House price expectations are not realistic

Grahame R Harwood wrote:

Now that the base rate has been so low for so long, it is most likely that the general public have now taken for granted the extra surplus income that this has created. In some cases a shortened working week and lower pay have been easier to manage financially due to lower mortgage repayments. But the message I am getting is that in general people have no spare money at the end of each month. Therefore, when interest rates finally start to increase it seems that many will feel the pinch. And depending how quickly and how far interest rates increase this could result in a serious unwillingness to spend. Made worse by the media hype surrounding redundancies which we can expect when the public sector cut backs are finalised. Maybe interest rates should have been increasing very gradually. The 0.5% base rate decision in late 2008 was a knee jerk reaction in my opinion - rates were previously far too high for far too long and many in Financial Services had long made this point. And I suspect that rates may well now have been far too low for far too long which has probably created another serious problem?

17 June 2010 10:36:41 GMT

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Ray Boulger wrote:

I agree with Paul that when it comes to house prices consumers’ expectations lag the market, but despite that the monthly Nationwide consumer confidence survey has proved a good short term indicator of house price movements. However, what is particularly interesting about Paul’s comments is the fact that although he adds that the RICS survey did not anticipate the size of the bounce-back since mid-2009 he makes no reference whatsoever to the fact that his firm’s forecast for 2009 was that prices would continue falling and that they would continue to fall this year. Paul’s comment in the last paragraph that “Over the longer-term house prices have to return to fair value” is nonsense. House prices don’t have to do anything and indeed very often confound the forecasts, especially those from economists. Indeed my own late 2008 forecast for house prices in 2009 was that they would be unchanged (*copy attached) and although that forecast was one of the most bullish it was still significantly adrift from the end result. Economists love concepts such as “fair value” and “seasonal adjustments” but what is fair value. Anyone who thinks that “fair value” is the long term historical average house price to earnings ratio is deluding themselves because that calculation ignores interest rates. Expecting the house price to earnings ratio to be the same in an era where Bank Rate fluctuates between 0.5% and, say, 6% as it was when interest rates frequently went well into double figures ignores one of the biggest influences on house prices. It also means that house prices have not, on that measure, represented “fair value” for about 10 years, which in itself ought to make economists question what is really “fair value.” A price one person considers is “fair” will be regarded as expensive by others and possibly cheap by a further group of people. Despite the fact that markets tend to overreact both on the upside and downside I would suggest that the best definition of “fair value” is a price agreed by a willing buyer and a willing seller in a free market, i.e. the market price. I agree with Paul that the cutbacks in public spending and increase in tax rates expected in next week’s budget will be a negative factor for house prices but these measures are needed because of the mess Gordon Brown left the economy in and although the recovery is likely to be slow and painful the quid pro quo for house prices is that it also means interest rates will remain very low for several years. In fact Roger Bootle, the highly respected MD of Capital Economics, has forecast that Bank Rate will not rise above 1% for at least 5 years. Low interest rates will support the housing market and act as a counter balance for the negative influences. As Grahame says, the time to next expect a serious fall in house prices will be if interest rates rise too far too quickly.

17 June 2010 15:19:17 GMT

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Jonathan Davis wrote:

Ray Boulger as ever misses the point(s) (his forecasts are normally way off the mark ie normally uselessly (some would say selfishly just to flog mortgages and put people in huge debt from which they will never come out)positive and based on little fundamental economics, more hope). For ever 'bulls' such as Ray told the world that house prices woukd soar if rates fell. Yet rates have not just fallen they have plummeted. So, why are prices still below the highs? Why is activity still at 50% of the highs? becasue, as ever, the market is only partially about rates. It is much more about the economy generally. Obviously, the economy is in dire straits. With the massive budgetr cuts now happening and to increase there will be c 500k extra unemployed and BTLers will find they have fewer tenants so rents will fall and, if you think through it, BTLs will be repossessed like billy-o. The same with 'owner'occupiers due to losses of earnings. Supply is already going through the roof and will continue to rise (RICS since December) and demand has been flat. It will soon fall persistently. Prices will fall dramatically just like 2007 to 2009. Unlike then there will be no election due for politicians to try and prop prices up. In any case they have nothing left in their armoury. They can't reduce rates. They can't create employment (the opposite will happen). Our currency has already fallen and this will not happen a second time as EU is in even worse shape than us.

19 June 2010 16:25:56 GMT

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MT wrote:

With the BoE's new responsibilities including managing asset price bubbles, hopefully future house price predictability will be easier. It would be good to see dynamic loan to value requirements set (if boom then high deposit, if bust then low deposit) as this aids control of bubbles, limits the risk of negative equity and is consistent with the UK's tendency to treat a home as a savings device (being able to take money out of a property during bust but not during boom). Nevertheless something probably needs to be done on the supply side as well.

19 June 2010 17:53:51 GMT

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Bobby Sidhu wrote:

I agree with Jonathan, house prices only have one way to go and that's down. Interests rates can't go any lower and now that the number of properties coming onto the market the argument that low stock levels were keeping prices high no longer works. More stock less buyers = a long over due fall in house prices.

20 June 2010 10:23:46 GMT

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