Sunday, 18 July 2010

UK Housing Market Crash, Its a Marathon not a sprint

"PricewaterhouseCoopers said there was a 70pc chance that British house prices would be below peak 2007 levels in 2015 in real terms, despite a continued expected recovery in prices in cash terms – in other words any rise in property prices won't keep pace with inflation. ... Even in 2020, after five years of predicted relatively steady growth, the accountants warned there is a 50pc chance that "real" house prices would be below 2007 levels."
A recent PwC report on UK House Prices

The beloved British property bubble has recently looked shaky once more. QE has come to a short term end, political talk of fiscal austerity, interest rates with only one way to go and a Government who are fast running out of money. There are no fundamentals supporting the recent dead cat bounce in the UK's property market. Many still believe that you can't go wrong with property, that its business as usual with never ending positive returns from the value of their land, but the coming decade will smash all those myths with a bear market that will endure for a whole generation. If market forces were allowed to play out we would have had the housing market crash, we would have had the 50-60% falls but with modern Government its never a quick sprint, it always becomes a drawn out marathon.

Over the long term as I have mentioned the value of the land (or houses as people commonly mistake) goes nowhere (Of course the free markets lowering of many consumer goods means assets can indeed buy more consumable goods in the future. It's one of the reasons the rich always get richer with our current monetary system). Its the depreciation of the value of our currency that provides this illusion. Don't believe me? Take a look at the chart of gold to house price ratio in the UK. 

The target area is not my illustration but obviously someone who predicts rising gold prices relative to houses. The chart is probably not quite up to date, but it displays the important historical ratio of how many ounces of gold it takes to buy a house. The chart illustrate some important historical changes notably 1971 when Bretton Woods - the fixing of many Western currencies to the dollar which in turn was pegged to gold - collapsed. Through the 50's and 60's house prices seemed to rise relative to gold, but this is because the fixed price masked the real price a free market would have determined for Gold. After 1971 when the price was liberated the value of houses to gold indeed fell greatly. This is during a time of great inflation, generally rising house prices in Sterling - but the key thing is they may have been rising but not in real terms. Then came the 80's, 90's and 00's - a historical unprecedented credit boom based on pure fiat money with no restraint. Free markets did their job and lowered prices of consumer goods, the authorities reaction - expand the money supply to counteract this based on their flawed central planning metrics. It reached a peak of over 500 ounces of gold to buy the average house, but this is where the illusion stopped and gravity would take hold once more.

Record low interest rates, huge private debt levels, trade and budget deficits, a Government fast running out of money and bullets there is only one way for this asset and thats down. 

The bigger problem I see is - we haven't liquidated any this debt - we haven't de-leveraged! Politicians like to proclaim that our public sector debt is low (however its now exceeding and growing at a faster rate than our peer nations) but forget to mention our private debt levels. They are astronomical compared with other Western Nations. We borrow huge amounts of money from the Russians, the Saudis, the Chinese, or owe it to ourselves and we dig further into debt to buy overpriced assets such as houses in order to fund short term consumption. We kid ourselves into thinking we can do this by becoming a financial centre but in reality it's just a ponzi scheme under the hood. We borrow huge amounts of money, spend this money through the economy, which in turn drives the City of London which packages all this money up and in turn we kid ourselves into thinking we have a sound economy. Of course it will all come crashing down with disastrous consequences. The world will not look kindly on us when we can't pay our way without turning to the printing press. 

These private debts are weighing down on the economy and will stagnate growth for many years to come. Unlike other nations who are in the Euro we have our own currency. Worryingly 99.9% of economists seem to think devaluation and money printing are the way out, but this will only compound the troubles. This will in turn drive interest rates ever higher over the long term, ultimately making it harder to service our debts, that the Government are obsessed with not liquidating just like Japan's politicians 20 years ago. 

People naively think inflation is great for high debts, but again they forget that goods and services rise under such conditions. Serving debt may become more expensive but what happens when the price of energy or food rises beyond pay inflation like what is happening now here in the UK? People struggle further opting for present consumption or living costs over future investments. Inflation erodes our existing capital and savings or drives it out of the country, just like what is happening now with negative saving rates. Society doesn't invest in capital goods (tools, for example computers, machines, roads) as it needs ever more resources in the present time to stand still. Societies prosperity relies on the capital structure, put simply the access each generation has to tools. I have higher living standard than my grandfather as I have more tools at my disposal. University, the Internet, a computer and so forth. When Governments inflate they give people pay cuts instead of allowing the capital structure to adjust. Companies accept this as a solution but in reality we get less productive as tools or innovation are deemed surplus to requirements over the short term. To an Austrian economist all of this makes perfect sense, but to the many it will only become clear once the process occurs. Then it will make perfect sense to all.

The Spanish are another country with similar issues to the UK. They also have a lower public debt compared to others, but their private debts are relatively large. They also try and prop up their zombie banks and prevent liquidation. The US on the other hand leads the western world in this aspect. Who was the nation writing off all these bed debts? People viewed the sub-prime fiasco that the US was becoming the basket case of the world but in fact they are ahead of the curve, indeed ahead of Europe that's for sure. The value of their houses have already fallen around 25-30% but their bubble was no where near as bad as others such as the UK. They don't have as much private debt as the UK. And despite talk of manufacturing decline, who produces some of the most innovative and high tech products in the World? The US. I'm bullish on the US relative to other nations. I'm wouldn't invest there, which tells you the trouble the world is in.

For example Apple is a marketing machine, with a whole fanatical legion of followers. They make their hardware in China buts its in their product design, software, marketing - the creative economy - that provides the real income. The UK would be lucky to have the same clout, but we don't. Sure we have small to mid size innovative companies which I take my hat off to who do a great job, but we have no Googles or Microsofts. All US based with their profits going back to their home country. 

My employment record is great illustration of the UK's problem. I currently work for a large Japanese based firm, prior to that a large American Services Company. I've worked for 3 UK based organisations. A UK government backed learning centre called the Open University, a car sales company called Reg Vardy who sell cars made by companies based in France, Germany, Japan the US - basically anywhere but the UK and a telecommunications company who sold German telephone equipment made by Siemens and photocopying products made by Cannon a Japanese imaging specialist.

Where are the large British companies? This is the problem - I agree with letting foreign companies and expertise come in - this increases all of our living standards. But it can only do so much. We will never be able to maintain the illusion we have made for ourselves under the current framework of more debt, more sales, more jobs based on this debt, rising assets based on this 'prosperity' with the cycle going full loop. It doesn't matter if its tangible or intangible - we only seem to be able to sell others products to ourselves by increasing our short term consumption debts. We make an excellent nation of salesman and people who get into huge debts but at some point in the future others will demand payment and stop lending at which point we will come short. 

The values of these such debts are tied in many places to assets such as houses. The government can not dampen or assist in this rebalancing process, all they can do is make the imbalances worse like they are doing now. By enforcing the cycle listed above. People like to think this is different to the seventies.

Back in the seventies we propped up manufacturing, car makers, our steal works etc. This was despite the fact that others around the globe were doing it cheaper and better. Then Thatcher came in and changed all this. She stopped propping up these type of jobs. Of course unemployment went through the roof as it takes time for the private sector to create sustainable jobs that were competitive in the global marketplace. In our present time replace factory worker or coalminers with estate agents or beauty therapists. Same problems just different unsustainable lines of work.  Sure we may have a need for such people but not on the sheer scale we have them now. That's the simple fact why for example estate agents haven't been hit as hard as they should have been. Low interest rates and printed money have supported the assets that they sell. The government has in fact given many of these lines of work a bailout, by ensuring the debt economy and imbalances can continue. 

People don't understand when you try and put all this into context - the unsustainablity of the debt we amass. Business as usual, I don't know how you will afford to buy if you don't buy now and so forth - as though this exponential debt boom can continue. "Surely the Government will turn to negative interest rates or the Government won't allow the prices to fall". Everyone misses the real crisis to come when the Government has no more bullets, they will no longer have control of circumstances and events will dictate policy. Greece may have been removed from red alert but the solution was just more of the same - more debt for all to bail the Greeks out. Economic gravity will take hold - you can't escape it. 

The illusion still seems real to people. Like a magician Derren Brown or David Blaine who kid people into believe that they are performing an art form or something that is indeed beyond the realms of magic but they are just the same as Paul Daniels - it's a trick that has been handed down through the generations only with their modern twists on such acts. The Gold ratio of house prices illustrates that house prices are just an illusion over history. Its the decline of the purchasing power of our governments monopoly over our money that provides the magic trick. The magic act has many more years to run.


  1. "Worryingly 99.9% of economists seem to think devaluation and money printing are the way out...".

    These same economists also seem to simultaneously believe that the UK and US governments can continue to borrow more or less as much as they want and that interest rates will remain low.

    I don't understand how these economists expect foreign creditors to buy government bonds when the strategy is to print and devalue.

  2. I am willing to look at alternative thinking.

    However, Jock from "Jock's Place" blog (a blog which seems similar to yours) seems to me to put forward possible solutions without explaining the details which led to the conclusions he came to. He likes Von Mises as well.

    A case for change which cannot be closely examined is far from compelling for me.

    Yet such a case must be positively made if people like me are to be convinced. This may take time but I suggest you see that time as an investment in better governing

  3. Just like the slow take supply of property in the UK, buyers and sellers remain cautious making the market fairly static. Good thing that stimulus programs such reduction in VAT, interest rates and banking bailout helped homeowners to be in-control in the recession period.

  4. Nice post..

    Any ideas about How to get information for private reg in UK?

  5. It’s not a slow house price crash in all regions of the UK, there is one part of the UK were house prices have crashed (and could still be crashing) Northern Ireland! Their house prices have crashed in nominal terms, not just in inflation adjusted terms as prices have fallen to about half of the 2007 peak, as can be seen from this chart of historic average house prices in England and Northern Ireland. It's interesting to note as well that house prices in Wales have stagnated since 2006, as showed in this graph of historic average house prices in Wales and Northern Ireland.

    It makes you wonder how horrible Welsh and Northern Irish house prices would look if they were adjusted for inflation or priced in Gold or Swish Francs for example?

    Inflation Monkey