Tradefair & Financials
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I have cut and pasted parts of an article from money week which has finally convinced me now is not the right time to buy a house. I would be interested if anyone (especially Chisel) disagrees with their economic arguments behind their prediction that house prices will fall another 20% at least before we reach the bottom of house prices.
In Britain we've had no need to clear any repossession overhang, nor to push prices down, nor manufacture any economic recovery to ride back out on. We've just cut rates like they've never been cut before. Before 2008, the lowest UK base rates had fallen in the previous 60 years was 3%. The lowest mortgage rates got was 2% above that, at 5%. But a year ago all that changed. The Bank cut base rates from 5% to 0.5% and they've been there ever since.
Just how long this can last is anyone's guess. The irony is that if the bulls are right (and I'm guessing they're the ones buying houses right now), the economy will recover very soon. That would mean that inflation is a real risk and rates have to rise before prices run out of control. Based on sterling weakness and oil-price volatility alone, the annual rate of headline Consumer Price Index (CPI) inflation could well top 3.5% before Easter. Over the last 20 years, the base rate has on average been around four percentage points above headline CPI. So let's say CPI settles around its current 2.9%. That means base rates 'should' be 6.9% and mortgage rates 2% above that at 8.9% double the current standard variable rate (SVR). How many house-price bulls have figured that into their 'return to normalcy' scenario?
Now, I don't think that's how this will pan out. I subscribe to the far gloomier view that we'll get a double-dip recession as fiscal policy is tightened. This will result in deflation and interest rates staying low for ages. But wouldn't this keep mortgage rates low and be good for house prices? Sadly not. Rates will only stay low if the recovery falters, credit remains constrained, taxes rise, bonuses and government spending get cut, and unemployment rises. None of these is good for housing demand and, in fact, several will result in more distressed sales.
It's a classic Catch-22. If the economy recovers and things normalise, mortgage rates will rapidly double, snuffing out any house-price growth and most likely kicking off the second stage of the down-leg. On the other hand, if the economy keeps struggling, then although rates will stay low, the demand and particularly the supply situation will get much worse.
Another thing that we haven't yet seen in Britain is the normal recessionary forced selling of property. Super-low mortgage rates have bailed some out for now, but mostly it's been the government's fiscal policy that has held sellers off the market. Unparalleled spending has kept the economy at a higher level than it would have slumped to, while electioneering has prevented Gordon Brown from cutting the public sector payroll. Yet all this misery is still to come. You can't pick up a paper today without seeing Greece's woes all over it. There but for an upcoming election go we.
Post election, the job cuts across the public sector will have to be extensive. The end of QE, further spending cuts and an increase in income tax will all mean slower growth. Whether this results in a double-dip recession will depend on the timing and scale of any policy reaction. But much of the economy is still living through a phony recession. Reality bites before the end of June.
The fact is that house prices are still very expensive on a long-run view. Recent strength in the market can be put down to unsustainable short-term factors, such as record low rates and end-of-era bank bonuses. What really stands out when we look at the state of the economy, the government's finances and other parts of the housing market, such as rents is that this is not a recovery, but merely bad news postponed. Almost all the factors that normally determine the quantity of sellers are being artificially restrained. As these constraints come off, the sellers will be forced out.
With public-sector employment still rising, the fiscal deficit over 12%, and QE equivalent to 20% of GDP, the economy still barely managed a positive move last quarter. Take all these supports away as we move into summer and what are we likely to see the wider economy do? Well, bearing in mind record borrowing spreads for most people in the household sector, I expect that once public sector support is withdrawn, the private sector's contribution to GDP will prove a huge disappointment. This is a much bigger issue than housing alone, but house prices will get caught in the fallout. If you must buy property, perhaps a bomb shelter is your best bet.
In Britain we've had no need to clear any repossession overhang, nor to push prices down, nor manufacture any economic recovery to ride back out on. We've just cut rates like they've never been cut before. Before 2008, the lowest UK base rates had fallen in the previous 60 years was 3%. The lowest mortgage rates got was 2% above that, at 5%. But a year ago all that changed. The Bank cut base rates from 5% to 0.5% and they've been there ever since.
Just how long this can last is anyone's guess. The irony is that if the bulls are right (and I'm guessing they're the ones buying houses right now), the economy will recover very soon. That would mean that inflation is a real risk and rates have to rise before prices run out of control. Based on sterling weakness and oil-price volatility alone, the annual rate of headline Consumer Price Index (CPI) inflation could well top 3.5% before Easter. Over the last 20 years, the base rate has on average been around four percentage points above headline CPI. So let's say CPI settles around its current 2.9%. That means base rates 'should' be 6.9% and mortgage rates 2% above that at 8.9% double the current standard variable rate (SVR). How many house-price bulls have figured that into their 'return to normalcy' scenario?
Now, I don't think that's how this will pan out. I subscribe to the far gloomier view that we'll get a double-dip recession as fiscal policy is tightened. This will result in deflation and interest rates staying low for ages. But wouldn't this keep mortgage rates low and be good for house prices? Sadly not. Rates will only stay low if the recovery falters, credit remains constrained, taxes rise, bonuses and government spending get cut, and unemployment rises. None of these is good for housing demand and, in fact, several will result in more distressed sales.
It's a classic Catch-22. If the economy recovers and things normalise, mortgage rates will rapidly double, snuffing out any house-price growth and most likely kicking off the second stage of the down-leg. On the other hand, if the economy keeps struggling, then although rates will stay low, the demand and particularly the supply situation will get much worse.
Another thing that we haven't yet seen in Britain is the normal recessionary forced selling of property. Super-low mortgage rates have bailed some out for now, but mostly it's been the government's fiscal policy that has held sellers off the market. Unparalleled spending has kept the economy at a higher level than it would have slumped to, while electioneering has prevented Gordon Brown from cutting the public sector payroll. Yet all this misery is still to come. You can't pick up a paper today without seeing Greece's woes all over it. There but for an upcoming election go we.
Post election, the job cuts across the public sector will have to be extensive. The end of QE, further spending cuts and an increase in income tax will all mean slower growth. Whether this results in a double-dip recession will depend on the timing and scale of any policy reaction. But much of the economy is still living through a phony recession. Reality bites before the end of June.
The fact is that house prices are still very expensive on a long-run view. Recent strength in the market can be put down to unsustainable short-term factors, such as record low rates and end-of-era bank bonuses. What really stands out when we look at the state of the economy, the government's finances and other parts of the housing market, such as rents is that this is not a recovery, but merely bad news postponed. Almost all the factors that normally determine the quantity of sellers are being artificially restrained. As these constraints come off, the sellers will be forced out.
With public-sector employment still rising, the fiscal deficit over 12%, and QE equivalent to 20% of GDP, the economy still barely managed a positive move last quarter. Take all these supports away as we move into summer and what are we likely to see the wider economy do? Well, bearing in mind record borrowing spreads for most people in the household sector, I expect that once public sector support is withdrawn, the private sector's contribution to GDP will prove a huge disappointment. This is a much bigger issue than housing alone, but house prices will get caught in the fallout. If you must buy property, perhaps a bomb shelter is your best bet.
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Replies: 3
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A bit of advice.
Never open a thread with such a long cut and pasted article. Who's going to bother to wade through it, to see if it is even of interest to them ?. |
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He's right. I've read his post and not yours.
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Ooh.Hurtful.
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