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Why the experts are wrong about house prices

Cliff D'Arcy
by Lovemoney Staff Cliff D'Arcy on 15 January 2013  |  Comments 13 comments

Property pundits predict higher home values in 2013, but there are a number of hurdles standing in their way.

Why the experts are wrong about house prices

With £4 trillion of the UK's total personal wealth of £7 trillion invested in property, it's hardly surprising that future house prices remain a British obsession.

As happens every year, property firms -- including estate agents, mortgage lenders and property websites -- have released their end-of-year predictions for where prices will go in 2013. Many pundits expect prices to rise slightly this year, but not by much.

For example, property website Rightmove reckons that prices will rise by an average of 2%, with growth strongest in London and the south east. Halifax, one of the UK's largest mortgage lenders, expects prices to be broadly flat and unlikely to rise more than 2%.

Fragile forecasts

However, we should take any such predictions with a hefty pinch of salt. This is because property pundits have a dreadful record of forecasting the future direction of house prices, as What 2012 has in store for house prices demonstrates.

Also, I believe that, by their very nature, property-related firms have a natural corporate bias towards promoting higher home values. They are cheerleaders for higher property prices, rather than dispassionate reporters on this vital economic trend.

I expect UK house prices to continue to weaken into 2013 and beyond. Here are seven solid reasons for my pessimism:

1. A slump in transactions

In 2006, a record 1.7 million homes changed hands in the UK. In 2007, the number of transactions slipped to 1.6 million, before falling off a cliff to 901,000 in 2008 as the credit crunch took hold.

Since 2009, the number of sales has not reached 900,000 in any calendar year, so transactions are running at roughly half of their peak. This is one important indicator that the UK housing market is still far from healthy.

2. No more risky mortgages

Before the long-overdue property crash arrived in the summer of 2007, lenders were scrambling to lend to anyone with a pulse. This lax lending resulted in crazy home loans such as the 125% and 130% mortgages that helped to sink Northern Rock and Bradford & Bingley.

Today, it's almost impossible to borrow even 100% of a property's valuation, as buying a home usually requires a substantial deposit. What's more, the Bank of England warned banks on Monday that they will have to put aside extra capital when lending to riskier homebuyers. This extra regulation will reduce the risk of another banking crisis by cooling down future credit and housing booms.

3. High personal debt

During the 'credit mania' of the Nineties and Noughties, UK personal debt (including mortgages) exploded from under £500 billion in mid-1997 to nearly £1.5 trillion by 2008.

This near-tripling of personal debt in a single decade has left the UK with a horrible hangover today. With personal debt now averaging close to £58,000 per household, we are in no position to start another credit-fuelled surge in house prices.

4. Weak wage growth

Fundamentally, house prices rely on earnings, because buyers need incomes to service their property debts. The bad news is that UK wage growth has been very weak since our economy started sliding in 2008. In fact, average earnings fell slightly in 2009 and, since then, have failed to keep pace with the ever-rising cost of living.

For instance, in the year to October 2012, total UK pay rose by a mere 1.3%, which is well below what is needed to maintain living standards. As a result, UK wages have not kept up with price rises since our economy went into reverse in 2008.

5. Inflation stays stubbornly above target

Inflation is a measure of the rising cost of living, usually expressed as a percentage over a previous 12-month period. The Bank of England has a target to keep inflation at or below 2% a year, as measured by the Consumer Prices Index (CPI).

Alas, by keeping its base rate at a historic low of 0.5% a year since March 2009, the Bank has contributed to inflation stubbornly staying above 2%. In fact, CPI inflation has remained above target in every month since December 2009 and stood at 2.7% in December.

These unexpectedly high rises in the cost of living put severe pressure on disposable incomes, leaving less money to spend on mortgage repayments and, ultimately, homes.

6. Interest rates are artificially low

The single biggest prop supporting house prices is the incredibly low interest rates currently on offer to new homebuyers and existing homeowners.

Thanks to the Bank of England's base rate sticking at 0.5% a year (the lowest since the Bank was founded in 1694), mortgage rates are well below historic norms. In addition, the launch of the Funding for Lending scheme in July 2012 has provided banks and other lenders with a flood of cheap cash to lend on. As a result, mortgage rates continue to plumb new depths.

While a rise in base rate this year looks unlikely, interest rates must go up eventually. This is sure to happen when fed-up bond investors force up the yields on gilts (UK government bonds) as our national finances worsen. When interest rates finally do start rising, we can expect utter carnage in the housing market.

7. Rising taxes and falling benefits

Finally, our ability to buy homes and meet mortgage repayments very much depends on disposable incomes, which are under pressure like never before. In recent history, the squeeze on take-home pay has been worse than at any time since 1921.

Rising tax bills and cutbacks to state benefits are set to hit incomes hard later this year. Through a process known as 'fiscal drag', millions more taxpayers are being dragged into higher tax bands. The withdrawal of Child Benefit from high earners and a 1% cap on many state benefits will heap more pressure on already-stretched household budgets.

More on property:

How house prices changed around the world in 2012

What 2013 has in store for house prices

What's the 'right' price of your house?

How rows with your neighbours could hurt your house price

What's your property worth?

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Comments (13)

  • OEJ
    Love rating 4
    OEJ said

    Agreed. Everything points to a continued stagnation or even contraction in property prices. Maybe I represent one of those 'debt killers' I've read about; for the last few years I've been obsessed with getting debts down to nothing, and what debt I do have is on a zero-interest basis. My mortgage is paid off. Debt was always bad news, especially when things went bonkers in the nineties & noughties. We need to return to days of reason and discipline when mortgages were 3x income, impossible though it sounds. We can now look back on that Blair/Brown era (and the creation of the utterly limp-wristed FSA) to see and know that when you relax the credit rules, everyone will abuse that 'freedom' and today not only are we paying for it, but young people starting out in life are paying for it too, even though they played no part in the madness of a decade or so ago.

    If the FSA had done what it said on their tin, they would have regulated financial services, and told all mortgage lenders not to offer loans above the old 3x single or 2.5x joint incomes. There was nothing wrong with that system for many years, but as soon as it was changed, the financial world caved in. And now the former FSA boss gets a knighthood. Absurd and nonsensical.

    Report on 15 January 2013  |  Love thisLove  0 loves
  • AlanThomas
    Love rating 35
    AlanThomas said

    I would agree with Cliff. As a homeowner & landlord from the early 80s there will be no lift in the market for 2 maybe 5 years.

    The last property boom and crash 1990 with the usual ressession thereafter is a perfect example, it was 1997 before there was any country wide movement in the property market.

    So sit tight and enjoy low interest rates.

    Alan

    Report on 15 January 2013  |  Love thisLove  0 loves
  • SevenPillars
    Love rating 70
    SevenPillars said

    I think the only point I would take slight issue with here is in relation to IR's. I'm not convinced that they will go up much at all. Several years ago the popular mantra of house price crash enthusiasts was that eventually IR's would have to go up and quite high, house prices would then crash, it hasn't happened. Essentially, both the BoE and Government have fiddled, as they always do, with the way they do things or what it is they measure things against, in order to keep IR's artificially low. I sometimes get the impression that they make things up as they go along, but it has been effective in what they want to achieve and avoid, which is essentially to have some inflation and avoid deflation.

    Then there is the Japanese experience of the last 25 years, their economy seemingly in a constant state of stagnation, IR's at a constant low rate. We in the West are faced with similar questions of where our economic growth is going to come from and Central Banks will not raise rates until the economy is looking good again. The problem with this is that we already have high real rates of inflation in the UK when measured against IR's, yet the BoE and Government are quite happy to do nothing. They've changed the rules because they know that higher IR's for the foreseeable future would be horrendous for a financial system still recovery from the disaster of its own making. So, as long as their price inflation measurement remains in low single figures, we shouldn't expect any increase in IR's soon. In this sense we could be turning Japanese.

    These low rates do act as a prop to property owners in that the policies undertaken by the Government and BoE since 2008 have kept the economy on life support and therefore stopped the recession or even depression that might have happened without it. Forced selling has been avoided, any thoughts of a house price crash probably off the agenda, but because of all the points you raise above it is a very artificial market. Low interest rates, massive loans to save the financial system and £400 billion of money printing goes along way to maintain this artificial picture.

    Report on 15 January 2013  |  Love thisLove  0 loves
  • r
    Love rating 98
    r said

    @OEJ: I couldn't agree with you more! A lot of people would be happier if they could get rid of their debt. Unfortunately, most members of our younger population don't seem to have learned from this. I suppose one cannot teach experience. I paid my mortgage off years ago because I was lucky enough to have a life insurance mature which paid out more than I thought and I have never been in debt since . . . and I have never been financially more happy.

    Cliff, a good article. It doesn't look like there will be much controversy over this one!

    r.

    Report on 15 January 2013  |  Love thisLove  0 loves
  • tuttogallo
    Love rating 99
    tuttogallo said

    @OEJ: I have done just the same and I could not agree more. There is good debt and bad debt, but the only really good debt is the debt that is paid off, dead, extinct, shuffled off this mortal coil etc.

    I fear for my children's generattion who are still having to pay inflated house prices and are dreadfully vulnerable to anything like normal rates of interest.

    The usual house buying chain starts with a first time buyer and ends with a deceased estate i.e a transfer of wealth from those who have least to those how no longer need it. This is a thoroughly bad thing. Rising house prices only benefit the government through stamp dute.

    Report on 15 January 2013  |  Love thisLove  0 loves
  • gold star
    Love rating 0
    gold star said

    It really annoys me when the media call these people 'experts'. If they are experts how can they be wrong? I would hate to fly in airplanes they design!

    Report on 15 January 2013  |  Love thisLove  0 loves
  • johncnuttall
    Love rating 11
    johncnuttall said

    I always find it very entertaining when pundits who regularly get it wrong continue to be referred to as "experts". This seems particularly prevalent in the property sector. A good test is to see whether they predicted the property crash, if they didn't then they're not a property "expert", they're someone who works in property who's not very good at simple arithmetic.

    Report on 15 January 2013  |  Love thisLove  0 loves
  • adrian406
    Love rating 0
    adrian406 said

    I see articles like this all the time, and to me they ignore two critical, and fairly obvious points.

    Interest rates, and a lender's affordability calculations, have never had any influence on my decision to buy a house or not. There's no way I'd borrow as much as they allow - I'd only lie awake at night worrying about the repayments. When I buy a house, I know I will be sacrificing a proportion of my income to live there. The more I want to live there, the higher the proportion I'm prepared to sacrifice. The lenders rates may alter that sacrifice in one direction or another, but not so significantly as to affect the buy/not-to-buy decision. So really, income, and confidence in projected future income, plays a much greater part. If that income is squeezed, it'll be the foreign holidays, the new TV, or eating out that will be cut first, as these expenditures are much easier to control in the short term. I'm not going to live in the wrong house. street or area simply so I can buy the latest iPad.

    Secondly, the housing market is currently comprised of for-sale property that is (a) junk, (b) desperate, or (c) lucky. With the general malaise in house prices, few people are going to choose to sell their prime property right now. Why would you? You can stick it out and stay living there, or rent it out. Why realise a loss, when you still have to live somewhere? So the for-sale stuff is junk (properties no-one would actually aspire to live in, but may have to from necessity); the property of people who simply have to move (for job, family or personal circumstances); and then there's the odd lucky find (someone is retiring, downsizing, moving abroad, moving in together etc).

    What this means is that there isn't a lot of good property for sale, which makes the market stagnate. When something good comes along, there's a surprising amount of activity around it (albeit limited by having a 'chain'). Nevertheless, when you average out the transactions, it tends to be dominated by less attractive property that's eventually selling at lower prices. But has the 'market price' for the UK's whole housing stock shifted downwards by that much? No, I don't think so. Walk up to any nice-looking front door and offer them a cheeky price for their house. I bet you won't get many takers.

    Report on 15 January 2013  |  Love thisLove  0 loves
  • oldhenry
    Love rating 343
    oldhenry said

    Just the sort of article you will never read in the Daily Mail or Telegraph property supplement!

    There is a lot of truth in the above comments too but i reckon a very large factor in slowing down house sales, eventually, will be teh cost of heating. This si getting ridiculous , especially if you have afamily that has been used to running all over the house in tee shirts etc.

    The next generation will have their woolies on again, as I did when 10 or 11. You will find teh running costs above teh mortage. insulation onlyworks up to a point, you stillhave to putheat in to save it. So will older house fall out of favour? Yes, I would not touch one unless it was very cheap and worth knocking down and rebuilding on the plot. All pre second WW house without cavity walls should be worth substantially less than one thay can be insulated effectively. These factors seem to be ignored by the housing 'experts' who witter on about a new bathroom , or some such irrelevance. Who looks at the Energy Certificate? I do , perhaps the only person?

    Of course when push comes to shove people have to live somewhere so there will be room at teh bottom for those with little cash and choice.

    Report on 15 January 2013  |  Love thisLove  0 loves
  • electricblue
    Love rating 769
    electricblue said

    Houses without cavity walls can have externally applied insulation blocks which are then spray rendered and look extremely smart. An alternative is internal block insulation but this does reduce the internal space. Both methods can be combined. Oldhenry, stick to commenting on a subject you actually have some expertise in if you want to be a critic of other 'experts'. My house was built around 1902 and is toasty warm thanks to modern insulation.

    Report on 15 January 2013  |  Love thisLove  0 loves
  • Nickolarge
    Love rating 4
    Nickolarge said

    The comment about knocking on someone's door and making an offer implies that a house is worth a price purely because the owner will not part with it at anything less than what they imagine it's worth.

    True value is determined by the offers you get when you really do want or need to sell.

    Report on 15 January 2013  |  Love thisLove  0 loves
  • Arblaster
    Love rating 43
    Arblaster said

    With £4 trillion of the UK's total personal wealth of £7 trillion invested in property,

    Where do these figures come from? I would think that these were the prices that homeowners paid for their homes, and I'll bet that the amount of mortgage would be included in that 1.4 trillion.

    Look, I am old enough to remember the last time. You are going to be told that house prices are going to go up throughout your lifetime, however good or bad the housing market is. If mortgage brokers, banks and estate agents don't sell, they don't eat. So of course they are going to tell you house prices are on the way up again, and you'd better clamber aboard or you're going to miss out on the BONANZA!

    The property bubble was caused by a bunch of deadbeats, who never learned how to handle money, going snout-to-carrot to any shark who was waving a mortgage application form. If one undertakes any big transaction, one has to know what one is doing. These people clearly did not. If they did, they would have known that the smart money had already got out of Dodge. ]]

    You have to remember the words of the late Sir James Goldsmith: "If you spot a bandwagon, it's too late."

    If people really want to invest in property, all they need is a few hundred quid. No mortgage necessary.

    Report on 15 January 2013  |  Love thisLove  0 loves
  • yocoxy
    Love rating 152
    yocoxy said

    "property expert" Cliff predicts price falls for the eighth year in a row. How many times has he been correct?

    Yep, property experts get it wrong most of the time.

    As someone who stepped off the property ladder in 2005 in anticipation of a crash and still out of the market does he have more or less of a vested interest than an estate agent?

    Report on 30 January 2013  |  Love thisLove  0 loves

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