House price crash 2008 - will the bears be right?

At the start of the week I had a call from ITV’s Tonight show asking what This is Money’s house price prediction for 2008 was?

As I had made that 2-3% increase prediction two months ago, I was also asked if I was sticking by it.

Now that was a tricky question. I made the prediction back in mid-November and even then it was fairly optimistic – since that time a further barrage of bad news has landed on the doorstep and house price crash looks like being the financial catch phrase of 2008.

Here at This is Money we have asked the crash question ourselves and any property news is being snapped up at the moment.

What has been fascinating is the depth of feeling aired in our reader comments. There are a lot of angry punters out there and a fair few campaigning for a full blown house price crash.

Of course, house price crash is a cliché, but it is a handy one and tempting to use. What actually happens as house prices slow is a big drop in transactions and a steady drip of small monthly falls, as a gap develops between what people think their home is worth and what others are willing to pay.

‘House price crash is a far overused phrase,’ Capital Economics property economist Ed Stansfield, told us when we asked him the big question for This is Money’s Where next for house prices? video.

Instead, he says past evidence suggests the housing market adjusts slowly, as property is not a liquid asset and a stock market-style crash doesn’t happen.

An easier thing to measure is sentiment - and this has changed dramatically over the past year. Over three weeks in December 2006, 55% of people said house prices would rise in the next 12 months. Over the same period in December 2007, 75% predicted a fall in the next 12 months.

This may be a straw poll measure, but it displays a remarkable shift in mood. It is not completely unexpected, however. In May, a This is Money poll showed just 41% of people thought prices would rise over the next 12 months.

Writing about that result and the prospect of a property slump, I commented: ‘The important thing though is that it doesn’t really matter what the experts or the doomongers think – house prices are dependent on what the public thinks.

‘So will prices crash? It’s unlikely when there are still 41% of people out there who think they’ll rise. But if confidence takes the same hit in the next six months and another 14% lose their faith, then there would be only be 27% believing prices will rise and that could spell a serious problem.’

Six months down the line that has happened, so should I revise my prediction of a 2% to 3% increase in prices?

Probably. But I’ll keep it for now. Firstly, I did qualify it with the words ‘making predictions is a mug’s game’ and secondly believe that if you are going to make a forecast you should stick with it for longer than two months.

Certainly on current evidence even low growth looks tough and the tightening of borrowing criteria by banks and building societies means the cheap money that has driven house prices upwards is no longer widely available. But there are supporting factors out there. My house price prediction takes in the whole UK property market and there is pent up demand and areas where I think inflation will be high enough to keep average annual prices going up slightly.

However, even my predicted rise of 2% would still see property essentially stagnate and lose value in real terms due to inflation, which is likely to be higher itself.

I think that’s going to continue for a while, as 2007 was the year that property became unaffordable. Stagnating house prices will be a good thing – even for those like me who have bought a home in the past two years - because one day we might want to move somewher bigger and need someone to buy our home.

Oh, and the sooner we get away from this obsession with our homes as a cash cow the better.

- Simon Lambert, This is Money

Useful links:

Analysis: Will there be a house price crash?

Mortgages and property news, tips and advice

Comments

[Alex]

Can't you see a big recession coming? We are waiting for the recession actually to buy a house. Thans for your good article by the way.

[John Ward]

In my admittedly limited experience, it seems that the only people who don't accept that there is already a significant price slump are those who are clinging to the over inflated price of their property at the height of the boom. House prices are slipping rapidly. this can be seen clearly on estate agent websites with 'New Price! etc' an increasingly regular feature. Statistics from Nationwide, Halifax and Lands Registry are based upon an unreflective number of sales in recent times and probably reflect deals struck weeks or months before the quoted period. It is hardly surprising that the former two sources are putting a rather transparent, positive emphasis on figures since falling house prices represent direct reducion in corporate assetts, or am I being too cynical?, time will tell. I think the next few months will show a much more significant and undeniable downturn. Anyone foolish enough to purchase recently have thrown money away. Thank goodness the property investment frenzy is over and ordinary people will soon be able to buy houses for the right reasons, i.e. places to live.

[smith]

Hello simon,
Being in the building trade, I think I have a good idea of what is a fair price to pay for a property, based on the price having to be paid for labour and materials and an assuption of what the major builders have paid for land - this of course is impossible to calculate as land is often bought years earlier and conveniently popped into landbanks - With this in mind, some four years ago my wife and I considered that house prices had risen to a level where they were frankly, a bit silly, and decided to sell up in England and move off to south west France. It is from this region of gently rolling countryside, sunflowers, vineyards, french boule, natural cheeses and local unadulterated french wine (which incidentaly never ever left me with a headache the next day) that we and all the other Brits looked on in isolated astonishment as this mass public blindness, fuelled by ever increasing personal debt and sheer human greed, took house prices in Britain to a level where they collectively, if indirectly, contributed to this subprime hell which now, tsunami style, threatens all economies in one way or another.

We've seen house prices boom and bust before, but this time the boom has been an explosion, which has blasted the vital first time buyer hurtling from the marketplace. There is only one way for prices to go now and that is down, until a fair and justifiable trading range is once again established. Back to Gascony in a couple of weeks, et voila! Back to reality. Bonne annee.

[john campbell]

It used to be the weather that was talked about at bus stops, how that has changed. I
t is now property prices, with the typical commment from an umberella holding lady 'I dont know how young people do it'.

Well we are and have been doing it.

[Brian Green]

The property crash in '91 was created by the base rate hike to 15%. Does anyone remember that? This time is different we have low interest rates. Sure some repos. will come on the market at realistic prices but I think these will be mainly new builds that have been over mortgaged through developers deals.
My guess is that with low base rates (anything below 7% is low by 70's and 80's standards) we will see a stabilising drop of 10% - 15% over the next 2 years and then a bit of stagnation, putting inflation in the equation property prices will be back on track in 3 years time.
Of course falling prices discourage sellers, so lack of good property on the market results in rising prices.

[richard smith]

i myself have been looking at the current situation with the word in the air being they must fall. I myself believe that is a fair asumption what with most estate agents not being able to sell a property at face value as they price them. I think that especially in poor Wales the lack of economy is a sure sign of fall in price also word is food prices are set to rise dramatically over the next few years which in turn will rock everybody's economy. A debate maybe just starting with fuel prices coming into play firstly as we all need items that get transported and they will all cost more just for starters. We know whats coming the houses cost to much for any substainability anymore people already pushed will loose out again bringing more repos and sceptics not to buy a £100000 down to £60000 i think thats 40 percent considering the real economy there at present it will happen and soon in my reconing .
Even big landlords are doing their nut thinking if it slumps and rental rates fall will they start a loss they cannot cope with. I know one who has 40 plus and he is starting to rebuild to bedsits and flats knowing that if there's a fall prices wont fall much on flats a one bed will always fetch £50 plus so my question to you all is how long will the big fall take too come

[Catherine]

I would like to comment on John Campbell words well I do remember the high interest rates and the negative equity and it effected me at the time and I was also made redundant at the same time and it was an awful time but as you said the interest rates are still low compared to then and as long as they stay like this things should pick up again but it will take time.
I have been made redundant again after 14 years in my work but so far I have managed to keep going by working for myself and taking on a part time job because I could not find a job that paid the same.
A lot of the work available is lower paid, I earnt good money for the past 20 years but now it seems to have changed with lower wages being offered for the same jobs available.
I am positive that things will sort themselves out and even though no one is happy about what is happening now, no one was moaning for the last ten years when things were going well for most people.
When we had those high interest rates back then it was under a conservative government. Things change ever so often and you have to weather the storm and sometimes it is harder than other times and I am not saying that because things are easy for me, far from it. I have had a tough few months and expect them to get tougher but I got to keep positive like everyone else. There are a lot of things wrong with this country at the moment but hopefully within time they will eventually get sorted out. Also I am not an older person I am only 40.