In January 2007 in the FT and on the Today program I suggested we might be seeing the top of the market. Many scorned my suggestion at the time but at the risk of tempting fate, I wonder if this might now be the bottom. As I said many times since then, I suspect that prices for many will have fallen by up to 50% and whilst most indices don’t think we have got there yet, unless we are staring at Armageddon then perhaps this may be ‘the darkest hour’.
It’s a long argument, please bear with me.
• House prices have already fallen 22% from their peak according to Halifax Index (£157k from £201k)
• Asking prices are at least 10% more than property is actually selling for.
• The market has a further 18% or more to fall say respected commentators.
• Who would buy today something that they are told they could buy for less tomorrow?
“We’re all used to sensational headlines, it’s what grabs the readers’ attention and encourages you to read on. There have been predictions of house price carnage (and there are even web sites such as ‘housepricecrash’) but surely we are only experiencing an over due ‘correction’?
“Well, many hope so but I fear that in fact things are already worse than the main house price indices suggest. Here’s why;-
“House prices, like the value of any other asset, are part art (appreciation of a picture or bottle of wine) and part science (supply, demand, the amount you can borrow and on what terms etc.,). In the current market, there are precious few motivated by pure esthetics – looking to buy just because ‘it’s got the perfect view’.
“The science part is in many ways the easier bit because it boils down to what else has sold and at what price. ‘Facts’ don’t require Brian Sewell to explain what you should appreciate. But the science is looking pretty grim.
“Irish house prices are already 50% off their peak and in Japan, homes lost over 80% of their value during what became known as ‘the lost decade’ in the early ’90’s so the first thing to accept is that house prices can fall a long way.
“According to the web site Rightmove, asking prices are about 10% above the levels that deals are being done but the statistics suggest it may be much more. Rightmove’s average asking price last month was £222,077 compared to £151,861 which was the average selling price of those few homes that sold according to Nationwide. The few buyers who can perform are clearly being merciless when it comes to making offers and there’s a big difference between what people are asking and what those that are selling are accepting.
“The Halifax Index says that prices are academically 21.89% off their peak in the summer of 2007. Like other indices, this is based on completions in the previous month which in turn reflect deals that were agreed two or three months before that. According to the likes of Nationwide and Hometrack prices are falling at nearly 2% per month So in some places we are probably nearly 28-30% down today.
“Question. Would you pay £10 for something today that you are told will cost £8 tomorrow?
“Most experts be they the chief economist at the Halifax or the wise men and women on the Monetary Policy Committee now say publicly that house prices will be cheaper tomorrow than they are today. Respected Surveyors Jones Lang LaSalle thinks that house prices could fall a further 18%. This obviously frightens potential buyers who don’t want to spend more than they have to. Another 10% to go before we hit the bottom? That may turn out to be conservative but lets be reasonable 22% so far according to the likes of Halifax and a further 18% to go – in total it’s still 40% less than it was at the peak.
“In fact, the value of a property (or any other asset) isn’t as is often said “what someone will pay for it” but actually what the under-bidder will pay. If you put your hand up for something and get home to find your spouse thinks you’ve made a mistake comparable with the one they suspect they made when they said “I do!” you will find that the value of the ‘bargain’ you have just snapped up isn’t what you paid for it but what they chap who lost it bid. At the moment around 5% less than the top offer. 43-45% off the peak then.
“If you are one of the few who can actually extract a mortgage offer from a bank then you are going to find that whatever you have agreed to pay will mean a nice man in a shiny suit is going to pop round and check that the bank isn’t lending 75% of an over inflated price (old dog, new tricks?). The valuer has at stake – both his reputation and his insurance is on the line so it isn’t a surprise that his instinct might be to be cautious. Much easier to under value than to get it wrong and get sued!
“Academically then house prices might be around 45% below their peak. As many can verify, there are a lot of properties on the market at present that can’t find a buyer at any price. If you put your property on the market today you have roughly a one in ten chance of selling it. Now there are those who will disagree and there are examples that challenge these numbers but there are so few sales (down 67% in London in January) that I would argue that if you have just sold you should be very pleased and if you have just bought then you almost certainly paid too much.
“The Halifax states that house price to average earnings ratio is back down from the peak of 5.84 in July 2007 to 4.26. However, the Council of Mortgage Lenders tells us that last month the Average Income Multiple (mortgage to average earnings) was just 2.95 – down from 3.35 in February 2008.
“If you buy a home to live in then paying 10% more than you ought is fine because that will be where you live for the next ten years. What price a happy home? But those whose business is based on the value of property will only lend 75% of what the man in the suit thinks. It’s how we know which way they think prices are going.
“Most home owners have always thought that their property is worth more than it is and while there is always the ‘art’ part to add into the value of any property, the scientific part suggests that today, your home is really only worth roughly half what you might have thought it was at the peak of the last boom in the summer of 2007.
“Perhaps then this is the bottom.”