rick

    (24 February 2011, 06:02PM)  Complain about this comment

    The way things seem to be going, I have my doubts there will be a HP crash.

    Have you considered the possibility of Banks repossessing houses but, rather than trying to sell them, giving the occupier the opportunity to rent from the Bank?

    And, if the occupier doesn't take up the option, there's probably plenty of others that would.

    You are probably aware of my scepticism & cynicism of Top Bankers. I do consider there could be a Master Plan, I can't say what.

    But, I do consider that part of the Plan is to attempt to rationalise the HP:Wage ratio via Wage Inflation rather than by HP reduction. Unless IRs are raised quite substantially quite soon, the Banksters will get their way.

    If that happens we'll all end up with Banksters as Landlords and no Savers (or Shareholders?). They're robbing us blind!!!!

    cont.........

  • 23. Critic Al Rick

    (24 February 2011, 06:29PM)  Complain about this comment

    ........cont

    The alternative, a damage limitation exercise:

    After the General Public has shown a stand of solidarity against the Top Bankers:

    1) The Govt takes control of that part of the Retail Banking Sector held by Investment Banks.

    2) The Govt completely severs subsidies to Investment Banks and charges them the same CT rates as it does lesser mortals.

    3) The Govt finds out who the owners of the BoE are (Official Secret, I believe). If not favourable - establish a separate entity to do the same job.

    It is better that Govt controlled Banks become the Landlords and that not all of us become tenants, non Savers,(non Shareholders).
    Don't you agree?

    Have you considered that a lot of the World's recent unrest could have been caused by the Worlds Investment Bankers - via control of IRs?!!!!!!!!!

  • 24. Critic Al Rick

    (24 February 2011, 08:12PM)  Complain about this comment

    You are probably aware of my belief that it is the Top Bankers who are controlling IRs.

    Well, it is my belief that they will keep IRs as low as they possibly can for as long as they possibly can - to encourage Wage Inflation. I know inflation would need to take place at the same rate in countries with which we trade, but they may well be in control of that too!

    I don't see why IRs couldn't increase quite substantially, and quite briskly. We have the contingency plan (alluded to above) for the Govt to become Landlord to those unfortunates who default on mortgage repayments.

    Think of the competitive trading advantage we could secure as a result of inflation proceeding slower here than with our trading partner countries!!!!! Thank goodness of our independence from the Euro!!

    You know it makes sense!!

    We just need a trigger.

  • 25. Critic Al Rick

    (24 February 2011, 08:21PM)  Complain about this comment

    QUOTES:

    Churchill:

    'The British nation is unique in the following respect: they are the only people who like to be told how bad things are, who like to be told the worst'


    Critic Al Rick:

    'The greater the challenge, the more I like it!'


    Rule, Britannia:

    'Britons never, never, never shall be slaves!!'

  • 26. landlord

    (25 February 2011, 10:36AM)  Complain about this comment

    I don't say properties will go up in value; more a case that money will go down in value!

    You might do better. technically, with barrels of oil or some such other commodity, but to the average person this isn't a very practical proposition.

    One must be selective but I remain unconvinced that to an Englishman his home will cease to be his castle

  • 27. thatdavewalsh

    (25 February 2011, 11:21AM)  Complain about this comment

    London is another country, having lived in the North and in NW1, I can assure you of that. In the North only the best houses are being sold, the rest stay on the market, for months and now years, with owners still expecting 2007 prices. Buyers will not pay, they read the news, their incomes are under siege and they can now look on the Web and find that their seller 'only' paid X thousand pounds for the place in 2003 and don't see why they should fund his/her lifestyle. There's price resistance on a massive scale. Over occupation is never factored into supply calculations. Of my social group, including relatives, we average 2.3 bedrooms per person, mainly held by the elderly. Most are looking to downsize but can't find buyers at the prices they 'expect' . This all contributes to the log jam which will be solved in one of two ways, either massive inflation, or a massive cut in prices as the government delayed recession finally bites.

  • 28. Critic Al Rick

    (25 February 2011, 11:47AM)  Complain about this comment

    As I was saying above, if things are allowed to progress along the 'planned' route , not only, eventually, will all Englishmen's homes cease to be their castle, but also none will accumulate Savings, and none will have Shares in any money making enterprise.

    We will have Coorporate Communism!!

    Is that what everyone wants?

    They say a populace gets what it deserves, in terms of 'rulers'.

    If the General Public does not make a stand of solidarity against the 'ruling' Top Bankers now, or very, very soon, we may be irretrievably on our way down the route to Corporate Communism. It's that fine.

    Don't say I didn't warn you!!!

  • 29. Critic Al Rick

    (25 February 2011, 11:52AM)  Complain about this comment

    QUOTES:

    Churchill:

    'History will be kind to me for I intend to write it'


    Einstein:

    'Imagination is more important than logic'


    Critic Al Rick:

    'A common sense genius is an astute and instinctive perceiver of reality of whatever nature'

    'An academic genius is a highly intelligent 'practical moron''

  • 30. Realistbear

    (25 February 2011, 03:51PM)  Complain about this comment

    You'd have to be a bit of an idiot to think that the housing market is going anywhere but up now.

    We had the falls, we've had the stagnation and now just as all the other periods of downward economic movement in the past we will have the upturn again.

    I anticipate prices will be 10% up in nominal terms by the end of the year.

  • 31. Critic Al Rick

    (25 February 2011, 05:30PM)  Complain about this comment

    @ 30.

    Oh no they won't!! Not if I get my way!!

    If I get my way; IRs will rise appreciably.

    Nor will HPs crash.

    If I get my way the whole of the Retail Banking Sector will be divorced from the Investment Banking Sector and be made Public (if & when appropriate).
    The new Retail Banks will act as Landlord to defaulting mortgagees (if they can afford a viable rent?) as a safety net to them.

    All others should fare OK; they have in the past, on higher repayments.

    Everyone would welcome lower prices for essentials like food and fuel, etc

    Businesses would offset increased interest repayments via cheaper inputs.


    BUT, first of all we ALL have to UNITE and DEMAND higher IRs.

    All of our backs are against the 'wall'. If we are to retain our freedom we have no alternative BUT to FIGHT.

    After IRs have been raised suitably, DESTINY will sort the rest out!

    Rule, Britannia

    Britons never, never,never shall be slaves!!!

  • 32. Critic Al Rick

    (25 February 2011, 05:38PM)  Complain about this comment

    QUOTES:

    Churchill:

    'Every day you make progress. Every step may be fruitful. Yet there will stretch out before you an ever lengthening, ever ascending, ever improving path. You know you will never get to the end of the journey. But this, so far from discouraging, only adds to the joy and glory of the climb'


    Einstein:

    'The World is a dangerous place in which to live; not because of the people who are evil, but because of the people who don't do anything about the evil people'


    Critic Al Rick:

    'The greater the battle, the more glorious the victory when it finally comes'

    'I am your DESTINY!!!'


    UNITE & FIGHT

    Britons never, never, never shall be slaves!!!

  • 33. Critic Al Rick

    (25 February 2011, 05:50PM)  Complain about this comment

    MORE QUOTES:

    Churchill:

    'One ought never to turn one's back on a threatened danger and try to run away from it. If you do that, you will double the danger. But if you meet it promptly and without flinching, you will reduce the danger by half'


    'It is a mistake to try to look too far ahead. The chain of DESTINY can only be grasped one link at a time'


    Critic Al Rick:

    'The greater the challenge, the more I like it!!!'



    Britons never, never, never shall be slaves!!!

  • 34. Kerome

    (28 February 2011, 02:40AM)  Complain about this comment

    All depends on the market behaviour in response to the government cuts. I find it amazing that people are blithely assuming all will be fine, while the cuts amount to a chunk of cash equal to 4-6% of GDP vanishing from the internal economy. The effect should make what we have had so far look like a walk in the park.

  • 35. Critic Al Rick

    (28 February 2011, 07:58PM)  Complain about this comment

    @ 31.

    QUOTE:
    'Nor will HPs crash'

    Well, I've thought things through and changed my mind.

    We have to rid the Public Sector of any parasites and grossly overpaid; there must be a lot. Economic necessity for directly affected individuals would precipitate forced 'downsizing' ; force a crash!

    The 'repo & rent' safety net would be applied at realistic price levels; levels that would be compatible with a sensible HP:Wage ratio.

    But a HP crash won't happen with the status quo. They'll, when the time is right (when inflation is proceeding at similar rates throughout the West+) coax a wage inflation spiral throughout the West+ to rationalise the HP:Wage ratio. NOT good for those that do have some wealth. They're out to destroy Western+ FR currencies!!! They're out to rob us of all our wealth and enslave us all.

    I'm not joking.

  • 36. Anthony

    (02 March 2011, 08:30PM)  Complain about this comment

    Does anyone know the current, accurate population growth (or decline) numbers?
    My anecdotal observations are I have seen a lot of people moving here who are at the lowest end of the salary/wealth scale; A surprisingly high number of the people I know from the higher end of the scale are moving overseas. I do not know of anyone from the high end of the scale who has moved here.
    Population growth aside, interest rates must and will rise. I predict an increase of 3 to 5%. UK salaries are unlikely to increase. Unemployment is likely to increase. These factors hit both the supply and demand sides, and put downward pressure on house prices.
    But then "population growth or decline" needs to be factored in.

  • 37. Critic Al Rick

    (04 March 2011, 07:06PM)  Complain about this comment

    @ 36.

    I would be pleased to see many of the higher paid (effective parasites) leaving these shores; we're far overcrowded and it would help lower House Prices'

    You're right that Interest Rates must rise; the salaries of the higher paid should also fall. The increased gap between rich and poor which opened in the last Labour dynasty was based upon a FAKE thriving economy.

    Britain is being torn apart by a contingency of greedy, corrupt and utterly selfish individuals.

    It's an absolute disgrace!!!

  • 38. max

    (06 March 2011, 10:28PM)  Complain about this comment

    @neil - who said .."I only earn 150k a year which is nowhere near the kind of money you need for a 2 bed flat even. "

    Do you intend to buy the property CASH or did you make a typo ?? 150k is a huge amount of money and even at only 4 times income you can afford 600k. Don't throw 100k away renting for 4 years.

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