Steepest House Price Drop Since 1992. It'll Get A LOT Worse Yet

I’ve a bone to pick with Nationwide. Two bones, actually.

Firstly, there’s the TV adverts. The ones with Mark Benton as the Bad Bank Manager, "hoiking" people in with low introductory rates. They’re bloody awful!

Then there’s Nationwide’s regular servings of miserable housing news. Now, I realise that I’m shooting the messenger here. But when the messenger produces such annoying adverts, I feel entirely justified! So what’s Nationwide’s latest dose of woe? Oh, nothing much... only that house prices have seen their biggest year-on-year drop since the last recession. They’re down 6.3% since June 2007.

But there’s still more to come, as I explain below.

In fact, someone buying a house today, hoping its value will eventually rise, could be in for a nasty experience. Homeownership could be the worst financial move new buyers ever make.

The sharp drop has caught many professionals by surprise. One estate agent in Wales had this to say:

"It’s just as bad as the 70s or 90s if not worse. In January we were celebrating our best year ever. In June I had to make 15% of my staff redundant."

And there are several reasons to believe things will deteriorate much further.

MoneyWeek contributor Fred Harrison — who has examined 3 centuries’ worth of data — argues that the housing market works on an 18-year cycle. If true, this might explain why the estate agent quoted above cites the 70s and the 90s as previous severe downturns.

"House prices can’t rise indefinitely for the simple reason that at some point they become unaffordable," says Fred. "Wages can’t rise as fast as house prices can when a speculative frenzy is underway, so there will come a point when the average man can’t buy the average house, and prices have to fall as a result."

Fred reckons there are usually 14 years of rising prices followed by four years of recession across the broader economy. If we’re seeing the same dynamics today, then this downturn has only just begun.

Earlier in the year many commentators were predicting a housing crash. I argued that we wouldn’t see a price plummet. Prices would ease, yes. But as they did so, more and more first-time buyers would step in. First-time buyers want a home, not an investment. As homes became more affordable, they would buy.

That was my theory. But, as tends to be the way with theories, the real world intervened and thwarted it. In this case, the lending market dried up. Mortgage lenders jacked up the amount new buyers had to put up as a deposit. They also jacked up rates, and reduced the number of deals available — which today stands at an all-time low.

At a stroke, lenders have made houses less affordable, even while they’re falling in price.

It’s a bizarre dynamic — prices coming down, but fewer people able to buy. But it explains why sales volumes have gone off a cliff.

And this lack of market action is why we can expect prices to keep on sliding. As Nationwide’s chief economist Fionnuala Earley says:

"With house purchase transactions so far below their long term trend, it seems unlikely there will be any rapid turnaround in housing market fortunes in the coming months."

But surely the market will turn eventually? Won’t it?

Perhaps. But colleague Bill Bonner has a cautionary tale for those seeking to make returns from property:

"I lived in Baltimore," he says, "and house prices there fell in real terms for 70 years."

House prices have risen for so long, many of us now take it for granted. We’ve got it into our heads that the long-term trend is always up.

But buying a house is not a one-way financial bet (though right now it’s arguably as close as you’ll get — just not in the direction we like!)

If you’re buying somewhere because you like the place, and want to live in it, great. That makes sense. So long as you can pay the mortgage, you don’t need to worry about the vagaries of the property market.

Otherwise, you could find that, once inflation is accounted for, owning property has made you poorer. You’d be better off buying shares — if nothing else, at least there’s no expensive repairs to pay for.

But while the credit crunch rumbles on — and it is rumbling on, even though other crises have stolen the limelight — Tom Bulford has found one lender that has bucked the trend...

Believe it or not, this could be the Golden Age of Lending!

Broadly speaking, the lending market is going through a tough time (I know it’s the 1st today, but that’s my early entry for Understatement of the Month).

But Tom Bulford, our penny shares specialist, takes a different view.

Tom likes to get right into a sector, and poke around in all the nooks and crannies. Today, he reveals how one company is preparing for what its CEO calls "a golden age of lending".

Yes, the credit crunch has been very kind to one lender...

Discover why this niche firm has seen business volumes jump by 250%... in just the last 12 months...

Could this stock double your money before the year is out?

"Yes!" says our commodities man Garry White.

Garry’s piece last Thursday created quite a buzz. And it’s easy to see why.

This is one of those moments that investors dream of — finding an undiscovered stock that’s ridiculously under-priced!

"If all goes to plan," says Garry, "we could be looking at a 100% return by 2009."

Actually, this one could go a lot further — you’ll see why in Garry’s article.

If you didn’t have a chance to read it last week, I urge you to do so now.

Find out why one little-known company is poised to grow rapidly on the back of China’s ongoing construction boom.

Until tomorrow

Ben Traynor

Today’s Daily Reckoning — What to do with your money, Part II

There's a house on my block
That's abandoned and cold
Folks moved out of it a
Long time ago
And they took all their things
And they never came back
Looks like it's haunted
With the windows all cracked
And everyone call it
The house, the house where
Nobody lives

Once it held laughter
Once it held dreams
Did they throw it away
Did they know what it means
Did someone's heart break
Or did someone do somebody wrong?

By Tom Waits

This just in...Bloomberg reports that Americans continue to fall further and further behind on their mortgage payments.

Unemployment is rising. And now, carpenters, plumbers and even granite countertop installers are getting jobs with the banks. They’re finding work maintaining foreclosed houses.

You can read today’s Daily Reckoning in full HERE. P.S. If you enjoyed this article then we encourage you to sign up for the free Fleet Street Daily eletter. Learn what you can expect from today's markets -- and how to prosper in the face of uncertainty. You won't find more thought provoking writing anywhere on the Internet.

^ Back to top

BlinkList
Del.icio.us
Digg
Facebook
Google Bookmarks
Livejournal
Newsvine
Reddit
StumbleUpon
Yahoo! My Web

Steepest House Price Drop Since 1992. It'll Get A LOT Worse Yet

RELATED ARTICLES

FLEET STREET LETTER

ZURICH CLUB

Steepest House Price Drop Since 1992. It'll Get A LOT Worse Yet