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I Want A House Price Crash!

Harvey Jones
by Lovemoney Staff Harvey Jones on 01 August 2008  |  Comments 85 comments

Falling house prices are exactly what we need, according to this Fool.

Everybody talks as if falling house prices are a bad thing, nay, a national disaster. Rising house prices, the logic runs, are therefore a good thing. But the reverse is true.

Right now, falling house prices are exactly what we need. You know it, I know it.

House prices dropped a record 8.1% over the past 12 months, according to Nationwide, the biggest drop since it started collecting figures in 1991. Other reports suggest that the value of your home could drop by as much as 30% by 2010.

Everybody pretends this is terrible news, but quite frankly, it isn't.

I would argue that most of us are delighted at the thought, and rightly so.

The press, of course, is revelling in all the doom and gloom, but headline-hungry journalists aren't the only ones getting excited by the housing market collapse.

Hoping for the worst

Many of us, not just first-time buyers and rivals for Gordon Brown's job, actively want prices to fall. We would be disappointed if they stabilised, and the housing market became tediously becalmed.

The forthcoming collapse has been so widely predicted that if it doesn't happen, we would all be crushed by the anti-climax.

There is also a collective - and very sensible - horror at the way house prices have spiralled beyond all logic in recent years. We're all financial puritans at heart.

Even people who have cashed in to the tune of hundreds of thousands of pounds have been appalled by this scarcely credible surge in values. If house prices can behave so irrationally, how rational is the rest of our financial system?

The party's over

Add to that widespread distaste at the orgy of debt the UK has indulged in lately, and you can see why many people have been howling for the party to come to an end. It may leave many of us nursing sore heads and negative equity, but we knew all along it would end in tears.

So who gets hurt by a crash? Some will find it painful, but not as many as you think. Existing homeowners may see up to 30% lopped off the value of their home, but their next property has also fallen by 30%, so where's the problem?

Even the 1.7 million that Standard & Poor's estimate face negative equity will only suffer if they absolutely need to move home in the next few years. If you are among their number, you have my sympathy.

Other homeowners will have a shrinking amount of equity to dip into, too. But given that the nation collectively owes £1.4 trillion, the last thing we need is more borrowing.

In my opinion, those who missed out on the house price bonanza should be popping champagne corks. Or better still, saving the money towards a deposit, to allow them to enter the property market at more affordable levels in a year or two.

Any fall must be set in the context of the astronomical gains in recent years. As Nationwide quickly points out, the average house is still worth £11,000 more than three years ago - although admittedly, maybe not for much longer.

So let's not get too carried away, it's not the end of the world as we know it, just an abrupt halt to its wilder excesses.

Short, sharp shock

A short, sharp property crash might do us all some good - and I do believe it is likely to be short and sharp.

Although unemployment is set to rise, it still remains at modest levels. Personal insolvencies and repossessions will increase, but many people will hang on by the skin of their teeth until the recovery comes.

There are also one or two pieces of good news floating around, overlooked in the current carnage.

Swap rates are falling and lenders are cutting their fixed-rate mortgages, which might ease some of the pain for those facing payment shock. Plus there is still a good chance that interest rates could start falling by the end of the year.

Reality bites

Add the fact that we live on a small, squeezed island with a pent-up demand for houses, and you can see the ground is clear for a relatively speedy recovery. But let's hope it isn't too speedy, because we don't want to find ourselves repeating the blunders of the past decade (and the decade before that).

Arguably, the crash is a much-needed jolt of economic reality, and is the first step towards restoring common sense to the property market, and the rest of the economy.

I'll say it again. Falling house prices are a good thing. Enjoy it while it lasts.

More: The Truth About House Prices

> Find a magnificent mortgage via The Fool's award-winning mortgage service.

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Comments (85)

  • akist
    Love rating 0
    akist said

    Selling a house must not necessarily be followed by buying a more expensive house in a more expensive area, "going up the ladder".

    If only the above scenario were true then yes, increasing house prices would not help.

    The cycle would be something like this: at 25 you buy a flat, at 35 you buy a house and have kids, at 45 you upgrade to a bigger house (if you are rich) and at 55 you sell the lot and buy somewhere in the sticks, with no need to be anywhere near a train station with a short link to the City, or anywhere near the best clubs in town or the best schools. At 55 you will want your house to have kept up with inflation as a minimum, and the bigger the increase the more cash you will have to spend as you please.

    What has happened in the past few years is that a healthy increase in house prices became an unsustainable bubble: too many people competing for too few houses near the most sought after areas. Speculators investing in buy-to-lets and others betting on speedy capital gains buying houses simply for quick profit. The market is now correcting itself as the speculators will try to find somewhere else to invest their cash and the housing market will be driven by the people who buy a house because they really need to live in it and not just for quick profit.

    As I write this I believe we have an imbalance still, rent prices are about 5% of asking price and lending rates are
    about 7%. In order to lure speculators in and fuel the housing market rent prices should increase to over 8% of asking price, or lending rates should fall to 4% or less, or some combination of both. Otherwise the only thing that remains is the asking price which must come down, or what we are also now seeing, house owners removing properties from the market and trying to rent them instead in order to keep up with their mortgages. Which means rents will come down even more as there is increased supply or properties to let, and that will mean house prices will fall even further. I do not know where the equilibrium will be found, there are so many parameters to consider. But it is obvious the housing market has slowed and will remain subdued until speculators come back in, and that will only happen when interest rates are low enough to make it worth their while. I think it is safe to assume that under pressure it is easier to lower the asking price than to wait for lending rates to fall to 4% (which would imply a base of 3%). Therefore I estimate a further fall in house prices of about 30%-40%, assuming interest rates stay at 5%, in order to bring realistic rent prices in line with a 8% of asking price. This has nothing to do with the recent difficulty in obtaining loans which can only make matters worse for house prices.

    If house prices are still holding and have not collapsed is maybe because some speculators think that a property is cheap compared to what it was selling for a year ago, and then they rush in to buy a "deal". However the realities of the rent market should soon sort them out and eventually that cash source will also disappear.

    What would happen if interest rates fell? That would certainly boost the housing market, but the increased cautiouness from lenders would still hinder the speculators, leaving only those with smaller leverage in the field (ie more up front capital, less loan, less leverage, less profit).

    But the BoE also has to think of inflation, which is a bad thing, because it makes everyone poorer not only those who speculate in buying and selling houses, and I presume their priority would be to stabilise inflation first.

    Report on 13 September 2008  |  Love thisLove  0 loves
  • youngian67
    Love rating 0
    youngian67 said

    It is ironic that for the past thirty years economic policy has been geared to maintaining low inflation but for some strange reason all political parties believe runaway inflation in the housing market is a good thing that can deliver a sustainable free lunch.
    The Buy-to-Let craze is just a form of modern spivery where profits are made by creating shortages in the number of houses for sale, which lead to even higher prices.
    Let the Thatcherite property owning democracy extend to private tenants by allowing them to turn their annual rent into equivalent equity ownership in the property.
    This would hopefully cause panic selling by Buy-to-Let landlords and put even more property on the market at an affordable price.

    Report on 09 December 2008  |  Love thisLove  0 loves

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