This is Money Blog

House prices debate on Radio 4 Moneybox

With house prices apparently stabilising, I was asked today to debate the issue on Radio 4's Moneybox with the programme interested in my previous comments about affordability measures. I think they're a misleading tool, used to justify inflated property values during the bubble years. To gauge how genuinely 'cheap' property is, it should only be measured against earnings.

Mortgage lenders and brokers - such as Ray Boulger of Charcol, who was part of the live debate - suggest affordability is returning. Ray says we've hit the bottom. Here are the two key factors used to justify this - and my reasoning as to why it's wrong.

'Affordability is returning'...
...Well it would be, with interest rates at unprecedented lows.  But this measure, based on the cost of mortgages and wages, is only a short-term driver on the market. Rates have fallen to near-zero so it is helping support the market now. If the bank rate were to raise to, say, 2.5% next year then house prices would suddenly become very unaffordable again.

Quantitative easing could help increase credit to consumers and this could help push house prices up - but again, this would be a short-term driver.

The purer wages alone vs house prices gives the clearest indicator of the 'cheapness' of property. [And old post explains why fair value is £126,000 compared to the current £160,000-ish - and see the image below]

But there is limited supply of property in the UK...
That's right. And I suspect there is a shortage squeeze happening now driven largely by the fact would-be 'downsizers' and other sellers are holding back, waiting for the market to 'come back' (there could be a flood of these coming on to the market when the owners realise prices might take years or even decades to regain earlier highs).

As with any market, supply and demand is a key factor. While supply may remain tight, demand will be undermined by a very weak economy. And the economy will remain weak because of the enormous debts we all owe (£1trillion) and the colossal public debt. This will be further aggravated by a rapidly ageing British population.

So the supply and demand is just misrepresented to suggest that a dense country will always have rising prices. But uber-compact Hong Kong had falling prices for seven years up to the early Noughties and in Japan, which has comparable population density, prices have been falling since 1989. It followed a giant debt-fuelled consumer spending boom and banking collapse. Sound familiar?

- Andrew Oxlade, Editor, This is Money

The problem in a nutshell (a little out of date but you get the idea)

Retire at 70? No chance. Our unfixable demographic problem

This demograhic problem is really coming home to roost.

It's a pet subject of mine...

- Demographic investments - I'm loving the returns (Apr 2009)
- How baby boomers will extend the financial crisis (Jan 2009)
- Demographics make emerging markets a screaming buy (Jan 2009)
- Demographics to spark a shares slump next year (Dec 2007)
- Demographics will spark a 15-yr slump, starting with falling London house prices in 2008 (Mar 2002)

...so I thoroughly enjoy these spells when the issue of population surges up the news agenda, given it is possibly the biggest and most immediate challenge facing the developed world...

- FSA boss says work until you're 70 (Daily Mail)
- Special report on ageing populations (The Economist - front page)

The problem in a nutshell

The post-war baby booms in Western economies (1945 to 1965) mean that a huge bulge in the population is transfering from contributing to the economy to taking from the economy because they are:
- Less likely to pay tax
- Less likely to spend
- More likely to use costly public services
- Certain to draw a state pension increasing pressure on public finances
- Likely to draw on stretched company pension schemes, increasing pressure on company finances

All these factors are then amplified by increasing longevity - life expectancy when the full state pension was introduced in the 1940s was around the same as pensionable age. Now it's 77 for men, and increasing by two years every decade.

The crest of this population bulge hits retirement age next year (or four years ago for women).

Before I trigger the hate mail/comments, I entirely accept that this hard-working generation deserves a well-earned retirement. I'm simply laying out the harsh reality of the economic impact.

And the solutions?

- Dramatically increase the pensionable age
- Dramatically increase immigration (a younger population helps pay for the old)

The first option is now impossible. The older population bulge also have the most votes - so no government would dare force them to work signifcantly longer. The opportunity has been lost. So open the floodgates to immigration? Again, political suicide.

So that's it. Just grin and bear it. The Japanese, who hit their own demographic wall 20 years before us in 1989, seem to have come to terms with the fact they're not constantly getting richer. Now we need to make the same adjustment.

- Andrew Oxlade, Editor, This is Money

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My buy-to-let barometer swings from plus to minus

In April 2009, I launched the This is Money buy-to-let barometer, a very slightly more sophisticated follow--up to my dismal house price predictor which, in June 2007, pointed to house price falls.

How the buy-to-let barometer works

We're lucky enough to have the strength of our content recognised by Google. So when you search buy-to-let our buy-to-let guide is the top result. So if we measure the amount of people clicking on it, we can gauge British appetite for investing in property. Admittedly, the extra variable of schadenfreude BTL searchers may have a slight impact on the results.

I combine this with Google Trends, which gives a rough idea of people searching for particular phrases.

My previous views on the market

I have written recently on how the market has a lot further to fall, if the market realigns itself with the long-term trend of prices versus average salaries.. The average UK house price - currently around £160,000 (Halifax) - should bottom out anywhere between £99,000 and £126,000.

But there's a big but... I've also warned on this blog of how the decline will be undulating - and the market could even see decent, sustained rises. Vast amounts of printed money - quantitative easing - have been pumped into the financial system. This is helping to increase the ability of companies to raise money and for banks to lend money. As I warned before, that could give a fillip to the market. And it looks ever more likely now that they are: [property market latest].

What does the not-so-dismal buy-to-let barometer suggest now?

In June, 2033 people searched 'buy-to-let' and clicked on our BTL guide. The figure spiked in January and fell and has hovered a little above 2,000 since then.
January: 3,322
February: 3,191
March: 2,969
April: 2,101
May: 2,024
June: 2,033

But that's not the real measure. That's because interest in BTL traditionally peaks in January and then falls (see the Google Trends chart below). The more interesting trend is year-on-year. So in January, the number of people reaching our BTL guide leapt 85% on January 2008. But that increased interest appears to evapourated in recent months and was actually down in June...
Year-on-year increase
January: +85%
February: +53%
March: +27%
April: +1%
May: +3%
June: -2%

The property market has benefited from renewed interest - several studies have reported price rises, some over several months. With the Bank of England still merrily pumping money into the system momentum may be sustained. Maybe a second mini-bubble will reinflate. However, confidence alone will not provide solid, long-term returns from property.

Investment bubbles are only fully deflated once nearly all investors give up all hope of the asset ever rising again. Like I said last time, we've got a way to go.

- Andrew Oxlade, Editor, This is Money

P.S. Moneybox on BBC Radio 4 have kindly asked me to come on the show for a live debate tomorrow at midday. Unsurprisingly, I'm arguing the case for the bears.

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Number of Google searches for "buy-to-let"

Fixed mortgage rates to fall? Don't bet on it

A lunch meeting gave me an interesting insight into the direction of fixed-rate mortgage rates yesterday.

In early to mid-June, our interest rates round-up warned that City traders were taking an outside punt that the Bank of England may raise the bank rate before the end of the year (the wider economic consensus is that rates will stay at 0.5% well into 2010).

At the same time, experts warned that 'swaps', one market for borrowing which heavily influences the price of fixed-rate mortgage offers, were edging up. Fixed-rate mortgage deals duly followed upwards.

However, I meet with a guy who knows his mortgages. Francis Ghiloni has recently helped set up the www.realpricecomparison.com, which shows full mortgage comparisons. He has lots of experience and a vast knowledge of how the industry works.

He pointed out that swap rates have fallen back again in recent weeks and are, in fact, lower than they were a month ago. So the lenders have presumably passed that on with cheaper rates? Er, no. And Ghiloni suspects they won't, with banks and building societies happy to scoop up bigger profit margins in the meantime. Competition in the mortgage market ain't what it used to be.

So should you fix now or wait? It should be a personal choice rather than a market call [how to decide to on fixed-rate mortgages]. Ghiloni faces the decision personally. 'I won't fix now,' he says. 'I'm waiting for more competition to enter the market.'

Let's hope it does.

- Andrew Oxlade, Editor, This is Money

• www.twitter.com/aoxlade

Other posts
- How to decide on fixed rates
- 'Expect rapid rate hikes!' - they wouldn't dare

The new career booster: Work for nothing

How not offering to work for free can have a harmful effect on your job security...

The world's first stock market-listed voluntary organisation, otherwise known as the airline British Airways, asked its staff to work a month for free in a crass attempt to bolster the company's financial strength.

 In all, 800 BA workers - with cabin crew on an average £29,000 - have agreed to work unpaid for a monthand another 6,200 will take a pay cut. Some 1,400 more will switch to part-time. In all, £10m will be saved.

  At first glance the high response is surprising (I was even more surprised by a pollon our site found that 35% of readers would work for nothing) but in reality, these 'volunteers' are saving not only their company but their careers. Can you imagine if, in the next wave of redundancies, the management attempted to get rid of any worker who had bravely stepped forward before to work for nothing. As a journalist, I'd run a story on such an injustice.

The real injustice, of course, is that it heaps pressure on those who had the temerity to expect to get paid for going work.

The plan was crass but it was successful, financially but not morally. Expect to see the same at a plc near you soon.

- Andrew Oxlade, Editor, This is Money

• www.twitter.com/aoxlade

 

Robert Shiller: 'House prices to fall further'

Robert Shiller (pictured) is a renowned US economist. 

Not only is he professor of economics and finance at Yale, he has also written respected books on economics and investor psychology - and his repeat-sales home price indices, developed originally with Karl E. Case, are now published as the Standard & Poor’s/Case Shiller Home Price Indices - a standard measure of the market in America (it suggest prices are down 33% so far). 

As you can imagine, his views carry weight. So it's worth pointing out an article he wrote at the weekend for the New York Times.

In it, he predicts that despite three years of falling house prices he expects more of the same. The health of the US property market is a linchpin for the global economy - further falls mean bigger losses - the extent is unknown - for financial institutions around the world.

He also cites reasons why property declines are so protracted...

• >> Sales of existing homes are mainly by people who are planning to buy other homes. So even if sellers think that home prices are in decline, most have no reason to hurry because they are not really leaving the market.
• >> Few homeowners consider exiting the housing market for purely speculative reasons. Owners don’t like shifting from being owners to renters. It also takes agreement from both halves of a couple - and there are children with school places, and friends, to think about. 'Most decisions to exit the market in favour of renting... are due to economic necessity.'
• >> Young couples, seeing rising unemployment and property turmoil, remain renters. They may not revisit that house-buying decision for some years.
• >> At the other end, elderly couples who during the boom were holding out against selling their home and moving to a continuing-care retirement community have decided that it’s finally the time to do so. It may take them a year or two to sort through a lifetime of belongings and prepare for the move, but they may never revisit their decision again.

And the conclusion:

'As a result, we will have a seller and no buyer, and there will be that much less demand relative to supply — and one more reason that prices may continue to fall, or stagnate, in 2010 or 2011.'

Although he admits these people 'could be made to change their plans if a sharp improvement in the economy got their attention', which might provide an 'upward kick to the market price'. He adds: 'That's why not all economists agree that home price declines are really predictable'.

And the UK impact?

Shiller didn't go into that - so I will. As previously observed on this blog, UK house prices still look wildly overvalued on fundamental measures, such as average wages vs property. However, I also suggested that we may get short-term bounces on the long road down. The Bank of England is dumping billions of pounds of printed money into the economy - that has helped improved confidence and helped make mortgage borrowing cheaper. I would imagine the Government and the BoE must be desperate to stabilise the housing market, knowing that further declines will inflict further bad debts on UK banks. They would surely do anything to protect the recent nascent recovery in banking confidence.

Meanwhile, there are legions of would-be buyers waiting on the sidelines ready to pounce on any sign that the bottom has been reached. A short period of sustained rises could, in theory, be followed by a longer period of sustained rises.

I talked to an estate agent in my area today - the Surrey/London borders - and he said sales dramatically picked up in March, although prices are still not rising. He even has one seller who wants to raise the price of his property.

Prices may rise short-term, but long-term I think Shiller is bang on the money. He points out that after the recession of 1991, US house prices didn't start rising until 1997. In the UK, it was small rises with 1995 with a substantial pick-up in 1997. This recession is far, far deeper than the last and the recovery faces additional headwinds.

- Andrew Oxlade, Editor, This is Money

For a full round-up of the factors, don't miss: What next for property prices?

Archive posts
- Shrewd buy-to-let seller buys again
- My buy-to-let barometer: confidence rises
- Are these towns property-crash proof?
- A Place in the Sun: 'Cape Verde prices will rise 75%'

'5p razors for £2.43': Brand rip-offs, part III

Another brand 'rip-off' is named and shamed today. The razor industry apparently makes replacement blades for as little as 5p and sells them for up to £2.43 a piece.

Presumably, the gap is a bit of profit, and a lot of marketing and advertising spending. The likes of Roger Federer, Thierry Henry and Tiger Woods - who have been fronting a campaign for Gillette don't come cheap.

Annual accountsfor Gillette-maker Proctor & Gamble show that in 2008 it spent 31% of its £83bn sales on the cost of selling and admin, which includes marketing.

So on average, for every P&G product you buy, up to a third of the price is the cost of convincing you to buy it.

Now the figure is only an average as P&G makes all sorts: Pampers, Ariel, Pantene, Pringles, Crest, Duracell, Head & Shoulders, to name but a few.

The opportunity to spend on advertising to increase margins depends on how emotive or aspirational the product is. So as a rule of thumb, the stuff that makes us look and smell nice gets the biggest ad budgets.

I began ranting last year about how the economic crisis would stymie big business on brand. With consumers feeling the pinch, why would they want to carry on bankrolling big ad budgets. Quality rather than brand is now a more important factor in consumer decisions. 

As for me, I've been buying Boots replacement razors for more than decade (£1.07 for 10), having decided there was no worthwhile difference in the quality of my shave but a huge difference in price.

I enjoyed this observation recently in marketing trade publication MediaBuyerPlanner...

'P&G is struggling against value brands as consumers become more focused on pricing due to the recession...'

Great - so time to cut the price or dramatically improve the product quality? Er, no...

'...Deutsche Bank analyst Bill Schmitz says P&G likely understands that halting the slide in its tracks, now, is less expensive than trying to regain it later, a fact which will lead to increased spending.'

Please help me keep the brand rip-off revolution rolling by buying value-for-money products. [Previously in the brand rip-off revolution: Part one - Hoorary for Tesco Discount brands | Part two: 20p bottles of perfume]

- Andrew Oxlade, Editor, This is Money

The profit-mirage behind bank bonuses

Today the Treasury Select Committee warns that the bank bonus culture is still 'flourishing'. The industry could argue that the bankers who have skillfully protected their banks from the need for direct taxpayer bailouts should be richly rewarded.

I don't agree. I agree with the Nobel Award-winning economist Paul Krugman (right). His column in the New York Times last month reflected a growing irritation that I felt...

'You might argue that we have a free-market economy, and it’s up to the private sector to decide how much its employees are worth. But... Wall Street is no longer, in any real sense, part of the private sector. It’s a ward of the state, every bit as dependent on government aid as recipients of Temporary Assistance for Needy Families, a k a “welfare.”

'I’m not just talking about the $600bn or so already committed under the TARP. There are also the huge credit lines extended by the Federal Reserve; large-scale lending by Federal Home Loan Banks; the taxpayer-financed payoffs of A.I.G. contracts; the vast expansion of F.D.I.C. guarantees; and, more broadly, the implicit backing provided to every financial firm considered too big, or too strategic, to fail.'

His point is that all parts of the banking industry have benefited from taxpayer assistance of one sort or another. And it's similar for other countries. In the UK, for instance, we have the Special Liquidity Scheme, a line of heavily subsidised credit that has been accessed by 32 banks and building societies, according to the Bank of England. It's just one of a handful of schemes launched by the BoE [more explained here].

Yes, I understand that improving credit was necessary. But when banks borrow cheap public money and make bumper profits - taxpayer-subsidised profits - is it right to use those profits to justify bonuses?

This profit-mirage also delays the inevitable restructuring and reordering of the banks. Most people who live within commuting distance of the City will have noticed, on a personal level, the vast pay disparity between bank workers and those in the comparable jobs of other industries.  As Krugman says: 'From the 1930s until around 1980 banking was a staid, rather boring business that paid no better, on average, than other industries, yet kept the economy’s wheels turning.'

This normality will return. Some bankers recognise it, but there's still a chance to churn more bumper 'profits' and bonuses in the meantime.

- Andrew Oxlade, Editor, This is Money 

>> Poll: Should bank bonuses be banned?

Andreas Panayiotou: Shrewd buy-to-let seller buys again

Andreas Panayiotou, who off-loaded apartments worth millions in 2006 ahead of the property crash, has called the bottom of the market and is buying again.

Panayiotou (right), a boxer-turned-property-magnate, was on the BBC2's painfully stretched-out Property Watch programme on Monday night, hosted by Kate Silverton (below) and Justin Rowlatt (neither are convincing at staying interested in house prices for a full hour every night).

Panayiotou, who once worked in a laundrette, said: 'Everyone was forgetting the rules. It was all about capital appreciation.'

He said he saw yields fall from 15% to 3% and that his rule was that yields should be higher than the cost of funding and higher than 'interest from the bank'.

'We are at the bottom and starting to see a recovery. We are actively involved and looking for sites. I'm going full-speed back into it. You have to see where interest rates are. Would you rather have your money earning 0.5% or 6% in buy-to-let?'

He says the current 'liquidity crisis' can only be compared with the 1930s with the difference this time being that governments acted quickly to improve the flow of credit. He believes that improving liquidity will even help stem the rising tide of unemployment, as more money flows into companies. Rising unemployment is cited by economists as one of the main drags on property prices. 

Panayiotou left school in east London at 15 without any qualifications and built his fortune by developing blocks of flats on the edge of an up-and-coming area and waiting for prices to rise. He claims to have predicted the success of Shoreditch, Clerkenwell and Hackney before anyone else but sold £750m worth of flats at the end of 2006 when he believed the market would collapse.

In August 2006 he said: 'We are reaching the height of the market… Property values are still increasing but rental income is not catching up, so the yield - your return - is being depressed.'

He instead turned to investing in hotels where he could find a yield of '6-7% compared with 3%' for residential property. He was 158th on the 2008 Sunday Times Rich List and worth £500m, up from £317m in 2003.

In December 2008, he said: 'I saw the bubble inflating - and then I saw it was about to burst and I got out in good time. At present I believe hotels are a much better bet, as long as they are top quality facilities in unique locations.'

You can watch the full interview on the BBC iPlayer for the next five days (flick to 24 and 28 minutes). He was also interviewed on the Truth About Property in May 2008.

So is Panayiotou right?

I think not. And I find it concerning that the property victims on the show are waiting for 'when' prices recover to fix their problems. 'When' could be next year if prices suddently rise 20%. Even if they rise at an optimistic 3% a year, we wouldn't reach previous peaks until 2017. That's not a great prospect for the split-couple waiting for a recovery. 

Britain's perilous long-term finances will undermine long-term prospects. We may have a short-term bounce due to £125bn being pumped into the economy, but rising unemployment and shrinking wages aside, there are basic factors that will weigh on the market:
- Long-term house price vs wages ratios: Prices should fall 38% to 50%
- The reason this slump will last longer than you think - demographics

Also:
- My buy-to-let barometer: Confidence is up... for now
- House prices: News and analysis round-up

One other thing - I don't need to remind This is Money's astute readership (but I will) to take all predictions with a pinch of salt. Correct forecasts get more coverage than failed ones. And even with those with a good track of predictions, there's no guarantee they will repeat the feat. [There's more on this in our stock market predictions round-up].

- Andrew Oxlade, Editor, This is Money

When even 'genuine' £1 coins are fakes

A recent study suggested as many as 5% of £1 coins are fakes - that's one in every 20.

Royal Mint figures previously suggested it was just 2%. So there's a fair chance you're handling a fake £1 coin every month.

Andy Brown, MD of Willings, a specialist coin validation firm, was the source of the story, which was widely reported.

I was invited on to ITV's This Morning - where I regularly talk about consumer issues - together with Andy Brown to help viewers spot fakes and understand their consumer rights.

However, while in the 'green room' afterwards he showed me a newspaper story that really summed up the extent of the problem. The Daily Express covered the rise of fake coins in January. The graphic to go with the story shows a 'fake' pound and a 'genuine' pound - only the one shown is a Queen's head from 2002. Andy Brown points out that the Mint only made pound coins with three lions in 2002 (click on the image below). So the 'genuine' is a fake. 

It's a stark reminder of the prevalence and high-quality of fake coins in circulation. Stay vigiliant.

>> See all pound coin designs for each year (Royal Mint)

>> How to spot counterfeit coins (Royal Mint website)

- Andrew Oxlade, Editor, This is Money