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Is A Long Term UK Property Crash A Good Thing?

Is A Long Term UK Property Crash A Good Thing?
Posted on October 11, 2011 by editor
Posted in Economy News, Politics Of Property Tagged , , , , , , ,

Excuse me readers but I am about to rant.

I was browsing through the weekend property news today and read the most ludicrous statement in the Guardian news paper from a guy called Neil Monnery who wrote a book about historic levels of house prices. He said:

“House prices, when viewed over a long period, tend to rise at 1% above inflation. In the UK in the last 15 years they have risen 5% per annum in real terms.  At some point, prices in the UK have to revert back to trend. But there are different ways of going there.”

 

OK so far, yes I agree, prices need to fall back to affordable levels as they always do with a crash. He then goes on to say;

There will not be a US or Irish-style crash [in the UK], however, but – thanks to low interest rates – something more akin to the pattern in Japan where prices have fallen every year for 20 years.

The market needs to come down and, if it’s possible, we can do that in a sensible way, without pain and where prices are at a point where younger people can buy more easily. In that sense, we’ve got quite a rosy scenario.”

ARE YOU KIDDING ME?

Newsflash. We already had a 20-30% UK property crash in 2007-8. The government stepped in and meddled with the system, effectively allowing the majority of house prices to creep back to where they were. House prices have risen artificially over the last 3 years, egged on by low interest rates and a lack of funding which created a high demand/ lack of supply scenario. But all that really did was stave off an inevitable drop.

How will a 5% drop in house prices per year for the next 20 years be a good thing, or painless even? Seriously? Pity the poor people trapped in their homes for 20 years watching the value of their asset depreciate year on year, whilst possibly leaving a debt to a future generation should they die. Many of those folks were encouraged to use their homes as a back-up pension plan too.

Most think tanks are finally admitting to falling house prices. Surely a quick drop is better than a dribble of pain over a very long term. Do we really want to be stuck in a downward spiral for 20 years?

What is ‘sensible” or “rosy” about an extended long term property crash? Someone please explain this to me because I just don’t get it.

The “Lost Decade” in Japan was brought about by easily obtainable credit which created an engorged property bubble, just as it did here. Banks made loans that had a low probability of being repaid. In turn this led to loan and Investment officers having a very hard time finding anything to invest in that would return a profit, which created a stagnant economy for decades.

Rosy Future?

Is this the rosy future Neil Monnery thinks we should have? What about our children and their future? Look at it this way; would you rather have a broken arm which is painful for a short term but then begins to knit together and reform, or would you like to break each bone in your body one by one over a 20 year period whilst hoping for a recovery each time?

Whichever way you look at it, there will be pain. The question is, how much can we endure and how long will it last?

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  • PHPAdam

    ” At some point, prices in the UK have to revert back to trend.”
    Why? …

    A long term property crash is good for me making housing more affordable and boost to Lettings and BTL. Not best for my property owner friends who are not landlords though…

    • http://www.mypropertymentor.co.uk/ Roberta Ward

      Why? because prices are generally cyclical and will eventually drop/ return and surpass the original value.
      I think you misunderstood the point of the post. I was not saying we dont need a crash or price correction, I was saying that having a 5% crash each year over 20 years as the commentator implied is not a good thing for anyone. A long drawn out crash would not make housing more affordable for many years. A crash now would.

  • REG

    Hi Roberta I don’t think he is saying he thinks prices will drop 5% per year, only that they will drop and possibly for 20 years as in japan. I think that’s unlikely for all sorts of reasons but you never know… But as Adam says, what is bad for some is good for others, such as FTBs. 

    BTW I disagree that property prices will necessarily be cyclical in the future in the same way as they have in the past. The past isn’t necessarily a guide to the future, only to the past… 

    • http://www.mypropertymentor.co.uk/ Roberta Ward

      Well I guess we will all have to wait and see whether the cycle remains intact. If the market were to correct naturally and interest rates were not massaged downwards, the initial crash we had would have made property more affordable. I doubt whether the govt ( whoever it is) will want a 20 yr price drop. Not good for votes ;-)
      Thanks for commenting

  • John Raiye

    The difference with property as opposed to other commodities is the regional variation and transaction price of the individual investor.  i.e if you buy gold bars at $1600 an ounce and it falls to $1300 you are in for a net loss, unless you hold, and hope it comes back.  A waiting game with no yield?!  With property it varies by region and varies by transaction price.  Purchasing property at 35% discount in a demanded property location, where prices have only fallen by 5%, could still be a good investment.  Another example is where you purchase a discounted property which has 3 beds and create 5 beds and extra living accommodation through permitted development which can leave a trading profit, even in a falling market, as long as you do your sums correctly.  Recycling cash in HMO’s can provide 20-30% returns via rental.  Again, as long as you stay disciplined with your deals.  It really does vary.                                                                                                                             
                                                                                                                                                 An overall correction and a reversion to the mean for lending would leave property borrowing at 3-3.5 times a households income.  That is a drop in prices and probably where banks should be in reality.  Do we really want banks taking excessive risk with the nations deposits?  They did that before and we had to print money to save them.  Imagine no banking system?  The reality is that is what actually happened.  A slow fall is probably best for everyone.  In my view it is actually happening and property is generally fluid at the very lower price levels and delivering a yield to investors above that.  Well placed property will always have a more robust demand so will fall less.  But price drops are what you would expect in this phase of the cycle.  Low interest rates have certainly propped things up for the last few years.  As housing providers we are a service industry the real concern is how quickly we can we get back to consistent yearly GDP growth.  

    John Raiye

    • http://www.mypropertymentor.co.uk/ Roberta Ward

      Hi, yes I agree with you re the first section, and they are time honoured ways of traditional investing which will continue to work. No, of course banks should not take excessive risks, but also, being overly tight is a bit ridiculous. The reason they are not lending is because they have little money themselves due to past recklessness, plus they clearly feel a drop is on the cards.
      True it is more fluid at the bottom, and at the very top, BUT there is no point to that unless the middle price bracket can move too, due to the chain situations we have in UK. This has led to a stagnation in the market as a whole. I agree that price drops are needed and are happening, however, for me I would prefer a bigger drop now rather than a trickle over decades. It certainly did not help Japan.
      Thanks for your comment.

  • Paddy_briggs

    Both Guardian article and this comment on it seem to ignore or nderplay Regional variations – no just (but especially) London cf rest of UK. Not sure national averages particularly helpful.

  • http://www.mypropertymentor.co.uk/ Roberta Ward

    I agree, there are lots of articles on this site specifically dealing with average house prices. This blog was more a general comment on that particular article and the potential damage to the economy of a long drawn out price fall. Since I wrote this, London is finally starting to dip in price. London is of course propped up by foreign buyers and city bonuses.

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