Abandon All Fear

What nobody else seems to be saying…

[Housing Market Myths] House Prices Always Rise

Posted by Lex Fear on April 9, 2007

Some months ago I posted my intentions to blog regarding the UK housing market.

I will begin with addressing some of the myths that are commonly cited with absolutely no backing, usually by vested interests (VIs) and home owners.

The First Myth: House Prices Always Rise

This is usually the first one pulled out by those VIs who want to motivate you to stretch yourself to get on the first rung of the ladder. Statistics prove the exact opposite. Certain areas will rise and fall depending on age population, land value, attractiveness of the area and changes in infrastructure just to name a few. Below is a graph of average prices in the postcode area I currently live (edited to remove address details):

And here is a more detailed graph for flats and semi-detached in the same road:

Data: Yahoo House Prices

I wanted to put detailed prices of individual properties but it was proving too much hassle to smudge the addresses in my imaging software. What the individual figures do show is people are not checking prices in the area and getting ripped off for similar properties. One example of this is:

103 My Street, 19 Jul 2002, Leasehold Flat, £174,950
100 My Street, 6 Sep 2002, Leasehold Flat, £100,000

That’s almost £75k decrease in price of a similar property within 3 months! I just plucked this one example from the list with relative ease. I regularly find it happening in areas myself or family members living in different parts of the UK. I guarantee if you go to Our Property or Yahoo House Prices right now and enter your postcode you will find many examples in your own area.

Historical data shows that house prices move in cycles and, while growing over the long term (along with inflation), that each ‘boom’ is followed by a ‘bust’.

Graph Source: Housepricecrash.co.uk (HPC), Nationwide data

So what’s my point- house prices are rising, right? At the moment yes, and it’s good news if you bought your house anytime between 1995 and 2001, and especially if you intend to sell now, or live in it for another 10 years. However for those who have bought in recent years, it doesn’t look as good, we are either at or nearing the top of a bubble which will not last.

The problem comes down to something called negative equity, and those who have bought recently are going to experience what it feels like. Let’s just say you buy a house which is currently valued at £200,000 with a mortgage of 90% at £180,000. If the price of the house goes up to, say, £220,000, then when it comes to selling you’re £20k better off. But what if the price drops £20k? You now have a house that is worth £180,000 and you stand to lose you’re original £20,000 deposit if you want to sell. Ouch! …and we’re only talking of a drop in value of 10%. Just look at the last crash on the graph- approximately 30% drop in 2 years.

Why did this happen? Because demand dropped- first time buyers (FTBs) could no longer afford to buy. When this starts to happen, investors start to lose confidence, when that happens the bottom drops out of the market. This is basic economics.

Take a look at this second graph, showing the price to earnings ratio of FTBs (courtesy of HPC):

Yes we all know it but refuse to acknowledge it- FTBs are now currently borrowing up to 6 times there salary as opposed to the long-term average of 3.5. Sadly these people will be the hardest hit by negative equity and will have to sit it out a long time in their 2 bedroom flat while others are buying 4 bedroom houses for the same value.

“But the government won’t let it happen!” Unfortunately, the government has little control over house prices as they so far reluctant to regulate and enforce existing regulations on mortgage lenders or estate agents. Gordon Brown has sailed the wind of this boom, and tweaking the economy by keeping interest rates artificially low can only prolong the inevitable.

For earnings to catch up with prices, interest rates must rise, and when this happens, it will all come tumbling down as people rush to sell, being unable to afford their mortgages.

Finally, America’s bubble has already started to deflate, which means Britain cannot be far behind. Perhaps the boom and bust cycle is best explained in the form of this rollercoaster simulation based on real US house price statistics by Speculative Bubble:

Previous: The Next Housing Crash: Prelude
Next: Myth: Low Interest Rates Means I Pay Less

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