BoE: Prepared for house prices to drop 33%

[BoEbrexit]

Wasn't sure whether to post this on property or here.

I'm a FTB and just saw the BoE stuff about being prepared for property price drop by up to 33% and massive interest rate rises.

I already knew that now is not the best time to buy, but I'm moving to a new area, and I might not be able to get a mortgage in a year or two due to work situation. I may move after four years or so, and was prepared for the fact I might sell at the same price, or slightly less...but one third less would be pretty destroying! (FYI, its not an expensive area, but not that much available, so prices seem to have stayed pretty stable over the years.)

My parents don't seen phased, saying I could just rent out and move into rented if in negative equity, like they did in the nineties.

Anyway, is anyone else panicking about this?!

@really

Yeah, I didn't mean to belittle that, would still be a big amount, but a third is huge.

But they are stress testing 33% because they think it is a possibility.

I think if I thought about every possibility I'd never sleep at night grin There's no reason to think that it's likely.

Hope all goes well with your house move.

They also test it the other way, as in what happens if prices increases by 33 %, and all variations in between, that's their job. They look at all scenarios.

reallybadidea take it from someone who was involved in that last crash, we bought a new build on a small estate, they were rising £250 a week at the height, we bought ours for £30500 and by the time the estate was finished the same houses were going for £35000, 12 months later a women who’s mum died and left her a house , put house on the market and it sold for £58950,
18 months later after the crash we sold area house for £29500, but the house we was buying was reduced as well, some of are friends bought at the height and was stuck for many years until house prices had risen.
So as you can see far more than12%

I said average. By definition that means there will be much greater falls. I certainly wasn't diminishing the impact of the last house price crash. My point was that an average of 12% falls had a massive impact on the country - a 15-20% average fall would be far worse.

It's worth noting that when undertaking stress tests they're aiming for a 1 in 200 probability. So it's a worst case scenario with what they deem to be a 0.5% chance of being the actual thing that happens.

Hopefully that helps to put it in context (which the media like to completely strip out as it sells more papers).

And I'm a Remainer so I do think crashing out will be bad but the way this is being reported is a bit out of context of what is really happening.

@umpteen

Ah, thanks upteen. How do you know?

33% as a worst case scenario sounds conservative to me. (Not an expert though.)

Willofthesimpletons Why will you be screwed if buying the next house will be reduced in price, if NE just sit it out

@Agustarella

I know where you're coming from considering the disaster of no deal, but think supply issues will stop them falling too much more than that, especially as many people won't move.

OP
I've been a poster on the HousePriceCrash forum for many years
there is ZERO chance of house prices falling by 33% in the short term
if nothing else because the number of properties being sold holds steady at about 5% of the stock even during recessions

there is also ZERO chance of interest rates rising much above 2% over the next 10 years
(I know that because I watch the rates being offered by the UK Government DMO)

PLEASE do not make housing judgements based on tabloid headlines
EVER

It isn't a big problem unless:

1. you don't have much equity i.e. first time buyers
2. you don't plan to move again i.e. retired people who's house is their retirement pot

For everyone else, it just means their next house will be cheaper too.

It will be variable in terms of where it hits worst. I just hope it hits brexiteers hardest of all. But it probably won't.

@BoEBrexit That was exactly what happened after the GFC: people didn't move because interest rates were low, middle class job losses were fairly low and banks were encouraged by government to exercise forbearance when mortgage holders were late with payments, and all of this helped to put a floor under falling house prices. Plus the BTL sector was still going strong, and it's now under pressure from policy changes, falling net migration and welfare reforms. I would be wary of assuming that the next recession will be like the last one, although there are so many variables it's hard to make predictions. With regard to house prices, I think the main differences between the post-Brexit recession and the 'credit crunch' of 2008 onwards, is that this time sterling depreciation will certainly be much worse and job losses heavier as employers pull out of the UK. The main 'known unknown' is what type of Brexit we will have, and thus how correspondingly dire the economic consequences will be: staying in the EEA would be a kind of slow puncture and long period of decline, whereas the No-Deal cliff edge will be dramatic and abrupt to say the least.

My own wild guesses are that in the very best case scenario (EEA) we would see a long overdue correction of at least 33%, and in the worst case scenario (No Deal) prices would crater by 90% at least.

there is ZERO chance of house prices falling by 33% in the short term
if nothing else because the number of properties being sold holds steady at about 5% of the stock even during recessions

Even if people who would otherwise have stayed in their homes are forced to sell by job loss and rising prices of essentials?

Don't forget, the Welfare State doesn't bail us out any more, or won't once UC is fully rolled out.

Augusta
a LOT of owned homes are owned by older people with little or no mortgage like me
the house price crash will be avoided because there are not enough social housing properties available

@Augusterella - 90% - I don't think that's likely at all! That would mean people could buy houses with six months salary :D

EEA would likely mean stagnation and drop in certain london areas - as it what is happening now - the market has been expecting EEA until recently, which is why stuff didn't completely crash after referendum.

But I agree no deal brexit will make recession look like nothing

I think as the Bank of England have said it can be avoided, even in a no deal scenario, if we have a transition period, which we do, the built in transition perioed goes to the end of 2020, then we can rest a little easier.

I'm no expert but I shall take Bank of England's comments over Augusta's.

Maybe read what the guy actually said....

@BoEbrexit

@Augusterella - 90% - I don't think that's likely at all! That would mean people could buy houses with six months salary :D

• 90% is a wild guess from someone who doesn't have any skin in that particular game, as I don't own property in the UK. I stand by it but I'm perfectly prepared to be proved wrong. It does sound absurd to talk about buying homes with six months' salary, but I used to have a book which was published by Law Pack in the late 90s called something like 'How to Buy Property at Auction': it featured many real world examples of houses and flats bought for the low thousands and low tens of thousands. No doubt they were at the cheaper end of the repossessed properties market, and money was worth more then, but many would still have been well within six months' salary at the time, when the average gross salary was around £18-20k. I can't find the link now, but I'm sure I've also read that during the 90s recession some people in the NE were giving their houses away to the local authority because they couldn't sell them.

Plus, when we talk about six months' salary, we're assuming that people haven't yet lost their jobs, burned through their redundancy money and faced huge hikes in food and fuel costs. When that happens, how will they pay their utilities and council tax? I'm not saying that most people will necessarily be in that position, but it only takes a significant minority of distressed homeowners to cause a crash by forcing sales.

Yes you can pick up some stuff at auction in the 10s of thousands in certain areas if it needs a lot of work.

But I'm sorry, habitable houses that are now worth 100,000 going down to 10,000, just isn't realistic when you look at the stock and people's earnings.

If they did, then I'd just get another house :p

How can a house which is now worth £100k go down to £10k some time next year? Well firstly, we don't know if a house priced at £100k is really 'worth' that amount. The market has been rigged for so long that price discovery is currently impossible. Secondly, as everybody knows, the supply of housing is only relevant in relation to demand. Demand will fall as the population falls, which it will do as a result of emigration (voluntary and forced) and the fact that many of the poorest cannot and so will not absorb a huge rise in the cost of living. Within that smaller population that remains, housing demand (including demand for social housing) will likely be proportionately much lower than it is now, because many people will not be able to pay rent or the other costs associated with running a household. Don't forget that in previous recessions since the 30s the welfare state has cushioned the blow - under UC there is no automatic entitlement to money, just a great deal of hoop-jumping in return for small intermittent payments which are likely to be arbitrarily cut off at any time.

Regarding the markets' hope for an EEA deal - this may be receding but it isn't dead yet. There's no way that No Deal is fully priced into sterling exchange rates, which suggests there will be an "Oh sh*t!" moment in October or even January followed by huge dumping of sterling. Or maybe the selloff will happen gradually until the end of March, followed by a sudden and total collapse in the currency.

Of course, if/when prices crater by 90%, some brave and still-solvent investors will fill their boots. I won't be one of them even if by some miracle I'm still solvent, because investing in the UK is too risky.

I would certainly hope that as @Bluntness suggests, Mark Carney knows more than I do. He is however rather constrained in what he can say publicly, as even his very measured comments on the increased likelihood of No Deal have led to the usual cries of remoaner scaremongering in the right wing press. Whereas I, being nobody in particular, can at least speak frankly. 'The poor man, when he walks along the way/ Before the robbers he may sing and play.' :)

The baseline cost of any house is its raw construction cost
for a 3 bed semi in the south east, that is around £150,000
so prices to buy a "ready built" will never go below "build it yourself"

My old terraced house in a poor area in the south east is still worth its construction cost (around £100,000)

House prices have become detatched from reality, but their floor is locked to reality

@Ta1kinpeace when I sold subprime mortgages back in 2000-2001, reinstatement values were often well in excess of market values. (Don't hate me, I was just an intern.)

Agusta
Ah yes, the "rebuilding cost" scam
been there, done that, ripped my mortgage company to shreds, threatened them with the press
I'm talking about the REAL cost - my tax clients build houses