New look

We've made some changes
to The Sunday Times

Navigation - link to other main sections from here

From The Sunday Times

November 4, 2007

Home economics - the property market

The storm clouds are gathering, the forecasters are slashing their house-price predictions and talk of crashes and negative equity is back

David Smith

This is a good time to be starting a weekly column on the housing market. The storm clouds are gathering, the forecasters are slashing their house-price predictions and talk of crashes and negative equity is back. Some monthly price indices are showing falls, though others such as the Nationwide – up 1.1% last month – are still rising.

So what is going on, how gloomy is it going to be, and are we doomed to follow America? There, according to the Case-Shiller index, which measures house prices in 20 of the largest American cities, prices are down by 4.4% in 12 months, with those in Tampa, Florida 10.1% lower. The last time America experienced anything like this was in the early 1990s, the time of the great housing crash in Britain.

Let us, like Donald Rumsfeld, the former American defence secretary, deal first with the “known knowns”. The best measure of housing demand is mortgage approvals for house purchase, with the figures produced monthly by the Bank of England.

In September, according to figures released last week, their number fell to 102,000, down from 108,000 in August and a six-month average of 112,000. Compared with a year earlier, approvals dropped by almost a fifth. So demand is clearly weakening.

But by how much? A bit of recent history might be useful. In November 2003, approvals were riding high at 133,000. Then homebuyers started to feel the effect of a rise in interest rates by the bank, from a 50-year low of 3.5% early that month to 4.75% by the following summer. By November 2004, approvals had dropped to 76,000, a fall of 43%, and house prices appeared to be teetering on the edge of a sharp fall.

But the bank stopped raising rates, homebuyers breathed a collective sigh of relief, mortgage approvals picked up strongly and by August 2005, when the bank announced a one-off quarter-point rate cut, they were back above 100,000. From the summer of 2004 to the early autumn of 2005, house prices stagnated, but did not fall. By the end of 2005, confidence had returned and prices had embarked on a renewed climb.

So, is history repeating itself? Then, as now, we saw five interest-rate increases by the bank. Then, as now, approvals fell sharply. The Council of Mortgage Lenders, for one, predicts a period of stagnation, with prices rising by just 1% in cash terms next year (and falling slightly when adjusted for inflation). Most economists – including this one – think a house-price crash will not happen in the absence of recession, sharply rising unemployment and a bigger rise in interest rates than we have seen.

But there is also a Rumsfeld “known unknown” hovering about. To what extent will the credit crisis that erupted in the summer have an impact on people’s ability to borrow? Could this be the trigger for something nastier? Kate Barker, the bank’s housing-market expert, says it is not clear that the events of August and September should have a big impact. That, however, is going to be the key question for the coming months.

It's quite simple we have high house prices, if banks are finding it difficult too get loans at competitive rates then what hope has wee jimmy who as just come out of a fixed rate mortgage with maybe loads of credit card debits and loans of getting a mortgage? (think it unfair that banks check new clients credit history but we r unable too check their current sub prime status seems an unfair playing field)

no worrys here though have sold up and i am just waiting

Belfast busdriver, belfast, ni

It has always seemed to me that mortgage approvals or more accurately the volume of money lent is the fuel that feeds the house price growth fire and ultimately underpins asset values. Tightening lending practices, if they continue, will cut off the fuel supply and I would therefore imagine that house prices will stagnate. It seems to me we could then reach a tipping point for people's sentiment to the store of value, which is the worth of their home or investment property. It also seems to me that the BOE 's $30bn support of Northern Rock, following the run on that bank, could almost be likened to a nationlisation of the homes that were purchased with the Northern Rock mortagages, unless of course as lender of last resort the Old Lady is only offering a short term loan. Perhaps that is Mr.Brown's thinking to increase social housing stock in Britain or a windfall gain. Here in NZ it has taken a base rate of 8.25% to finally quell the appetite for housing.

Jeremy Allsop, Auckland, New Zealand

David Smith asserts his belief that a house price crash can only happen when accompanied with a recession and rising unemployment. However, a glance across at the U.S., and maybe soon Ireland & Spain, would suggest otherwise.

Paul Ellott, Cirencester,

Surely the other known unknown is the buy to let phenomenon and the end of fixed rate mortgage deals next year. A large, possibly even the largest proportion of new build buy to let flats in our major cities are buy to lets. If landlords rental income cannot cover mortgage payments we could see a glut of properties on the market and a consequent drop in prices. We could even see negative equity again in at least one section of the market. If that has a knock on effect panic could easily ensue. Unlikely I agree but not impossible given that the bank may find it hard to cut interest rates.

Paul Owen, Birmingham, Uk

A wobble in 2004, but a full blown earthquake now. Not only have prices continued to defy gravity since 2004, increasing the inevitability of a crash and also increasing significantly the likely scale of price falls, but the banks have finally woken up to the fact that lending too much to people who can't afford to pay it back is an unwise business model. We don't need a wider economic recession this time to precipitate a crash, there are plenty of other factors to act as the catalyst instead.

Clive, Sussex, UK

David - can I ask, did you or "most economists" predict the recession now underway in the US, the house price crash underway there or even the credit crunch?

I don't think you did, in fact up until even last February this year all we heard was it was "contained", "soft landing", "golidilocks economy" and that todays global markets insulated us all from disaster by passing risk around using new fangled credit instruments.

The hard fact of the matter is that economists like yourself rarely accurately predict (in public at least) the onset of recession let alone events like Northern Rock.

So given that it's very hard to buy into your continuing complacency over the enormous imbalances at work in our housing market and the world economy.

MichaelT, Edinburgh, UK

David Smith is only scratching the surface here - "known knowns" include the fact that many mortgages face increased payments as the period of cheap fix ends, and the extent of withdrawal of mortgage products has also been documented, guaranteeing that few buyers who depend on high income multiples and high loan to value ratios will be offered finance. Also known is that BTL has accounted for over 11% of purchases in recent times.

The "known unknowns" include how far injections of bonus money will fall, although Savills have predicted a decline from 5.5bn to 2bn (without mentioning that even most of the 2bn could go to paying down existing mortgages rather than buying more properties); and how (potential) BTL landlords (and their lenders) will react to negative yields on properties bought over the past year or so (rent and capital appreciation insufficient to cover costs) and the changing CGT regime. The economics do not look supportive of buying houses as investments currently.

Mark, Woking,