What we can learn from the last housing crash
By
Dominic Frisby Jun 03, 2009
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'House prices in Britain rose last month, confirming that the slump in the south of England has levelled out, according to the Halifax,' ran the story in The Times. 'The Halifax's latest quarterly survey shows that prices in general rose by 0.5%, and the indications are of a definite bottoming-out'.
The above statements were not made this week or last week. In fact, they were made in October 1990. House prices didn't bottom for another four years.
Now, just as then, you should ignore the outbreak of bullish talk across the media on UK house prices. This is a dead cat bounce.
The housing crash is not over
The bullish sentiment on houses is everywhere. According to the Bank of England, the number of new home loans approved for home buyers rose in April for the third month in a row. Nationwide's most recent house price data showed prices rising in May, and the annual rate of decline slowing.
And goodness knows how much guff has appeared in my inbox from various estate agents. Aspire for example, suggest that this is 'The Turning Point', saying 'property in London is now looking like good value once again'.
But the crown jewel came from property advisers Assetz, who say: 'It is very unlikely we will see another dip in the near future. The negative effects on house prices from poor buyer sentiment and the lack of home loans, are now receding. House prices are very close to long term affordability, and interest rates are likely to remain low for the foreseeable future.'
Phew! I don't know where to start.
Let's look first – as I always like to do – at what happened last time. After the first leg down in 1989, prices moved sideways for over a year, leading many to declare they had 'found a bottom'. In fact, this was a nasty bull trap. (My thanks to www.housepricecrash.co.uk for the charts in this email).
I have no doubt we are going to see exactly the same pattern this time around. The only difference is that in 2009 the underlying economic fundamentals are considerably worse than in 1991. If you have property that you are not particularly keen on, the next few months are, in my view, your last chance to get out.
After last year's deflationary bust, inflation has become the big concern once again. So some are rushing to buy a house in the belief that you need to hold tangible assets in an inflationary environment as cash loses its value. There is something to that argument.
But house prices rise and fall with the growth of credit, and credit is deflating, as banks tighten lending. Of the 1,623 home loans currently on offer, a whopping two-thirds require a deposit of at least 25%. Where is that 25% cash going to come from?
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Houses are not affordable
Which brings me to my next point. Houses are not affordable. To determine how affordable they are, you need to look at what people are earning. Wage growth is slowing sharply, according to National Statistics data, particularly in the private sector. With unemployment rising, many people are even taking pay cuts just to stay in work. In this economic environment, I do not see how we are going to get rampant wage inflation returning any time soon. 'Peak credit and her twin sister peak earnings have arrived,' as Mish Shedlock of Global Economic Analysis is fond of saying.
This next chart shows the ratio of house prices to earnings for the average first time buyer. As you can see, we are still above the peak levels of 1988!
Even if we do see inflation, as I believe we will, it will only manifest itself in the price of essential, imported items such as food, metals and energy, which we buy with cash, not in the price of assets which are driven by credit. If we get neither wage inflation nor credit growth, there's only one way for house prices, which are driven by one, the other or both, to go.
Why you should fix your home loan now
And it doesn't matter that we have low interest rates, because incomes are falling. If you get a 15% pay rise each year, then 15% interest rates are not expensive. But if your wages are falling, then even a 4% rate gradually becomes less and less affordable. What's more there will come a time – and that time may not be far away – when Mr Market will force higher interest rates if our government is to be able to sell gilts to fund our huge deficit. That, I suspect, is when all those currently sitting pretty on variable-rates could find themselves in a spot of bother, and that is when the next leg down in house prices start in earnest.
Policy-makers may find themselves in the ugly dilemma of choosing between saving the currency or the housing market. It may be that only the collapse of the former can save the latter. Either way, I venture that now is a good time to fix that rate, if you haven't already.
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