Data is accumulating that the British residential property market is now undergoing a significant fall. The commercial side of it has been suffering for some time. Apart from some prime residential bits in central London – and even these parts are not immune to change – average prices have now fallen month on month across the country for quite some time.
Some of this may abate eventually. I hope so, since a collapse in house prices would presage a major recession. It is all well and good for people to say that a shakeout is necessary to clear all this cheap money out of the system – and I understand that point – but it is pretty grim having to endure the process first-hand. But beyond that, what this episode reminds me of is the unwise move by many people to put all their long-term retirement savings options into property. I know quite a few people who cheerfully tell me that they have no pension and are relying on a business or set of properties to do the job. Well, they have a half-decent point: many pension savings schemes are a rip-off and poorly invested. But relying on bricks and mortar to keep us comfortable in our rocking chairs does not strike me as very smart. Maybe market developments will act as a wakeup call. And anyway, as I have remarked before, more and more people are going to have to re-think the whole notion of “retirement” anyway, particularly if we are going to live longer, and in healthier shape, than our ancestors.
JP,
With all the usual caveats (i.e. I know a whole Football Association of nothing about the reflected-sound-as-of-underground-spirits) and that I don’t have a mortgage or anything…
Isn’t there something appallingly structurally wrong with an economy based entirely on the service sector and basically financed by increasing property equity?
Shouldn’t at some point people have to make and do things? And I don’t just mean the Chinese.
Also, is it right that a decent drum somewhere you’d actually want to live is at least 1/4m quid?
What Nick M says.
Also, if you look at Nationwide’s inflation adjusted prices(Link), we are back to 2004 price levels!
Seeing as the last time housing was affordable was about 2000, we about a third of the way there again.
Housing was affordable in 2000? Affordable to whom exactly?
For example, back in 2001 (just a year after the Golden Age Of Cheap Housing) me and the uvver arf rented a one-bed-and-a-box-room flat in Finsbury Park for £260 a week. Its value was about a quarter of a million quid (landlady had just bought it**). Just an ordinary flat, nothing special, no marble halls and gold taps. What definition of “affordable” applies here?
**Meaning, taken out a ridiculously usurous loan in the expectation of one day owning it.
Congratulations, Johnathan! You’ve experienced for yourself the frustration I feel watching our manufacturing flog-off overseas, to deliver the West cut-price goods at the cost of local jobs:
“…a shakeout is necessary to clear all the inefficient manufacturers out of the system – and I understand that point – {and so do the Chinese, with all their dreadful Communist-era heavy industry} – – but it is pretty grim having to endure the process first-hand.
Cheers!
I have to disagree here. High house prices are ripping the country apart, and are causing a massive intergenerational theft from the young to the old. Them falling is something we should be cheering.
It is true that them falling is going to hurt. However it is still necessary. The idiocy was letting them get so high in the first place. House prices correlate very well to the availability of credit. In which case people have only themselves to blame if it all comes tumbling down.
Ian, London housing has always been a premium and Finsbury Park (despite being a shithole) is close in.
I think owning property for retirement is always valid as the actual value isn’t so relevant – the rents are more important.
The real problem, I feel, is that the property market is the modern version of Great Depression stockmarket – too accessible and too leveraged. Legions of amateur investors are competing with people just buying to own and the market isn’t distinguishing between them.
Like all bubble markets it’s ultimately only reinforced by itself – the market goes up because everyone is convinced it has to keep going up.
Foolish government intervention only enhances the trend – regulations that specify that new developments must include ‘affordable housing’ create tranches of perfect buy-to-let investments that are bought in bulk, and housing developers bolster their margins by inflating the price of the ‘real’ properties.
The whole thing reminds me very much of the japanese boom which was largely fuelled by rampant bank lending/secured borrowing – empty lots were turned over three or four times being revalued each time, and more money lent each time too.
Also, no-one seems to be quoting price per square metre. What 15 years ago would be a two bedroom house is now a four – a 2 bed flat now a three, etcetera. We purchased a 5 bedroom house in a London suburb for £205k in 1999 and immediately turned it into a three bedroom house by removing partitions. Those three bedrooms are now adequately sized – i.e. you can get three double beds in there, rather than the house having room for one double bed and four single beds. This is additional value inflation – by making your house a rabbit warren you can increase its value.
England is also fairly unique in basically being ‘London or bust’ for ‘intellectual’ jobs. Just about all the other european countries, Japan, America, Korea, India manage to have more than one city with a full range of services. We somehow continue to relentlessly centralise.
I personally believe that property prices in the more overvalued areas will halve and that in the less overvalued areas they will decrease by a third. This would bring London, Bristol etc prices down to sensible levels and do the same for the rest of the country. An economy where everyone spends all their money on mortgages is obviously not sustainable and, one way or another, will collapse. People are peer driven, they will buy houses even if they have to impoverish themselves to do so, and it only takes a few of those to lose their jobs and then their houses to set off a tidal wave of fear and start the ball rolling in the other direction.
Also anyone who bought anything as an investment after 2002 and didn’t offload it by early 2007 was obviously just a bandwagon-jumping greedy bastard who had no idea of the concept ‘enough’ and deserves it 🙂
And, don’t forget the contribution that high housing costs make to emigration from the UK.
Nice try Jim, but no cigar. There is a clear difference between painful change as it affects some people that are caused by adjusting to free market forces, as in the case of free trade that you attack, and painful change that occurs as a result of the bursting of a credit bubble that is caused by, among other things, unwise monetary policy of a central bank and deliberate attempts to prevent market forces, such as mad planning controls in south-east England.
It may not be nice to lose a job to a Chinese manufacturer, or see the value of a house fall by half because of a massive contraction of the money supply, but the two positions are quite different in terms of their cause and cure. Trying to use my point to make the case for trade protectionism is utter crap, and you know it.
Jonathan,
Whilst its may be foolish to rely on only bricks and mortar I think the behaviour is driven by the that fact people neither trust the government (Mr G Brown and his idiotic pensions dividend raid from ’97 onwards) nor do they trust the large bloated schemes with poor returns.
They are trying to do it for themselves but just not that well… points for trying though 🙂
The housing price correction is painful but necessary (in the US as well as the UK), but I disagree with the idea that using real estate as a retirement investment is always unwise. In the long run, real estate has held its value well. (As Mark Twain said, “Buy Land. They’ve stopped making it.”) But the key is “long run.” Like any other asset, its value is subject to short-term fluctuations, so you shouldn’t be using it as a retirement vehicle unless you have a time horlzon of at least 10 years or so (or unless it comprises a small part of your total portfolio). Eventually the value will come back.
Surely by definition any product in any market is “affordable” at all times?
The reason that housing has become so relatively expensive is because of the constraints on supply by the planning system. The credit boom/bust were short-term phenomena but the lack of supply is ongoing.
@ IanB. The last time that housing was cheap (i.e. buying cheaper than renting) was in 1995. The last time it was ‘affordable’ was when buying became more expensive than renting, in 2000 or thereabouts. But no doubt prices will crash back down to 1995 levels again, and it will be cheaper buying than renting again. And so on, ad infinitum.
Some things need to be repeated many times – and, unfortunately, this area of knowledge is one of them.
For markets to clear and real recovery to start, malinvestments caused by the increase in the money supply must be liquidated (otherwise the distortion of the capital structure will remain) and prices and wages must adjust.
However, normally governments try and prevent this – and claim they are “fighting rescession” by doing so. This is amusing, in a bitter sort of way, as it was government supported increase in the money supply that is the cause of the boom-bust cycle and thus of the recession they claim to be fighting (fight by various policies that make things worse and drag them out longer).
Sometimes governments do not try and maintain prices wages and “demand” (for example the Administration of Warren Harding in 1921 – which just cut taxes and government spending instrad), but mostly they do.
For example, Herbert Hoover put into effect the line of policy for which F.D.R. got the “credit” – the line of policy that turned the crash of 1929 into the Great Depression over the 1930’s.
And Hoover would have done the same in 1921 if he could have done – his endless advice as Commerce Secretary to President Harding makes this clear.
As President Calvin Coolidge later said of Herbert “The Forgotten Progressive” Hoover.
“No one has offered me more advice – and all of it has been bad advice”.
Sadly many people seem to think that boom-busts (in the housing market, the stock exchange or the……..) are the result of “greedy speculators” who then “panic” and have no actual physical cause (ignoring the increase in the money supply and just assuming that traders are more greedy at some times than at other times).
In this they follow the “animal spirits” line of John Hales in the 16th century and his admirer the “economist” Lord Keynes in the 20th century.
Sadly many people seem to think that boom-busts (in the housing market, the stock exchange or the……..) are the result of “greedy speculators” who then “panic” and have no actual physical cause (ignoring the increase in the money supply and just assuming that traders are more greedy at some times than at other times).
In this they follow the “animal spirits” line of John Hales in the 16th century and his admirer the “economist” Lord Keynes in the 20th century.
Paul Marks rides to the rescue again!!!
I would add that there is no fundamental reason why house prices or stock prices will double every x years, except for the increase in the money supply. ie if the govt were to suddenly gain even a moderate understanding of what goes on around them and act upon it to benefit the vast majority of the population rather than themselves and their “friends”, the investment principles we know and love would have to be relearnt pronto!
In defence of Laird, I have to say I can’t see this happening any time soon so his advice is well worth listening too.
“greedy speculators” who then “panic”
How about the just plain greedy who think they find a way to define common sense, live way beyond their means until somebody notices. There was an excellent NPR report on mortgages recently showing how bond traders used data from Prime mortgages to show that sub-price lending would always work.
As for the Money Supply… the seeds for this little problem were laid back in the mid-80s with the Consumer Credit Act 1984. On the one had you have a government proclaiming it is committed to controlling the money supply, on the other they essentially make anybody over 18 credit worthy.
When I started work in late 1984 it was practically impossible to give people credit from the shop I worked in and very few, relatively speaking, had credit cards. Two years later pretty much everybody over the age of 18, with a bank account, job optional, had a credit card.
Two years after that the retail chain I had worked for went under, mostly sucked down by their failed credit department. Go figure.
I tend to agree with some of what Paul is saying (yes, obviously it is a blue moon) but I think a lot of people on all sides of the ideological divide won’t like what it means.
I do feel somewhat smug in that I don’t think a 250K mortgage is all that onerous and I see my place in London as a long term investment. I also got a cracking remortgage deal just before the wheels came off the mortgage cart.
I am a jammy git. i sold my house at the end of 2007 and now sit in rented accomodation. i would love to say that this was all planned and i expected a crash, but it was pure luck. I now sit and wait for the right property to comer out….and i think this is the interesting point. I came ti understanf recently that 1m houses are now on the market, the highest on record. The main reason i’m not buying, isn’t becasue prices might fall but because i haven’t found the right one yet. my point being that house buying or maybe better put home buying is most often an emotional purchase than anything else. I bloody hope prices crash…at the same time i am prepared to pay a premium for the right house