Merryn Somerset-Webb, in Moneyweek, recently set out the data showing that, if you go back 100 years, then there was no increase in UK house prices above inflation, until after 1960 - which just happens to be the time when, as I set out previously, Tory Chancellor, Reggie Maudling, began printing money.
In fact, as I set out in that previous blog, there is no reason that house prices should not fall over time, like every other commodity. That is because, like every other commodity, increases in productivity mean that the cost of building houses will fall in real terms.
In addition, to the changes I set out in that previous blog, showing why there is likely to be a change in the fundamental relations of Supply and Demand, that will crash house prices, a further measure is about to be introduced, which will mean that the good news of lower house prices could be brought closer.
According to House Price Crash.co.uk the EU is to introduce new rules, which will bring some of the reckless lending in the UK mortgage market into line with the situation in the rest of Europe. At the moment, a large number of Buy-To-Let, Landlords have come into the market due to this reckless lending. They can do it, because, at the moment, they are allowed to count rental income from houses they have mortgaged, in order to obtain further mortgages. In other words, this is a Ponzi Scheme.
Unlike old style Landlords, who usually owned the properties they were renting outright, the Buy-To-Let merchants are newcomers, with only marginal equity in the properties they rent out - which will become even more marginal as the price of those properties collapses - and so the ground they stand on, separating profit from loss, is very tenuous. That is bad news for tenants, who lose out on security of their tenure, and face an uncertain future, if their landlord goes bust. Tenants in Europe, like workers in Europe, have far more security, and far greater rights than do their UK counterparts. The changes being proposed by the EU, will help to change that situation, so it will not just be good news for those hoping to buy a house, or buy a more expensive house; it will be good news for tenants too.
The EU propose to put the Buy-To-Let merchants in exactly the same position as anyone else wanting to take out a mortgage. That is they will have to base their ability to repay on their actual earnings, not on the potential rent they may or may not receive from renting out properties. That will mean that the current Ponzi Scheme will be ended. Many of those with Buy To Let mortgages will be unable to provide the evidence of sufficient income to justify new mortgages, or to re-mortgage when their current arrangements terminate.
Given that there are around 1.5 million buy-to-let properties, that means that a flood of additional houses are likely to appear on the market, cratering the current excessive prices, and bringing releif to millions as a result.
With unemployment set to soar, and inflation already rising sharply, cutting disposable incomes by a greater amount than any time since the 1920's, the UK Housing Bubble's days are numbered.
8 comments:
Boffy, explain to me how unemployed and economically-stressed people will afford houses even with house prices radically slashed.
Why would I need to explain that? Its not as if I have ever suggested that unemployed or otherwise economically stressed people COULD afford houses with radically slashed prices is it?
What is clear is that there are many ordinary workers, who would like to buy a house, or to buy a better house than the one they currently have, but who cannot do so, because house prices are in a massive bubble.
What is also undeniable is that for both these people, and for the unemployed and otherwise economically a fall in house prices will make those houses MORE affordable than they currently are, and, therefore, as with the reduction in price of any of the other commodities that workers need to buy, such a fall would be good news.
And, in fact, it would be good news for those unemployed, and otherwise economically stressed people who still could not afford to buy, because such a massive reduction in house prices would necessarily have a massive downward pressure on rents too.
What is also undeniable is that for both these people, and for the unemployed and otherwise economically a fall in house prices will make those houses MORE affordable than they currently are, and, therefore, as with the reduction in price of any of the other commodities that workers need to buy, such a fall would be good news.
You must mean that if house prices fall and everything else remains equal; however, in your article you acknowledge everything else will not remain equal, as you state your expectation of a rise in unemployment, for one. In other words, house prices may fall, but ability to afford houses may fall even further. If so, that offers no "relief" to the people who require relief.
No I did not mean if everything else remains the same. It means that if house prices fall they will become MORE affordable than if they DIDN'T fall.
If unemployment increases, and house prices remained the same, then for those additional unemployed people houses would be LESS affordable than if house prices did fall. Similarly, a dramatic fall in house prices would have the same downward influence on rents, so those additional unemployed would benefit from that too.
In short, as I said previously, a fall, particularly a big fall is in the interests of workers, be they unemployed or employed, just as is the fall in the prices of any of the other commodities they have to buy.
Say I am unemployed. Say I have negative net worth. Say my negative net worth is -10. Say house prices drop. Say they drop from an indexed 100 to an indexed 1. Wow. Such a drop. If I can increase my negative net worth by more than an order of magnitude, I can easily afford a house!
Actually, it is not only possible, for unemployed people to buy houses under such conditions, but they frequently do. Terraced houses here currently sell for as little as £30,000. Suppose they fell by 80% as i think they may. That would reduce that price to £6,000, which is considerably more than the prices they were selling for 15 years ago, when they exchanged hands for cash in the pub.
For someone, who has just been made redundant, and received even a small redundancy payment, it may well be worth using it to buy such a house for cash, thereby obtaining some security, and avoiding future rental or mortgage payments. In addition, the majority of unemployed people are only unemployed for around four months. Finally, many unemployed people live in households where other family members are in employment. Especially given the complications that has for the entitlement to benefits, it may well be not only possible, but advantageous to buy a cheap house under those conditions.
But, I would not make the point that just because house prices fell substantially, this would mean that in general unemployed or economically stressed people COULD let alone should buy a house. I merely make the point that a substantial fall makes them more affordable than they would otherwise have been, and that is good news for workers in general.
I am dubious that prices will fall by anything like the degree you predict primarily because of the imbalance between supply and demand.
We need 270,000 new homes a year just to keep track with the demographics - we build between a third and a half of that number primarily because NIMBY planning regulations prevent capitalists from building more homes in the areas that people want to live.
While capitalists have been leaning very hard on the gov to relax the regs I am far from convinced that what we end up with will significantly change the supply situation.
And the second factor is that now pensions have been gutted we simply cannot afford to lose the equity value of our homes as many of us have nothing else to fall back on.
Property values are just too important to the middle class for the state to allow them to decline too far - even though this requires them to engineer a perpetual housing shortage and to give home owners and speculators tax breaks that radically unbalance the whole economy.
But, as I pointed out in my blog House Price Crash, there is in Britain already over 1 million houses that are either empty, or which have Planning Permission ready to build. With 270,00 new homes per year "needed" (which as I demonstrate is a very soft figure), and around 90,000 being built, that means that there are already enough empty houses available to Supply five years worth of demand!
The Government's latest moves make the situation worse for house prices. By subsidising, mortgages for new built, that encourages increased supply of new houses, putting downward pressure on houses. But, also, because this mortgage gurantee is only available for first time buyers on NEW houses, it distorts the market away from existing houses, meaning existing sellers will have to reduce prices further to compete.
Already selling prices are falling by large amounts. I have seen lots of houses already reduced by up to 30%, a house across from me has been reduced by 16%, but still can't find a buyer, in a very desirable area, with an acre of land with it, and so on.
The majority of howeowners, because they bought their houses, more than 20 years ago, would still have equity in their houses even if prices fell by 80%. But, the truth is that when prices begin to fall their will be nothing they or the Government can do about it. The Government cannot reduce interest rates, and mortgage rates any further. On the contrary, they are set to rise substantially as part of the Credit Crunch.
According to Rightmove, even asking prices fell by 3% last month. It is seeing the sharpest declines since the last Credit Crunch. The fact is that asset classes in a bubble eventually collapse. That happened with housing in the UK in 1990. It happened with Stock markets, particularly the NASDAQ in 2000. In the US where there is even more of the middle classes wealth tied up in house prices, they have fallen by 60-75%. In the UK, they fell by 20% a in 2008/9.
The economic conditions givbe little room for the State to intervene further to keep this bubble inflated.
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