2012 – Year of Crash and Opportunity 132

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I predict a very substantial fall in UK house prices in 2012 – and that will be a very good thing.

Average house prices currently stand at over 6 times average earnings. That compares to a long term average since 1945 of under 4, which charts show to be the norm.

People simply cannot afford to buy homes at six times their earnings. People living on average earnings, and paying the high rents such high property prices entail, would take ten years to save one years earnings, which would give them a deposit. They then would need five times earnings (or two and half times joint earnings for a couple) in mortgage. It is with good reason that banks will not lend at that level – it is more than people can pay.

There is a fascinating graph in this BBC report of a National Housing Federation (NHF) study last summer. It shows that the number of households under 30 living in private rented accommodation increased astonishingly, from 30 per cent to 48 per cent, in the bubble years between 1997 and 2009. That is a massive gain to a landlord class apparently very rich in assets -but the value of whose assets is strangely inflated.

This leaves ordinary people stuck in a very unpleasant position. Until last year, I was forced to live in private rented accommodation. My annual rent was about 6% of the nominal property value. I now pay substantially less than that in mortgage interest.

The NHF study predicts that current trends will continue, that the private rented sector will continue to grow, and that house prices will grow 21% over the next five years. But the NHF, who commissioned the study, are providers of rented accommodation and as usual this “academic” study uses assumptions which promote the economic interests of those who funded it.

In fact, I expect the massive decoupling of house prices from average earnings will end in 2012 or 2013 and we will see a major crash in house prices. It may not begin in 2012 – possibly it can be delayed until 2013, but I predict that by 2015 we will see house prices to earnings ratios back to four per cent. And as I see no significant increase in average earnings over that period, that means a fall in nominal house prices of over 40%.

House prices currently bear no relation to the ability of people to buy them to live in. They are like a rock balanced on an apex, requiring only a little push to crash them down. A number of pushes are coming:

– Cuts in housing benefit. The whole rush to the private rented sector has been underpinned by artificially high rents forced up by government payment of housing benefit. I am of course extremely sorry that individuals may be hurt by the implementation of these cuts. I also expect some backtracking as it dawns on MPs that the £2,800 per month does not actually go into the pocket of the Daily Mail’s Sudanese refugee family, it goes into the fat pocket of some Tory landlord. But the housing benefit cuts will reduce returns to landlords and knock house prices.

– Unemployment. The main impact of public spending cuts is yet to feed through in terms of higher unemployment – you ain’t seen nothing yet. Tories like unemployment – it reduces the costs and leverage of labour. 2012 is the year that it will really hit. By the end of 2012, repossessions will be very high. This would always spark a drop in house prices; people have not yet got their heads round what a fall it will be this time.

– Interest Rates. The key factor in balancing that house price boulder has been the lack of any high wind of interest rates. The short term outlook is for base rates to remain real terms negative (which is undeniably true yet strangely almost never said). But that will not last forever either…

The coming crash in house prices is of course going to have a huge effect on the viability of the financial sector, and will join together with sovereign bond defaults in precipitating the fall of the casino capitalists who live on our labour and have the rest of us in their lockhold. Those who saw 2011 as a global year of revolutionary change were only witnessing a tremor before the eruption. I cannot be sure that the crash will come in 2012 rather than 2013 or 2014; but I am looking forward to the new year with genuine hope that a deal of stench will be cleansed.

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132 thoughts on “2012 – Year of Crash and Opportunity”

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  • ingo

    Just having ten friends around for Plov and games afterwards, grandson liked it and so did everyone else, my regards to Nadira for introducing me to the dish in Newmarket road.
    Both my kids have problems finding their own place and the markets needed adjusting yonks ago, who knows, the crash might not have happened if houses declined in 2004, not surged.

  • Mary

    Heard this news item on the radio this morning. Duke of Westminster gives away over £300 million worth of renovation and propertyfor yet another rehabilitation centre. He is of course a member of the military in severak forms and is the richest landowner. We are still living in a feudal system.
    .
    http://www.dailymail.co.uk/news/article-2080937/Duke-Westminster-donates-country-house-use-new-rehab-centre-wounded-troops.html?ito=feeds-newsxml
    .
    Ingo He doesn’t own that Park and Ride site as well does he?

  • ingo

    No, here its the Colemans and feudal is the word, nothing ever changed sine Cromewell. shaking by the scruff of the neck springs to mind.
    Me thinks, the Duke thinks that wars and rehabilitation might be the norm for years to come for the next decade, what better than to be seeen charitable, run a hospital for piddle piss being paid by the taxpayer and get large chunks of tax relief on the rest of your national operation.

    then comes some favourable MSM article about the Dukes work for our heroes, sic, talking how charitable it all is, nowt about his share portfolio in BAE. These people have abused the once principled notions of Quakers, socially responsible people who’s riches were shared somewhat, the Bournevilles spring to mind, but there were many others, they use charity as a means of legit income, a tax dodge par excellence, the done thing, hay ho and lets ahve a little trust fund for Tarquin set up, only takes 7 years….

  • Roderick Russell

    @Mary – An interesting comment about the Duke of Westminster`s charitable donation; though as I read the article in the Daily Mail the donation was closer to 6 million pounds that the 300 million headlined. If the donation were expensed for tax purposes at the property’s highest possible value (i.e. before property prices declined), then after tax write offs the amount might be much less.

    One senses that royalty and near royalty (like the Duke himself) are in the midst of a series of major PR campaigns in the MSM. It was certainly very different when back on 12 Feb 2007, in that same DAILY MAIL, journalist Geoffrey Levy under the headline “The Duke of Westminster: so rich and very foolish“ wrote: “Reckless, boastful, stupid, weak – such lacerating words hardly exaggerate the case against the Duke of Westminster.”

  • Jives

    It’s hard to be Royal-or born thus.
    .
    And i’m certainly no Royalist.
    .
    But,then again,i do empathise will those souls in life who find themselves in situations they can hardly control.
    .
    A tuff gig.

  • Mary

    Ingo Is that the mustard manufacturing Colman family now part of the multi national? They must have done well when they combined with Reckitts and then the Dutch Benckisers. Now Reckitt Benckiser I think with revenue of £8billion.
    http://en.wikipedia.org/wiki/Reckitt_Benckiser
    .
    Roderick I was thinking about you when I put the post up. What a b******!

  • Mary

    Yes Ingo Colmans is Unilever now.
    .
    From 1896 Sir Jeremiah Colman became Chairman:[2] in 1903, under his leadership, the firm took over rival mustard maker Keen Robinson & Company (makers of Keen’s Mustard),[1] through which it also acquired the Robinsons Lemon Barley Water brand and baby food business. In 1938 it merged with Reckitts to form the Reckitt & Colman household products conglomerate (now Reckitt Benckiser).[1]
    .
    From 1997 to 2001, Colman’s were the main sponsors of Norwich City F.C..
    .
    The Colman’s part of the business was demerged in 1995 and Colman’s became part of Unilever UK Ltd.[1] As well as mustard, it applies its name to condiments, sauces and other foodstuffs
    .

  • ingo

    Green Norfolk CC leader defects to the Conservatives who are pressing incineration on to their supporters aaand, in return, Cons. Cllr. Perry Warnes resigns from his job on Norfolk’s police Authority, with turncoat Phil Hardy taking over his responsibilities, on extra perks. Phil Hardy was never green at all, he used the electorate and his conservative opponent in the last election, for his self serving careerist ways.

    106 record comments to this turncoat story, now closed for comments
    http://www.edp24.co.uk/news/politics/green_leader_at_norfolk_county_council_defects_to_conservatives_1_1157800

  • Leonard

    There is only one reason why house prices refuse to go down to acceptable levels: The government is paranoid about upsetting those who expect as of right their house to be a substitute for proper savings and investment. The artifical and ludicrously low interest rate has given existing house owners who cashed in on the boom ridiculously low mortgage payments. This is also artificially keeping property values absurdly high. It is also discouraging proper investment in REAL wealth, ie: industry, productiveness and long term infrastructural investment.

    This policy utterly ignores those who played no part in the boom and bust, and who cannot afford ANY house. Property prices need to be reduced at least 30% for a truly “healthy” housing market to prosper. Unfortunately the media is run by journalists most of whom have a personal vested interest in keeping house prices high. They therefore keep plugging away in their relentless desire to talk up prices. Add to that all the professional property institutions like the council of mortgage lenders, RICS, estate agent associations and rental agency pressure groups and the whole of the UK is living under constant bombardment that somehow a sensible reduction in property prices is a bad thing.

    The polar opposite is true.

  • Mark Golding - Children of Iraq

    Thankyou Felix – a great link which has inspired this post:
    .
    THE HYPOCRISY OF THE Organisation for Economic Co-operation and Development (OECD)

    The OECD is purported to be in the words of Hillary Clinton [May 25th 2011:Paris] a community of shared values, open and effective markets, human rights, freedoms, and the rule of law, accountable governments and leaders, free, fair and transparent competition…
    .
    On 10 May 2010, the OECD decided to invite Israel to become a member of the OECD and on 21 August 2010, Israel deposited its instrument of accession to the OECD Convention, thereby becoming a member of the Organisation.
    .
    Recently Alistair Burt told his fellow MPs of a compromise reached whereby the OECD has agreed to consider the occupied West Bank (including East Jerusalem) and the Golan Heights as property of Israel for certain purposes. Following a visit by OECD officials to the Israeli Central Bureau of Statistics in the summer this year, it was agreed that Israel would not need to provide “disaggregated data” on macroeconomic issues that distinguish between “pre-1967 Israel and the post-1967 areas.”
    .
    http://www.theyworkforyou.com/wrans/?id=2011-12-05a.84357.h
    .

    It appears the OECD is happy to accommodate the Israeli occupation of the West Bank and the imprisonment of Gaza for the sake of convenience despite a signed member agreement where the OECD use of Israel’s data is transacted without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law.{oecd.org}

    Despite the OECD mandate Israeli Arabs and ultra-Orthodox Jews, or Haredim, have large families, poor educational outcomes and low employment rates. As a result, just over half of Arab and Haredi families live in poverty. Almost half of all children entering primary school in Israel come from one of these two groups.
    .

    Furthermore the OECD promotes the harmonisation of national policies and legislation in the nuclear liability and compensation field amongst its member countries;
    .
    • encourage the development of national legislation governing the peaceful uses of nuclear energy based upon internationally accepted principles, particularly in the area of liability and compensation;

    • develop recommendations concerning the Paris Convention and the Brussels Supplementary Convention, as amended, for submission, if appropriate, to the Steering Committee for Nuclear Energy;

    • promote the exchange of information and the sharing of experience between member countries on these issues;

    • advise the Secretariat on collecting, analysing and disseminating information on major developments in the nuclear law field at both national and international levels.
    .
    Despite OECD’s claim to work alongside the International Atomic Energy Agency and other international organisations on matters of common nuclear interest, it has turned a blind eye to Israel’s nuclear arsenal and the passage of nuclear material from the Dimona reactor into it’s nuclear weapons program.
    .
    The ability of Israel to assume the obligations of membership is laughable, a sick joke that undermines the organisation’s authority and order and in my opinion adds weight to the deceitfulness employed by founder members despite it’s own strict rules on protectionism, extortion and accountability.

  • nuid

    “End of the pro-democracy pretense”
    Glenn Greenwald
    http://www.salon.com/2012/01/02/end_of_the_pro_democracy_pretense/singleton/
    .
    Nailing it, as usual.
    .
    Between your own economic problems in the UK, an imminent crash of the Eurozone, the ongoing “Arab Spring”, and the Occupy movement (which is calling for a global strike next Mayday), not forgetting potential strikes against Iran, this year will certainly not be a quiet one.
    .
    I don’t welcome violence or chaos or looting or rioting. I fear them, on all our behalfs. But I would welcome a massive disruption in the status quo. And yes, I know the outcome would be unpredictable – to say the least.
    .
    For those of us who put away a few Euros as we were getting older, the prospect is to lose the lot. People like myself have been looking online for advice, from economists, financiers, bankers, people who dabble in the stock market, you name it. Nobody has a definitive answer as to what best to do. Nobody knows exactly what will happen, but the ‘prognosis’ is that we will lose everything. And no, switching Euros to Sterling is no guarantee of safety either — even if it was a big enough sum to be worth switching currencies. Because how a Eurozone crash will affect other currencies is not clear at all.
    .
    Anyway, I would willingly lose the lot, to see Obama and Cameron and Netanyahu and Co fall on their arses. In a coccyx-shattering fashion. (I believe it’s going to happen anyway, but perhaps not in my lifetime.)
    .
    I will now go and make a nice cup of tea, and ponder living in a Mad Max world.

  • Mary

    BBC uses a spokesman from the “Taxpayers’ Alliance”: a right-wing pressure group to comment on ‘Government Policy’.
    .
    http://bbc.in/vlezgv
    .
    2 January 2012
    Housing experts have warned that changes to the benefit system could mean that there will not be enough affordable housing for families on a low income.
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    The Chartered Institute of Housing believes 800,000 homes will become too expensive.
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    But the government argues that a cap on housing benefit will be fairer on the taxpayer and stop rents spiralling.
    .
    Mike Sergeant reports.
    ~~~~
    Tent Cities here we come!

  • Mark Golding - Children of Iraq

    Nuid – Good one! Obama has signed the NDAA Martial Law – The ‘Happy New Year Bill’ which makes the ‘Imagine’ ‘tube’ the antithesis of everything John Lennon wrote in the song before he was assassinated murdered. Christ! – We are still ‘sleep walking’ down this walled pathway so expect more of the same in Britain two years on if we remain sat on our back-sides contemplating our navels.

  • Ade

    It’s going to get worse because it’s all by design, things make a lot more sense if you forget about mainstream media, it’s all Orwellian doublespeak where invading a foreign country, nurdering millions, imposing a brutal dictatorship on them while stealing all their weralth is now known as humanitarian intervention.
    Now they’ve largely finished with the 3rd world, Western civilisation is next.
    All they need now is to sink us into more and more unrest and poverty, if they can do it slowly enough so the masses does realise, it doesn’t matter if a few realise, a few cannot do very much (boiling the frog )

    http://infowars.con

  • nuid

    In a wee bit of a rush – see my comment which finally appeared at 2 Jan, 2012, 3:56 pm. (I don’t know how many readers or commenters here might be in the Eurozone, and be in the same mess I’m in about a few paltry savings.)
    Back anon (as Suhayl advised earlier). He’s at 5 to 1.

  • Sam

    Craig,

    Happy New Year Craig! I’m not sure whether you read to comment number 80, as usually they’ve descended into madness a long time before. I certainly agree this is going to be a crazy year, and in terms of the financial crisis: you ain’t seen nothing yet. However, since everything is so crazy, and we really are entering uncharted territory, I would hesitate about making firm predictions.
    .
    The other factor in the house price equation is the effect on banks balance sheets and the abandonment of mark-to-market accounting. Banks have mortgages on their balance sheets at the bubble price, and want to do everything they can to sustain this. This is the main reason prices haven’t collapsed in the US: rather than sell foreclosed properties, which would immediately reveal their true value, banks keep hold of them to sustain the illusion of solvency. If you look at volumes of house sales, these have collapsed.
    .
    The housing market could continue to move in the other direction: a financial class owning more and more of the real assets and extracting rents from the proles. Interest rates may stay completely decoupled from reality to keep our crack-whore banks hooked on their endless supply of cheap credit. Borrow free money, buy real assets, and screw as much rent out of the tenants as possible.

  • Mary

    ….as usually they’ve descended into madness a long time before….
    .
    That is everyone else’s comments except yours I assume.

  • tommi

    Rob Royston wrote:
    “If an owner has to move and has a £300,000 mortgage but the property is only worth £200,000, then surely it should be possible for the missing £100,000 to be set into a financial device between the government,the lender and lendee, with them all making matching repayments. After all, they all allowed and encouraged this bubble in the first place.
    The lenders would have to increase their rates for everyone but the problem will never go away unless something like this is done.”

    Why should the rest of the country, those in rented accomodation; those trapped in some of the most deprived ‘schemes’, Council or Housing Association tenants, those renting amidst those who’ve long ago bought the same type houses for a song and elevated themselves from snobbery and disdain, to outright disprespect for the mere ‘tenants’ amongst their neighbours –why should the whole country pay who’ve never benefited a whistle from the largesse and special consideration, I’d say bribery given to property owners, through the government chipping in anything to bail these avaricious vultures out of a hole of their own making, keep their houses and have the debt relinquished, the government doesn’t have any money, only other peoples, people who have and under this system will only ever have nothing. Enough bail-outs and hand outs to this chosen few at the expense of everyone else.

  • Mark Golding - Children of Iraq

    A short New Year Fable.
    .
    Senator Carl Levin – the Old Friendly Shoemaker.
    .
    Carl Levin, the poor shoemaker and his wife needed money to pay for their campaigns. Carl has spent a great deal of time ensuring money went to the right places – jobs, healthcare, clean environment, education, agriculture, infrastructure, that sort of thing. That interest provided a foundation for expansion and gained Carl the required respect from his colleagues and also his enemies.
    .
    In fact Carl had ensured support for ongoing treatment of a needy Iraq war veteran in an unnecessary war where he had authorised additional funding to prevent certain failure. A failure of course would have disturbed the divine elves and made their life considerably more dangerous. The Iraq war had annoyed the diverse mycellum of political action committees or PACS where these divine elves congregate nightly. It had distracted from the War on Terrorism that had been twenty years in the making, a war intended to drive out opposition to Israel and support for Palestine wherever that threat emanates.
    .
    The Iraq war had affected the integrity of homeland America, it had changed world opinion towards a benevolent entity that had fed the needy and supported the poorest and deprived in the real world. Now those needy such as Pakistan had begun urinating in the rings created by the elves from which the war could be controlled, expanded and where killer drones could be deployed.
    .
    The shoemaker will of course continue supplying the needs of war to please the divine elves but sadly the rest, the needy will now begin turning their eyes and hearts towards better alternatives; other lands who peoples are gifted in magic, mentally sharp and are characterized as lovers of nature, art, and song.

  • anno

    Customer’s wife in limo passing through market town: Who’s got this town?..’… I forget the nane of the town we were driving through.
    Husband embarrassed: ‘ no-one, my dear’
    .
    Kurdistan needs an oil pipe to the sea through Syria same as Libya. Who better to secure it than Al @qaida? Instead of having to repair it all the time when they breach it, pay them to fight for it and pay them from the proceeds to look after it.
    One of Mrs T’s golden rules was that everyone has their price – even mujahideen.

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