Huge Dive In House Prices

CNBC has today been reporting figures, from Rightmove, showing that asking prices for houses fell 1.7% this Month. That is a huge amount, equal to more than 20% on an annual basis, three times the fall in July, recorded by Nationwide, and Halifax, and nearly as bad as the 2.2% fall last December, when asking prices are always low for seasonal reasons.

The explanation given, that this was due to a seasonal dip, with people away on holiday, doesn't seem to fly to me. For one thing, September, is the busiest month of the year, for house sales. Given that sellers are guided by Estate Agents, in determining asking prices, those agents would, in the middle of August, be setting those prices looking forwards not backwards. The statement that "No one really wants to come to market in August unless they have to. It shows these new sellers have a compelling need to sell," from Rightmove commercial director Miles Shipside, seems to me an explanation why selling prices in August might have fallen, not asking prices. If agents looking forward are already pricing in such weakness they must see things getting much worse.

In fact, on the basis of selling prices, rather than asking prices, things already do seem to be getting rapidly worse. Some websites provide information on individual houses, showing how much prices have been reduced from the original asking prices. A trawl though these already shows that 10% reductions are already not uncommon. And, it shows that these reductions apply at all levels of the housing market. That's not surprising. If you were employed in one of the top jobs such as those at the Audit Commission, you may well have taken out a £750,000 mortgage on the back of your £250,000 a year salary that you might have thought was secure. But, as the Liberal-Tories crater the economy, its becoming clear that even these top jobs are not safe. If you've just lost such a job, or, on the basis of the announcement on the Audit Commission, and other Quangos, think you might be next, you might well be anxious to get that large pile on to the market quickly, take a £100,000 haircut to sell it quickly, before you end up in serious doodoo. To that extent, the Rightmove statement about sellers having a compelling need to sell, is an indication of the kind of panic that is already setting in in the housing market, as much as in other areas of the economy, as the Liberal-Tories policies put the jitters under everyone.

Many economists have commented on the fact that the rise in house prices over the last year, when the economy was still in recession, or crawling out of it, was perverse. But, not really. The reason for the rise was simple. Firstly, Labour and the Bank of England had flooded the economy with liquidity. Interest rates tumbled, and, for thousands of people, with tracker mortgages, their outgoings were slashed by thousands of pounds a year. That saved some who were in arrears or struggling. Secondly, the banks faced with arrears had an incentive not to foreclose. They were under political pressure to lend, having been bailed out. The simplest way to meet that demand was not to call in existing lending. Additionally, if they foreclosed, it would have started to reduce prices, meaning they would have been in danger of getting back from sales less than the mortgage outstanding. And, with the huge monetary and fiscal stimulus, that had been put in, working its way through into economic recovery, the banks would have had reason to believe that, as this played out, better economic times would mean the debts would be repaid. The final part of that puzzle is that, although borrowers were being asked to put down a reasonable amount of deposit, for the first time in a generation, they were encouraging buyers to obtain this from parents, who had equity in their own properties, bought decades earlier. Parents who did that will have reason to seriously regret such a decision as prices crash, because they will have gone from a position of relative security, to one of negative equity, in which they might be at risk of losing the home they had previously paid for.

But, all of those elements are unwinding. The Bank of England is wrestling with the problem that inflation is way above its target, and unlikely to come down. Not the conditions for more liquidity issuance. Moreover, creating more money only works if there is a mechanism for getting it into the economy. If the private sector doesn't demand the money, then the only means of doing that is via fiscal policy. Given the Liberal-Tory fiscal tightening that is being cut off, and at the same time is acting to reduce private sector demand, as it begins to run scared. Although, Bank of England, interest rates are not likely to rise any time soon, the interest rates on all those Tracker Mortgages are running out, and those with them are facing their monthly repayments trebling and more! As banks begin to look at the prospect of a house price crash, and an economic slowdown, with unemployment rising by more than a million, none of them will want to be the last one trying to get their money back. There will be increasing pressure to get debts paid, or to foreclose. That in itself will set in place a firesale. Again already there are websites specialising in selling foreclosed properties at knock-down prices. Finally, as the economy begins to tank, as a result of the Liberal-Tory economic mismanagement, people will begin to look to keep some money to one side, for emergencies, rather than to use as a deposit, and as with any deflation no one is going to step in to buy if they think that by holding on another few months they will be able to buy at a fraction of the current price.

Ironically, as I was writing this, I heard an advert on the TV, that gives a sign of the times. It was the first of its kind I've heard for a while, from a company asking "Do you need to sell your house?" You have to be desperate to resort to such companies, who give you only a fraction of what you would get for it on the open market. The fact that such companies are seeing it worthwhile advertising again, shows that there must be a lot of people out there already who really are that desperate!