BofE says brace for house price crash

In message , David Off writes

If they truly thought this, why have they just put interest rates up again?

Because they've sold up, put their money in the bank and moved into rented accomodation

They didn't. At the last Bank of England Monetary Committee meeting they decided to keep rates unchanged.

Chris

At the last meeting, yes, but still the rates went up a teeny tiny little bit just a short while ago.

The BofE's brief is not to give householders (like me) nice little earners but to keep inflation within strict limits around 2.5%

And another few teeny weeny little bits a short time before that.

The fact is that rates have risen by over 25% in 12 months, which seems to be having an effect on the market already.

Given that there is a lag between changes in rates, and effect, I hope the committee feel that they have now done enough, otherwise a crash could be on the cards.

Oh no they won't ! -

"IMF: no sign of house price fall

There is no strong evidence that house prices will fall, the International Monetary Fund (IMF) has said.

Higher interest rates might slow the growth of house prices, but the IMF does not see a fall in house prices, it said in its biannual report.

The IMF added that global financial markets are at their strongest since the stock market bubble burst in the late 1990s.

However, it warned that high oil prices could slow growth and raise inflation.

Rising prices?

Strong house price gains in several countries have prompted fears that prices may fall sharply, as current prices do not reflect real value.

Federal Reserve chairman Alan Greenspan lent support to this view when he said last month that house prices may be "out of alignment with fundamentals".

A recent survey by the Economist magazine found that home prices are now at record levels in relation to average incomes in the US, Australia, the UK, France, Ireland, Holland, New Zealand and Spain.

Homes both at home and abroad are more overvalued today than at previous market peaks, from which prices typically fall sharply in real terms, the magazine said.

The IMF's view is more optimistic.

"Even though prices in some countries like the UK, Australia, Spain and the US might be high, the risk of decline in the near term is not very real at the moment," Hung Tran, chairman of the IMF committee which oversaw the report, said late on Wednesday.

The key issue is the sensitivity of households to rate increases, Gerd Haeusler, director of the IMF's international capital markets department, said.

The level of household debt is rising, particularly in America and in the UK but many households, especially in the US, have locked into long-term low rates, making them immune to rising rates.

Upbeat

The IMF's tone was cautiously upbeat.

The report sounded a warning note about the impact of rising oil prices on inflation but applauded the Federal Reserve for preparing the market for interest rate rises.

The world's financial system has strengthened, Mr Haeusler said.

"The financial system has not looked as resilient as it does at present in the three years since the bursting of the equity bubble," he explained.

"Short of a major devastating geopolitical incident or a terrorist attack undermining in a significant and lasting way consumer confidence, it is hard to see where systemic threats could come from in the short term," the IMF said.

The IMF and its sister institution, the World Bank, plan to issue a number of reports ahead of the annual meetings of the two institutions in October.

Story from BBC NEWS:

Published: 2004/09/16 05:22:44 GMT"

Here's another article that I've stumbled across. It calculates that UK house prices need to fall by 25% over 4 years to get back to average house prices to earnings and house prices to rents ratios

"Global house prices

Hair-raising

Jun 3rd 2004 From The Economist print edition

Australia's housing bubble could be the first to burst. It won't be the last

SEEKING to cut through the tangle of statistical measures of Britain's housing market, the economics editor of The Economist turned to her hairdresser. Last year, he was convinced that ?buy to let? was a sure way to make money. Today, finding it harder to cover his costs with rents, he has decided to sell. A sign that the residential-property boom could soon turn to bust? Maybe. Figures, not just anecdote, also suggest that in Britain and elsewhere, housing markets look ready to fall.

Two years ago, we launched a set of house-price indicators, backdated to 1975, for 13 developed economies. In our latest quarterly update we have added three more countries: New Zealand, Denmark and Switzerland. Our indicators, based on data from estate agents, lenders and official sources, show that house prices are slowing in several economies that had been looking frothy. In America average house prices rose by only

1% in the first quarter of this year, the smallest quarterly increase for six years. Prices fell in 39 of the 220 metropolitan areas covered. Even so, prices were still 7.7% higher than a year before (see table). California saw the biggest gains, with prices up by 18% in Los Angeles. But higher mortgage rates may be starting to bite: new home sales fell by 12% in April, the biggest drop for ten years.

The average house price in Britain, as measured by the Office of the Deputy Prime Minister (ODPM), rose by 7.8% in the year to March, down from an increase of 25% at the end of 2002. The ODPM index weights price changes by the value of homes in different parts of the country and is considered to be a more accurate measure than other indices which currently show prices rising much more rapidly.

Australia's housing market has weakened. According to official data, average house prices kept rising in the first quarter, leaving them

18% higher than a year before. However, figures collected by Australian Property Monitors, which are more timely because they are based on prices when contracts are signed rather than at settlement, suggest that home prices tumbled by an average of 8% in Sydney and by 13% in Melbourne in the first quarter. Anecdotal evidence suggests that the slide has continued since then. Last weekend in Sydney only one-third of properties put up for auction?the most common method of sale in Australia?were sold, signalling that prices have farther to fall.

The drop in house prices in Australian cities undermines a popular argument heard in Britain and America that even if house prices do look frothy, they are unlikely to fall unless there is a big rise in interest rates or a jump in unemployment. Neither has been needed in Australia. Interest rates have risen by only half a percentage point during the past year, to 5.25%?less than half the level during the previous housing downturn in 1990. Meanwhile, unemployment is close to a 20-year low.

Instead, the main reason for the falls in Sydney and Melbourne seems to be that first-time buyers have been priced out of the market, while demand from buy-to-let investors has dried up as net rental yields have fallen below mortgage rates. This holds lessons for Britain, where the number of first-timers has also slumped and buying-to-let is looking less profitable.

However, not all markets are slowing down. House prices in New Zealand surged by 22% in the year to the first quarter, the biggest increase in any of the countries we track. House prices have also risen at double-digit rates in France, Italy, Spain and Ireland in the past year.

House prices have outpaced inflation everywhere in recent years except Germany and Japan, where prices continue to fall. Among our 16 countries, prices are now at record levels in relation to average wages and rents in America, Australia, Britain, Ireland, the Netherlands, New Zealand and Spain. The ratios of prices to incomes exceed their averages in the past 30 years by between 25% and 60%. A return to the long-term average could be brought about either by a fall in house prices or by a rise in wages and rents. The snag is that with wages in most countries increasing by only 3-4% a year, it would take years for inflation to erode real house prices to normal levels.

The chart to the right shows by how much prices would need to fall to get back to their long-term average, assuming that the decline takes place over four years and that wages rise at a pace similar to that in the recent past. House prices would need to fall by 10% in America, by

15% in New Zealand and by 20-30% in the other five countries.

Need prices fall so far? Maybe not: lower real interest rates than in the past would justify an increase in the long-term ratio of house prices to wages and rents, and would therefore require a smaller fall in prices. On the other hand, when past housing booms have turned to bust, prices have typically undershot their average by 10% or more."

I presume this inflation indicator does not include house price inflation?

Roland.

An article in the Economist is proposing serious worries that rates could be in double figures in the West within a few years. The gist seemed to be that it could be brought about by three of the following five happening at once:

1. Oil hits 70+ Dollars per.
2. China gets a hard landing.
3. The Dollar falls precipitously rather than being managed down at least another 20%
4. The US current account deficit produces a loss of confidence in creditors by running up towards a trillion per anuum.
5. The US trade deficit promotes a round of protectionism in the US.

Luckily such double digit interest rates can be avoided if only:

A. China raises its currency by 20% to 30% against the Dollar to avoid a hard landing from its credit bubble. B. The US manages the Dollar down 20%. C. The US brings the budget back to balance from 600Bn deficit per annum by large tax rises and savage cuts in federal spending. D. Mainland D. Europe and Japan institute reforms and stimulate consumer spending rather than keep trying to trade their way out of their problems.

The last three I can't see a hope in hell of happening short of a major world recession. China probably has a 40% chance and rising of raising interest rates which might raise its currency against the Dollar. OTOH, it might cause the bubble to burst in China and cause even more problems.

Of the causes, I could easily see 2 through 5 happening (and even causing each other) with 2 looking a near certainty. It's hardly beyond the bounds of credibility to see all five happening at once.

FoFP

Does this help?

In message , Fred Bloggs writes

MMM! It didnt keep interest rates in check, so one could presume that the MC may be paying it mere lipservice. I wonder what they will do when inflation is stifled to below 1% under the new measure.

Well, the fact that they let house price inflation influence interest rate decisions implies it may as well be included in the general inflation indicators!

Roland.

Better get your fixed rate mortgages in while you can!

Roland.

(P.S. I thought your K-wave w>